Econ Exam 3

If the MPC is 0.6, the multiplier will be - 1.67. - 4.0. - 6.0. - 2.5.

2.5.

One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the - start of a predicted recession and the actual start of the recession. - time fiscal action is taken and the time that the action has its effect on the economy. - time the need for the fiscal action is recognized and the time that the action is taken. - start of the recession and the time it takes to recognize that the recession has started.

time fiscal action is taken and the time that the action has its effect on the economy.

In the aggregate expenditures model, technological progress will shift the investment schedule - upward and increase aggregate expenditures. - upward and decrease aggregate expenditures. - downward and decrease aggregate expenditures. - downward and increase aggregate expenditures.

upward and increase aggregate expenditures.

The real-balances, interest-rate, and foreign purchases effects all help explain - shifts in the aggregate supply curve. - shifts in the aggregate demand curve. - why the aggregate demand curve is downsloping. - why the aggregate supply curve is upsloping

why the aggregate demand curve is downsloping.

The real-balances, interest-rate, and foreign purchases effects all help explain - why the aggregate supply curve is upsloping. - shifts in the aggregate demand curve. - shifts in the aggregate supply curve. - why the aggregate demand curve is downsloping.

why the aggregate demand curve is downsloping.

In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line - 1. - 3. - 2. - 4.

3.

The level of aggregate expenditures in a mixed open economy consists of - Ca + G. - Ca + Ig + Xn. - Ca + Ig + Xn + G. - Ca + Ig + G + T + Xn.

Ca + Ig + Xn + G.

In contrast to investment, consumption is - relatively stable. - unmeasurable. - relatively unstable. - measurable.

relatively stable.

Which of the following best describes the built-in stabilizers as they function in the United States? - Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises. - The size of the multiplier varies inversely with the level of GDP. - Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. - Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

The aggregate expenditures model is built upon which of the following assumptions? - Prices are fully flexible. - Prices are fixed. - Government spending policy has no ability to affect the level of output. - The economy is at full employment.

Prices are fixed.

Refer to the diagram for a private closed economy. The upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects - an increase in the MPC. - an increase in investment expenditures. - a decrease in consumption expenditures. - an increase in the APS.

an increase in investment expenditures.

An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to - a rightward shift of the aggregate demand curve in the AD-AS model. - a leftward shift of the aggregate demand curve in the AD-AS model. - a movement downward along a fixed aggregate demand curve in the AD-AS model. - a decrease in aggregate supply in the AD-AS model.

a rightward shift of the aggregate demand curve in the AD-AS model.

Which of the following represents the most contractionary fiscal policy? - a $30 billion tax increase - a $30 billion tax cut - a $30 billion increase in government spending - a $30 billion decrease in government spending.

a $30 billion decrease in government spending

If the dollar appreciates relative to foreign currencies, we would expect - a country's net exports to fall. - the multiplier to decrease. - a country's net exports to rise. - a country's exports and imports to both fall.

a country's net exports to fall.

An increase in aggregate demand is most likely to be caused by which of the following? - a decrease in government spending - a decrease in the tax rates on household income - a decrease in expected returns on investment - an increase in real interest rates

a decrease in the tax rates on household income

The consumption schedule shows - an inverse relationship between aggregate consumption and accumulated financial wealth. - a direct relationship between aggregate consumption and accumulated wealth. - a direct relationship between aggregate consumption and aggregate income. - an inverse relationship between aggregate consumption and the price level.

a direct relationship between aggregate consumption and aggregate income.

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

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

Proponents of the notion of a "political business cycle" suggest that - cyclical swings in the economy are produced by the inherent political instability found in capitalist economies. - the standardized budget is a better indicator of the state of the economy than the actual budget, for political reasons. - a possible cause of economic fluctuations is the use of fiscal policy by policymakers for political purposes and goals. - there is constant political trading among policymakers that tends to make the economic policies of state and local governments procyclical.

a possible cause of economic fluctuations is the use of fiscal policy by policymakers for political purposes and goals.

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S. - aggregate supply curve would shift to the left. - aggregate demand curve would shift to the right. - aggregate supply curve would shift to the right. - aggregate demand curve would shift to the left.

aggregate demand curve would shift to the right.

