Econ exam 3

If unintended decreases in business inventories occur, we can expect:

an increase in GDP and falling unemployment

The U.S. public debt

consists of the historical accumulation of all past federal deficits and surpluses.

If government decreases its tax revenues by $5 billion and the MPC is 0.8, then we can expect the equilibrium GDP to:

increase by $20 billion.

The crowding-out effect of expansionary fiscal policy suggests that:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

The most likely way the public debt burdens future generations is by:

reducing the current level of investment.

If investment increases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

rightward by $40 billion at each price level.

Imports have the same effect on the current size of GDP as:

saving.

Other things equal, an increase in both business taxes and operating costs will:

shift the investment-demand curve to the left.

If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule:

will shift downward.

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 the MPC in an economy is 0.8, a $1 billion increase in government spending will ultimately increase equilibrium GDP by:

$5 billion.

Discretionary fiscal policy is so named because it:

(a) involves specific changes in T and G undertaken expressly for stabilization at the discretion of Congress and requires new explicit action by Congress.

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

3 billion

Assume the current equilibrium level of income is $4,625 billion as compared to the full-employment income level of $4,750 billion. If the MPC is 0.8, what change in taxes is needed to achieve full employment?

A decrease of $31.25 billion.

Assume the current equilibrium level of income is $3,000 billion as compared to the full-employment income level of $4,000 billion. If the MPC is 0.75, what change in taxes is needed to achieve full employment?

A decrease of $333.3 billion.

Ceteris paribus, a decrease in the real interest rate will result in a(n):

Increase in the quantity-demanded of investment.

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

Is not subject to the timing problems of discretionary policy

The aggregate expenditures model is built upon which of the following assumptions?

Prices are fixed.

is one in which taxes as a percentage of income increase as income increases.

Progressive income tax system

The cyclically adjusted budget refers to:

The cyclically adjusted budget refers to:

Which of the following will not tend to shift the consumption schedule upward? a. The expectation of a future increase in consumer incomes. b.Declining real interest rates. c.The expectation of a future decline in the consumer price index. d. A currently low level of household debt.

The expectation of a future decline in the consumer price index.

If unintended increases in business inventories occur, we can expect:

a decline in GDP and rising unemployment.

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.Refer to the information. The recognition lag of fiscal policy is reflected in events:

1 and 2

The spending multiplier is

1/MPS

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to:

increase by $45 billion.

An increase in disposable income or real GDP:

increases both consumption and saving by moving upward to the right along both the consumption and saving schedules.

Investment and saving are, respectively:

injections and leakages

Viewed through the aggregate expenditures model, the U.S. recession of 2007-2009 resulted mainly from:

insufficient aggregate expenditures.

Contractionary fiscal policy is so named because it:

is designed to contract real GDP and shift the Aggregate Demand curve to the left. Correct

Expansionary fiscal policy is so named because it:

is designed to expand real GDP and shift the Aggregate Demand curve to the right.

If investment decreases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:

leftward by $50 billion at each price level.

According to Keynes, the most important determinant of consumption and saving is the:

level of income

Supply-side economics emphasizes:

long-run effects on aggregate supply rather than short-run effects on aggregate demand. increasing incentives to work, save, and invest. low marginal tax rates

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the:

multiplier effect.

The equilibrium level of GDP is associated with

no unintended changes in inventories

Automatic, or non-discretionary, fiscal policy is so named because it:

occurs automatically to counteract the business cycle as the nation's level of GDP changes and does not require new explicit action by Congress.

In a private closed economy, when aggregate expenditures equal GDP:

planned investment equals saving.

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Refer to the information. If government desired to raise the equilibrium GDP to $650, it could:

raise G by $30 or reduce T by $40.

If MPC = .5, a simultaneous decrease in both taxes and government spending of $20 will:

decrease GDP by $20

If government decreases its purchases by $5 billion and the MPC is 0.75, then we would expect the equilibrium GDP to:

decrease by $20 billion.

If government increases its tax revenues by $15 billion and the MPC is 2/3, then we can expect the equilibrium GDP to:

decrease by $30 billion.

An appropriate contractionary fiscal policy for severe demand-pull inflation is:

decrease in government spending and increase in taxes.

A decrease in disposable income or real GDP:

decreases both consumption and saving by moving downward to the left along both the consumption and saving schedules.

Automatic and Discretionary fiscal policy will both stabilize the economy most when:

deficits are incurred during recessions and surpluses during inflations

In the aggregate expenditures model, it is assumed that investment

does not change when real GDP changes

It is true that:

equal increases in government spending and taxes increase the equilibrium GDP

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Refer to the information. The spending multiplier for this economy is:

4

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Refer to the information. The equilibrium level of GDP for this economy is:

530$

consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income.Refer to the given data. At an $800 level of disposable income, the level of saving is:

60$

consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income.Refer to the given data. At an $800 level of disposable income, the level of consumption is:

740$

Which of the following would increase GDP by the greatest amount?

A $20 billion increase in government spending

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in government spending is needed to achieve full employment?

An increase of $15 billion.

Assume the current equilibrium level of income is $4,625 billion as compared to the full-employment income level of $4,750 billion. If the MPC is 0.8, what change in government spending is needed to achieve full employment?

An increase of $25 billion

Assume the current equilibrium level of income is $3,000 billion as compared to the full-employment income level of $4,000 billion. If the MPC is 0.75, what change in government spending is needed to achieve full employment?

An increase of $250 billion.

The immediate determinants of investment spending are the:

expected rate of return on capital goods and the real interest rate.

Other things being equal, a decrease in an economy's exports will

Decrease domestic aggregate expenditures and the equilibrium level of GDP

Due to automatic stabilizers, when the nation's total income rises, government transfer spending:

Decreases and tax revenues increase

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Great Depression.

The total amount of debt owed by the Federal government is represented by the total value of the outstanding:

U.S. government securities

An appropriate expansionary fiscal policy for a severe recession is:

a decrease in taxes and an increase in government spending.

Taxes represent:

a leakage of purchasing power, like saving.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because:

a portion of a tax cut will be saved.

The level of aggregate expenditures in the private closed economy is determined by the:

expenditures of consumers and businesses.

At equilibrium real GDP in a private closed economy:

aggregate expenditures and real GDP are equal.

An inflationary expenditure gap is the amount by which

aggregate expenditures exceed the full-employment level of GDP.

Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of:

an increase in personal taxes.

If for some reason households become increasingly thrifty, we could show this by:

an upward shift of the saving schedule.

The Laffer curve suggests that:

beyond some relatively high tax rate, increasing marginal tax rates may actually decrease tax revenues.

The immediate-short-run aggregate supply curve represents circumstances where:

both input and output prices are fixed.

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the:

budget surplus

In a private closed economy, when aggregate expenditures exceed GDP:

business inventories will fall.

In a private closed economy, when aggregate expenditures are less than GDP:

business inventories will rise.

Compared to consumption, investment spending in the United States tends to be unstable because:

capital goods are durable. expected profits are highly variable. innovation occurs at an irregular pace.

The spending multiplier applies to:

consumer, investment, net exports, and government spending.

A recessionary expenditure gap is

the amount by which the full-employment GDP exceeds the level of aggregate expenditures. Correct

When current government expenditures exceed current tax revenues and the economy is achieving full employment:

the cyclically adjusted budget has a deficit.