ECON 222 Lindahl Midterm #2

How much will $500 in new spending change equilibrium income if the marginal propensity to consume is 0.9? a) $450 b) $4,500 c) $5,000 d) $1,000

c) $5,000

The part of the budget that works its way through the appropriations process of Congress each year is: a) spending authorized by permanent laws. b) mandatory spending. c) discretionary spending. d) spending on programs such as Social Security.

c) discretionary spending.

What is the spending multiplier if the marginal propensity to consume is 0.5? a) 0.5 b) 1.5 c) 0.25 d) 2

d) 2

Because Susan received a raise in pay from $30,000 to $50,000, her consumption increased from $29,000 to $45,000. What is Susan's marginal propensity to consume? a) 0.8 b) 0.9 c) 0.97 d) 0.75

a) 0.8

If income is $50,000, consumption is $48,000, and saving is $2,000, then the average propensity to consume is: a) 0.96. b) 0.50. c) 1.04. d) 0.04.

a) 0.96.

The term fiscal policy refers to changes in: a) discretionary spending and taxes. b) mandatory spending and taxes. c) the money supply and interest rates. d) taxes only.

a) discretionary spending and taxes.

If Belinda's marginal propensity to save is 0.2, what is her marginal propensity to consume? a) 0.2 b) 2 c) 0.8 d) 8

c) 0.8

Why is the aggregate supply curve positively sloped in the short run? a) Some input costs are slow to change. b) Some input costs are quick to change. c) Output does not vary much over time. d) Output varies considerably over time.

a) Some input costs are slow to change.

Which of the following statements about the multiplier is correct? a) The spending multiplier can work to increase or to decrease equilibrium GDP. b) The spending multiplier exists only during economic expansions. c) The size of the spending multiplier is dictated by the amount of government spending. d) The value of the spending multiplier is the inverse of the marginal propensity to consume.

a) The spending multiplier can work to increase or to decrease equilibrium GDP.

What shape is the aggregate demand curve? a) a downward-sloping line b) an upward-sloping line c) a vertical line d) a horizontal line

a) a downward-sloping line

Which of the following is an example of contractionary fiscal policy? a) decreasing government spending b) increasing government spending c) increasing transfer payments d) decreasing taxes

a) decreasing government spending

The idea of the spending multiplier is that: a) one person's spending becomes another person's income, which stimulates more spending. b) people spend money on some items, such as food and toiletries, multiple times. c) people tend to spend a greater amount (a multiple) in stores than they originally intend. d) when a person saves money in a bank, the money earns interest and grows to a larger amount.

a) one person's spending becomes another person's income, which stimulates more spending.

The aggregate demand curve shows the amount of: a) output b) investment that will occur at different interest rates. c) unemployment at various price levels. d) budget deficits at various levels of real GDP.

a) output

If the marginal propensity to consume is 0.75, the initial effect of a decrease in spending of $1000 is a decrease of _______ in income followed by an additional decrease of _______ in consumption as a result of the income generated. a) $1000; $1000 b) $1000; $750 c) $750; $1000 d) $750; $750

b) $1000; $750

If the marginal propensity to consume is 0.8, the initial effect of an increase in spending of $1000 is an increase of _______ in income followed by an additional _______ in consumption as a result of the income generated. a) $1000; $1000 b) $1000; $800 c) $800; $1000 d) $800; $800

b) $1000; $800

What is the average propensity to consume if consumption spending is $21,000 and income is $30,000? a) 1.42 b) 0.7 c) 0.42 d) 0.3

b) 0.7

What is the average propensity to consume if consumption spending is $40,000 and income is $50,000? a) 1.25 b) 0.8 c) 0.5 d) 0.2

b) 0.8

If the marginal propensity to save is 0.2, what is the multiplier? a) 0.2 b) 5 c) 0.5 d) 1.25

b) 5

Which of the following will cause the aggregate demand curve to shift to the right? a) an increase in household debt b) an increase in consumer confidence c) a decrease in consumer spending brought about by lower household wealth d) a decrease in household purchasing power brought about by a higher price level

b) an increase in consumer confidence

If the multiplier is 1.5 and investment spending decreases by $200, equilibrium income will _______ by ________. a) increase; $200 b) decrease; $300 c) increase; $12 d) decrease; $133

b) decrease; $300

The goal of expansionary fiscal policy is to: a) balance the budget. b) increase aggregate output. c) prevent the economy from entering into an inflationary spiral. d) bring down interest rates.

b) increase aggregate output.

