Question 1

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions:
-According to the application, the increase in the share of health- care spending to GDP from the 1950s to 2000 is due to:
A) a larger elderly population.
B) a higher relative price of health- care relative to other goods and services.
C) higher life expectancy.
D) All of the above are correct.

Accepted Answer

The increase in the share of health-care spending to GDP from the 1950s to 2000 is due to all of the above factors: a larger elderly population, a higher relative price of health-care relative to other goods and services, and higher life expectancy.

Question 2

Figure 15.3
-Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $18 million to $15 million if:
A) the Fed buys bonds in the open market.
B) the government reduces taxes.
C) firms expect their sales to increase in the future.
D) the government reduces government expenditures.

Accepted Answer

The answer of  Figure 15.3
-Refer to Figure 15.3. At...

Question 3

The crowding- in effect implies that a decrease in government purchases causes:
A) interest rates to rise, which increases investment.
B) interest rates to fall, which increases investment.
C) interest rates to fall, which decreases investment.
D) interest rates to rise, which decreases investment.

Accepted Answer

The crowding-in effect suggests that when government purchases decrease, it can lead to lower interest rates, which in turn encourages more private investment.

Question 4

Assuming that the economy is in the long run equilibrium at full employment, changes in the money supply affect:
A) the price level.
B) employment.
C) real GDP.
D) all of the above

Accepted Answer

Changes in the money supply affect the price level through the quantity theory of money, but in the long run, they do not affect employment or real GDP as they are determined by factors such as technology, labor force, and capital stock. Therefore, the correct choice is A.

Question 5

In the short run, which of the following determines the level of real GDP?
A) prices
B) stock prices
C) aggregate demand
D) wages

Accepted Answer

In the short run, the level of real GDP is primarily determined by aggregate demand. This includes consumer spending, investment, government spending, and net exports. Prices, stock prices, and wages may influence aggregate demand, but they do not directly determine the level of real GDP.

Question 6

One implication of Say's Law is that:
A) inflation will always exist, as all goods in the economy will be purchased.
B) there is no recession, as all goods produced in the economy will be purchased.
C) unemployment will always persist.
D) there will always be a recession, as not all goods in the economy will be purchased.

Accepted Answer

Say's Law states that supply creates its own demand, meaning that all goods produced in the economy will be purchased. Therefore, there is no recession as all goods are being bought and sold. However, this does not mean that there will be no unemployment or inflation, as those factors are influenced by other economic variables.

Question 7

If the long- run neutrality of money holds, then an increase in the money supply will _______ investment and output in the long run.
A) increase
B) decrease
C) have no effect
D) increase or decrease

Accepted Answer

According to the long-run neutrality of money, changes in the money supply have no effect on real variables such as investment and output in the long run. Therefore, none of the options A, B, or D are correct. The correct option is C, which states that an increase in the money supply will have no effect on investment and output in the long run.

Question 8

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions:
-According to the application, as individuals increase spending on health- care:
A) investment spending increases causing a rise in living standards in the long- run.
B) investment spending decreases causing a decline in living standards in the long- run.
C) government spending decreases causing a decline in living standards in the long- run.
D) government spending increases further causing a rise in living standards in the long- run.

Accepted Answer

According to the application, as individuals increase spending on health-care, investment spending decreases causing a decline in living standards in the long- run. This is because health-care expenditures crowd out investment spending, which is necessary for economic growth and an increase in living standards.

Question 9

Figure 15.3
-Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $15 billion to $10 billion if:
A) the government increases net taxes.
B) the government increases government expenditures.
C) the government reduces government expenditures.
D) the Fed increases the money supply.

Accepted Answer

The answer of  Figure 15.3
-Refer to Figure 15.3. At...

Question 10

If the equilibrium output is below potential output:
A) the price level decreases.
B) unemployment is constant.
C) aggregate demand increases.
D) inflation usually rises.

Accepted Answer

The correct answer is A because when the equilibrium output is below potential output, there is excess supply in the economy. This excess supply will put downward pressure on prices, causing the price level to decrease.

Question 11

Recall Application 2, "Elections, Political Parties, and Voter Expectations," to answer the following questions:
-According to the application, which political party puts more emphasis on fighting inflation?
A) Democrats
B) Republicans
C) Libertarians
D) Green

Accepted Answer

According to the application, Republicans put more emphasis on fighting inflation. The application states that Republicans believe in controlling inflation through monetary policy and reducing government spending.

Question 12

Because the long- run aggregate supply curve is drawn as a vertical line, then we effectively assume that the level of production in the economy is determined solely by:
A) the demand for the goods and services.
B) the price level.
C) the amount of inputs and the level of technology.
D) the wage rate in the economy.

Accepted Answer

The long-run aggregate supply curve assumes that the economy has fully adjusted to any changes in the price level and that firms are using the most efficient combination of inputs given the prevailing technology. Therefore, the level of production in the economy is determined solely by the amount of inputs and the level of technology. Demand and wage rate may affect the short-run aggregate supply curve, but in the long run, these factors will adjust and the economy will operate at full production capacity given the level of inputs and technology.

Question 13

The reduction in investment spending in the long run resulting from an increase in government expenditures is called:
A) the multiplier effect.
B) crowding in.
C) money neutrality.
D) crowding out.

