1.

Which of the following did New Classical macroeconomists use as the centerpiece of
their model?
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The inductive reasoning method.

Regression analysis.
The decision process of a rational self-interested individual.
The flows of aggregates.
2. Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8
percent. A Keynesian economist would most likely blame this increase in unemployment
on:
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a decline in the level of aggregate demand.

a decline in aggregate supply.
an increase in the bargaining power of labor unions.
an increase in the minimum wage.
3. Housing prices fell sharply in 2008 and 2009, contributing to a severe recession as the
AD curve shifted leftward. The ordinary AS/AD model would predict that falling short-
run aggregate supply would bring deflation and move the economy back to potential
output. Which of the following describes the impact of dynamic feedback effects on this
return to potential output?
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Expectations that prices might fall further could cause people to reduce spending,
shifting the AD curve further to the left.
The deflation will be counteracted by increases in the money supply from the Federal
Reserve, preventing the price adjustment and keeping the economy below potential
output.
Falling house prices could cause people to buy more house than they really need,
creating a further crisis as another wave of foreclosures and bankruptcies occurs.
As the SAS curve shifts downward, firms respond by increasing their investment in
capital equipment, but re-hire few of the laid-off workers, so that employment does not
return to normal.
4. The paradox of thrift will not arise if:
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increases in saving are translated into identical increases in investment.

decreases in saving are translated into identical increases in investment.
decreases in saving are translated into identical decreases in consumption.
increases in saving are translated into identical decreases in consumption.
 5. Which of the following statements would a Classical economist of the 1930s most likely
disagree with?
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Wages and prices will adjust to eliminate unemployment.

In the short-run the economy might experience some problems.
Unions do not impede wage and price adjustment.
The market, left to its own devices, is self-adjusting
6. Which of the following could not be explained by the Keynesian model in the 1970s?
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Stagflation.
Expansionary fiscal policy.
Budget deficits.
Oil price shocks.
7. An increase in the price level:
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increases the purchasing power of money, leading to lower interest rates and increases
investment.
decreases the purchasing power of money, leading to lower interest rates and increases
investment.
increases the purchasing power of money, leading to higher interest rates and decreases
investment.
decreases the purchasing power of money, leading to higher interest rates and decreases
investment.
8. An agent in the DSGE model is assumed to know:
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all the things that might happen but does not know the probability with which each of
them will happen.
all the things that might happen and the probability with which each of them will
happen.
only a small portion of things that might happen and the probability with which each of
them will happen.
nothing at all, and has to constantly change his thinking about situations.
9. If total income remains the same but profits fall and real wages rise, the aggregate
demand curve will most likely:
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shift to the left.

shift to the right.
become steeper.
 become flatter.
10. Keynes believed equilibrium income was:
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not fixed at the economy's potential income.

always above the economy's potential income.
fixed at the economy's potential income.
always below the economy's potential income.
11. If an economist is focusing on whether a model works or not, rather than how it works,
then this economist would want to work with a(n):
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regression model.
deductive scientific model.
engineering model.
butterfly-effect model.
12. The multiplier effect makes the aggregate demand curve:
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flatter.
steeper.
horizontal.
vertical.
13. Refer to the graph above. If the economy is at point D, which of the following policies is
most appropriate to bring the economy to potential?
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no change in taxes or government spending

increase in taxes
cut in government spending
cut in taxes
14. What will likely happen to the SAS curve in each of the following instances?

15.

a) Productivity rises 6 percent; wages rise 8 percent.

 -2-2

The SAS curve will remain unchanged.

The SAS curve will shift down.
The SAS curve will shift up.

16.

b) Productivity rises 9 percent; wages rise 7 percent.

-2-2

The SAS curve will shift up.

The SAS curve will remain unchanged.
The SAS curve will shift down.

17.

c) Productivity declines 9 percent; wages rise 9 percent.

-2-2

The SAS curve will shift up.

The SAS curve will remain unchanged.
The SAS curve will shift down.

18.

d) Productivity rises 9 percent; wages rise 9 percent.

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The SAS curve will remain unchanged.

The SAS curve will shift down.
The SAS curve will shift up.
19. Which of the following would shift the aggregate demand curve to the left?
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 a higher future expected price level.
a depreciation in the value of the country's currency.
a decrease in exports.
an increase in foreign income.

20. "Classical economist" is often used interchangeably with which term?

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Activist economist.
Keynesian economist.
Laissez-faire economist.
Marxian economist.
If total income remains the same but profits fall and real wages rise, the aggregate demand curve
will most likely:
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shift to the left.

become steeper.
shift to the right.
become flatter.
If the multiplier effect is 4, a $15 billion increase in government expenditures will shift the AD
curve:
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to the right by $15 billion.

to the left by $60 billion.
to the left by $15 billion.
to the right by $60 billion.