Exam 3

A tax multiplier equal to -4.30 would imply that a $100 tax increase would lead to a

$430 decline in real GDP

According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be

0

Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC) is given by the formula

1-[1/(1-MPC)]

In Exhibit 15-13, supply siders claimed that the shift from AS1 to AS2 would occur if the government

Decreased tax rates and decreased the amount of government regulation

As the aggregate demand curve shifts from AD1 to AD2 in Exhibit 14-16, the economy experiences

Demand-pull inflation

Beginning at equilibrium E1 in Exhibit 15-11, when the government increases spending or cuts taxes the economy will experience

Demand-pull inflation

The interest-rate effect is the impact on real GDP caused by the ____________ relationship between the price level and the interest rate.

Direct

The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption and more saving is known as the

Real balances effect

According to supply-side fiscal policy, reducing tax rates on wages and profits will

Reduce both unemployment and inflation

Unemployment compensation payments

Rise during a recession and thus reduce the severity of the recession

Which of the following is NOT a component of the aggregate demand curve

Saving

An expansionary fiscal policy

All of the answers above are correct

Supply-side economics calls for

All of the answers above are correct

The shift from AS1 to AS2 in Exhibit 14-15 could be caused by a(an)

All of the answers above are incorrect

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

A decrease in government spending

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then

Both real GDP and the price level will fall

When the economy enters a recession, automatic stabilizers create

Budget deficits

Automatic stabilizers "lean against the prevailing wind" of the business cycle because

Federal expenditures and tax revenues change as the level of real GDP changes

The real balances effect occurs because a higher price level will reduce the real value of peoples

Financial assets

In Exhibit 14-17, choosing to operate the economy at GDP = $1,200 billion and P = 110 would be opting for an economy of

Full employment with inflation

Stagflation is a period of time when the economy is experiencing

High inflation and high unemployment at the same time

Which of the following is an example of expansionary fiscal policy?

Increase government spending

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is .75, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should

Increase spending by $250 billion

In the __________ range of the aggregate supply curve, expansionary fiscal policy causes aggregate _______ to increase, which results in a higher price level and a higher equilibrium level of real GDP

Intermediate, demand

The net exports effect is the ________ relationship between net exports and the price level of an economy

Inverse

The real balances effect is the impact on real GDP caused by the ___________ relationship between the price level and the real value of financial assets

Inverse

Assume the marginal propensity to consume (MPC) is .75 and the government increases taxes by $250 billion. The aggregate demand curve will shift to the

Left by $750 billion

When the government levies a $100 million tax on peoples income and puts the $100 million back into the economy in the form of a spending program, such as new interstate highway constructions, the

Level of real GDP expands by $100 million

Which of the following are beliefs of classical theory?

Long-run full employment

In Exhibit 14-17, if aggregate demand increases from AD1 to AD2,

Prices alone will increase

An increase in oil prices will shift the aggregate

Supply curve leftward

The aggregate demand curve shows how real GDP purchased varies with changes in

The price level

In Exhibit 14-14, as production increases, firms resort to offering higher wage rates to attract the dwindling supply of unemployed resources in

The segment labeled bc.

In Exhibit 14-14, resources are fully employed, and competition among producers for resources will lead to a higher price level in

The segment labeled cd

As the economy moves to the right in Exhibit 14-16 along the upward-sloping aggregate supply curve the

Unemployment rate falls

In Exhibit 14-17, the aggregate demand and supply curves reflect an economy in which

excess aggregate demand forces prices up to P = 120