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Self-test Questions
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1In the absence of government participation and foreign trade, the circular flow model shows that:
A)Firms supply both the resources and output used in production.
B)Households demand both resources and outputs.
C)Firms supply resources and households demand outputs.
D)Households supply resources and firms supply output.



2The simple circular flow model shows that:
A)Firms demand resources and supply outputs.
B)Households demand outputs and supply resources.
C)Firms generate the income necessary for households to consume.
D)Households generate the revenue necessary for firms to produce.
E)All the above.



3A primary difference between microeconomics and macroeconomics is that:
A)Macroeconomics studies the operation and performance of the economy as a whole.
B)Microeconomics studies the aggregate level of income and employment.
C)In formulating and implementing government policy, microeconomics shows the effects of policy variables on the entire economy.
D)Macroeconomics studies the operation and performance of individual economic units.



4Which of the following conditions would not be studied by the macroeconomist?
A)The level of national unemployment during 2004.
B)The effect of government economic policy on the inflation rate during 2004.
C)The effect of changing petroleum prices on the demand for coal.
D)The effect of lower income taxes on the rate of economic growth.



5By using the expenditures (aggregate demand) approach, GDP may be defined as:
A)GDP = C + I + (G - NX)
B)GDP = (C - I) + G + NX
C)GDP = C + I + G + NX
D)GDP = C + (I - G) + NX



6In a macroeconomic model without foreign trade or government spending, aggregate demand is the sum of:
A)Personal saving and private investment.
B)Personal saving and personal consumption.
C)Personal consumption and personal income.
D)Personal consumption and private investment.



7In the simple circular flow model of a closed, private economy:
A)There is assumed to be no foreign sector.
B)There is assumed to be no government intervention in the economy.
C)All spending comes from households and businesses.
D)Businesses demand the factors of production supplied by households.
E)All of the above.



8With respect to the circular flow of economic activity, taxes represent:
A)Leakage
B)An injection
C)Transfer payments
D)A stock



9With respect to the circular flow of economic activity, government purchases are:
A)An injection, like savings
B)An injection, like investment
C)A leakage, like savings
D)A leakage, like investment



10An increase in the economy's stock of physical productive capital is called:
A)Saving
B)Inventory adjustment
C)Investment
D)Crowding out



11The relationship between inflation and aggregate demand is negative.
A)TRUE
B)FALSE



12A 5% increase in product prices with no increase in nominal wages will lead to an increase in aggregate supply.
A)TRUE
B)FALSE



13If real wages remain constant, an increase in aggregate demand will increase both equilibrium GDP and inflation.
A)TRUE
B)FALSE



14Producing income normal and income inferior goods is a form of business cycle risk reduction.
A)TRUE
B)FALSE



15In a closed economy with no government sector, leakages must equal injections.
A)TRUE
B)FALSE



16The difference between government spending and tax receipts is ________.
A)The Current Account
B)The Balance of Payments
C)Leakages
D)The Budget Deficit



17An increase in aggregate supply will lead to __________ in inflation and ________ in GDP.
A)An increase, a decrease
B)An increase, an increase
C)A decrease, a decrease
D)A decrease, an increase



18A reduction in aggregate demand will lead to _______ in inflation and ________ in GDP.
A)An increase, a decrease
B)An increase, an increase
C)A decrease, a decrease
D)A decrease, an increase



19An increase in government spending will _______ aggregate ________.
A)Increase, Supply
B)Increase, Demand
C)Decrease, Supply
D)Decrease, Demand



20Following an improvement in labour productivity, aggregate _______ will shift to the _________.
A)Demand, Right
B)Demand, Left
C)Supply, Right
D)Supply, Left







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