Macro Final Unit 2

Continuing the problem in question 15, if the MPC is still 0.80, and if the goal is to increase real GDP by $200 million, then by how much would government spending have to change to generate this increase in real GDP? a. $240 million b. $200 million c. $180 million d. $50 million e. $40 million

e. $40 million

Which of the following will shift the consumption function upward? a. An increase in consumer wealth. b. An increase in the interest rate. c. An increase in personal income taxes. d. A decrease in the MPC. e. An increase in disposable income.

a. An increase in consumer wealth.

5. Which of the following are beliefs of classical theory? a. Long-run full employment. b. Inflexible wages. c. Inflexible prices. d. All of the above. e. None of the above.

a. Long-run full employment.

Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what the borrowers and lenders expected, then who benefits from lower real interest rates? a. Only the borrowers benefit. b. Only the lenders benefit. c. Both borrowers and lenders benefit. d. Neither borrowers nor lenders.

a. Only the borrowers benefit.

As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index? a. Substitution bias. b. Trasportation bias. c. Quality bias. d. Indexing bias.

a. Substitution bias.

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index? a. Substitution bias. b. Transportation bias. c. Quality bias. d. Indexing bias.

a. Substitution bias.

Which of the following favors government policies to stimulate the economy by creating incentives for individuals and businesses to increase their productive efforts? a. Supply side economics. b. Keynesian economics. c. Monetarist economics. d. Marxian economics.

a. Supply side economics.

In the intermediate range of the aggregate supply curve, if government expenditures increase caused the aggregate demand curve to shift outward, which of the following is most likely to occur? a. The price level and real GDP will both rise. b. The price level will not change, but real GDP will increase. c. The price level will rise, but real GDP will not change. d. Both the price level and real GDP will not change.

a. The price level and real GDP will both rise.

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: a. both real GDP and the price level will fall. b. real GDP will fall and the price level will rise. c. real GDP will rise and the price level will fall. d. both real GDP and the price level will rise.

a. both real GDP and the price level will fall.

In the U.S. economy, the effect on federal tax revenues and spending of a decrease in employment is to: a. cut tax revenues and raise spending. b. cut spending and raise tax revenues. c. raise both tax revenues and spending. d. cut both spending and tax revenues.

a. cut tax revenues and raise spending.

Using the aggregate expenditure model, assume the aggregate expenditures (AE) line is above the 45-degree line at full-employment GDP. This vertical distance is called a (an): a. inflationary gap. b. recessionary gap. c. negative GDP gap. d. marginal propensity to consume gap.

a. inflationary gap.

The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the: a. price level. b. exports. c. consumption. d. investment.

a. price level.

A movement along in the consumption function is caused by a change in: a. real GDP. b. can be caused by a change in the price level. c. the marginal propensity to consume (MPC). d. None of the above.

a. real GDP.

In the aggregate expenditures model, an increase in government spending causes a(n): a. upward shift in the aggregate expenditures curve. b. downward shift in the aggregate expenditures curve. c. shift in the 45-degree line. d. rightward movement along the aggregate expenditures curve. e. leftward movement along the aggregate expenditures curve.

a. upward shift in the aggregate expenditures curve.

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a: a. $500 billion decrease in aggregate demand. b. $500 billion increase in aggregate demand. c. $1,000 billion increase in aggregate demand. d. $1,000 billion decrease in aggregate demand

b. $500 billion increase in aggregate demand.

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least: a. 1.6 percent. b. 3 percent. c. 4 percent. d. 5 percent.

b. 3 percent.

If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier is: a. 2. b. 5. c. 8. d. 10.

b. 5.

Suppose that your income during Year Y was $50,000, and the CPI for Year Y was 150 (base year = Year X). Back in Year X your income was $30,000. Has your real income increased or decreased from Year X to Year Y? By how much? a. Increased by $5,000. b. Increased by $3,333.33. c. Unchanged. d. Decreased by $3,333.33 e. Decreased by $5,000.

b. Increased by $3,333.33.

If the bank offers you a nominal interest rate of 9 percent on a student loan, and if inflation is 6 percent, then what is the real interest rate? a. 15 percent. b. 9 percent. c. 6 percent. d. 3 percent.

d. 3 percent.

Which of the following correctly describes the marginal propensity to consume? a. The change in savings divided by the change in consumption. b. The change in consumption divided by the change in real disposable income. c. The change in real disposable income divided by the change in consumption. d. The change in savings divided by the change in real disposable income

b. The change in consumption divided by the change in real disposable income.

The marginal propensity to consume (MPC) is computed as the change in consumption divided by the change in: a. GDP. b. disposable personal income. c. saving. d. none of the above.

b. disposable personal income.