The short-run aggregate supply curve is upward sloping due to the: a) wealth effect. b) input costs not changing as fast as product prices. c) flexibility of input costs in the short run. d) income effect.

b) input costs not changing as fast as product prices.

Spending authorized by permanent law is: a) monetary policy. b) mandatory. c) discretionary. d) spending on programs such as national defense, transportation, science, environment, and income security.

b) mandatory.

Because Lilly received a raise in pay from $90,000 to $110,000, her consumption increased from $50,000 to $60,000. What is Lilly's marginal propensity to consume? a) 2 b) 1 c) 0.75 d) 0.5

d) 0.5

What is the average propensity to consume if saving is $10,000 and income is $100,000? a) 0.10 b) 0.5 c) 0.25 d) 0.90

d) 0.90

If the marginal propensity to save is 0.25, what is the multiplier? a) 0.25 b) 0.75 c) 1.33 d) 4

d) 4

What is the spending multiplier if the marginal propensity to consume is 0.8? a) 0.5 b) 1.25 c) 0.8 d) 5

d) 5

Which of the following will cause a movement up along the aggregate demand curve? a) an increase in household debt b) an increase in consumer confidence c) an increase in consumer spending brought about by higher household wealth d) a decrease in household purchasing power brought about by a higher price level

d) a decrease in household purchasing power brought about by a higher price level

The effect of an increase in government spending on the economy can be shown as: a) a movement to the right along the same aggregate demand curve. b) a movement to the left along the same aggregate demand curve. c) a shift to the left of the entire aggregate demand curve. d) a shift to the right of the entire aggregate demand curve.

d) a shift to the right of the entire aggregate demand curve.

Which of the following is involved in expansionary fiscal policy? a) increasing taxes b) decreasing transfer payments c) decreasing government spending d) increasing government spending

d) increasing government spending

Which of the following, when used as inputs for production, most likely contributes to the positive slope of the short-run aggregate supply curve? a) the cost of fuel for a taxi driver b) the cost of metals, such as copper, for a company that makes electrical wiring c) food costs for a restaurant d) labor costs paid by an airline

d) labor costs paid by an airline

If the multiplier is 6 and investment spending increases by $200, how much will equilibrium income increase? a) $1,200 b) $300 c) $12 d) $3

a) $1,200

If the marginal propensity to consume is 0.7 and income increases from $20,000 to $30,000, by how much does consumption increase? a) $10,000 b) $7,000 c) $5,000 d) $50,000

b) $7,000

If the marginal propensity to consume is 0.9, an initial $1000 increase in spending and income will result in an increase in consumption of _______ followed by an increase in consumption of _______ in the next round. a) $1000; $1000 b) $900; $900 c) $900; $810 d) $810; $900

c) $900; $810

What is the average propensity to consume if income is $50,000 and saving is $10,000? a) 0.20 b) 0.50 c) 0.8 d) 1.25

c) 0.8

What is the spending multiplier if the marginal propensity to consume is 0.6? a) 0.4 b) 2 c) 2.5 d) 4

c) 2.5

What happens to long-run aggregate supply when the aggregate price level decreases? a) It increases. b) It decreases. c) It stays the same. d) It varies depending on long-run aggregate demand.

c) It stays the same.

The effect of higher commodity prices (such as cotton and wheat) on the economy would be illustrated by: a) a movement to the right along the same short-run aggregate supply curve. b) a movement to the left along the same short-run aggregate supply curve. c) a shift to the left of the entire short-run aggregate supply curve. d) a shift to the right of the entire short-run aggregate supply curve.

c) a shift to the left of the entire short-run aggregate supply curve.

What does the aggregate supply curve look like in the long run at full employment? a) an upward-sloping line b) a downward-sloping line c) a vertical line d) a horizontal line

c) a vertical line

In the long run, the aggregate supply curve is: a) a vertical line at an output level that is less than full-employment output. b) a downward-sloping line that intersects the horizontal axis at full-employment output. c) a vertical line at full-employment output. d) a horizontal line at full-employment output.

c) a vertical line at full-employment output.