Accepted Answer

Crowding out refers to the decrease in private investment spending due to increased government spending, as it leads to higher interest rates and reduced availability of funds for private investment. This reduction in investment spending in the long run is known as crowding out. The multiplier effect refers to the impact of an initial change in spending resulting in a larger change in overall demand. Money neutrality refers to the idea that changes in the money supply do not affect real economic variables such as output and employment. Crowding in refers to the opposite of crowding out, where increased government spending leads to higher private investment spending.

Question 14

If crowding out occurs in the long run and the government increases spending for infrastructure projects such as roads and bridges, then the additional government spending:
A) decreases total consumption spending in the economy.
B) replaces a larger amount of private investment.
C) enhances private investment by the same amount.
D) replaces an equivalent amount of private investment.

Accepted Answer

Crowding out is a phenomenon where an increase in government spending leads to a decrease in private investment. In the case of infrastructure projects, the government's increase in spending may cause interest rates to rise, making borrowing more expensive for private firms. This, in turn, may lead to a decrease in private investment. Therefore, the additional government spending would most likely replace an equivalent amount of private investment, resulting in no net increase in investment in the economy.

Question 15

An increase in taxes is likely to:
A) result in an increase in aggregate supply.
B) increase the real interest rate.
C) increase the demand for money.
D) crowd in investment spending by businesses.

Accepted Answer

The answer of An increase in taxes is likely to:
A)...

Question 16

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions:
-According to the application, as individuals become richer, sooner or later they will substitute spending away from _______ and into _______ .
A) nursing homes; retirement communities
B) less expensive health care; more expensive health care
C) consumer durables; increasing their lifespan
D) consumer durables; stocks of HMO's

Accepted Answer

As individuals become richer, they tend to substitute spending away from consumer durables (such as cars, electronics, etc.) and into increasing their lifespan through healthcare expenditures. This is consistent with the income elasticity of demand for healthcare being greater than one.

Question 17

If crowding out occurs in the long run and the government increases spending for non- investment projects such as defense, then the additional government spending:
A) replaces a larger amount of private investment.
B) decreases total investment spending in the economy.
C) replaces an equivalent amount of private non- investment.
D) enhances private investment by the same amount.

Accepted Answer

Crowding out occurs when government borrowing to finance its spending leads to an increase in interest rates, which in turn reduces private investment spending. Since the question states that the government is increasing spending for non-investment projects such as defense, it is likely that this spending will be financed through borrowing. Therefore, the increase in government spending will lead to an increase in interest rates, which will reduce private investment spending in the long run. Therefore, choice B is the correct answer.

Question 18

The aggregate supply curve shows the relationship between prices and the
A) level of real GDP produced.
B) level of nominal GDP demanded.
C) level of nominal GDP produced.
D) level of real GDP demanded.

Accepted Answer

The aggregate supply curve shows the relationship between prices and the level of real GDP produced. It indicates the quantity of real output that firms are willing and able to supply at each price level. Therefore, option A is the correct choice.

Question 19

In macroeconomics, the "short run" denotes the time period:
A) when some prices are sticky.
B) when all prices fully adjust.
C) less than one year.
D) within the same fiscal year.

Accepted Answer

The short run in macroeconomics is typically defined as the period of time when some prices are sticky or do not fully adjust to changes in supply and demand. This can result in temporary imbalances in the economy, such as unemployment or inflation, that may eventually be corrected in the long run when all prices have had time to adjust. The length of the short run is not necessarily a fixed amount of time, but is generally considered to be less than the long run, which may be several years or more.

Question 20

Assuming that the economy is in the long run equilibrium at full employment, an increase in the money supply will cause a:
A) proportional increase in the price level and no change in real GDP.
B) proportional reduction in the price level and an increase in real GDP.
C) proportional increase in the price level and an increase in real GDP.
D) proportional increase in the price level and a reduction in real GDP.

Accepted Answer

According to the quantity theory of money, an increase in the money supply will lead to an increase in aggregate demand. However, in the long run, the economy is at full employment and therefore any increase in aggregate demand will only result in an increase in the price level, with no change in real GDP. Therefore, the best choice is A.

Quiz 15: Modern Macroeconomics: From the Short Run to the Long Run

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions: -According to the application, the increase in the share of health- care spending to GDP from the 1950s to 2000 is due to:

Figure 15.3 -Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $18 million to $15 million if:

The crowding- in effect implies that a decrease in government purchases causes:

Assuming that the economy is in the long run equilibrium at full employment, changes in the money supply affect:

In the short run, which of the following determines the level of real GDP?

One implication of Say's Law is that:

If the long- run neutrality of money holds, then an increase in the money supply will _______ investment and output in the long run.

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions: -According to the application, as individuals increase spending on health- care:

Figure 15.3 -Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $15 billion to $10 billion if:

If the equilibrium output is below potential output:

Recall Application 2, "Elections, Political Parties, and Voter Expectations," to answer the following questions: -According to the application, which political party puts more emphasis on fighting inflation?

Because the long- run aggregate supply curve is drawn as a vertical line, then we effectively assume that the level of production in the economy is determined solely by:

The reduction in investment spending in the long run resulting from an increase in government expenditures is called:

If crowding out occurs in the long run and the government increases spending for infrastructure projects such as roads and bridges, then the additional government spending:

An increase in taxes is likely to:

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions: -According to the application, as individuals become richer, sooner or later they will substitute spending away from _ and into _ .

If crowding out occurs in the long run and the government increases spending for non- investment projects such as defense, then the additional government spending:

The aggregate supply curve shows the relationship between prices and the

In macroeconomics, the "short run" denotes the time period:

Assuming that the economy is in the long run equilibrium at full employment, an increase in the money supply will cause a: