ECON exam 2

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers

There is a _______ relationship between the amount of loanable funds demanded and the rate of interest.

negative

If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium?

negative supply shock.

If the economy is at equilibrium at E1, it is experiencing a(n):

recessionary gap.

Recessions typically cause the unemployment rate to ________ and the inflation rate to ________.

rise; fall

All of the following are sources of federal tax revenue EXCEPT:

sales taxes.

If there is a recessionary gap in the economy, discretionary fiscal policy would likely involve action to:

shift aggregate demand to the right.

A rapid increase in the price of oil will tend to

shift short-run aggregate supply to the left

A general increase in wages will result in the:

short-run aggregate supply curve shifting to the left.

For the US economy as a whole, the partial government shutdown likely

slightly decreased economic growth.

An increase in the government budget surplus will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________.

supply; right; fall

There is only one correct answer for each question. Fill in the circle on the supplied bubble sheet that corresponds to the answer that you believe to be most correct.

tax cuts; government spending/transfer payments

Suppose that the stock market crashes. Which of the following is most likely to occur?

the aggregate demand curve shifts to the left

The marginal propensity to consume is:

the change in consumer spending divided by the change in aggregate disposable income.

The point at which the long-run aggregate supply curve touches the X-axis is known as:

the economy's potential output.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,

the long-run aggregate supply curve will shift to the right.

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

the rightward shift of the short-run aggregate supply curve that occurs after a recession

If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be

an inflationary gap.

If the MPC equals 0.5, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.

$0.250 trillion (250 billion)

The market is in equilibrium. If the government budget deficit rises, such that the equilibrium interest rate change to 5%, what would be the new quantity of private savings (after the deficit rises)?

$150 million

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. (Scenario: Closed Economy S = I) How much is national saving?

$2 trillion

In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. (Scenario: Open Economy S = I) How much is national saving?

$2 trillion

If the interest rate is 8% in the loanable funds market, businesses will want to borrow approximately

$2 trillion.

Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion I= $2 trillion G = $2 trillion TR = $2 trillion T = $3 trillion 9) Based on the information above, what is the level of private saving in the economy?

$3 trillion

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.8. Assuming no taxes and no trade, by how much will real GDP change?

$500 billion decrease

Suppose there is no trade and no government in a small economy. The GDP is equal to $25 trillion, and consumption spending is equal to $18 trillion this year. (Scenario: A Small Economy) What is the level of investment spending?

$7 trillion

Suppose that real GDP is currently $17.1 trillion, potential GDP is $17.4 trillion, and the tax multiplier is -1.6. By how much will taxes have to change to bring the economy to equilibrium at potential GDP?

-$0.1875 trillion

Potential real GDP is equal to $10,000 and the current level of real GDP is equal to $9,000. The output gap is therefore equal to:

-10%

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is:

0.6.

Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The value of the MPC is:

0.75

Following the recession of 2008/2009, we saw the US unemployment rate hit a peak of approximately ________. In a counterfactual world where the 2009 American Recovery and Reinvestment Act never occurred, we would likely see unemployment rates that _____________ .

10%; exceeded 10%.

If the MPS = 0.1, then the value of the spending multiplier equals:

10.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5

Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, then:

AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.

Which of the following would NOT shift the aggregate demand curve?

An increase in the price level.

The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150 billion?

Businesses become more optimistic about the return on investment spending.

The components of aggregate demand are:

C (consumption), I (investment), G (government) expenditures, and X - IM (net exports).

Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000. Which of the following would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75?

Decrease spending by $100 billion

Taxes are greater than government spending.

G = $5 trillionT = $5 trillionTR = $1 trillion

Which of the following is considered investment spending in macroeconomics?

GM builds a new plant to manufacture automobiles.

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Increase government spending by $20 billion.

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right.

________ of unemployment during ________ make it easier for workers to ________ wages.

Low levels; an inflationary gap; negotiate higher

Which of the following is a reason that the 2009 American Recovery and Reinvestment Act was not as successful as it could have been?

Many families didn't even realize they had received a tax cut.

A business will want a loan when

Question options: interest rate < (return on project - cost of project) / cost of project × 100.

Suppose the MPC = 0.8 and the government cuts taxes by $40 billion. Which of the following will be the likely effect?

Real GDP will increase by $160 billion.

In a closed economy, public saving is equal to which of the following? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)

T - G - TR

The budget balance is calculated as:

T - G - TR.

