Econ 204 test 2

When government spending is increased, the amount of the increase in aggregate demand primarily depends on: A. The average propensity to consume B. The size of the multiplier C. Income taxes D. Exchange rates

B. The size of the multiplier

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A. increase the amount of U.S. real output purchased. B. increase U.S. imports and decrease U.S. exports. C. increase both U.S. imports and U.S. exports. D. decrease both U.S. imports and U.S. exports.

B. increase U.S. imports and decrease U.S. exports.

In 2009, about ____ percent of the U.S. public debt was held by people and institutions abroad. A.43 B.18 C.29 D.33

C. 29

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a: A. Trade deficit B. Trade surplus C. Budget deficit D. Budget surplus

C. Budget deficit

Which of the following economic perspectives focuses on the need for government to shift aggregate supply to correct problems of unemployment and inflation? A. Supply-side. B. Keynesian. C. Classical. D. Monetary.

A. supply-side

The largest proportion of the U.S. public debt is held by: A.the U.S. public (individuals, businesses, financial institutions, etc.) and state and local governments. B.foreignindividuals and institutions. C.the Federal Reserve System. D.U.S. government agencies.

A. the U.S. public (individuals, businesses, financial institutions, etc.) and state and local governments.

Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP? A. Demand shifts to the left and supply shifts to the right. B. Demand shifts to the left and supply shifts to the left. C. Demand shifts to the right and supply shifts to the right. D. Demand shifts to the right and supply shifts to the left.

C. Demand shifts to the right and supply shifts to the right

The goal of expansionary fiscal policy is to increase: A. The price level B. Aggregate supply C. Real GDP D. Unemployment

C. Real GDP

The public debt is held as: A.U.S. securities, corporate bonds, and common stock. B.Federal Reserve Notes. C.U.S. gold certificates. D.Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

D. Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

The intent of contractionary fiscal policy is to: A. Increase aggregate demand B. Decrease aggregate demand C. Increase aggregate supply D. Decrease aggregate supply

B. Decrease aggregate demand

Ceteris paribus, the price level will decrease if the aggregate A. Supply curve shifts to the left. B. Demand curve shifts to the left. C. Demand curve shifts to the right. D. Supply and demand curves both shift to the right.

B. Demand curve shifts to the left.

Keynesian levers include A. Deregulation. B. Fiscal policy. C. Monetary policy. D. Aggregate supply.

B. Fiscal Policy

Which of the following economic perspectives focuses on the need for government to use spending and taxes to shift aggregate demand and thus correct problems of unemployment and inflation? A. Supply-side. B. Keynesian. C. Classical. D. Monetarists.

B. keynesian

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes: A. the output effect. B. the foreign purchases effect. C. the real-balances effect. D. the shift-of-spending effect.

B. the foreign purchases effect

Which of the following is considered a legitimate concern of a large public debt? A.Bankruptcy of the Federal government B.Crowding-out of private investment C.Burdening future generations D.Collapse of the financial system

B.Crowding-out of private investment

Which one of the following might offset a crowding-out effect of financing a large public debt? A.a decline in net exports B.an increase in public investment C.a decrease in the money supply D.a decline in public investment

B.an increase in public investment

When the Federal government cut taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be: A. Passive B. Automatic C. Countercyclical D. Nondiscretionary

C. Countercyclical

The only policy lever that is effective against unemployment when the AS curve is vertical is A. Fiscal policy. B. Monetary policy. C. Supply-side policy. D. Laissez faire policy.

C. Supply-side policy

Which group of economists believes that there is a natural rate of output that is relatively immune to short-run fluctuations in aggregate demand? A. Supply-siders. B. Keynesians. C. Monetarists. D. Fiscal economists.

C. monetarists

When the AS curve is vertical, fiscal policy will be A. Ineffective against both inflation and unemployment. B. Effective against inflation but not unemployment. C. Effective against unemployment but not inflation. D. Effective against both inflation and unemployment.

B. Effective against inflation but not unemployment.

The Federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the: A.equation-of-exchange effect. B.paradox of thrift. C.crowding-out effect. D.net export effect.

C.crowding-out effect.

The average tax rate required to service the public debt is roughly measured by: A.the absolute size of the debt. B.the debt as a fraction of the GDP. C.interest on the debt as a percentage of the GDP. D.the ratio of government spending to the GDP

C.interest on the debt as a percentage of the GDP.

