economics test 3 Q13-Q17
Suppose the full-employment level of GDP is $250 billion in a hypothetical economy. Currently, aggregate expenditures total $270 billion. Which of the following would be most in accord with appropriate fiscal policy?
A)Lower tax rates on corporate income B)Reducing or limiting personal deductions and credits when figuring personal income taxes C)Expanded spending on new domestic security programs D)Decreases in interest rates B
The group responsible for setting policy on buying and selling government securities (bills, notes, and bonds) is the:
A)Securities and Exchange Commission B)U.S. Treasury Board C)Federal Open Market Committee D)12 Federal Reserve Bank presidents C
d. In order to finance this expansion of government spending, suppose the government decides to levy a lump-sum tax of $100 billion. By how much will GDP change, and in what direction?
A lump-sum tax of $100 billion reduces disposable income by $100 billion at every level of real GDP. Since the MPC is .8, consumption will initially fall by $80 billion. Multiplied by the multiplier of 5, this translates to a drop in GDP of 5 x $80 = $400.
If the marginal propensity to consume (MPC) is 0.60, the value of the spending multiplier is
A) 0.4 .B) 0.6. C) 1.5. D) 2.5. D
The change in GDP associated with a change in government spending is:
A) equal to the change in government spending B) smaller than—and opposite in sign to—that associated with an equal change in taxes C) smaller than—and of the same sign as—that associated with an equal change in net exports D) larger than—and opposite in sign to—that associated with an equal change in taxes D
Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through
A) expanding and contracting the money supply. B) encouraging business to expand or contract investment. C) regulating net exports. D) decreasing government spending or increasing taxes. D
If the MPC is .75 and the economy has a recessionary expenditure gap of $10 billion, then equilibrium GDP is:
A)$10 billion below full-employment GDP B)$10 billion above full-employment GDP C)$40 billion below full-employment GDP D)$40 billion above full-employment GDP C
Refer to the table. The equilibrium level of GDP in this economy is:
A)$150 B)$200 C)$250 D)$300 B
In the U.S., there are:
A)50 Federal Reserve Districts corresponding to the 50 states B)7 Federal Reserve Districts corresponding to the 7 members of the Board of Governors C)12 Federal Reserve Districts corresponding to the 12 Federal Reserve Banks D)6 Federal Reserve Banks corresponding to the 6 U.S. time zones C
Which of the following most accurately describes the primary cause of the 2007-2008 U.S. financial crisis?
A)A rapid increase in the size of the federal deficit B)Widespread defaults on home mortgages precipitated by banks' lax lending practices C)A sharp reduction in the money supply by the Federal Reserve Bank D)The rapid collapse in the stock market B
Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment?
A)A tax cut in a recession B)A tax increase during inflation C)An increase in government spending during a recession D)A decrease in government spending in a recession A
Which of the following is included in M2 but not M1?
A)Currency held by banks B)Small-denominated time deposits (less than $100,000) C)Credit card balances D)Large time deposits (at least $100,000) B
If inventories are declining unexpectedly at the current level of GDP:
A)GDP exceeds the level of current expenditures B)GDP is at its equilibrium level C)current expenditures exceed the level of GDP and GDP will fall D)GDP is below its equilibrium level D
An increase in the incomes of U.S. trading partners would shift the U.S.:
A)aggregate demand curve to the right B)aggregate demand curve to the left C)aggregate supply curve to the right D)aggregate supply curve to the left A
All else equal, if domestic consumers begin to spend a greater fraction of their consumption expenditures on foreign-produced goods:
A)aggregate expenditures and GDP will both increase B)aggregate expenditures and GDP will both decrease C)exports will also rise, offsetting the increase in imports D)the multiplier will increase B
When planned injections of investment, government spending, and exports equal leakages of saving, taxes, and imports:
A)aggregate expenditures will equal GDP B)consumption plus injections will be greater than aggregate expenditures C)net exports will be zero D)output will be below its equilibrium level A
The short-run aggregate supply curve:
A)assumes that wages and salaries fully match any change in the price level B)is a vertical line located at the full-employment level of output C)shows the amount of real output supplied at various price levels D)becomes increasingly flatter as output expands C
Net exports will be positive:
A)at the equilibrium level of GDP B)whenever GDP is below its equilibrium level C)whenever GDP exceeds its equilibrium level D)if exports exceed imports D
Built-in stabilizers:
