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ECO CH 17

True/False
Indicate whether the sentence or statement is true or false.
 

1. 

All income follows a circular flow between businesses and consumers.
 

2. 

According to Keynesian theory, leakages reduce aggregate demand.
 

3. 

Keynesian economists believe that a serious imbalance in leakages and injections caused the Great Depression.
 

4. 

The government has no way of speeding up the economy to combat unemployment.
 

5. 

Increasing taxes and/or reducing government spending may eventually lower inflation.
 

6. 

Monetarists and Keynesian economists agree on the causes of the Great Depression.
 

7. 

Monetarists believe that the Fed should increase the money supply rapidly.
 

8. 

Monetarists generally oppose using fiscal policy to stimulate or slow the economy.
 

9. 

Monetarists criticize fiscal policy because the President alone has the power to enact it.
 

10. 

Fiscal policy generally has an immediate effect on the economy.
 

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

11. 

People who do not follow federal and state laws regarding employment are part of
a.
frictional unemployment.
c.
structural unemployment.
b.
seasonal unemployment.
d.
the underground economy.
 

12. 

Measuring unemployment is difficult because
a.
most people do not admit they are unemployed.
b.
people do not respond to government surveys.
c.
there is an underground economy.
d.
most unemployment is frictional.
 

13. 

Cyclical unemployment is
a.
caused by seasonal changes.
b.
caused by changes in the economy.
c.
associated with fluctuations in the business cycle.
d.
caused by temporary layoffs.
 

14. 

An economic condition in which rising prices and unemployment occur at the same time is called
a.
cost-push inflation.
c.
stagflation.
b.
demand-pull inflation.
d.
anticipated inflation.
 

15. 

Which of the following describes a situation that can lead to demand-pull inflation?
a.
rapid increase in the money supply
c.
increase in taxes
b.
decrease in the demand for goods
d.
rapid decrease in the money supply
 

16. 

Keynesian economists believe that the Great Depression resulted from
a.
a circular flow of income.
b.
an equilibrium.
c.
an imbalance in leakages and injections.
d.
unemployment.
 

17. 

Income that is removed from the economy through consumer savings is called
a.
an injection.
c.
a leakage.
b.
an imbalance.
d.
an equilibrium.
 

18. 

Injections into the economy occur through
a.
business investment.
c.
unemployment.
b.
taxation.
d.
cutbacks on government spending.
 

19. 

Supporters of fiscal policy believe inflation can be reduced by
a.
increasing government spending.
c.
decreasing taxes.
b.
increasing taxes.
d.
increasing production.
 

20. 

One way the government can use fiscal policy to combat unemployment is by
a.
increasing taxes.
c.
eliminating tax credits on investments.
b.
reducing government spending.
d.
decreasing taxes.
 

21. 

Which of the following is part of Milton Friedman's theory about stabilizing the economy?
a.
when the amount of money in circulation expands, people spend more
b.
when the amount of money in circulation expands, people spend less
c.
Fed should not regulate the nation's money supply
d.
Fed should use taxation as a way of stabilizing the economy
 

22. 

Monetarist theory
a.
supports the use of fiscal policy to affect the economy.
b.
supports budget deficits.
c.
opposes the use of fiscal policy to affect the economy.
d.
opposes balancing the budget.
 

23. 

Rather than operate with budget deficits each year, monetarists believe the government should
a.
borrow money in the credit market.
c.
use fiscal policy.
b.
balance the federal budget.
d.
rapidly decrease the money supply.
 

24. 

Monetarists believe that a steady growth in the money supply would result in
a.
rapid inflation.
c.
recession.
b.
high unemployment rates.
d.
controlled expansion of the economy.
 

25. 

Monetarists criticize fiscal policy because
a.
a single government designs and implements it.
b.
there are lag times between enacting the policy and its effective date.
c.
it becomes effective immediately after it is enacted.
d.
government cannot implement it.
 

Completion
Complete each sentence or statement.
 

26. 

_________________________ always exists to some degree because of firings, layoffs, and voluntary searches for new jobs.
 

 

27. 

_________________________ affects construction workers and farmworkers.
 

 

28. 

Economists today consider the economy at ____________________ when the unemployment rate is less than 5 percent.
 

 

29. 

Increases in government spending and in business investment for expansion can result in ____________________.
 

 

30. 

The wage demands of labor unions and the excessive profit motive of large corporations cause ____________________.
 

 

Matching
 
 
Match each item with the correct statement below.
a.
stabilization policies
b.
unemployment rate
c.
full employment
d.
demand-pull inflation
e.
cost-push inflation
 

31. 

percentage of the civilian labor force that is unemployed, but is actively looking for work
 

32. 

theory that the wage demands of labor unions and the excessive profit motive of large corporations push up prices
 

33. 

attempts by the federal government to keep the economy healthy
 

34. 

when the unemployment rate is lower than a certain number established by economists
 

35. 

theory that prices rise as the result of excessive business and consumer demand
 
 
Match each item with the correct statement below.
a.
fiscal policy
b.
circular flow of income
c.
equilibrium
d.
leakages
e.
injections
 

36. 

removal of money income from the economy
 

37. 

economic model that pictures income as flowing continuously between businesses and consumers
 

38. 

state of the economy in which leakages and injections balance each other
 

39. 

federal government's use of taxation and spending policies to affect overall business activity
 

40. 

flow of income into the economy
 
 
Match each item with the correct statement below.
a.
monetarism
b.
monetarists
c.
monetary rule
d.
time lags
e.
fiscal policy
 

41. 

government use of taxation and spending to affect overall business activity
 

42. 

periods between the time fiscal policy is enacted and the time it becomes effective
 

43. 

supporters of the theory of Milton Friedman
 

44. 

theory that deals with the relationship between the amount of money the Fed places in circulation and the level of activity in the economy
 

45. 

belief that the Fed should allow the money supply to grow at a consistent rate per year
 



 
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