There is a government budget surplus if

T > G +TR.

A budget surplus exists when which of the following occurs?

Taxes are greater than government spending.

Suppose that consumer expectations about the future improve. How will this affect the aggregate demand curve?

The aggregate demand curve shifts to the right.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following would most likely result? Question options:

The economy could move into a recession.

The market is in equilibrium. If the government budget deficit rises, which of the following would you expect to see?

The quantity of loanable funds demanded by firms will fall below $120 million.

Suppose the economy enters a recession. If government policymakers do not take any policy actions in response to the recession, which of these alternatives would be the likely result?

The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

They will shift the aggregate demand curve to the right.

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will decline.

On the long-run aggregate supply curve

a decrease in the price level has no effect on the aggregate quantity of GDP supplied

Suppose the economy is producing the output level Yp and a negative demand shock shifts the AD1 curve to AD3. The economy now has:

a recessionary gap, which can be closed by expansionary fiscal policy.

An example of an automatic stabilizer that works when the economy contracts is:

a rise in government transfers as more people receive unemployment insurance benefits.

The Congressional Budget Office reported that federal budget deficits in the United States were likely to increase in future years, and these higher deficits might "pose a threat to the economy by crowding out business investment and threatening a spike in interest rates." This higher budget deficit would be represented graphically by

a shift in the supply curve for loanable funds to the left.

A movement from point B on AD1 to point E on AD2 could have been the result of:

an increase in consumer optimism.

Which of the following would likely cause the short-run aggregate supply curve to shift to the left?

an increase in the price of imported oil

Which of the following is an expansionary fiscal policy?

an increase in unemployment benefits

Consider an economy that is producing an output level of Y1. This economy is in:

an inflationary gap, which can be closed by contractionary fiscal policy.

We discussed in class that we have recently begun to experience an inverted yield curve on US federal government bonds. This means that long-term interest rates are now slightly ____________ short-term interest rates. Historically, this has been a signal of an upcoming ______________.

below; recession

What can the federal government do to finance a deficit?

borrow funds

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the

budget deficit or surplus as a percentage of GDP.

In comparison to a government that runs a balanced budget, when the government runs a budget deficit

business investment will fall.

Which of the following factors cannot shift the aggregate demand curve?

changes in the price level

The response of investment spending to an increase in the government budget deficit is called

crowding out.

If the current level of real GDP lies above potential GDP, then an appropriate fiscal policy would be to _____, which will shift the ADcurve to the _____.

decrease government purchases; left.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes.

Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ government spending, which would cause aggregate demand to ________.

decrease; decrease

The presence of an automatic stabilizer in government tax revenue that occurs when GDP rises:

decreases the size of the multiplier.

An increase in individual income taxes ________ disposable income, which ________ consumption spending.

decreases; decreases

Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds.

demanders; suppliers

Part of the spending on the Doyle Drive project (infrastructure spending) in northern California came from the American Reinvestment and Recovery Act, which is an example of ________ aimed at increasing real GDP and employment

discretionary fiscal policy

If the economy is at equilibrium at E1, the government should use __________ fiscal policy to shift the aggregate demand curve to the ________ .

expansionary; right

In the long run, nominal wages are:

flexible because contracts and informal agreements are renegotiated in the long run.

Social insurance programs are:

government programs intended to protect families against economic hardships.

Congress and the president carry out fiscal policy through changes in

government purchases and taxes.

Consumer spending will rise if:

government transfers rise.

The national debt:

grows when the government runs a deficit.

An aggregate output level lower than potential output means there will be:

high unemployment.

If the economy is at full employment, expansionary fiscal policy is most likely to lead to:

higher inflation rates.

The short run in macroeconomic analysis is a period

in which many production costs can be taken as fixed.

A movement from point A on AD1 to point C on AD2 could have resulted from a(n):

increase in the total quantity of consumer goods and services demanded at every price level.

If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output would be a(n):

increase in transfer payments.

A decrease in energy prices will

increase short-run aggregate supply.

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

increase; fall; rises

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes.

The tax multiplier

is smaller in absolute value as compared to the government spending multiplier

One of the shortcomings of fiscal policy is that:

it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.

Discretionary fiscal policy involves:

using government spending or tax policy to affect aggregate demand.

The long-run aggregate supply curve is:

vertical.

Nominal wages are "sticky" because:

wages are slow to rise in the short run when there are labor shortages and slow to fall even when there is significant level of unemployment.