Answers may vary but below might be some possibilities:Real GDP in Billions of DollarsThe government could either decrease taxes and/or increase government spending.It occurs when the overall price level increases rapidly during periods of recession.The government could increase taxes and/or decrease government spending.Inflation is an increase in the overall price level.We are suppose to recognize that one person's expenditure is someone else's income.Test Item File 3: Principles of Macroeconomics 5(18) Introduction to Macroeconomics The Roots of Macroeconomics1. Explain the difference between macroeconomics and microeconomics.Macroeconomics focuses on the economy as a whole and in particular on the determinants of total national output. Microeconomics by contrast looks at the functioning of individual decision-making units like the household and the firm.Difficulty: E Type: D2. Identify three macroeconomic and three microeconomic topics.Answers may vary but below might be some possibilities:Macro Issues Micro IssuesUnemployment Health benefitsRecession Computer salesConsumption Price movements between Coke and PepsiInflation Changes in the demand for laborThe Money Supply Price floors for wheat farmersDifficulty: E Type: F3. Explain what sticky prices are in terms of macroeconomic equilibrium.Sticky prices are prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.Difficulty: E Type: C84Test Item File 3: Principles of Macroeconomics4. Discuss what is meant by the Classical belief that the economy is self-correcting.Classical theory argued that an excess supply of labor would fairly quickly drive down wages to a new equilibrium level and as a result unemployment would be eliminated.Difficulty: E Type: C Real GDP in Billions of Dollars5. Referring to the above table from the Economic Report of the President what is happening to the economy between 1996 and 1997? What would you assume is happening to the unemployment rate and the inflation rate? What policy action, if any might be appropriate?The economy is in an economic boom. The unemployment rate is more than likely decreasing and the inflation rate may be increasing. It isn't clear that any policy action be taken unless of course inflation is seen as a serious threat in which case a contractionary fiscal policy might be in order (i.e. a cut in spending or increase in taxes).Difficulty: E Type: C6. What are the basic tenets of Keynesian theory that help explain the level of employment?Keynes' view was that prices and wages do not determine the level of employment as the classical school assumed but rather the level of aggregate demand for goods and services. Hence, Keynes believed that the government could intervene in the economy by directly stimulating aggregate demand and thereby pull the economy out of recession.Difficulty: E Type: C85Chapter 5 (18): Introduction to Macroeconomics 7. Assume that the demand for computer programmers drops precipitously. Explain usingKeynesian reasoning why this will cause unemployment.Keynes argued that wages may not adjust right away. Thus the decline in the demand for labor is not met by a commensurate drop in the wage rate. This means that there will be many more programmers actively seeking employment but much fewer being hired in the market.Difficulty: E Type: C8. Assume that the demand for construction workers declines because of a slump in the housing market. Explain using Classical reasoning why this will not cause unemployment.The Classical belief is that markets are resilient and that wages and prices are flexible. Thus the decline in the demand for construction workers should result inlower wages. This will cause some workers to cease looking for work and will serve as an incentive for firms to increase the number of workers demanded. What would otherwise be a surplus (unemployment) in the labor market results in the market clearing.Difficulty: E Type: C9. Which school of thought would more likely make the following statements?a. The economy is in recession but we should leave it alone. b. Draft a piece of legislation subsidizing the hiring of recent college graduates.c. Let's fine-tune the economy.d. The market is self-correcting.a. Classicalb. Keynesianc. Keynesiand. ClassicalDifficulty: E Type: F10. Microeconomists generally do not expect to see excess supplies in most markets. However, macroeconomists will often observe that during recessions the quantity supplied of labor can exceed the quantity demanded of labor. Explain what macroeconomists are referring to and explain why the wage rate may not adjust right away.The wage rate may stay above the market clearing level if workers have signed multi-year wage contracts or firms may be reluctant to lower wages for fear of adversely affecting morale and productivity.Difficulty: M Type: A86Test Item File 3: Principles of Macroeconomics11. Explain what is meant by deflation. Explain the impact that it might have on the value of assets.Deflation is a decline in the overall average price level. It can actually cause the real value of assets to rise since the purchasing power of those assets has risen.Difficulty: M Type: A12. Keynes argued that it is not prices and wages that determine the level of employment. What then did he argue was the determinant?Keynes posited that the level of aggregate demand for goods and services determines the level of employment. He believed that the government could intervene in the economy and affect the level of output and employment. That is,the government could augment private demand through public spending.Difficulty: E Type: F13. Briefly describe what is meant by the phrase "fine tuning."This is a term that was coined in the 1960s to refer to the government's discretionary role in regulating inflation and unemployment.Difficulty: E Type: D14. Define stagflation and explain why it undermined faith in the simple Keynesian model.Stagflation refers to the simultaneous occurrence of a rapid rise in the price level and persistent unemployment. This undermined faith in the simple Keynesian model because before the 1970s rising prices were generally observed only when the economy was prospering.Difficulty: E Type: D15. What might be some Keynesian prescriptions to get the economy out of an economic slump?The government could either decrease taxes and/or increase government spending.Difficulty: E Type: C16. Under which condition does stagflation