ECON 201 Test 4 Blanchard

increase tax rates and/or reduce government spending.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

7%

If the inflation premium is 3 percent and the real interest on a loan is 4 percent, then the nominal interest rate is

aggregate demand increases because net exports increase.

If the national incomes of our trading partners increase, then our

$0.75 to $1.25.

In an economy, it costs $1,500 to produce 2,000 units of output. If the costs increase to $2,500, then the per unit cost of production will have increased from

agricultural commodities

In which industry or sector of the economy is output least likely to be affected by the business cycle?

Ca + Ig + Xn + G

The level of aggregate expenditures in a mixed open economy consists of

the larger the MPC.

An increase in taxes will have a greater effect on the equilibrium GDP

crowding-out effect

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the

equilibrium level of real domestic output and prices.

The intersection of the aggregate demand and aggregate supply curves determines the

cost-push inflation

may be caused by a negative supply shock

built in stability

means that with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus

If net exports are positive,

aggregate expenditures are greater at each level of GDP than when net exports are zero or negative.

The aggregate cost of unemployment can be measured by the

amount by which potential GDP exceeds actual GDP.

If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the

consumption schedule will shift downward by $20 billion.

Okun's law

every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, a 2 percent GDP gap is generated

federal budget deficits

exists when federal government spending exceeds tax revenues in a given year

a persons real income will increase by 3 percent if her nominal income

increases by 5% while the price index rises by 2%

when the economy is at full employment

the actual and the cyclically adjusted budgets will be equal.

short run

version of aggregate supply assumes that product prices are flexible, while resource prices are fixed

surplus

when current tax revenues exceed current government expenditures and the economy is achieving full employment, the cyclically adjusted budget has a __.

discretionary fiscal policy

when the federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is

$10Bil increase in gov spending

which represents the most expansionary fiscal policy?

at the economy's natural rate of unemployment

the economy achieves its potential output

net exports have increased

the economy experiences an increase in the price level and an increase in real domestic output. which is a likely explanation?

aggregate demand

the intent of contractionary fiscal policy is to decrease

7 and 8

1. Government Spending 2. Consumer Expectations 3. Degree of Excess Capacity 4.Personal Income Tax Rates 5.Productivity 6. National Income Abroad 7. Business Taxes 8. Domestic Resource Availability 9. Prices of Imported Products 10. Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which combination of factors best explain why the aggregate supply curve would shift?

supply curve would shift to the left.

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate

$40 billion

Assume the MPC is 0.8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by

8%

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of potential GDP is

not in the labor force.

Full-time homemakers and retirees are classified in the BLS data as

surplus and price level will fall

If a particular price level, real output from producers is greater than real output desired by purchasers, then there will be a general

shift downward

If net exports decline from zero to some negative amount, the aggregate expenditures schedule would

$3 Billion

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by

depreciate the dollar compared to foreign currencies.

If the United States wants to increase its net exports in the short term, it might take steps to

a country's net exports to fall.

If the dollar appreciates relative to foreign currencies, we would expect

rise proportionately more than the change in GDP.

If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should

government purchases and exports.

Injections into the income-expenditure stream include

time the need for the fiscal action is recognized and the time that the action is taken.

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the

start of the recession and the time it takes to recognize that the recession has started.

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the

supply curve will shift rightward.

Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate

decrease by $50 billion.

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to

1.6%

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about

business cycles

The recurrent ups and downs in the level of economic activity extending over several years are referred to as

20.6 percent.

The total adult population of an economy is 175 million, the number of employed is 122 million, and the number of unemployed is 17 million. The percentage of adults who are not in the labor force is

long run

The version of aggregate supply that allows for changes in both product prices and resource prices is the

10 percent

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6 percent. But if the rate of inflation was anticipated to be 4 percent, the bank would most likely charge the firm an annual interest rate of

decrease government spending and increase taxes

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP gap here?

less flexible

a decrease in aggregate demand will cause a greater decline in the real output the ___ is the economy's price level

productivity

a rightward shift in the aggregate supply curve is best explained y an increase in

A decrease in government spending will cause a(n)

decrease in aggregate demand.

multiplier effect

demonstrates equal increases in government spending and taxes increase the equilibrium GDP.

-4.0 percent

if the consumer price index was 125 in one year and 120 in the following year, then the rate of inflation was approximately

taxes

if the government wishes to increase the level of real GDP, it might reduce

percentage change

in real income approximates percentage change in nominal income minus percentage change in price level

cost push inflation

is characterized by a decrease in aggregate supply and no change in aggregate demand

federal budget deficit

is found by subtracting government tax revenues from government spending in a particular year

public debt

is held as treasury bills, treasury notes, treasury bonds, and us savings bonds

crowding-out effect

of expansionary fiscal policy suggests that government spending increases at the expense of private investment

investment schedule

shows the amounts business firms collectively intend to invest at each possible level of GDP.

aggregate supply curve

shows the various amounts of real output that businesses will produce at each price level

2

suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is

the higher the rate of unemployment

the larger is the GDP gap

investment

the most likely way the public debt burdens future generations, if at all, is by reducing the current level of __.

downsloping

the real-balances, interest-rate, and foreign purchases effects all help explain why the aggregate demand curve is

recognition lag

the time that elapses between the beginning of a recession or an inflationary episode and the indentification of macroeconomic problem is referred to as an