macro topic 7 practice questions

Again, assuming that MPC = 0.8, Assume that the economy falls into a recession and the federal government implements a "stimulus package" that increases government spending by $10 million. With no mitigating factors to limit the multiplier effect, by how much would output increase? A. $50 million B. $12.5 million C. $18 million D. $40 million

A

An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand? A. The aide thought the tax cut would be permanent, but the actual tax cut was temporary. B. The actual MPC was larger than the MPC the aide used to compute the multiplier. C. The increase in income shifted money demand less than the aide had anticipated. D. The increase in income resulted in investment rising more than the aide had anticipated.

A

Assume that to stimulate the economy, the federal government cut taxes by $100 million. By how much would aggregate demand change, continuing to assume that the MPC = 0.75 and there are no mitigating factors that limit the multiplier effect? A. AD increases by $300 million B. AD increases by $30 million C. AD increases by $400 million D. AD increases by $40 million

A

By how much will household saving change using the same info? A. saving will decrease by $20 B. saving will increase by $20 C. saving will decrease by $80 D. saving will increase by $80

B

Federal, state, and local tax revenue from all sources are approximately what percentage of GDP in the U.S.? A. 18 B. 26 C. 50 D.90

B

If GDP were to increase by $50 million, the according to the simple Keynesian consumption function, by how much would savings increase? Assume that the marginal propensity to consume is 0.75. A. $10 million B. 12.5 million C. 37.5 million D. savings would not increase

B

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller? A. the MPC is small and changes in the interest rate have a small effect on investment B. the MPC is small and changes in the interest rate have a large effect on investment C. the MPC is large and changes in the interest rate have a small effect on investment D. the MPC is large and changes in the interest rate have a large effect on investment

B

Tax revenues collected by the government are _____, and transfer payments made by the government to households are _____. A. procyclical; procyclical B. procyclical; countercyclical C. countercyclical; procyclical D. countercyclical; countercyclical

B

Which of the following correctly explains the crowding-out effect? A. An increase in government expenditures decreases the interest rate and so increases investment spending. B. An increase in government expenditures increases the interest rate and so reduces investment spending. C. A decrease in government expenditures increases the interest rate and so increases investment spending. D. A decrease in government expenditures decreases the interest rate and so reduces investment spending.

B

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase? A. the crowding-out effect B. the multiplier effect C. the exchange-rate effect D. the interest-rate effect

B

Which of the following values for the "total" fiscal multiplier (i.e., taking into account mitigating factors), would we expect to prevail when the economy is at full employment? A. 0 B. 0.5 C. 2.5 D. 5.0

B

Government spending increases by $30 billion. Assume the MPC is 0.625 and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the A. left by $60 billion. B. left by $36 billion. C. right by $68 billion. D. right by $36 billion.

C

If Ricardian Equivalence holds, A. Tax cuts will have an effect larger than given by the tax multiplier B. Tax cuts will have a larger effect on spending than government spending increases C. Tax cuts will have no effect on spending D. Tax cuts will cause interest rates to increase more than equivalent government spending increases

C

Other things the same, automatic stabilizers tend to A. raise expenditures during expansions and recessions. B. lower expenditures during expansions and recessions. C. raise expenditures during recessions and lower expenditures during expansions. D. raise expenditures during expansions and lower expenditures during recessions.

C

The federal government budget deficit is defined as A. Government purchases less tax revenue B. Government purchases plus transfers less interest and tax revenue C. Government purchases plus transfers plus interest less tax revenue D. Government purchases plus transfers plus interest plus tax revenue

C

Which of the following is true? A) Marginal tax rates and average tax rates are identical. B) Marginal tax rates are always less than average tax rates. C) Marginal tax rate are always higher than average tax rates. D) Marginal tax rates are sometimes higher and sometimes lower than marginal tax rates.

C

A reduction in personal income taxes increases Aggregate Demand through A. an increase in investment spending. B. an increase in national savings. C. an increase in private savings. D. an increase in personal consumption.

D

Assume that the marginal propensity to consume is 0.8 . If household income rises by $100 and taxes do not change, by how much will household consumption change due to this increase in income? A. consumption will decrease by $20 B. consumptions will increase by $20 C. consumption will decrease by $80 D. consumption will increase by $80

D

If the federal government increases spending, but also increases taxes by the same amount, then A. The government budget deficit will increase and AD will stay the same B. The government budget deficit will decrease and AD will stay the same C. The government budget deficit will stay the same and AD will decrease D. The government budget deficit will stay the same and AD will increase

D

Now assume that instead of increasing government spending, the government chooses to cut taxes by $10 million. Again assuming no crowding out or other mitigating factors, by how much would output increase? A. $50 million B. $12.5 million C. $18 million D. $40 million

D