Practice Exam 2 Econ

the short run aggregate supply curve shows the relationship between

the quantity of real gdp supplied and the price level

if disposable income increases from 5,000 to 5,400 and consumption increases from 4000 to 4200, what is the average propensity to consume when disposable income is 54000?

0.78

in the simple Keynesian model with no government and foreign sectors, assume that full employment occurs at an output level of 20,000. with a marginal propensity to save of 0.20 and equilibrium output at 15,000, by how much will investment spending have to increase to move the economy to full employment?

1,000

if the national debt is 6 million and this years deficit is 5 million, what would the new national debt be

11 million

suppose the marginal propensity to consume is 0.75. people feel increasing confidence in their economy and spending 5 billion more on vacations. equilibrium income will rise by

20 billion

if the marginal propensity to save is 0.20, the spending multiplier is

5

if the cost of production increases, there is

a decrease in aggregate supply and the SRAS curve shifts leftward

what is stagflation

a period of economic recession with rising prices

what would cause inflation and employment to increase?

a rightward shift of the AD curve

a recessionary gap is

a situation where the actual level of output is below the potential level of output

imagine that in the current year the economy is in long run equilibrium. then the federal government reduces its purchases of goods by 50%. which curve shifts and in what direction

aggregate demand shifts left

if the ultimate goal of fiscal policy aimed at aggregate supply is achieved, what happens to the aggregate price level and aggregate output

aggregate price level decreases, aggregate output increases

what does the 'paradox of thrift' say

an economy that saves too much can end up with lower total savings

how does the spending multiplier compare between a $1000 increase in government spending and a $1000 decrease in taxes collected

an increase in government spending has a greater spending multiplier than an equivalent tax decrease

if the economy is at full employment, increases in government spending

are primarily absorbed by price increases

according to the crowding out effect, if the government sells bonds to finance spending, ____ can eventually fall

consumption and investment

____ occurs when aggregate demand expands so much that equilibrium output exceeds full employment output

demand-pull inflation

there are four limitations to the effectiveness of discretionary fiscal policy, which is not one

fiscal multiplier

according to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80

income will increase by 10,000

which of the following is an example of an expansionary fiscal policy tool

increasing government spending and decreasing taxes

what occurs when spending is above the full employment level?

inflationary gap

if real GDP at full employment is 5 billion while current GDP is 6 billion, a ___ gap exists and will require a ___ in spending to bring the economy back to full employment

inflationary, decrease

all of these programs are considered mandatory spending except

interest on national debt

public debt owned by US banks, corporations, mutual funds, pension plans, and individuals is called ___ debt

internally held

potential gap

is independent of price level

other things the same, if technology increases, then in the long run

output is higher and prices are lower

assume the MPC is 0.75. full employment is considered to be at a GDP level of $500 billion. the gap is 600 billion. what should the government do to achieve full employment?

reduce spending by 25 billion

if interest rates rise, the burden of a nation's public debt will ____ and it will be ____ difficult to service its debt

rise; more

cost-push inflation occurs when

rising resource costs reduce short run aggregate supply

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

shift AD to the right

the "sticky wage" hypothesis explains the

slope of the short run aggregate supply curve

when consumer confidence falls in an economy, ____ will decrease which is going to be ____ by the spending multiplier

spending; magnified

which of the following best describes the effect of the aggregate supply curve if political negotiations results in a substantial decrease in the price of oil?

the SRAS curve shifts rightward

which of these is an example of an automatic stabilizer

unemployed workers claiming unemployment benefits during a recession

if peoples expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve

will shift rightward because people will increase spending now