1. B
Explanation: Fiscal policy involves government actions on spending and taxation to manage economic growth, control inflation, and reduce unemployment.

2. C
Explanation: The spending multiplier equals 1 ÷ (1 – MPC). With an MPC of 0.8, the multiplier is 5, amplifying the effects of initial spending.

3. C
Explanation: Contractionary fiscal policy, like tax increases or spending cuts, reduces aggregate demand to control inflation.

4. C
Explanation: Structural unemployment results when technological or industry changes make certain skills obsolete.

5. B
Explanation: Increasing reserve requirements reduces the amount banks can lend, which contracts the money supply.

6. B
Explanation: In the long run, aggregate demand changes affect only the price level, not real GDP, since output depends on resources and technology.

7. C
Explanation: GDP includes final goods and services produced domestically, such as the sale of a new car made in the country.

8. B
Explanation: A current account deficit increases demand for foreign currency, leading to depreciation of the domestic currency.

9. A
Explanation: The Phillips Curve shows the inverse short-run relationship between inflation and unemployment.

10. A
Explanation: The real interest rate equals the nominal rate minus the inflation rate: 6% – 4% = 2%.

11. B
Explanation: Automatic stabilizers, like unemployment insurance, adjust spending and taxes automatically to stabilize the economy.

12. C
Explanation: A rise in input costs, such as oil prices, shifts the short-run aggregate supply curve leftward, raising prices.

13. B
Explanation: Higher government spending without a tax increase boosts aggregate demand and short-term economic growth.

14. A
Explanation: The crowding-out effect occurs when government borrowing raises interest rates, reducing private investment.

15. B
Explanation: The long-run aggregate supply is vertical because real output depends on resources, technology, and labor, not prices.

16. B
Explanation: The natural rate of unemployment is reached when cyclical unemployment is zero, leaving only frictional and structural types.

17. B
Explanation: Expansionary monetary policy lowers interest rates and stimulates investment and consumption.

18. B
Explanation: At full employment, increasing aggregate demand primarily raises prices, not real output.

19. B
Explanation: GDP measures new domestic production; used goods or transfers aren’t counted to avoid double counting.

20. B
Explanation: In a liquidity trap, interest rates are too low for monetary policy to encourage further investment.

21. B
Explanation: If people hold more cash, banks have fewer reserves to lend, which lowers the money multiplier.

22. B
Explanation: Lower interest rates lead to capital outflows, weakening the domestic currency and boosting exports.

23. B
Explanation: The Federal Open Market Committee (FOMC) conducts open market operations to influence money supply and interest rates.

24. B
Explanation: When nominal GDP rises faster than real GDP, it reflects price increases—indicating inflation.

25. B
Explanation: Stagflation occurs when inflation rises while unemployment also increases, often from supply shocks.

26. C
Explanation: To fight inflation, raising interest rates and cutting spending reduce aggregate demand.

27. B
Explanation: Opportunity cost is the value of the next best alternative forgone when a choice is made.

28. A
Explanation: Higher prices reduce purchasing power, decreasing consumption and aggregate demand.

29. B
Explanation: The balance of payments always sums to zero because current and capital account balances offset each other.

30. A
Explanation: Cyclical unemployment arises from downturns in the business cycle that reduce demand for labor.

31. B
Explanation: A budget deficit occurs when government spending exceeds revenue in a fiscal year, requiring borrowing to cover the shortfall.

32. B
Explanation: An increase in capital stock raises productivity, shifting long-run aggregate supply to the right.

33. A
Explanation: The crowding-in effect occurs when increased government spending encourages higher private investment.

34. B
Explanation: Lower income taxes increase disposable income, boosting consumer spending and aggregate demand.

35. A
Explanation: When government borrowing increases, higher interest rates discourage private investment—this is the crowding-out effect.

36. B
Explanation: Selling government securities decreases bank reserves, contracting the money supply and raising interest rates.

37. B
Explanation: Technological improvements boost productivity and potential GDP, shifting long-run aggregate supply rightward.