Macroeconomics Exam 2

The investment demand curve will shift to the left if

business taxes increase

Domestically financed deficit spending shifts the cost of government spending to future generations by ____________________.

reducing the capital stock, lowering productivity and wages.

If consumption and disposable income are equal at a particular level of income

saving must be zero at this point

Assume the level of investment is independent of the level of GDP. If the interest rate rises, the investment schedule will

shift downward

Domestic crowding out makes the impact of a given increase in G

smaller

The existence of imports make the multiplier

smaller

The existence of taxes makes the multiplier

smaller

National debt is a ___________ concept.

stock

If the slope of the consumption line is .8

the MPC is .8

Along a particular saving schedule, each change in disposable income of $15 billion generates an additional $3 billion in saving. Therefore

the MPS is .2

The recessionary (deflationary) expenditure gap is

the amount by which an economy's aggregate expenditures schedule must shift upward to achieve full-employment GDP.

The inflationary expenditure gap is

the amount by which the economy's aggregate expenditures schedule must shift downward to achieve full-employment GDP

The national debt is __________________.

the cumulative effect of all prior surpluses and deficits.

The inflationary expenditure gap will eliminate __________.

demand-pull inflation

A _______________ requires explicit action by policy makers.

discretionary stabilization

The existence of lags makes discretionary fiscal policy

more difficult to implement

The equilibrium level of GDP is associated with

no unplanned changed in inventories

If inventories are declining unexpectedly at the current level of GDP

planned expenditures exceed current level of production

All else equal, if the interest rate rises

planned investment spending will decrease.

Under the 45 degree line model, it is assumed that

prices are fixed

Crowding out is the idea that as the government finances deficit spending by borrowing, it must ________________.

raise interest rates, thus diverting funds away from private investment.

The ____________ arises because the economy does not move smoothly through the business cycle.

Recognition Lag

The ______________ is the time between the beginning of recession or inflation and the certain awareness that it is actually happening.

Recognition Lag

A private, open economy includes

households, businesses, and net exports

A mixed open economy includes

households, businesses, net exports, and government expenditures

Suppose that the level of equilibrium GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by

$50 billion

If the MPC is .63, the multiplier is

1 / .37

The ___________________ will be the lag between the time the need for fiscal action is recognized and the time action is taken.

Administrative Lag

Which of the following might have caused the shift from consumption schedule C1 upward to schedule C2?

An increase in household wealth

A ____________ is anything that increases the government budget deficit or reduces its budget surplus during a recession and increases its budget surplus or reduces its budget deficit during an expansion without requiring explicit action by policymakers.

Automatic (built-in) stabilizer

True or False: A tax on household incomes will cause the AE line to shift upward.

False

True or False: Over time, an increase in the real output and incomes of the countries with whom the united States buys and sells will decrease net exports.

False

True or False: The sequester would reduce the recessionary expenditure gap.

False

True or False; The appropriate policy to eliminate the inflationary expenditure gap would be to increase government expenditures.

False

If the dollar depreciates, what is the effect on the NX component of AE?

Negative net exports, Shifts downward

The ________________ occurs between the time fiscal action is taken and the time that action effects output, employment, or the price level.

Operational Lag

What happens in the 45 degree line model when the level of AE is smaller than the level of real output that is being produced.

Overstocked

True or False: A key assumption is that beyond full employment there is demand pull inflation.

True

True or False: A movement down the investment demand curve comes about by decrease the rate of interest

True

True or False: If a large fraction of African Americans work for the federal government, they also do business with black owned firms, and many send their children to HBCUs, the dollar amount of the sequester is likely to have a significant effect on income in the African-American community which, in turn, will make it more difficult to pay for schooling for their children.

True

True or False: The establishment of a tax system is a discretionary act.

True

True or False: The only way the cyclically adjusted budget can change is through a change in G or t.

True

The consumption schedule is

a direct relationship between consumption and disposable income

The equilibrium if GDP in a private closed economy is where

aggregate expenditures equals GDP

When planned injections of investment, government spending, and exports equal leakages of saving, taxes, and imports

aggregate expenditures will equal GDP

Deficit spending and a large national debt can have important effects on future generations because they ________________.

can significantly impact spending on capital formation.

According to domestic crowding out, deficit financing, an increase in debt-finaned government expenditure _________________.

causes interest rates to rise and private investment to fall.

As the economy moves to a higher equilibrium

consumption increases

If the government was depressed, to stabilize they would ____ tax rates.

cut

What kind of unemployment is associated with the 45 degree line diagram?

cyclical

The recessionary expenditure gap will reduce ______________.

cyclical unemployment

Assume the MPC is 2/3. If government spending decreases by $6 billion, equilibrium GDP will

fall by $18 billion

Suppose the MPC is ¾. If investment spending falls by $10 billion, the level of GDP will

fall by $40 billion.

Federal deficit is a _________ concept.

flow

The external debt is the portion of national debt owned ______________.

foreigners

The national debt is a burden to future generation to the extent that a portion of the debt is held by ________________.

foreigners

The idea that a large public debt is "mortgaging the future of our children and grandchildren" is misleading because _________________.

future generations will inherit interest payments along with interest obligations.

A private, closed economy includes

households and businesses