In the aggregate expenditures model, a tax increase causes a (an): a. upward shift in the aggregate expenditures curve. b. downward shift in the aggregate expenditures curve. c. shift in the 45-degree line. d. rightward movement along the aggregate expenditures curve. e. leftward movement along the aggregate expenditures curve.

b. downward shift in the aggregate expenditures curve.

Automatic stabilizers tend to "lean against the prevailing wind" of the business cycle because: a. wages are controlled by the minimum wage law. b. federal expenditures and tax revenues change as the level of real GDP changes. c. the spending and tax multiplier are constant. d. special interests influence government spending and tax revenue legislation.

b. federal expenditures and tax revenues change as the level of real GDP changes.

The equilibrium level of real GDP is $1,000 billion, the target full-employment level of real GDP is $1,500 billion, and the marginal propensity to consume is 0.75. The target can be reached if government spending is: a. increased by $100 billion. b. increased by $125 billion. c. increased by $50 billion. d. held constant.

b. increased by $125 billion.

8. Along the Keynesian range of the aggregate supply curve, a decrease in the aggregate demand curve will decrease: a. only the price level. b. only real GDP. c. both the price level and real GDP. d. real GDP and reduce the price level.

b. only real GDP.

Assuming prices and wages are fully flexible, the aggregate supply curve will be: a. upward sloping, but not vertical. b. vertical. c. horizontal. d. downward sloping.

b. vertical.

Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now: a. $110. b. $1,000. c. $1,100. d. $1,225.

c. $1,100.

If the equilibrium level of real GDP is $400,000 above the full employment level of real GDP and the spending multiplier is 4, how much of a decrease in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium down to the full-employment level of real GDP? a. $400,000. b. $200,000. c. $100,000. d. $25,000. e. $10,000.

c. $100,000.

If the marginal propensity to consume is 0.80, then what is the marginal propensity to save? a. -0.80. b. 0.00. c. 0.20. d. 0.80. e. 1.00

c. 0.20.

If your disposable personal income increases from $40,000 to $48,000 and your consumption increases from $35,000 to $39,000, your marginal propensity to consume (MPC) is: a. 0.2. b. 0.4. c. 0.5. d. 0.8. e. 1.0.

c. 0.5.

Suppose that the economy is operating in a full-employment equilibrium along the vertical section of the aggregate supply curve, but at a higher-than-necessary price level. If the aggregate demand curve must be reduced by $100 billion in order for the price level to decline by the desired 5 percent, and if the marginal propensity to consume is 0.75, then what change in taxes would generate the desired price reduction? a. $300 billion b. -$75 billion c. 33.3 billion d. -$25 billion

c. 33.3 billion

If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is: a. 1. b. 2. c. 4. d. 9.

c. 4.

Which of the following would shift the investment demand curve rightward? a. Firms are operating their plants at less than full capacity. b. A decrease in the interest rate. c. A decrease in business taxes. d. All of the above. e. None of the above.

c. A decrease in business taxes.

Which of the following will most likely cause an rightward shift in a firm's investment demand? a. A decrease in interest rates. b. Low levels of existing capacity utilization. c. Expectations of higher future business profitability. d. An increase in interest rates.

c. Expectations of higher future business profitability.

What is the title of the John Marnard Keynes's book published in 1936 that challenged the classical self-correction economic theory? a. In the Long-run We Are Dead. b. Classical Economics Revised. c. General Theory of Employment, Interest, and Money. d. A Keynesian Approach to Economic Policy.

c. General Theory of Employment, Interest, and Money.

Which of the following could not be expected to shift the aggregate demand curve? a. Net exports fall. b. Consumption spending decreases. c. An increase in government spending. d. A change in real GDP.

d. A change in real GDP.

A disadvantage of using discretionary fiscal policies to control aggregate demand is that these policies are subject to: a. imprecise forecasts. b. pressure from interest groups. c. time lags. d. All of the above are true.

d. All of the above are true.

If the marginal propensity to consume (MPC) shrinks, then which of the following is true? a. It takes the same increase in autonomous aggregate expenditures to shift equilibrium real GDP upward to the full-employment level. b. It takes a smaller decrease in autonomous aggregate expenditures to shift equilibrium real GDP downward to the full-employment level. c. It takes a larger increase in autonomous aggregate expenditures to shift equilibrium real GDP upward to the full-employment level. d. It takes the same decrease in autonomous aggregate expenditures to shift equilibrium real GDP downward to the full-employment level.

c. It takes a larger increase in autonomous aggregate expenditures to shift equilibrium real GDP upward to the full-employment level.

The French economist Jean-Baptiste Say transformed the equality of total output and total spending into a law that can be expressed as follows: a. Unemployment is not possible in the short run. b. Demand and supply are never equal. c. Supply creates its own demand. d. Demand creates its own supply.

c. Supply creates its own demand.

