Econ Exam Practice

Which of the following is incorrect?

When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

Which of the following would shift the saving schedule upward?

a decrease in wealth

The economy starts out with a balanced federal budget. If the government then implements expansionary fiscal policy, then there will be a

budget deficit.

The short-run aggregate supply curve shows the

direct relationship between the price level and real GDP produced.

Refer to the graph. Which of the following factors does not explain a movement along the AD curve?

the expenditure multiplier effect

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

r will fall as more investment is undertaken.

The goal of expansionary fiscal policy is to increase

real GDP.

Productivity measures

real output per unit of input.

The size of the multiplier is equal to the

reciprocal of the slope of the saving schedule.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to

reduce government expenditures or increase taxes.

The effect of imposing a lump-sum tax is to

reduce the absolute levels of consumption and saving at each level of GDP but to not change the size of the multiplier.

In an effort to stop the U.S. recession of 2007-2009, the federal government

reduced taxes and increased government spending.

Which would most likely shift the aggregate supply curve? A change in the prices of

resources.

The foreign purchases effect on aggregate demand suggests that a

rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand.

At the point where the consumption schedule intersects the 45-degree line,

saving is zero.

Refer to the given figure. If the relevant saving schedule were constructed,

saving would be minus $20 billion at the zero level of income.

Leakages from the income-expenditure stream are

saving, taxes, and imports.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

shift the AD curve to the left.

If businesses feel more optimistic about the state of the economy, then this change is likely to

shift the investment demand curve to the right.

Other things equal, a 10 percent decrease in corporate income taxes will

shift the investment demand curve to the right.

Assume that an increase in a household's disposable income from $40,000 to $48,000 leads to an increase in consumption from $35,000 to $41,000, then the

slope of the consumption schedule is 0.75.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the

smaller is the economy's MPS.

If Trent's MPC is 0.80, this means that he will

spend eight-tenths of any increase in his disposable income.

The investment demand curve will shift to the right as a result of

technological progress.

A recessionary expenditure gap is

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

Which factor explains the variability of investment?

the durability of capital goods

Consumption is $141 billion, planned investment is $15 billion, and saving is $15 billion in a private, closed economy. At this level,

the economy is in equilibrium.

When we draw an investment demand curve, we hold constant all of the following except

the interest rate.

Which of the following is graphed as a horizontal line across levels of real GDP in the aggregate expenditures model?

the investment schedule

The value of the multiplier is likely to fall if there is a fall in

the marginal propensity to consume.

The real interest rate is

the percentage increase in purchasing power that the lender receives on a loan.

Per-unit production cost is

total input cost divided by units of output.

Refer to the graph for a private closed economy. When output or income is $350 billion, there will be

unplanned decreases in inventories.

The long-run aggregate supply analysis assumes that

both input and product prices are variable.

Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. A change in which factor is most likely to change both aggregate demand and aggregate supply?

Business Taxes

In 2008 during the Great Recession, the federal government provided tax rebate checks to taxpayers in the hope that

C would shift up.

Refer to the diagram. At disposable income level D, consumption is equal to

D minus CD.

Saving is always equal to

actual investment

An increase in productivity will

increase aggregate supply.

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes

the foreign purchases effect.

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by

$20 billion.

Refer to the table. All figures are in billions of dollars. Suppose investment is $12 billion and the economy revises its saving plans to save $4 billion less at all levels of income. The new equilibrium GDP will be

$290 billion.

Ig = 80 S = −80 + 0.4Y (Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). In equilibrium, consumption will be

$320.

If the MPC is 0.80, all taxes are lump-sum taxes, and the equilibrium GDP is $25 billion below the full-employment GDP, then the size of the recessionary expenditure gap is

$5 billion.

If the economy has a recessionary expenditure gap of $15 billion and the MPS is 0.3, then the equilibrium level of GDP is

$50 billion below the full-employment level.

Ca = 25 + 0.75 (Y − T) Ig = 50 Xn = 10 G = 70 T = 30 (Advanced analysis) The accompanying equations are 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. The equilibrium level of GDP for this economy is

$530.

The table shows the consumption schedule for a hypothetical economy. All figures are in billions of dollars. If planned investments were fixed at $16, taxes were zero, government purchases of goods and services were zero, and net exports were zero, then equilibrium real GDP would be $630 initially. If government purchases were then raised from $0 to $10, and lump-sum taxes also increased from $0 to $10, other things constant, then the equilibrium real GDP would become

$640.

The table shows a private open economy. All figures are in billions of dollars. If net exports increased by $10 billion at each level of GDP, the equilibrium real GDP would be

$650.

If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by

$9 billion.

Refer to the given table, which illustrates the multiplier process. The marginal propensity to save is

0.2

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. The MPC is

0.90.

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

10 billion

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy. C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of consumption spending will be

195.