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is: A. Cyclical B. Implicit C. Discretionary D. Nondiscretionary

D. Nondiscretionary

Contractionary fiscal policy would tend to make a budget deficit become: A. Bigger B. Smaller C. A trade deficit D. A trade surplus

B. Smaller

Fiscal policy is the use of A. Government spending and taxes to alter macroeconomic outcomes. B. Money and credit controls to alter macroeconomic outcomes. C. Tax incentives, deregulation, and other mechanisms to increase the ability and willingness to produce goods and services. D. Trade policy to alter macroeconomic outcomes.

A. Government spending and taxes to alter macroeconomic outcomes.

n an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could: A. Increase taxes by $16 billion B. Increase taxes by $24 billion C. Decrease government spending by $10 billion D. Decrease government spending by $16 billion

A. Increase taxes by $16 billion

When the AS curve is vertical, increases in AD will A. Increase the average price level but have no impact on unemployment. B. Increase the average price level and decrease unemployment. C. Increase both the average price level and unemployment. D. Have no impact on either the average price level or unemployment.

A. Increase the average price level but have no impact on unemployment.

Which of the following would result if the price level were below the equilibrium level? A. Aggregate demand would increase. B. Aggregate supply would decrease. C. Consumers would bid prices up by competing for goods currently in shortage. D. Shortages would force sellers to lower prices in order to increase aggregate quantity demanded.

C. consumers would bid prices up by competing for goods currently in shortage

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending: A. increases during a period of recession, rather than prosperity. B. is primarily for capital-type goods. C. is financed by borrowing. D. is financed by taxation.

C. is financed by borrowing

Which of the following is the best example of public investment? A.salaries of Senators and Representatives B.government expenditures on food stamps C.construction of highways D.funding of regulatory agencies

C.construction of highways

To say that "the U.S. public debt is mostly held internally" is to say that: A.only interest payments on the public debt are an economic bur den. B.official figures understate the size of the public debt. C.the bulk of the public debt is owned by U.S. citizens and institutions. D.the public debt is equal to the land and buildings assets owned by the Federal government

C.the bulk of the public debt is owned by U.S. citizens and institutions.

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by: A. $10 billion B. $20 billion C. $31.25 billion D. $40.50 billion

B. $20 billion

In the long run, an increase in aggregate demand will lead to A. A higher price level and an increase in real GDP. B. A higher price level only. C. An increase in real GDP only. D. A decrease in real GDP.

B. A higher price level only.

The emphasis by some economists on long-term outcomes is reminiscent of A. Keynesian theory. B. Classical theory. C. Supply-side theory. D. None of the choices are correct.

B. Classical Theory

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is: A. Active Monetary Policy B. Automatic Fiscal Policy C. Discretionary Fiscal Policy D. Active Federal Policy

C. Discretionary Fiscal Policy

A given reduction in government spending will dampen demand-pull inflation by a greater amount when the: A. Economy's MPS is large B. Economy's aggregate supply curve is flat C. Economy's MPC is large D. Unemployment rate is high

C. Economy's MPC is large

What fiscal policy decreases government spending and increases taxes?

Contractionary Fiscal Policy

In 2009, about ____ percent of the U.S. public debt was held by the Federal government and Federal Reserve. A.29 B.57 C.62 D.43

D. 43

Which of the following fiscal policy changes would be the most contractionary? A. A $40 billion increase in taxes B. A $10 billion increase in taxes and a $30 billion cut in government spending C. A $20 billion increase in taxes and a $20 billion cut in government spending D. A $30 billion increase in taxes and a $10 billion cut in government spending

D. A $30 billion increase in taxes and a $10 billion cut in government spending

Individual employment and training programs are levers most likely to be advocated by A. Classical economists. B. Monetarists. C. Keynesians. D. Supply-side economists.

D. Supply-side economists

Which of the following is true if equilibrium exceeds full employment? A. The economy is inside the production possibilities curve. B. The economy is experiencing low inflation. C. Growth rates are unacceptably low. D. The economy is working beyond normal capacity.

