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.
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