If the MPC is 0.6, the multiplier will be

2.5.

The table gives aggregate demand and supply schedules for a hypothetical economy. The equilibrium price level will be

200.

In the accompanying graph, the long-run aggregate supply curve would be represented by which line?

4

Suppose that an economy produces 300 units of output, employing 50 units of input, and the price of the input is $9 per unit. The level of productivity and the per-unit cost of production are

6 and $1.50, respectively.

Dissaving occurs where

consumption exceeds income.

An increase in household wealth that creates a wealth effect would shift the

consumption schedule upward and the saving schedule downward.

In the aggregate expenditures model of the economy, a downward shift in aggregate expenditures can be caused by a

decrease in government spending or an increase in taxes.

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations.

Fiscal policy refers to

deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.

Other things being equal, the effect of a downward shift of the economy's net export schedule on equilibrium GDP will be similar to a(n)

downward shift in the consumption schedule.

The economy's long-run AS curve assumes that wages and other resource prices

eventually rise and fall to match upward or downward changes in the price level.

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)

expansionary fiscal policy.

The determinants of aggregate demand

explain shifts in the aggregate demand curve.

When the Federal government uses taxation and spending actions to stimulate the economy, it is conducting

fiscal policy.

Injections into the income-expenditure stream include

government purchases and exports.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

government should undertake neither expansionary nor contractionary fiscal policy.

C = 40 + 0.8Y Ig = 40 X = 20 M = 30 (Advanced analysis) The equations give information for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in billions of dollars. International trade in this case

has a contractionary effect on GDP.

The variability of business profits

helps explain the instability of investments over time.

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID2?

higher expected rates of return on investment

A personal tax cut of $50 billion will affect income differently than an increase in government spending by $50 billion because

households may save part of the additional income from the tax cut.

A change in interest rates would shift the consumption schedule and the saving schedule ______; a change in taxes would shift these two schedules ______.

in opposite directions; in the same direction

The determinants of aggregate supply

include resource prices and resource productivity.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

increase aggregate demand.

In the aggregate expenditures model, an increase in government spending may

increase output and employment.

In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

increase taxes by $16 billion.

The short-run aggregate supply curve represents circumstances where

input prices are fixed, but output prices are flexible.

Refer to the diagram for a private closed economy. In this economy, investment

is $40 billion at all levels of GDP.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. The marginal propensity to save

is highest in economy (1).

The effect of contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

If consumers expect prices to rise and shortages to occur in the future, then there will be a shift

of the consumption schedule upward and of the saving schedule downward.

(Last Word) Art Buchwald's article, "Squaring the Economic Circle," is a humorous description of what would happen to total income if

people and firms stopped buying from one another.

Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's budget shows a surplus,

planned investment must exceed saving.

Refer to the graph for a private closed economy. At the equilibrium level of GDP, saving will be

$100 billion.

Refer to the diagram for a private closed economy. The equilibrium GDP is

$180 billion.

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 per-unit cost of production in the economy described is

$2.

Refer to the accompanying consumption schedule. The average propensity to save at income level B is represented by

EF/BF.

Which of the following statements concerning the equilibrium level of GDP is incorrect?

Full employment will necessarily be realized.

If the equilibrium level of GDP in a private open economy is $1,000 billion and consumption is $700 billion at that level of GDP, then

Ig + Xn must equal $300 billion.

Refer to the graph. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?

P2 and Q2

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

Prices are fixed.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

In a mixed open economy, the equilibrium GDP is determined at that point where

Sa + M + T = Ig + X + G.

The graph shows the relationship between consumption and income. Which of the following statements is correct?

The average propensity to consume at income level K is given by KM divided by KN.

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

Which of the following fiscal policy changes would be the most contractionary?

a $10 billion increase in taxes and a $30 billion cut in government spending

An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to

a rightward shift of the aggregate demand curve in the AD-AS model.

Planned investment plus unintended increases in inventories equals

actual investment.

When planned investment exceeds saving in a private closed economy,

aggregate expenditures will exceed GDP.

Investment spending in the United States tends to be unstable because

all of the factors mentioned in other answers contribute to the instability. (expected profits are highly variable, capital goods are durable, innovation occurs at an irregular pace.

If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause

an $8 billion downshift in the consumption schedule.

In deriving the aggregate demand curve from the aggregate expenditures model, we note that

an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward).

Which combination of factors would most likely increase aggregate demand?

an increase in consumer wealth and a decrease in interest rates

Which of the following events would most likely reduce aggregate demand?

an increase in real interest rates

The investment demand curve will shift to the left as a result of

an increase in the excess production capacity available in industry.

The given figure suggests that

as income increases, consumption decreases as a percentage of income.

The fraction, or percentage, of total income which is consumed is called the

average propensity to consume.

The MPC can be defined as the

change in consumption divided by the change in income.