A)automatically increase the size of deficits when the economy experiences demand-pull inflation B)avoid the problems associated with the administrative lag of discretionary fiscal policy C)automatically produce a budget that is balanced over the business cycle D)tend to offset the impact of discretionary fiscal policy B
The aggregate demand curve slopes downward to the right:
A)because a lower domestic price level reduces net exports B)because of the income and substitution effects of lower prices C)at low prices, but not at high prices D)because a lower price level reduces the demand for money, which lowers the interest rate and increases desired investment D
A leftward shift of the short-run aggregate supply curve would illustrate:
A)demand-pull inflation B)an inflationary gap C)a positive GDP gap D)cost-push inflation D
Assume the MPC is 2/3. If government spending decreases by $6 billion, equilibrium GDP will:
A)fall by $2 billion B)fall by $18 billion C)fall by $6 billion D)fall by $4 billion B
At very low levels of output, the short-run aggregate supply curve is relatively:
A)flat, because firms are reluctant to give their current workers raises when output is so low B)flat, because firms can expand output with relatively little increase in per-unit production costs C)steep, because increasing output will cause relative large increases in per-unit production costs D)steep, because increasing output will cause aggregate demand to increase B
The U.S. money supply is "backed" by:
A)gold B)silver C)a joint committee of the Federal Deposit Insurance Corporation and the National Credit Union Administration D)the ability of the government to maintain its value D
An increase in the price level will:
A)increase net exports B)reduce the value of household debt and increase investment C)increase production costs and reduce short-run aggregate supply D)reduce the purchasing power of household wealth and reduce consumption D
Other things equal, a dramatic decrease in the money supply would:
A)increase the price level B)reduce the purchasing power of each dollar C)increase the purchasing power of each dollar D)have an ambiguous impact on the purchasing power of each dollar C
The effectiveness of an expansionary fiscal policy will be reduced if:
A)increased government borrowing increases interest rates, causing a reduction in private investment B)it is accompanied by a cut in Social Security taxes as well C)the price level falls D)stock prices rise A
The purchasing power of the dollar:
A)increases with the rate of inflation B)is inversely related to the price level C)is directly related to the supply of money D)is directly related to the price level B
If the MPC is .75, government could eliminate a $60 recessionary expenditure gap by:
A)increasing government spending by $240 B)reducing lump-sum taxes by $80 C)reducing lump-sum taxes by $60 D)balancing its budget B
Which of the following exemplifies the crowding-out effect? An increase in government spending:
A)is financed by increasing the money supply, reducing interest rates and causing net exports to fall B)is financed by borrowing, raising interest rates and causing private investment to fall C)causes taxes to rise automatically, reducing consumption spending D)causes the price level to rise, reducing net exports B
In the short run, a reduction in aggregate demand is:
A)likely to cause a reduction in the price level B)unlikely to cause a reduction in the price level because of the interest rate effect C)unlikely to cause a reduction in the price level because of menu costs and efficiency wages D)likely to cause a reduction in aggregate supply C
Higher prices of imported resources will:
A)move the economy downward and to the right along the aggregate demand curve B)make the aggregate demand curve steeper C)shift the aggregate supply curve to the left D)shift the aggregate demand curve to the left C
Assume the level of investment is independent of the level of GDP. If the interest rate rises, the investment schedule will:
A)shift to the right B)shift to the left C)shift downward D)shift upward C
Whenever the Jones family receives change from a purchase, it goes into a jar to be used in the summer as spending money for the family vacation. The primary function served by the money in the jar is:
A)standard of value B)store of value C)unit of account D)medium of exchange B
Writing a check to purchase a new computer is an example of using money primarily as a:
A)unit of account B)standard of value C)medium of exchange D)store of value C
c. Next suppose a government is introduced, and plans to spend $20 billion. By how much will this change in spending ultimately cause GDP to change, and in what direction?
GDP will increase by the multiplier times the initial amount of government spending: 10 x $20 = $200.
c. Next suppose a government is introduced, and plans to spend $100 billion. By how much will this change in spending ultimately cause GDP to change, and in what direction?
GDP will increase by the multiplier times the initial amount of government spending: 5 x $100 = $500.
b. Suppose each input costs $6. What is the per-unit production cost at each level of output?
