Econ test 2

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

A. A $40 billion increase in government spending

When the AS curve is vertical, increases in AD wil

A. Increase the average price level but have no impact on unemploymen

fiscal policy is the use of

A. Government spending and taxes to alter macroeconomic outcome

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

A. Increase taxes by $16 billion

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

A. Taxes

93. Assume the economy is initially in equilibrium on AD 2 and AS 2 . Which curve would have shifted, and in what direction would it have shifted, if a new equilibrium were to occur at an output level of $300 billion and a price level of P 3 in Figure 8.3?

A. aggregate supply would have shifted to the left

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

A. fiscal policy

Which of the following is a potential problem at macro equilibrium

A. inconsistent with macroeconomic goals

Which combination of fiscal policy actions would most likely be offsetting?

A. increase in taxes and government spending

in the long run which of the following is true

A. profit effects are equal to cost effects

consumers expect increasing inflation

As consumers expect prices to be higher in the future, their spending rises today causing AD to shift right

Macro equilibrium always occurs when

C. Aggregate demand equals aggregate supply at a given average price lev

Which of the following would result if the price level were below the equilibrium level

C. Consumers would bid prices up by competing for goods currently in shortage

98. Given AD1 and AS1 in Figure 8.3, the classical approach to achieving full employment at an output of $300 billion would be to

C. Do nothing and wait for "natural" market forces to achieve full employme

n an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is 0.9, then it could:

C. Increase government spending by $6 billion

according to keynes uemployment results form

C. Insufficient spending on the part of consumers, business, and governmen

The interest rate effect suggests that

C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending

The aggregate demand curve is:

C. downsloping because of the interest rate, real balances, and foreign purchases effects

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?

C. $12 billion

When the Federal government cut taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be

C. Countercyclical

Refer to the above graph. Assume that the economy is in a recession with a price level of P 1 and output level Q 1 . The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new eq uilibrium price level and output?

C. P2 and Q2

the goal of expansionary fiscal policy is to increase

C. Real GDP

The only policy lever that is effective against unemployment when the AS curve is vertical is

C. Supply-side policy

Refer to the above graph. What combination would most likely cause a shift from AD 1 to AD 3

C. an increase in taxes and a decrease in government spending

You are given the following information about aggregate demand at the existing price level for an economy: (1) co nsumption = $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 consiste nt with closing the GDP - gap here?

C. decrease government spending and increase taxes

According to Keynesian theory, the correct fiscal policy to stimulate the economy would be to

C. increase government expenditures to increase aggregate demand

Which group of economists believes that there is a natural rate of output that is relatively immune to short - run fluctuations in aggregate demand

C. monetarists

The public debt is the amount of money that

C. the Federal government owes to holders of U.S. securities

Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a higher level of output would be to

D. Employ an expansionary fiscal policy

For the aggregate supply curve, the profit effect

D. Is temporary in the short run, while in the long run it is canceled out because the cost effect dominates

Refer to the figure above. The economy is at equilibrium at point C which is below potential output . What fiscal policy would increase real GDP?

D. Shift aggregate demand by increasing transfer payments

the public debt is held as

D. Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds

The real - balances effect indicates that:

D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Refer to the above graph. Assume that the economy initially has a price level of P 1 and output level Q 1 . If the government implements expansionary fiscal policy and the full multiplier effect was felt, it would bring the economy to

D. P1 and Q3

Individual employment and training programs are levers most likely to be advocated by

D. Supply-side economists

fiscal policy is enacted through changes in

D. Taxation and government spending

Which of the following results if at a particular price level, the aggregate quantity supplied exceeds the aggregate quantity demanded

D. a surplus causes the price level to fall

which of the following is a basic macro policy strategy

D. all of the choices are correct

You are given the following i nformation about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full - employment level of GDP for th is economy is $600 billion, then what combination of actions would be most consistent with closing the GDP - gap here?

D. increase government spending and decrease taxes

If full employment is associated with an output that is greater than the current macro equilibrium, which of the following best describes the impact of a rightward shift of the aggregate supply curve, ceteris paribus

D. lower price level and a higher level of output

When changes in taxes and government spending occur in the economy with explicit action congress, such policy is

D. nondiscretionary

From the supply - side perspective, the economy may fail to reach full employment because of

D. taxes that are too high

Which of the following is true if equilibrium exceeds full employmen

D. the economy is working beyond normal capacity

The devastating effects of the tsunami trigger a recession across South Asia; given the fact South Asia is U.S. trading partner.

