hinsafdar

The sustainable growth rate of real GDP is most likely to be increased by:

A) an increase in government spending.

B) an increase in the propensity to consume by households.

C) the discovery of untapped oil fields.

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Sustainable growth in real GDP is defined as the growth rate in real GDP that is sustainable over the long term. The sustainable growth rate is positively affected by increases in the supply of natural resources, the supply of physical capital, or the supply or productivity of labor. An increase in government spending does not increase an economy’s sustainable growth rate.

hinsafdar

When incomes in foreign countries increase, aggregate demand in the U.S. is most likely to:

A) increase because foreign consumers will tend to buy more U.S. export goods.

B) decrease because U.S. interest rates will tend to increase.

C) decrease because foreign consumers will tend to buy fewer U.S. export goods.

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When incomes in foreign countries increase, it is unlikely to have a direct effect on interest rates in the U.S. However, increased foreign income is likely to result in greater foreign purchases of U.S. exports. Thus, aggregate demand in the U.S. is likely to increase.

hinsafdar

Which of the following factors is most likely to increase aggregate demand?

A) Increasing real interest rates.

B) An increase in real wealth.

C) An expected decrease in future prices.

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While an increase in real wealth will shift the AD curve to the right, an increase in the real rate of interest will shift the AD curve to the left as consumers and businesses reduce their borrowing and spending. An expected decrease in prices will shift the AD curve to the left as households and businesses postpone their consumption in anticipation of lower prices in the future.

hinsafdar

Which of the following factors is most likely to increase long-run aggregate supply?

A) The average rate of labor productivity increases.

B) Wage rates increase.

C) Aggregate demand decreases.

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Factors that shift the long-run aggregate supply curve (LAS) to the right include improvements in technology and productivity, increases in the supply of resources, and institutional changes that increase the efficiency of resource use. An increase in the productivity of the average worker is likely to shift the LAS curve to the right. Wage rate changes shift the short-run aggregate supply curve (SAS) but not the LAS curve. A decline in consumer demand would represent a move down the LAS curve but not a shift in LAS.

hinsafdar

Which of the following events is least likely to cause a decrease in short-run aggregate supply?

A) Inflation increases from 4% to 7%.

B) A labor stoppage causes the price of steel to rise.

C) Oil exporting countries reduce their production levels.

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Changes in the price level represent movement along the short-run aggregate supply curve. The other items listed are events that are likely to shift the short-run aggregate supply curve to the left (decrease SRAS).

hinsafdar

The long-run aggregate supply curve is best described as:

A) elastic because most input prices are variable in the long run.

B) perfectly elastic because input prices are sticky in the long run.

C) perfectly inelastic because input prices change proportionately with the price level in the long run.

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The long-run aggregate supply curve is perfectly inelastic because in the long run, wages and other input prices adjust to changes in the overall price level. Long-run aggregate supply equals potential GDP.

hinsafdar

Which of the following statements concerning aggregate demand is most accurate?

A) When price levels rise, real wealth increases, and individuals will spend more.

B) When price levels rise, real wealth decreases, and individuals will spend less.

C) When price levels fall, real wealth increases, and individuals will spend less.

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When price levels rise, real wealth decreases, and we would expect individuals to spend less. If the converse were also true—if price levels were to fall—real wealth should increase, and we would expect individuals to spend more, all else being equal.

hinsafdar

Which of the following is least likely a reason that the aggregate demand curve slopes downward?

A) The wealth effect causes consumers to spend less when the price level rises.

B) Business investment declines as a rising price level increases interest rates.

C) Because entitlements are adjusted for inflation, a rising price level forces government spending to increase.

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The aggregate demand curve plots real GDP against the price level. Rising entitlement payments that result from an increasing price level affect nominal GDP, but not real GDP. Both remaining choices describe reasons why the consumption and investment components of real GDP decrease when the price level increases.

hinsafdar

An increase in real interest rates can be expected to:

A) decrease investment and increase net exports.

B) increase government spending and decrease consumption.

C) decrease investment and decrease consumption.

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An increase in real interest rates can be expected to decrease business investment and decrease consumption. The impact on government spending and net exports is not clear-cut.

hinsafdar

If a fiscal budget deficit increases, which of the following factors must also increase if all other factors are held constant?

A) Investment.

B) Savings.

C) Trade surplus.

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The relationship between the fiscal balance, savings, investment, and the trade balance is (G − T) = (S − I) − (X − M). An increase in a fiscal budget deficit (G − T) must be funded by an increase in savings (S), a decrease in investment (I), or a decrease in net exports (X − M), which would decrease a trade surplus or increase a trade deficit.