Econ 2105 Principles of Macroeconomics Prof. Grace O Practice question. Chapter 6. 1. In the “paradox of thrift”: A) firms that are pessimistic about the future lay off the most saving-conscientious workers. B) when families and business are feeling pessimistic about the future, they spend more today. C) increased saving by individuals increases their chances of becoming unemployed. D) profligate behavior during economic tough times has large negative consequences for society. 2. The widely held view that the government should take an active role in the macroeconomy dates back to: A) the Civil War. B) World War I. C) the Great Depression. D) the Vietnam War. 3. The modern tools of macroeconomic policy are: A) tax policy and antitrust policy. B) fiscal policy and monetary policy. C) monetary policy and exchange rate policy. D) capital policy and labor policy. 4. Fiscal policy refers to: A) the control of interest rates. B) the control of government spending and taxations. C) the control of the quantity of money. D) the control of interest rates and of government spending. 5. In recent times the U.S. government has been trying to help the economy through one of the worst economic slumps. The policies used are based on: A) Keynesian theory. B) classical theory. C) supply-side theory. D) trickle down theory. 6. Keynesian economics propagates the economic ideas: A) that argue that the government intervention in the economy can be destabilizing. B) that argue that the government can help a depressed economy through fiscal and monetary policies. C) that argue that the private sector is perfectly capable to regulate itself. D) that argue that the free market system will always prevail. 7. John Maynard Keynes believed that the: A) government should actively try to mitigate the effects of recessions by using fiscal andEcon 2105 Principles of Macroeconomics Prof. Grace O monetary policies. B) government should not interfere with the economy and should let the economy self correct. C) government should only intervene when there is a boom but let the recession run its course. D) government should not use fiscal and monetary policies, as these policies have long term adverse effect on the economy. 8. Periods in which output and employment are falling are known as: A) recessions. B) booms. C) expansions. D) deflations. 9. An expansion is a period in which: A) output declines. B) the price level falls. C) output rises. D) unemployment rises. 10. Recessions are periods when: A) output rises. B) the aggregate price level rises. C) the unemployment rate is falling. D) output and employment are falling. 11. The short-run alternation between economic downturns, recessions, and economic upturns and expansions is known as the: A) business cycle. B) contractionary cycle. C) expansionary cycle. D) disequilibrium cycle. 12. The basic difference between an economic recession and economic depression is that: A) the latter is a shorter economic downturn than the former. B) during recessions output falls faster than during depressions. C) during depressions employment falls faster than during recessions. D) the former is a longer economic downturn than the latter. 13. If during a period of several months we observe the economy to be simultaneously increasing its level of output and employment, we could assume that the economy is in: A) a depression. B) an expansion. C) a recession. D) a turning point between a recovery and a downturn.Econ 2105 Principles of Macroeconomics Prof. Grace O 14. A business cycle is: A) a very deep and prolonged economic downturn. B) a period in which output and employment are rising. C) a period in which output and employment are falling. D) a short-run alternation between economic upturns and downturns. 15. Long-run growth is the sustained upward trend in: A) aggregate output per person over several decades. B) nominal GDP over time. C) interest rates over time. D) aggregate output per person over the business cycle. 16. Long-run growth is: A) the sustained upward trend in aggregate output per person over several decades. B) the expansion phase of business cycles. C) the downturn phase of business cycles. D) the sustained downward trend in the employment rate over several decades. 17. Long-run growth is represented by: A) the sustained upward trend in the economy's overall output per person that generates higher incomes and higher standard of living for its members. B) an increase in the rate of inflation across time which reduces the real salaries. C) an increase in the overall output of the economy over a three- or four-year period. D) a reduction in the price level over a period of decades. 18. Which of the following is (are) true? A) Inflation means an increase in the overall level of prices. B) Deflation refers to a decrease in prices only in the energy and transportation sectors. C) During inflation most people hold more cash than usual. D) Inflation was first a problem in the recession of 1929–1933. 19. Deflation: A) raises the cost of making purchases and sales for which cash is required. B) can result in an increase in employment. C) encourages people to hold cash rather than invest in new factories and productive assets. D) is caused by changes in interest rates. 20. If the economy grew at a 3% rate this year and average prices grew ______, people would be better off this year compared with last year. A) 3% B) faster than 3% C) slower than 3% D) faster than 10%Econ 2105 Principles of Macroeconomics Prof. Grace O 21. If wages grew at a 5% rate last year and average prices grew at a 3% rate, then the average worker is: A) better off. B) worse off. C) no better or worse off. D) unaffected. 22. Which of the following is true about inflation and deflation? A) Both are good for the economy. B) Inflation is always good for the economy and deflation is always bad for the economy. C) Inflation is always bad for the economy and deflation is always good for the economy. D) Both inflation and deflation can pose problems for the economy. 23. An increase in the nation's overall price level is known as _____. A) long-term economic growth B) unemployment C) inflation D) deflation 24. Inflation is a situation where: A) the average price level falls. B) the average