Econ chapter 11 and 12 test review

If the government lowers taxes by $400 billion, and the MPC is 0.75, the change in GDP will be:

$1,200 billion

If the government increases spending by $400 billion, and the MPC is 0.75, the change in GDP will be:

$1,600 billion.

During a recession, analysts at the CBO project that the economy is operating $1.5 trillion below potential output. Assuming the MPC is 0.8, by how much would the government have to cut taxes to restore potential output?

$375 billion

If the government wishes to increase GDP by $1,000 billion, and the MPC is 0.6, it should increase its spending by _______ billion

$400

If spending increases by $100, and GDP increases by $400 as a result, what must the MPC be?

.75

What is the calculation for the simplified spending multiplier?

1/(1 − MPC)

Suppose that Christina has a disposable annual income of $50,000 and an MPC of 0.8. She allocates $10,000 of her income for necessities, and the remaining money is both spent and saved. Based on this information, what is Christina's autonomous consumption?

10,000

Suppose Erin receives an inheritance worth $50,000. If her MPC is 0.75, how much of the additional $50,000 that Erin earns will be spent?

37,500

If the MPC is 0.8, what must the spending multiplier be?

5

The long-run aggregate supply curve represents:

A)potential output in the economy. B) the level of output possible if the economy is operating at full capacity. C) a production function for the entire economy.

Which of the following is a basic factor of production that is used to produce output?

All of these are factor inputs.

Which of the following is a component of aggregate demand?

Consumption , Investment , Net exports

Which of the following would likely cause the aggregate demand curve to shift to the left?

Decreased consumer confidence

A drop in government spending would cause which type of shock?

Demand shock

Which component of GDP is not correlated with the price level?

Government spending

Which of the following statements is true about the aggregate demand curve?

It shows the relationship between the overall price level and the level of total demand.

Suppose new immigration legislation permanently limits the number of people who are able to enter the country through H1-B visas. Which type of shock would this legislation cause?

Long-run supply shock

Which of the following is a component of aggregate demand?

Net exports

Which three macroeconomic variables together best describe the health of the economy?

Output, prices, and employment

Which of the following is a determinant of investment spending?

Real income

Which of the following events would cause a long-run supply shock?

Refinery capacity in the United States drops permanently.

Which of the following is a determinant of investment spending?

Taxes

Suppose OPEC announces it will be expanding the production of oil, decreasing its cost in the world market. How would this be represented in the AD/AS model?

The short-run aggregate supply curve would shift to the right.

Which of the following describes the relationship between production and inventories?

Which of the following describes the relationship between production and inventories?

During the Great Depression, unemployment was so bad that nearly _______ of the labor force was unemployed.

a quarter (25%)

An inflationary output gap exists when the current level of output is _______ full employment GDP.

above

The relationship between the overall price level and total production by firms is shown in the:

aggregate supply curve.

A vertical supply curve reflects:

aggregate supply in the long run.

Planned investment is the:

amount that firms budget for new capital resources and inventory accumulation

If the MPC is 0.6, and the government spends an additional $50 billion, the overall effect on GDP will be

an increase of $125 billion.

In the equation PAE = A + bY, the MPC is captured by:

b

Government spending tends to:

be unaffected by changes in the price level.

A recessionary output gap exists when equilibrium aggregate expenditure is _______ full employment GDP.

below

The four components of aggregate expenditure (AE) are:

consumption, investment, government, and net exports

When PAE is less than Y, firms will:

decrease production

When the housing bubble popped in 2007, combined demand and supply side shocks:

decreased output.

The multiplier measures the:

effect of government spending or tax cuts on national income.

When the U.S. price level decreases relative to the rest of the world:

exports and net exports will increase.

Higher interest rates cause:

firms to invest less in new factories and working capital.

Lower interest rates cause:

firms to invest more in new factories and working capital.

The aggregate supply and aggregate demand model is used to explain:

how output, prices, and employment are tied together in a single economic equilibrium.

If a firm's business taxes decrease, we would expect investment spending to:

increase

When PAE is less than Y, inventories should:

increase

To counteract the effects of a recession, policymakers can:

increase government spending.

Which of the following could cause a decrease in consumption?

interest rates increase

If PAE is greater than Y, we expect:

inventories to decrease.

Actual investment is the:

investment a firm makes into stocks and bonds to generate profit

Autonomous expenditure:

is mostly controlled by the government

The long-run aggregate supply curve represents the level of output possible if the economy:

is operating at full capacity.

Suppose a housing bubble inflates house prices to new records. What will happen to overall consumption in this economy?

it will increase

Widespread adoption of mobile phones over the last 20 years has caused the _______ aggregate supply curve to _______

long-run; shift to the right

Stagflation refers to a situation in which an economy is experiencing _______ economic growth and _______ inflation.

low; high

Higher interest rates:

make it more expensive to borrow

The acronym MPC stands for:

marginal propensity to consume.

During the Great Depression, the banking industry was crippled so badly that _______ of the banks failed.

nearly half

The wealth effect explains the _______ relationship that exists between consumer spending and overall _______.

negative; price level

In economics, investment refers to:

physical capital

The Keynesian equilibrium occurs when:

planned inventories are equal to actual inventories

A(n) _______ relationship exists between expected future income and consumption.

positive

The real exchange rate generally has a _______ relationship with aggregate expenditure.

positive

The long-run aggregate supply curve will shift to the right if the:

potential output of the economy expands.

If PAE is greater than Y

production will eventually increase.

An example of stimulus spending by the government might be:

road building and infrastructure repair.

Temporary supply shocks:

shift the short-run aggregate supply curve.

If consumption increases, the aggregate demand curve will:

shift to the right.

The U.S. government cut the top corporate income tax rate from 35 percent to 21 percent through the 2017 Tax Cuts and Jobs Act. This legislation:

shifted the aggregate demand curve to the right.

In 2009, the U.S. government passed a bill that increased government spending. In response, the aggregate demand curve most likely:

shifted to the right

A spike in oil prices caused by labor disputes would shift the:

short-run aggregate supply curve only

If the government implements a new, more stringent minimum wage law, we would expect the _______ aggregate supply curve to shift to the _______.

short-run; left

The aggregate demand curve:

slopes downward.

Because the prices of final goods and services tend to increase more quickly than the prices of inputs, the short-run aggregate supply curve:

slopes upward

In the short run, the aggregate supply curve:

slopes upward.

The multiplier effect suggests that

spending $1 increases GDP by more than $1.

A situation in which output decreases while prices increase is often referred to as:

stagflation.

If the government were to increase income taxes, we would predict:

the aggregate demand curve to shift to the left.

If the government does not react to a recession:

the economy will recover, but much more slowly.

When the prices of final goods and services increase more quickly than the prices of inputs:

the prices of some inputs are sticky.

The aggregate supply curve shows:

the relationship between the overall price level and firms' total production

The real exchange rate is the:

value of goods in one nation relative to the value of the same set of goods in another country.

Economist John Maynard Keynes noted that one of the main contributors to the Great Depression in the 1930s was:

weak spending