An inflationary expenditure gap is the amount by which - equilibrium GDP falls short of the full-employment GDP. - aggregate expenditures exceed the full-employment level of GDP. - aggregate expenditures exceed any given level of GDP. - saving exceeds investment at the full-employment GDP.

aggregate expenditures exceed the full-employment level of GDP.

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)? - increased consumer optimism regarding future economic conditions - increased government spending on military equipment - a reduced amount of excess capacity - an appreciation of the U.S. dollar

an appreciation of the U.S. dollar

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward - a reduction of subsidies and transfer payments and an increase in tax rates. - an equality of tax receipts and government expenditures. - an excess of government expenditures over tax receipts. - an excess of tax receipts over government expenditures.

an excess of government expenditures over tax receipts.

The multiplier effect means that - a change in consumption can cause a larger increase in investment. - a decline in the MPC can cause GDP to rise by several times that amount. - an increase in investment can cause GDP to change by a larger amount. - consumption is typically several times as large as saving.

an increase in investment can cause GDP to change by a larger amount.

Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of - an increase in household wealth. - an increase in disposable income. - the expectation of a recession. - an increase in personal taxes.

an increase in personal taxes.

Which of the following events would most likely reduce aggregate demand? - an increase in expected returns on investment - a reduction in the amount of existing capital stock - an increase in real interest rates - a reduction in business and personal tax rates

an increase in real interest rates

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

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

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

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

The fraction, or percentage, of total income that is saved is called the: - saving schedule. - marginal propensity to save. - average propensity to save. - disposable income schedule.

average propensity to save.

The MPC can be defined as that fraction of a - given total income that is consumed. - change in income that is spent. - change in income that is not spent. - given total income that is not consumed.

change in income that is spent.

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase - GDP by $120 billion. - GDP by $20 billion. - consumption by $80 billion. - saving by $25 billion.

consumption by $80 billion.

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n) - neutral fiscal policy. - high-interest-rate policy. - expansionary fiscal policy. - contractionary fiscal policy.

contractionary fiscal policy.

Other things equal, a decrease in the real interest rate will - reduce investment and shift the AD curve to the right. - expand investment and shift the AD curve to the left. - reduce investment and shift the AD curve to the left. - expand investment and shift the AD curve to the right.

expand investment and shift the AD curve to the right.

The immediate determinants of investment spending are the - level of saving and the real interest rate. - marginal propensity to consume and the real interest rate. - expected rate of return on capital goods and the real interest rate. - interest rate and the expected price level.

expected rate of return on capital goods and the real interest rate.

Two basic determinants of investment spending are - domestic trade and international trade. - consumer spending and government spending. - general price level and the level of output. - expected returns and real interest rates.

expected returns and real interest rates.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2, - government should undertake neither an expansionary nor a contractionary fiscal policy. - the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes. - the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes. - the economy is achieving its maximum possible output.

government should undertake neither an expansionary nor a contractionary fiscal policy.

The crowding-out effect of expansionary fiscal policy suggests that - private investment increases at the expense of government spending. - government spending increases at the expense of private investment. - imports replace domestic production. - saving increases at the expense of investment.

government spending increases at the expense of private investment.

The more progressive the tax system, the - greater is the severity of business fluctuations on the economy. - less is the effect of crowding out on the economy. - greater is the built-in stability for the economy. - less is the built-in stability for the economy.

greater is the built-in stability for the economy.

In an inflationary expenditure gap, the equilibrium level of real GDP is - greater than planned investment. - greater than full-employment GDP. - less than full-employment GDP. - equal to full-employment GDP.

greater than full-employment GDP.

An economy characterized by high unemployment is likely to be - experiencing hyperinflation. - experiencing a high rate of economic growth. - having an inflationary expenditure gap. - having a recessionary expenditure gap.

having a recessionary expenditure gap.

A high rate of inflation is likely to cause a - high nominal interest rate. - low rate of growth of nominal GDP. - decrease in nominal wages. - low nominal interest rate.

high nominal interest rate.

A private closed economy includes - households, businesses, and government, but not international trade. - households only. - households and businesses, but not government or international trade. - households, businesses, and international trade, but not government.

households and businesses, but not government or international trade.

In the aggregate expenditures model, an increase in government spending may - shift the aggregate expenditures schedule downward. - increase output and employment. - decrease real GDP. - reduce the size of the inflationary gap.

increase output and employment.