Production cost is measured as the price of each input times its price. Per-unit production cost is this amount divided by total output, or real GDP. In this example, per-unit production cost at each level of output is $1.2. $1.2 = ($6 x 100)/$500 = ($6 x 105)/$525 = ($6 x 110)/$550 = ($6 x 115)/$575.
b. Suppose each input costs $5. What is the per-unit production cost at each level of output?
Production cost is measured as the price of each input times its price. Per-unit production cost is this amount divided by total output, or real GDP. In this example, per-unit production cost at each level of output is $1.25. $1.25 = ($5 x 100)/$400 = ($5 x 105)/$420 = ($5 x 110)/$440 = ($5 x 115)/$460.
Suppose the relationship between an economy's aggregate inputs and its output can be represented by the following table, in which inputs and real GDP are expressed in billions: a. What is the productivity level in this economy?
Productivity is measured as the ratio of total real output to total inputs. In this example, productivity is 400/100 = 4.
Suppose the relationship between an economy's aggregate inputs and its output can be represented by the following table, in which inputs and real GDP are expressed in billions: Inputs- 100 105 110 115 REAL GDP- 500 525 550 575 a. What is the productivity level in this economy?
Productivity is measured as the ratio of total real output to total inputs. In this example, productivity is 500/100 = 5.
Suppose a private closed economy has an MPC of .8 and a current equilibrium GDP of $7400 billion. a. What is the multiplier in this economy?
The multiplier is 1/(1 -.8) = 5.
Suppose a private closed economy has an MPC of .9 and a current equilibrium GDP of $8000 billion. a. What is the multiplier in this economy?
The multiplier is 1/(1 -.9) = 10.
c. Suppose productivity increases by 10% with no change in input prices. Calculate the new per-unit production cost.
The new productivity level is 1.1 x 4 = 4.4, a 10% increase over its previous level. This means that 100 billion units of inputs could produce 100 x $4.4 = $440 billion of real GDP. The new per-unit production cost is ($5 x 100)/$440 = $1.14, a drop of 10%.
c. Suppose productivity increases by 10% with no change in input prices from question b above. Calculate the new per-unit production cost.
The new productivity level is 1.1 x 5 = 5.5, a 10% increase over its previous level. This means that 100 billion units of inputs could produce 100 x $5.5 = $550 billion of real GDP. The new per-unit production cost is ($6 x 100)/$550 = $1.09, a drop of 10%.
b. Now suppose the economy opens up trade with the rest of the world and experiences net exports of $10 billion. What impact will this have on equilibrium real GDP?
These positive net exports represent an initial increase in spending. The increase in GDP will be the multiplier times this initial injection, or $100 billion. 10 x $10 = $100. Real GDP rises from $8000 to $8100 billion.
b. Now suppose the economy opens up trade with the rest of the world and experiences net exports of $20 billion. What impact will this have on equilibrium real GDP?
These positive net exports represent an initial increase in spending. The increase in GDP will be the multiplier times this initial injection, or $100 billion. 5 x $20 = $100. Real GDP rises from $7400 to $7500 billion.
Currently, the U.S. national debt is more than $20 trillion.
a, True b, False B
Increased government borrowing stimulates private borrowing because of its effect on interest rates.
a, True b, False B
The entire national debt is owed to U.S. citizens.
a, True b, False B
An increase in fiscal deficit spending financed by borrowing will increase the national debt.
a, True b, False A
The federal government never has to pay off the national debt.
a, True b, False A
With regard to the national debt, to whom does the federal government owe money?
a.Taxpayers. b.Federal government workers. c.The Federal Reserve system. d.Investors who buy U.S. Treasury bills, bonds, and notes. D
When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of:
a.World War II. b.the Vietnam War. c.the Reagan defense buildup and tax cut. d.the Bush economic recovery program. A
If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:
a.balanced budget amendment. b.deficit reduction plan. c.conference resolution. d.continuing resolution. D
An increase in our federal government's budget deficit will likely:
a.increases the national debt. b.increases interest rates. c.decrease borrowing by households and businesses. d.be less effective in stimulating the economy than the spending multiplier implies because of crowding out. e.All of the answers are correct. E
The national debt is unlikely to cause national bankruptcy because the:
a.national debt can be refinanced by issuing new bonds. b.interest on the public debt equals GDP. c.national debt cannot be shifted to future generations for repayment. d.federal government cannot refinance the outstanding national debt. A