U.S. exports due to the recession, AD shifts left

the intersection of the AD and AS curves. 97. Given AD1 and AS1 , if the average price level in Figure 8.3 were at P3

a. a surplus would exist initially

95. Macro equilibrium is established at which price level, given AD 1 and AS 1 in Figure 8.3

b. P2

U.S. corporate taxes decline

business after-tax profits rise, AS shifts to the right

The foreign purchases effect

moves the economy along a fixed aggregate demand curve.

A supply - side policy approach in Figure 8.3, given AD1 and AS1 , to achieve both lower prices and more output would be to

B. Reduce marginal tax rates and government regulation in an effort to move AS 1 to AS 2

In the long run, an increase in aggregate demand will lead

B. a higher price level only

Ceteris paribus , the price level will decrease if the aggregate

B. demand curve shifts to the left

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

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

Refer to the above graph. What combination would most likely cause a shift from AD 1 to AD 2 ?

B. A decrease in taxes and an increase in government spending

f the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be

B. Increased government spending or decreased taxation, or a combination of the two actions

Recessions have contributed to the public debt by:

reducinh national income and therefore tax revenues

Refer to the figure above. The economy is at equilibrium at point B. What would expansionary fiscal policy do?

B. Shift aggregate demand from AD 2 to AD 3

Alternating periods of economic growth and contraction are

B. The result of recurrent shifts of aggregate demand and aggregate supply

the crowding-out effect suggests that

B. government borrowing to finance the public debt increases the real interest rate and reduces private investment

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:

B. increase U.S. imports and decrease U.S. exports

the public debt for the above economy is

$460 billion

Controversies between Keynesian, monetarist, and supply-side theories focus on the

A. Shape and sensitivity of aggregate demand and aggregate supply curve

Refer to the above diagram. Initially assume that the investment demand curve is ID 1 . Which of the following effects of financing a large public debt might shift the investment demand curve from IDC 1 to ID 2 , wholly offsetting any crowding - out effect

A. a n improvement in profit expectations by businesses

The portion of the public debt held outside Federal agencies and the Federal Reserve is

A. larger than the portion held by Federal Agencies and the Federal Reserve.

The largest proportion of the U.S. public debt is held by

A. the U.S. public (individuals, businesses, financial institutions, etc.) a nd state and local governments

In 2009, the U.S. public debt was about

A. $11.9 trillion

Refer to the above data. If year 1 is the first year of this nation's existence and year 6 is the present year, this nation's public debt is

A. $275 billion

In Figure 8.2, an improvement in technology is best represented as a movement from poin

A. A to point B

n Figure 8.1, an increase in government spending, ceteris paribus , is best represented as a movement from point

A. A to point B

Which of the following is not considered a legitimate concern of a large public debt?

A. Bankruptcy of the federal government

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the:

A. Economys MPS is small

The most likely way the public debt burdens future generations, if at all, is by

A. Reducing the current level of investment

Which of the following economic perspectives focuses on the need for government to shift aggregate supply to correct problems of unemployment and inflation?

A. Supply-side

Other things equal, an increase of corporate bonds from $140 bil lion to $150 billion in the above economy would

A. not change the size of the public debt

Refer to the figure above. The econom y is at equilibrium at point A. What fiscal policy would be most appropriate to control demand - pull inflation?

A. shift aggregate demand by increasing taxes

The real balances, interest rate, and foreign purchases effects all help explain:

A. why the aggregate demand curve is down sloping.

nterest rates decline

AD shifts right do to increased private spending

The emphasis by some economists on long - term outcomes is reminiscent o

B. Classical theory

the group that often initiates changes in fiscal policy is the

B. Council of economic comittee

Which of the following is considered a legitimate concern of a large public debt

B. Crowding - out of private investment

the intent of contractionary fiscal policy is to

B. Decrease aggregate demand

when the AS curve is vertical fiscal policy will be

B. Effective against inflation but not employment

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

B. Expansionary fiscal policy

keynesian levers include

B. Fiscal Policy

Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the above economy would:

B. Increase the public debt from $460 billion to $480 billion

Which of the following economic perspectives focuses on the need for government to use spending and taxes to shift aggregate demand and thus correct problems of unemployment and inflation

B. Keynesian

The unique situation in which the behavior of buyers and sellers is compatible is referred to as

B. Macro equilibrium

Which one of the following might offset a crowding - out effect of financing a large public debt?

