ECO231 Midterm

If people's real assets increase, then the:

consumption function will shift up

The four components of the aggregate expenditures model are

consumption, investment, government purchases, and net exports

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:

continuing resolution.

Automatic stabilizers "lean against the prevailing wind" of the business cycle because

federal expenditures and tax revenues change as the level of real GDP changes.

Automatic stabilizers stabilize the level of real GDP because:

federal expenditures and tax revenues change as the level of real GDP changes.

If aggregate expenditures exceed real GDP, then:

firms are depleting their inventories.

A government spending and taxation policy to achieve macroeconomic goals is known as:

fiscal policy.

The government is pursuing an expansionary policy if it:

increases its spending and/or reduces its tax revenues

As the marginal propensity to consume (MPC) increases, the spending multiplier:

increases.

Expansionary fiscal policy consists of:

increasing government spending.

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume is 0.75, federal policymakers can follow Keynesian economics and restrain inflation by:

increasing tax revenues by $200 billion.

If no fiscal policy changes are implemented to fight inflation, suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is 0.90, this increase in aggregate demand could be prevented by:

increasing taxes by $100 billion

If the interest rate increases, then the:

investment demand curve will shift downward.

Prior to the Great Depression, classical economists believed that a recessionary downturn would be reversed by:

lower wages and prices

The impact of the multiplier effect is to

magnify small changes in spending into much larger changes in real GDP.

Personal income taxes:

make recessions and inflationary episodes less severe.

The ratio of a change in consumption to a change in disposable income is the:

marginal propensity to consume.

A decrease in the rate of interest, other things being equal, will cause a

movement downward along the investment demand curve.

An increase in the rate of interest, other things being equal, will cause a(n):

movement upward along the investment demand curve

The national debt is unlikely to cause national bankruptcy because the

national debt can be refinanced by issuing new bonds.

The total accumulated debt of the federal government due to deficit spending is called the

national debt.

An economy that is operating below its full-employment capacity is experiencing a(n):

recessionary gap.

Automatic stabilizers are government programs that:

shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion

At low levels of employment, the Keynesian aggregate supply curve:

shows a constant price level.

A tax is regressive if it collects a:

smaller fraction of income as income rises.

At the equilibrium level of real GDP, total production equals total:

spending.

The national debt is best described as the:

sum of all federal budget deficits, past and present.

According to Say's law, there cannot be overproduction of goods and services because

supply creates its own demand.

An increase in oil prices will shift the aggregate:

supply curve leftward.

An increase in regulation will shift the aggregate

supply curve leftward.

Advances in technology will shift the aggregate

supply curve rightward

A reduction in regulation will shift the aggregate:

supply curve rightward.

If the federal government runs a budget _______, then the national debt becomes __________.

surplus, smaller

A recessionary gap can be defined as:

the amount by which aggregate expenditures falls short of the level needed to generate equilibrium real GDP at full employment without inflation.

The marginal propensity to save is

the change in saving divided by the change in income.

The national debt is:

the cumulative effect of all past budget deficits and surpluses of the federal government

It is inflationary for government to increase spending if

the economy is at full employment.

If the fiscal year begins without a budget and Congress fails to pass continuing resolution, then:

the federal government shuts down

Cost-push inflation occurs when the:

aggregate supply curve shifts leftward while the aggregate demand curve is fixed.

The marginal propensity to save is:

1 - MPC

The spending multiplier is

1 / (1 - MPC).

A rightward shift of the investment demand curve could be caused by

1 a technological advance. 2 optimism about long-term growth. 3 forecasts of favorable business conditions. 4 an increase in confidence in short-run economic conditions. 5 any of these CORRECT - any of these

Total government spending (federal, state, and local) sums to approximately

40 percent of the U.S. economy.

Suppose fairness is defined as those with the highest incomes can afford to pay a greater proportion of their income in taxes. Then which of the following taxation systems would be consistent with this notion of fairness?

A progressive tax on income.

Automatic stabilizers combine changes in discretionary fiscal policy with changes in government spending and taxes influenced by the business cycle in order to stabilize the economy.

F

Which of the following options could be used to eliminate a recessionary gap?

Decrease taxes.

Cost-benefit analysis cannot be applied to collective or public choice decision-making.

False

State and local sales taxes are typically progressive

False

The federal income tax is progressive because poor people pay little or no taxes.

False

The largest revenue source in the U.S. federal tax system is the corporate income tax

False

Which of the following owns the largest proportion of the national debt?

Federal, state, and local governments and the Federal Reserve.

Which one of the following are the components of aggregate expenditures?

Household consumption, business investment, government spending for goods and services, and net exports.

Which of the following policy options would not be used to eliminate an inflationary gap?

Increase investment

Each year, the president must submit a budget proposal to Congress by:

January.

If the economy experiences a recessionary gap then

Keynesian economics would recommend an increase in government spending or a decrease in taxes.

The sum of past federal budget deficits increases the:

National Debt

The sum of past federal budget deficits is the:

National Debt

Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following?

People's desire to maintain real wealth holdings, the interest rate, and international trade

According to classical macroeconomic theory, if real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?

Real GDP will remain unchanged but the price level will rise.

According to Keynesian theory, if equilibrium real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?

Real GDP will rise, but the price level will remain constant.

If the federal government has a budget surplus, then the national debt is:

Reduced

That part of disposable income not spent on consumption is:

Saved.

The classical economists argued that the production of goods and services (supply) generates an equal amount of total income and, in turn, total spending. This theory is called:

Say's Law.