An economist who favored expanded government would recommend - tax cuts during recession and reductions in government spending during inflation. - increases in government spending during recession and tax increases during inflation. - tax cuts during recession and tax increases during inflation. - tax increases during recession and tax cuts during inflation.

increases in government spending during recession and tax increases during inflation.

The short-run aggregate supply curve represents circumstances where - input prices are flexible, but output prices are fixed. - input prices are fixed, but output prices are flexible. - both input and output prices are flexible. - both input and output prices are fixed

input prices are fixed, but output prices are flexible.

Refer to the diagrams. Curve A - is an investment demand curve, and curve B is an investment schedule. - shifts to the left when curve B shifts upward. - is an investment schedule, and curve B is a consumption of fixed capital schedule. - and curve B are totally unrelated.

is an investment demand curve, and curve B is an investment schedule.

Expansionary fiscal policy is so named because it - necessarily expands the size of government. - is designed to expand real GDP. - is aimed at achieving greater price stability. - involves an expansion of the nation's money supply.

is designed to expand real GDP.

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy - makes the actual budget a better reflection of the condition of the economy than the standardized budget. - does not produce a cyclical deficit, as discretionary policy does. - has a greater multiplier effect than discretionary policy. - is not subject to the timing problems of discretionary policy.

is not subject to the timing problems of discretionary policy.

Refer to the diagrams. Other things equal, an interest rate increase will leave curve A in place but shift curve B upward. shift curve A to the right and shift curve B upward. shift curve A to the left and shift curve B downward. leave curve A in place but shift curve B downward.

leave curve A in place but shift curve B downward.

In a recessionary expenditure gap, the equilibrium level of real GDP is - less than full-employment GDP. - greater than full-employment GDP. - less than planned aggregate expenditures. - greater than planned aggregate expenditures.

less than full-employment GDP.

Refer to the diagram. If (C + Ig) are the private expenditures in the closed economy and Xn2 are the net exports in the open economy, we can conclude that - trade is balanced. - exports are negative. - net exports are positive. - net exports are negative.

net exports are positive.

Refer to the diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE3, the - inflationary expenditure gap is BC. - inflationary expenditure gap is ed. - recessionary expenditure gap is BC. - recessionary expenditure gap is ed.

recessionary expenditure gap is ed.

An expansionary fiscal policy is shown as a - leftward shift in the economy's aggregate supply curve. - movement along an existing aggregate demand curve. - leftward shift in the economy's aggregate demand curve. - rightward shift in the economy's aggregate demand curve.

rightward shift in the economy's aggregate demand curve.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will - shift the AD curve to the right. - increase the equilibrium GDP. - not affect the AD curve. - shift the AD curve to the left.

shift the AD curve to the left.

When consumers decide to increase household debt, this action will - decrease the amount consumed along a stable consumption schedule. - shift the consumption schedule downward. - increase the amount consumed along a stable consumption schedule. - shift the consumption schedule upward.

shift the consumption schedule upward.

The aggregate supply curve - gets steeper as the economy moves from the top of the curve to the bottom of the curve. - shows the various amounts of real output that businesses will produce at each price level. - is explained by the interest rate, real-balances, and foreign purchases effects. - is downsloping because real purchasing power increases as the price level falls.

shows the various amounts of real output that businesses will produce at each price level.

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the - start of the recession and the time it takes to recognize that the recession has started. - time fiscal action is taken and the time that the action has its effect on the economy. - time the need for the fiscal action is recognized and the time that the action is taken. - start of a predicted recession and the actual start of the recession.

start of the recession and the time it takes to recognize that the recession has started.

Dissaving means - that households are spending more than their current incomes. - that disposable income is less than zero. - that saving and investment are equal. - the same thing as disinvesting.

that households are spending more than their current incomes.

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 - the foreign purchases effect. - the real-balances effect. - the shift-of-spending effect. - the output effect.

the foreign purchases effect.

The most important determinant of consumer spending is - consumer expectations. - the level of income. - the stock of wealth. - the level of household borrowing.

the level of income.

The investment demand curve suggests that - an increase in business taxes will tend to stimulate investment spending. - there is an inverse relationship between the real rate of interest and the level of investment spending. - changes in the real interest rate will not affect the amount invested. - there is a direct relationship between the real rate of interest and the level of investment spending.

there is an inverse relationship between the real rate of interest and the level of investment spending.