Macroeconomics exam 3

When fiscal policy is used to correct short-run fluctuations in the business cycle, which type of spending is able to be changed more readily?

discretionary spending

As GDP increases, tax revenues _____ and transfer payments _____.

increase; decline

As a result of the crowding-out effect, interest rates _____ and private sector borrowing _____.

increase; decreases

Suppose the economy is at full employment, and consumers spend more than usual. In the short run, prices will _____; in the long run, prices will _____.

increase; increase

A rising aggregate price level _____ interest rates and therefore _____ output demanded.

increases; reduces

(Figure: Determining Fiscal Policy) This graph depicts an economy in short-run equilibrium at point a. For an economy in this situation, expansionary fiscal policies could

move the economy to full employment.

Price stickiness refers to when

prices are slow to adjust to economic shocks.

All of these are considered expansionary fiscal policies EXCEPT a(n)

reduction in unemployment compensation.

If the government offers firms investment tax credits for building new factories, the after-tax rate of return _____, causing the loanable funds _____ curve to shift _____, leading to _____ interest rates.

rises; demand; rightward; higher

If an economy is in a recession, what would expansionary fiscal policy do?

shift AD to the right

In the market for loanable funds, what can cause a rise in interest rates?

supply shifting left and demand shifting right

In an AD/AS model, if the economy is below its long-run output, what will happen in the long run if the markets are left alone?

SRAS will shift right.

If income increases across Europe, what will happen to the aggregate demand curve for the United States?

The aggregate demand curve will shift to the right.

Short-run macroeconomic equilibrium occurs at the intersection of

aggregate demand and short-run aggregate supply.

The solution to simultaneous deflation and unemployment is to shift the

aggregate demand curve to the right.

Which event would MOST likely lead to a decrease in interest rates and an increase in loanable funds?

an increase in the amount of pretax dollars individuals can contribute into savings plans

Which event will NOT cause the aggregate demand curve to shift?

A rise in the aggregate price level causes a decline in exports.

In November 2016, Australia experienced a decrease in business spending on new plant, buildings, equipment, and machinery. What effect would this have had on Australian aggregate demand, all else equal?

Australian investment would decrease, and Australian aggregate demand would decrease.

Automatic stabilizers, such as tax revenues and transfer payments, eliminate fluctuations in the business cycle.

False

T or F - If a $1,000 bond is issued with a coupon rate of 12%, the bondholder will receive $12 per year for the life of the bond.

False. Answer: $120

_____ government spending, _____ transfer payments, and _____ taxes are all examples of expansionary fiscal policy.

Increasing; increasing; lowering

In the following figure, an economy is currently in short-run equilibrium at point a. What is likely to happen in the long run?

SRAS will shift to the left and the aggregate price level will increase.

If improved consumer confidence leads to households saving a smaller portion of their income, what will happen in the market for loanable funds?

Supply of loanable funds would shift to the left.

T or F - Discretionary spending by the federal government must work its way through the appropriations process of Congress each year.

True

T or F - Examples of discretionary government spending include national defense, transportation, and education.

True

T or F - Insurance companies are examples of financial intermediaries that are the bridge between savers and borrowers.

True

T or F - To change the mandatory spending portion of the federal budget, Congress must change any relevant laws.

True

The _____ is the amount by which annual government spending exceeds tax revenues.

budget deficit

Legislators debate for six months on which spending programs to utilize to manipulate the business cycle. This is an example of the _____ lag.

decision

As GDP decreases, tax revenues _____, which tend to partially _____ the initial decline in GDP.

decline, offset

Simultaneous recession and deflation can be explained by a(n)

decrease in aggregate demand.

Suppose the economy is at full employment, and energy prices spike. In the short run, output will _____; in the long run, output will _____.

decrease; remain unchanged

If a government collects $550 billion in taxes and spends $700 billion, it would have a

deficit of $150 billion.

A solution to the simultaneous emergence of deflation and unemployment is to use policies that shift the aggregate

demand curve to the right.