D. the economy is working beyond normal capacity

Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions? A.56 percent B.71 percent C.43 percent D.29 percent

D.29 percent

Which of the following statements is correct? A.Federal deficits were larger in the early 2000s than in the late 2000s. B.Deep tax cuts always expand tax revenues and reduce the public debt. C.The public debt has usually declined during wartime. D.There is a tendency for the public debt to grow during recessions.

D.There is a tendency for the public debt to grow during recessions.

What fiscal policy increases government spending and decreases taxes?

Expansionary Fiscal Policy

These are examples of what type of investment: new federal buildings and new highways?

Public Investment

Which of the following fiscal policy changes would be the most expansionary? A. A $40 billion increase in government spending B. A $20 billion tax cut and $20 billion increase in government spending C. A $10 billion tax cut and $30 billion increase in government spending D. A $40 billion tax cut

A. A $40 billion increase in government spending

International trade and money flows can increase aggregate supply and aggregate demand if A. Trade barriers are increased. B. Trade barriers are reduced. C. Tariffs are increased. D. Quotas are increased.

B. Trade barriers are reduced.

The group that often initiates changes in fiscal policy is the: A. Congressional Budget Office B. Council of Economic Advisors C. Joint Economic Committee D. Federal Reserve Board

B. Council of Economic Advisors

The crowding-out effect suggests that: A.tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B.government borrowing to finance the public debt increases the real interest rate and reduces private investment. C.it is very difficult to have excessive aggregate spending in a capitalist economy. D.consumer and investment spending always vary inversely

B. government borrowing to finance the public debt increases the real interest rate and reduces private investment.

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is 0.9, then it could: A. Decrease taxes by $6 billion B. Decrease taxes by $12 billion C. Increase government spending by $6 billion D. Increase government spending by $12 billion

C. Increase government spending by $6 billion

iscal policy is enacted through changes in: A. Interest rates and the price level B. The supply of money and foreign exchange C. Unemployment and inflation D. Taxation and government spending

D. Taxation and government spending

Which of the following results if at a particular price level, the aggregate quantity supplied exceeds the aggregate quantity demanded? A. Aggregate demand shifts to the right. B. Aggregate supply shifts to the left. C. A surplus causes the price level to rise. D. A surplus causes the price level to fall.

D. A surplus causes the price level to fall

Which of the following is a basic macro policy strategy? A. A laissez faire approach. B. Shifting the aggregate supply curve. C. Shifting the aggregate demand curve. D. All of the choices are correct.

D. All of the choices are correct.

The set of fiscal policies that would be most contractionary would be a(n): A. Increase in government spending and taxes B. Decrease in government spending and taxes C. Increase in government spending and a decrease in taxes D. Decrease in government spending and an increase in taxes

D. Decrease in government spending and an increase in taxes

Which of the following is not a significant contributor to the U.S. public debt? A.war financing B.tax cuts and expenditure increases in the 1980s C.recessions D.demand-pull inflation

D. Demand-Pull Inflation

From the supply-side perspective, the economy may fail to reach full employment because of A. Production incentives. B. Declining costs. C. Lack of government regulation. D. Taxes that are too high.

D. Taxes that are too high.

The real-balances effect indicates that: A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.

d. a higher price level will decrease the real value of many financial assets and therefore reduce spending

The aggregate demand curve: a. Is upsloping because a higher price level is necessary to make production profitable as production costs rise. b. is downsloping because production costs decline as real output increases. c. shows the amount of expenditures required to induce the production of each possible level of real output. d. shows the amount of real output that will be purchased on each possible price level.

d. shows the amount of real output that will be purchased on each possible price level.

If full employment is associated with an output that is greater than the current macro equilibrium, which of the following best describes the impact of a rightward shift of the aggregate supply curve, ceteris paribus? A. A higher price level and a higher level of output. B. A higher price level and a lower level of output. C. A recession or depression. D. A lower price level and a higher level of output.

D. a lower price level and a higher level of output

If aggregate demand decreases and aggregate supply decreases, the level of real output will A. Decrease, and the price level will definitely decrease. B. Decrease, and the price level will definitely increase. C. Either increase or decrease, but the price level will stay the same. D. Decrease, but the price level is indeterminate.

D. decrease but the price level is indeterminate

The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will: A. shift the aggregate demand curve leftward. B. shift the aggregate supply curve leftward. C. decrease U.S. exports and increase U.S. imports. D. increase U.S. exports and decrease U.S. imports.