Which of the following groups analyzes federal budgets proposals?

The Congressional Budget Office.

What is the difference between the federal budget deficit and the national debt?

The budget deficit is the amount by which expenditures exceed revenues in a particular year, while the national debt is the cumulative effect of all past budget deficits and surpluses.

Which of the following correctly describes the spending multiplier?

The ratio of the change in real GDP to an initial change in any component of aggregate expenditures

Automatic stabilizers are government programs that tend to push the federal budget toward surplus as the real GDP rises and toward deficit as the real GDP falls.

True

Cost-benefit analysis can be applied to individual decision-making and public choice theory.

True

Public choice theory argues that one reason for rational voter ignorance is the indivisibility of public service.

True

Rational ignorance might explain low voter turnout because people apply marginal analysis to voting

True

State and local property taxes are regressive.

True

The Social Security payroll tax tends to be regressive.

True

When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of

World War II.

If the economy is experiencing demand-pull inflation, then the appropriate government policy would be to shift the:

aggregate demand curve by using a tax increase coupled with spending cuts.

When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier

also increases.

Along the intermediate range of the aggregate supply curve, an increase in the aggregate demand curve will increase

both the price level and real GDP.

A rightward shift in the aggregate demand curve can be caused by an increase in:

business investment spending.

The consumption function will shift for all of the following reasons except

changes in a household's disposable incomes.

A movement along a consumption function is caused by

changes in households' disposable incomes.

Superhighways, public housing facilities, and defense projects are all ways that the President can:

close a recessionary gap

A decrease in aggregate supply can result in:

cost-push inflation.

A decrease in real GDP would affect the U.S. economy by:

cutting tax revenues and raising government expenditures

A downward movement along the investment demand curve would be caused by a(n)

decrease in the rate of interest

If the national debt rises to the debt ceiling and there is currently a budget ________, the Congress and the President must agree to ________ the debt ceiling or else the federal government will have insufficient funds to pay its bills and will be forced to shut down.

deficit, raise

The Keynesian view stresses that:

demand creates its own demand. there is direct relationship between consumer spending and disposable income. when aggregate expenditures (demand) can be forever less than full-employment output therefore prolonged unemployment will persist. all of these are true. CORRECT - all of these are true.

A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future consumer income will fall will all cause aggregate:

demand to shift leftward

An increase in the price level caused by a rightward shift of the aggregate demand curve is called:

demand-pull inflation.

In the view of the classical school, unemployment:

disappears when everyone who is willing to work at the equilibrium wage finds employment.

In the aggregate expenditures model, a decrease in government spending causes a(n)

downward shift in the aggregate expenditures curve.

An increase in aggregate supply will cause the price level to:

fall and GDP to rise.

A recessionary gap is the amount by which aggregate expenditures ____ the amount required to achieve full-employment equilibrium GDP.

fall short of

Automatic stabilizers create ________ during recessions from increased government spending on welfare and unemployment insurance, and reduced tax revenues, and create _________ during peak growth periods of the economy from reduced government welfare spending and increased tax revenues.

fiscal stimulus, fiscal contraction

Keynesians:

focus on increasing aggregate demand in order to stimulate the economy.

According to the net exports effect, as the price level falls relative to the rest of the world,

foreigners buy more U.S. goods

A balanced budget is present when:

government revenues equal government expenditures.

A primary emphasis of the Keynesian school is the economy:

has a tendency to be in equilibrium at less than full employment.

External debt is that portion of the national debt:

held by foreigners

A recessionary gap:

implies an equilibrium level of output less than the full-employment level.

"Crowding out" is the theory that an increase in our federal government's budget deficit will likely:

increase the national debt. increase interest rates. decrease borrowing by households and businesses reduce the impact of the spending multiplier implies because of crowding out. all of these Correct - all of these.

If the federal government were to run a budget deficit, this would

increase the size of the national debt.

In the Keynesian model, the larger the marginal propensity to consume, the

larger the multiplier.

Equal increases in government spending and taxes will:

lead to an equal increase in the equilibrium level of real GDP.

Along the Keynesian range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

only real GDP.

Along the classical or vertical range of the aggregate supply curve, an increase in the aggregate demand curve will increase

only the price level

When the spending of consumers, businesses, government, and foreigners (net exports) is less than the aggregate output level of the economy, the Keynesian model result is that

output will fall

Cost-benefit principles can be applied to the decision of:

profit-maximizing firms. majority-rule voting. which project receives the most votes. rational ignorance. all of these Correct - all of these

A tax where wealthy people pay a larger percentage of their income than poor people is known as a(n)

progressive tax.

Generally, most economists feel that a sales tax is:

regressive

A tax is structured so that the tax as a percentage of income declines as the level of income increases is called a(n):

regressive tax

The social security tax is a:

regressive tax above a certain income level

A tax whose impact varies inversely with the income of the person taxed, and poor people have a higher percentage of their income taxed than rich people, is known as a:

regressive tax.

Sales and excise taxes are:

regressive.

The consumption function expresses the:

relation between consumption and disposable personal income

A decrease in aggregate supply will cause the price level to:

rise and GDP to fall.

Unemployment compensation payments

rise during a recession and thus reduce the severity of the recession.

A lower interest rate makes more investment projects profitable, meaning that

there is an inverse relationship between the rate of interest and the quantity of investment spending

"Crowding in" refers to federal government deficits:

used for public infrastructure that will offset any decline in business investment.

Aggregate supply increases when:

wage rates decrease while the economy's price level remains unchanged.