Chapter 9, 8, and 10
The formula for the simple spending multiplier is:
1/(1 - MPC).
(Figure: Determining SRAS Shifts) Which statement is NOT correct?
An increase in aggregate demand would lead to deflation.
________ inflation occurs when a supply shock reduces aggregate supply.
Cost-push
_____ is the part of the budget that works its way through Congress each year; it includes such programs as national defense, transportation, Medicaid, and education.
Discretionary spending
Which of the following may be an explanation for the shift in aggregate demand from A to B?
Interest rates fall and boost investment.
The largest category of federal government spending in 2012 was:
Social Security.
_____ is the change in consumption associated with a change in income.
The marginal propensity to consume
______ is the total accumulation of past budget deficits less surpluses.
The public debt
The collapse of home values that began in 2008 led to ____ in Americans' consumption and _____ in their saving rates.
a decrease; an increase
According to Keynes, as income grows:
both consumption spending and saving grow.
If the stock market collapses, consumption will:
decrease because people feel less wealthy.
Suppose the government raises income taxes, so consumers have less take-home pay. This policy action will cause a(n):
decrease in aggregate demand.
Saving is equal to:
disposable income minus consumption.
The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.
disposable income; consumption
MPC + MPS:
equals 1.
(Figure: Determining Fiscal Policy) The best discretionary fiscal policy option is:
expansionary fiscal policy that leads to full employment.
The _____ lag is the time required to turn fiscal policy into law and affect the economy.
implementation
The shift in aggregate demand depicted may be due to a(n): (from right to left)
increase in income taxes.
Expansionary fiscal policy is typically used to __________ aggregate demand in order to ____________.
increase; escape a recession
The $787 billion stimulus package passed in the United States in 2009 focused more on spending than on taxes partly because:
increased spending leads to a larger increase in GDP than the same reduction in taxes
Government spending on Social Security:
increases aggregate demand.
As income increases, consumption ______
increases at a slower rate
The largest source of federal government revenues is:
individual income taxes.
The spending reduction necessary to bring an overheated economy back to full employment is called the:
inflationary gap.
The GDP gap divided by the multiplier yields the:
inflationary or recessionary gap.
In the simple Keynesian model, equilibrium exists when:
investment spending equals saving.
Crowding out:
leads to higher interest rates.
If the amount of regulation in an economy increases, the aggregate supply curve shifts _____ and output supplied will be _____.
left; reduced
Transfer payments are:
monies paid directly to individuals by the government.
The _____ is the sum of past _____.
public debt; budget deficits
High family debt:
reduces the tendency to consume.
Public choice theorists primarily examine the:
relationship between economics and political decision making.
An increase in taxes:
removes money from the economy's spending stream.
When taxes are decreased, disposable income _______ and consumption spending ______________ multiplied by the change in disposable income.
rises; rises by the marginal propensity to consume
Cost-push inflation occurs when:
rising resource costs reduce short-run aggregate supply.
When the economy is in equilibrium in the simple Keynesian model:
saving is equal to investment.
The government can finance a budget deficit by:
selling assets.
Consumption spending is:
spending by individuals and households on both durable and nondurable goods.
Automatic stabilizers are designed so that as income falls:
spending does not fall as much as income.
Between 1929 and 1933, government spending _____ and net exports _____.
stayed the same; declined
Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:
supply-side fiscal policy.
A problem with supply-side fiscal policies is that they:
take longer to work than demand-side fiscal policies.
Investment spending:
tends to be volatile
The idea that new spending creates more new spending is known as:
the multiplier effect.
If the government borrows money from the Federal Reserve:
the quantity of money in circulation will rise.
Cost-push inflation is a situation in which:
the short-run aggregate supply curve shifts leftward.
A depression economy has considerable slack, so:
unemployment is high.
Contractionary fiscal policy:
decreases aggregate demand.
A shift of the aggregate _______ curve to the ________ would cause inflation to rise and employment to increase.
demand; right
Which of the following is NOT a reason the aggregate demand curve is negatively sloped?
income effect
When the price of a given product declines, the consumer's spendable income rises because it takes less income to purchase the same quantity. This is called the:
income effect.
Which of the following equations is correct?
AE = C + I + G + (X - M)
_____ will most likely increase the economy's long-run aggregate supply.
Advances in technology
In macroeconomics, the long run is:
a period long enough that participants in the economy will have enough time to gain all relevant information and enough time to act correctly on that information.
A solution to the simultaneous emergence of deflation and unemployment is to use policies that shift the:
aggregate demand curve to the right.
The curve that shows how much GDP is demanded at various price levels is called:
aggregate demand.
According to Keynes, what determines the level of employment and income?
aggregate expenditures
John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income.
aggregate spending
Supply-side fiscal policies include all of the following EXCEPT:
increasing transfer payments.
Aggregate expenditures are equal to:
the total of consumption plus investment plus government expenditures plus exports minus imports.