Fiscal policy is concerned with: a. encouraging businesses to invest. b. regulation of net exports. c. changes in government spending and/or tax revenues. d. expanding and contracting the money supply.

c. changes in government spending and/or tax revenues.

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is: a. supply-side economics. b. Keynesian economics. c. classical economics. d. mercantilism. The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is: a. supply-side economics. b. Keynesian economics. c. classical economics. d. mercantilism.

c. classical economics.

During the 1970s, the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which triggered higher inflation rates in the United States. This type of inflation is best classified as: a. pseudo-inflation. b. demand-pull inflation. c. cost-push inflation. d. hyperinflation.

c. cost-push inflation.

The consumer price index (CPI): a. adjusts for changes in product quality. b. includes separate market baskets of goods and services for both base and current years. c. includes only goods and services bought by the typical urban consumer. d. uses current year quantities of goods and services.

c. includes only goods and services bought by the typical urban consumer.

One way the consumer price index (CPI) differs from the GDP chain price index is that the CPI: a. uses current year quantities of goods and services. b. includes separate market baskets of goods and services for both base and current years. c. includes only goods and services bought by typical urban consumers. d. is bias free.

c. includes only goods and services bought by typical urban consumers.

Cost-push inflation is due to: a. "too much money chasing too few goods." b. the economy operating at full employment. c. increases in production costs. d. all of the above.

c. increases in production costs.

During the Reagan administration, the Laffer curve was used to argue that: a. the supply-side effects of tax cuts are relatively small. b. discretionary tax cuts are unwise because they create stagflation. c. lower income tax rates could increase tax revenues. d. a "flat tax" would simplify the tax code and stimulate economic growth.

c. lower income tax rates could increase tax revenues.

The net exports effect is the inverse relationship between net exports and the __________ of an economy. a. real GDP. b. GDP deflator. c. price level. d. consumption spending.

c. price level.

An increase in regulation will shift the aggregate: a. demand curve leftward. b. supply curve rightward. c. supply curve leftward. d. demand curve rightward.

c. supply curve leftward.

Inflation is measured by an increase in: a. homes, autos and basic resources. b. prices of all products in the economy. c. the consumer price index (CPI). d. none of the above.

c. the consumer price index (CPI).

In the aggregate demand and supply model, the: a. aggregate supply curve is horizontal at full-employment real GDP. b. vertical axis measures real GDP. c. vertical axis measures the average price level. d. All of the above. e. None of the above.

c. vertical axis measures the average price level.

Autonomous consumption is equal to the level of consumption associated with: a. unstable disposable income. b. positive disposable income. c. zero disposable income. d. negative disposable income.

c. zero disposable income.

If the equilibrium level of real GDP is $100,000 below the full employment level of real GDP and the spending multiplier is 4, how much of an increase in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium to the full-employment level of real GDP? a. $400,000. b. $200,000. c. $100,000. d. $25,000. e. $10,000.

d. $25,000.

If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP by $200 million, then by how much would they have to change taxes? a. -$240 million b. -$200 million c. -$180 million d. -$50 million e. -$40 million

d. -$50 million

The balanced budget multiplier is always equal to: a. 1/MPC. b. 0.75. c. 0.50. d. 1.

d. 1.

Supply-side economics calls for: a. lower taxes on businesses and individuals. b. regulatory reforms to increase productivity. c. government subsidies to promote technological advance. d. All of the above.

d. All of the above.

__________ inflation can be explained by an _______ shift in the aggregate ________ curve. a. Demand-pull, inward, demand b. Cost-push, outward, supply c. Demand-pull, outward, supply d. Cost-push, inward, supply

d. Cost-push, inward, supply

If the inflation rate exceeds the nominal rate of interest, a. the real interest rate is negative. b. lenders lose. c. savers lose. d. all of the above.

d. all of the above.

The relationship between consumer expenditures and disposable income is the: a. savings function. b. the tax rate function. c. disposable income function. d. consumption function.

d. consumption function.

An increase in the price level caused by a rightward shift of the aggregate demand curve is called: a. demand shock inflation. b. supply shock inflation. c. cost-push inflation. d. demand-pull inflation.

d. demand-pull inflation.

Keynes theorized that there are _________ when equilibrium real GDP is below the full employment level, which implies a ________ aggregate supply curve. a. highly flexible prices and wages, vertical b. highly flexible prices and wages, horizontal c. fixed prices and wages, vertical d. fixed prices and wages, horizontal

d. fixed prices and wages, horizontal

Classical economic theory predicted that in the long run the economy would experience: a. idle factors of production. b. rising rate of inflation. c. below full employment. d. full employment.

d. full employment.