If the economy shown in the figure begins at point C, an increase in consumer confidence leads to what changes in the short run?

demand-pull inflation

If the real interest rate were below the equilibrium real interest rate in the loanable funds market, an excess _____ for loanable funds would occur and the real interest rate would _____.

demand; rise

The _____ lag is the time required to turn fiscal policy into law to have an impact on the economy.

implentation

Suppose the economy is at full employment, and consumers spend more than usual. In the short run, output will _____; in the long run, output will _____.

increase; remain unchanged

The _____ lag is the time policymakers must wait for economic data to be collected, processed, and reported.

information

After the government collects the necessary macroeconomic data, it takes time for policymakers to confirm whether a recession or a recovery has started. This situation is called the _____ lag.

recognition

When the economy is in a recession, welfare and unemployment compensation payments _____ and tax revenues _____

rise; decline

Other things equal, when the U.S. aggregate price level falls, U.S. exports _____ and U.S. imports _____.

rise; fall

The quantity of loanable funds supplied by _____ is _____ related to the real interest rate.

savers; positively

Suppose the government implements a policy reducing the rewards earned by savers. In this case, the _____ loanable funds shifts _____.

supply of; left

As interest rates rise

there is a movement upward along the supply curve for loanable funds

The demand for loanable funds is downward sloping because

as interest rates fall, businesses find more projects to be profitable and thus want to borrow more.

If saving falls during booming times in the economy, then the equilibrium real interest rate _____ and the quantity of loanable funds _____.

rises; falls

Automatic stabilizers are initiated by acts of Congress.

False

If the economy is above long-run equilibrium output, what will happen in the long run if SRAS adjusts?

Prices rise and output decreases.

_____ will MOST likely increase the economy's long-run aggregate supply.

advancements in technology

Which of these will cause the demand for loanable funds curve to shift leftward?

an end to a program that provides investment tax credits

Automatic stabilizers have _____ effects during times of economic prosperity and _____ effects during times of economic downturn.

contractionary; expansionary

What is the one major category that separates national debt from public debt?

debt held by other government agencies

An expansionary fiscal policy can result in

inflation and higher GDP.

which asset represents ownership in a company

stocks

If the U.S. aggregate price level rises

the purchasing power of wealth will decrease.

If the government offers an incentive for individuals to save, the supply for loanable funds will shift to the _____ and the real interest rate will _____.

right; decrease

T or F - When market interest rates fall, the price of an existing bond will rise

True

Suppose a severe drought results in a poor harvest and leads to higher overall food prices. This situation is a _____ shock and is likely to lead to _____ inflation.

supply; cost-push

What is likely to happen if the government runs a budget surplus?

Additional loanable funds are provided to the market, leading to lower interest rates.

If an economy's current output is greater than its long-run output with full employment, what is likely to happen to the aggregate price level and SRAS curve?

The aggregate price level will rise and SRAS will shift to the left.

a rise in real GDP is associated with increase employment

True

If the U.S. dollar appreciates against the Canadian dollar, what is expected to happen to U.S. exports to Canada and to U.S. aggregate demand, all else equal?

U.S. exports to Canada would decrease and U.S. aggregate demand would decrease.

When investors wish to increase their investment activities by using the market for loanable funds

demand shifts right

How do changes in inflation expectations impact the short-run aggregate supply curve and the long-run aggregate supply curve?

expectations that inflation will rise will cause short-run aggregate supply to decrease and long-run aggregate supply to remain constant

During cost-push inflation, aggregate output _____ and the aggregate price level _____.

falls; rises

How would an increase in the consumer price index be represented in the following figure?

movement from point a to point b

During an economic expansion, automatic stabilizers

help to keep the economy from generating inflationary pressures.

If the economy is producing at an output level below full employment, the government should _____ spending and _____ taxes

increase; decrease

A shift to the _____ of the _____ curve would cause the price level and employment to decrease.

left; aggregate demand

When the economy is overheating and policymakers pursue contractionary fiscal policy, they express a willingness to trade off _____ output for a _____ price level.

lower; lower

Because of the wealth effect, a rising aggregate price level _____ the purchasing power of wealth and therefore _____ output demanded.

reduces; reduces

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

The reason bond prices and interest rates are inversely related is because

the coupon payment is fixed for the term of a bond