D. increase U.S. exports and decrease U.S. imports.

Payment of interest on the U.S. public debt: A. increases the current domestic standard of living in the United States. B. has no effect on the distribution of income. C. is thought to decrease income inequality. D. is thought to increase income inequality.

D. is thought to increase income inequality.

The foreign purchases effect: A. shifts the aggregate demand curve rightward. B. shifts the aggregate demand curve leftward. C. shifts the aggregate supply curve rightward. D. moves the economy along a fixed aggregate demand curve.

D. moves the economy along a fixed aggregate demand curve

f a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the: A. Economy's MPS is small B. Economy's MPS is large C. Economy's MPC is small D. Unemployment rate is low

A. Economy's MPS is small

When the Federal government uses taxation and spending actions to stimulate the economy it is conducting: A. Fiscal policy B. Incomes policy C. Monetary policy D. Employment policy

A. Fiscal policy

Which combination of fiscal policy actions would most likely be offsetting? A. Increase taxes and government spending B. Decrease taxes and increase government spending C. Increase taxes, but make no change in government spending D. Decrease government spending, but make no change in taxes

A. Increase taxes and government spending

A laissez faire policy approach during a recession would advocate A. Noninterference by the government. B. Increasing AS by funding programs that improve worker skills. C. Increasing AD by increasing government spending. D. Increasing both AD and AS.

A. Noninterference by the government.

In the long run, which of the following is true? A. Profit effects are equal to cost effects. B. Profit effects are larger than cost effects. C. Cost effects are larger than profit effects. D. None of the choices are correct.

A. Profit effects are equal to cost effects.

If the government wishes to increase the level of real GDP, it might reduce: A. Taxes B. Transfer payments C. The size of the budget deficit D. Its purchases of goods and services

A. Taxes

Which of the following is a potential problem at macro equilibrium? A. It is inconsistent with the macroeconomic goals. B. A surplus of goods exists. C. A shortage of goods exists. D. The economy is permanently stuck there.

A. it is inconsitant with the macroeconomic goals

The portion of the public debt held outside Federal agencies and the Federal Reserve is: A. larger than the portion held by Federal Agencies and the Federal Reserve. B.smaller than the portion held by Federal Agencies and the Federal Reserve. C.equally split between U.S. and foreign lenders. D.all held by foreign lenders.

A. larger than the portion held by Federal Agencies and the Federal Reserve.

Controversies between Keynesian, monetarist, and supply-side theories focus on the A. Shape and sensitivity of aggregate demand and aggregate supply curves. B. Existence or nonexistence of the aggregate supply curve. C. Importance of international balances to the economy. D. Usefulness of aggregate demand and supply to analyze adjustment of the macro equilibrium.

A. shape and sensitivity of aggregate demand and aggregate supply curves

The real-balances, interest-rate, and foreign purchases effects all help explain: A. why the aggregate demand curve is down sloping. B. why the aggregate supply curve is up sloping. C. shifts in the aggregate demand curve. D. shifts in the aggregate supply curve.

A. why the aggregate demand curve is down sloping

In 2009, the U.S. public debt was about: A.$11.9 trillion. B.$6.8 trillion. C.$5.1 trillion. D.$2.9 trillion.

A.$11.9 trillion.

Which of the following is not considered a legitimate concern of a large public debt? A.Bankruptcy of the Federal government B.Disincentives created by higher taxes C.Crowding-out of private investment D.Increased income inequality

A.Bankruptcy of the Federal government

Recessions have contributed to the public debt by: A.reducing national income and therefore tax revenues. B.increasing real interest rates. C.increasing the international value of the dollar. D.increasing national saving.

A.reducing national income and therefore tax revenues

The most likely way the public debt burdens future generations, if at all, is by: A.reducing the current level of investment. B.causing future unemployment. C.causing deflation. D.reducing real interest rates

A.reducing the current level of investment.

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n): A. Supply-side fiscal policy B. Expansionary fiscal policy C. Contractionary fiscal policy D. Nondiscretionary fiscal policy

B. Expansionary fiscal policy

A vertical aggregate supply curve A. Implies that supply-side policies will have no effect on the macro equilibrium. B. Implies that aggregate demand shifts have no impact on output. C. Is likely in the short run. D. Reflects the inflexibility of prices and wages.