In the aggregate expenditures-output model, if aggregate expenditures (AE) are greater than GDP, then: a. employment decreases. b. inventory is accumulated. c. inventory is unchanged. d. inventory is depleted.

d. inventory is depleted.

Assume the marginal propensity to consume (MPC) is 0.90 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the: a. left by $1,000 billion. b. right by $1,000 billion. c. right by $900 billion. d. left by $900 billion. e. None of the above.

d. left by $900 billion.

Disinflation means a decrease in the: a. general level of prices in the economy. b. prices of all products in the economy. c. circular flow. d. none of the above.

d. none of the above.

Expansionary fiscal policy occurs when the government: a. increases its spending or increases its tax revenues. b. decreases its spending and increases its tax revenues. c. decreases its spending or reduces its tax revenues. d. none of the above.

d. none of the above.

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the effect will be: a. a redistribution of wealth from borrowers to lenders. b. a net gain in purchasing power for lenders relative to borrowers. c. no change in the distribution of wealth between lenders and borrowers. d. none of the above.

d. none of the above.

Real income in Year X is equal to: a. Year X nominal income x CPI. b. Year X nominal income x 100. Year X real output c. Year X nominal income x 100. Year X real GDP d. none of the above.

d. none of the above.

The formula to compute the spending multiplier is: a. 1/(C + I). b. 1/(1 - MPS). c. 1/(MPC + MPS). d. none of the above.

d. none of the above.

The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be: a. backward bending at the full-employment level of real GDP. b. positively sloped at the full-employment level of real GDP. c. horizontal at the full-employment level of real GDP. d. none of the above.

d. none of the above.

Use the aggregate expenditures model and assume an economy is in equilibrium at $5 trillion which is $250 billion below full-employment GDP. If the marginal propensity to consume (MPC) is 0.60, full-employment GDP can be reached if government spending: a. increases by $60 billion. b. increases by $250 billion. c. is held constant. d. none of the above.

d. none of the above.

Use the aggregate expenditures model and assume an economy is in equilibrium at $6 trillion which is $500 billion above full-employment GDP. If the marginal propensity to consume (MPC) is 0.75, full-employment GDP can be reached if government spending: a. decreases by $75 billion. b. decreases by $500 billion. c. is held constant. d. none of the above.

d. none of the above.

Using C to represent consumption, I to represent investment, G to represent government spending, S to represent saving, X to represent exports, and M to represent imports, aggregate expenditures can be represented by: a. C + I + G + (X-M) - S. b. (C -S) + G + (X-M). c. C + I + G + (X + M). d. none of the above.

d. none of the above.

Other factors held constant, a decrease in resource prices will shift the aggregate: a. demand curve leftward. b. demand curve rightward. c. supply curve leftward. d. supply curve rightward.

d. supply curve rightward.

An advocate of supply-side fiscal policy would advocate which of the following? a. Subsidies to produce technological advances. b. Reduction in regulation. c. Reduction in resource prices. d. Reduction in taxes. e. All of the above.

e. All of the above.

Under the Laffer curve theory, changes in the federal tax rate affect: a. tax revenue. b. savings. c. investment. d. incentive to work. e. All of the above.

e. All of the above.

Which of the following is correct? a. The percentage change in real income equals the percentage change in nominal income plus the percentage change in CPI. b. Real income equals nominal income multiplied by the CPI as a decimal. c. People whose nominal incomes rise faster than the rate of inflation lose purchasing power. d. All of the above. e. None of the above.

e. None of the above.

Which of the following options could be used to eliminate a recessionary gap? a. Decrease government spending. b. Decrease consumption. c. Decrease investment. d. Decrease transfer payments. e. None of the above.

e. None of the above.

Which of the following is not a component of the aggregate demand curve? a. Government spending (G). b. Investment (I). c. Consumption (C). d. Net exports (X-M). e. Saving.

e. Saving.

3. In the aggregate expenditures-output model, if an economy operates above equilibrium GDP, there will be: a. unplanned inventory accumulation. b. a decrease in GDP. c. a decrease in employment. d. none of the above. e. all of the above.

e. all of the above.

Demand-pull inflation occurs: a. when "too much money is chasing too many goods." b. because of excess factor payments. c. at or close to a recession. d. all of the above. e. none of the above.

e. none of the above.

Use the aggregate expenditures model and assume the marginal propensity to consume (MPC) is 0.80. A decrease in government spending of $1 billion would result in a decrease in GDP of: a. $0. b. $0.8 billion. c. $1.0 billion. d. $8.0 billion. e. none of the above.

e. none of the above.

The concurrent problems of inflation and unemployment is termed: a. depression. b. downturn. c. deflation. d. demand-pull inflation. e. stagflation.

e. stagflation.