B. an increase in public investment

refer to the above data. as percentage of GDP the

B. budget surplus was less than 1 percent in year 6

a vertical aggregate supply curve

B. implies that aggregate demand shifts have no impact on output

contractionary fiscal policy would tend to make a budget deficit become

B. smaller

When government spending is increased, the amount of the increase in aggregate demand primarily depends on:

B. the size of the multiplier

International trade and money flows can increase aggregate supply and aggregate demand i

B. trade barriers are reduced

Refer to the above diagram. Initially assume that the investment demand curve is ID 1 . The crowding - out effect of a large public debt would be shown as a(n)

C. increase in the interest rate from 4 percent to 6 percent and a decline in investment spending of $5 billion.

To say that "the U.S. public debt is mostly held internally" is to say that:

C. the bulk of the public debt is owned by U.S. citizens and institutions

The economy is in a recession. The government enacts a policy to incre ase 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?

C. $10 billion

refer to the above data. the budget deficit in year 3 is

C. $100 billion

What percentage of the U.S. public debt is held by Federal agencies and the Federal Reserve?

C. 43 percent

Using Figure 8.2, a decrease in real output resulting from the profit effect would be depicted as a movement from poin

C. B to point C

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

C. Budget deficit

Which of the following is the best example of public investment?

C. Construction of highways

If the U.S. Congress passes legislation to raise taxes to control demand - pull inflation, then this would be an example of a(n

C. Contractionary Fiscal Policy

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

C. Crowding out effect

Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP?

C. Demand shifts to the right and supply shifts to the right

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

C. Economys MPC is large

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

C. discretionary fiscal policy

The average tax rate required to service the public debt is roughly measured by:

C. interest on the debt as a percentage of the GDP

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

C. is financed by burrowing

Which of the following is the best example of supply - side policy?

C. the regan tax cuts in 1981

In 2009, about ____ percent of the U.S. public debt was held by people and institutions abroad

C> 29

Which of the following statements is correct

D. There is a tendency for the public debt to grow during recessions

The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will

D. increase U.S. exports and decrease U.S. imports.

Payment of interest on the U.S. public debt

D. is thought to increase income inequality

The aggregate demand curve:

D. shows the amount of real output that will be purchased at each possible price level.

Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?

D. 29 percent

Refer to the above data. If year 1 is the first year of this nation's existence and year 4 is the present year, the public debt as a percentage of GDP in year 4 is

D. 3.9 percent

In 2009, about ____ percent of the U.S. public debt was held by the Federal government and Federal Reserve

D. 43

Refer t othe above data. A budget surplus occured in year

D. 6

Using Figure 8.1, a decrease in the quantity of aggregate demand resulting from the interest rate effect would be depicted as a movement from poin

D. C to point A

The set of fiscal policies that would b e most contractionary would be a(n):

D. Decrease in government spending and an increase in taxes

If aggregate demand decreases and aggregate supply decreases, the level of real output wil

D. Decrease, but the price level is indeterminate

Which of the following is not a significant contributor to the U.S. public debt

D. Demand-pull inflation

a tax cut can best be characterized as

D. Either fiscal or supply-side policy

Suppose the Federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:

D. Increased by $150 billion

A laissez faire policy approach during a recession would advocate

a. noninterference by the government

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

b. the foreign purchases effect

businesses find the cost of employee health insurance rising

business cost rise, AS shifts to the left

outsourcing reduces costs of American businesses

business costs fall, AS shifts to the right

Macro equilibrium is established at which level of real output, given AD 1 and AS 2 in Figure 8.3?

c. $300 billion

96. Given AD2 and AS1 , the equilibrium price level in Figure 8.3 is

c. P3

the stock market is on the rise t

consumer wealth goes up resulting in AD shifting right

92. Assume the economy is initially in equilibrium on AD 1 and AS 1 . Which curve would have shifted, and in what direction would it have shifted, if a new equilibrium were to occur at an output level of $300 billion and a price level of P 3 in Figure 8.3?

d. aggregate demand would have shifted to the right

Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget s urpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have

increased by $20 billion

U.S. productivity declines

unit cost rises due to the productivity decline, AS shifts to the left