B. Implies that aggregate demand shifts have no impact on output.

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be: A. Increased government spending or increased taxation, or a combination of the two actions B. Increased government spending or decreased taxation, or a combination of the two actions C. Increased government spending or increased taxation, but not a combination of the two actions D. Decreased government spending or decreased taxation, or a combination of the two actions

B. Increased government spending or decreased taxation, or a combination of the two actions

The unique situation in which the behavior of buyers and sellers is compatible is referred to as A. Full-employment GDP. B. Macro equilibrium. C. Micro equilibrium. D. Labor market balance.

B. Macro equilibrium

Alternating periods of economic growth and contraction are A. The result of government intervention according to Keynes. B. The result of recurrent shifts of aggregate demand and aggregate supply. C. Indicative of an unstable economy and require government intervention according to classical economists. D. Not typical of the U.S. economy.

B. The result of recurrent shifts of aggregate demand and aggregate supply.

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending assuming that the aggregate supply curve is horizontal across the range of GDP being considered? A. $6 billion B. $8 billion C. $10 billion D. $16 billion

C. $10 billion

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective? A. $6 billion B. $9 billion C. $12 billion D. $16 billion

C. $12 billion

Macro equilibrium always occurs when A. Aggregate supply is greater than aggregate demand. B. The labor force is fully employed. C. Aggregate demand equals aggregate supply at a given average price level. D. The level of output is expanding.

C. Aggregate demand equals aggregate supply at a given average price level.

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n): A. Supply-side fiscal policy B. Expansionary fiscal policy C. Contractionary fiscal policy D. Nondiscretionary fiscal policy

C. Contractionary fiscal policy

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here? A. Increase government spending and taxes B. Decrease government spending and taxes C. Decrease government spending and increase taxes D. Increase government spending and decrease taxes

C. Decrease government spending and increase taxes

Which of the following is the best example of supply-side policy? A. The government response to the Great Depression. B. Inflation during the 1970s. C. The Reagan tax cuts in 1981. D. Government policy before 1930.

C. The Reagan tax cuts in 1981

The interest rate effect suggests that: A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

What percentage of the U.S. public debt is held by Federal agencies and the Federal Reserve? A.71 percent B.56 percent C.43 percent D.29 percent

C.43 percent

According to Keynesian theory, the correct fiscal policy to stimulate the economy would be to A. Raise taxes to increase aggregate demand. B. Increase the money supply to increase aggregate supply. C. Increase government expenditures to increase aggregate demand. D. Lower taxes to increase aggregate supply.

C.Increase government expenditures to increase aggregate demand.

According to Keynes, unemployment results from A. Increased business investment that reduces consumer spending. B. Flexible wages and price. C. Insufficient spending on the part of consumers, business, and government. D. Increased government spending that reduces consumer spending.

C.Insufficient spending on the part of consumers, business, and government.

The public debt is the amount of money that: A.state and local governments owe to the Federal government. B.Americans owe to foreigners. C.the Federal government owes to holders of U.S. securities. D.the Federal government owes to taxpayers.

C.the Federal government owes to holders of U.S. securities.

A tax cut can best be characterized as A. Monetary policy only. B. Fiscal policy only. C. Supply-side policy only. D. Either fiscal or supply-side policy.

D. Either fiscal or supply-side policy

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here? A. Increase government spending and taxes B. Decrease government spending and taxes C. Decrease government spending and increase taxes D. Increase government spending and decrease taxes

D. Increase government spending and decrease taxes

For the aggregate supply curve, the profit effect A. Provides an incentive for producers to decrease output when prices rise. B. Dominates in the long run and causes the curve to be upward-sloping. C. Along with the cost effect causes the curve to be downward-sloping in the long run. D. Is temporary in the short run, while in the long run it is canceled out because the cost effect dominates.

D. Is temporary in the short run, while in the long run it is canceled out because the cost effect dominates.

The aggregate demand curve is: a. vertical under conditions of full employment. b. horizontal when there is considerable unemployment in the economy. c. downsloping because of the interest-rate, real balances, and foreign purchases effects. d. downsloping because production costs decrease as real output rises

c. downsloping because of interest-rate, real balances, and foreign purchases effects.