ECONS 102 Exam 4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, the level of income associated with Y1 in panel (b):
reveals an inflationary gap compared with Yp.
Firms will reduce production due to an unintended _____ in inventories
rise
In the long run, the economy is:
self-correcting as prices of goods that are sticky in the short run become very flexible in the long run and thus move the economy to full employment.
Planned aggregate spending
the total amount of planned spending in the economy
Which is an automatic stabilizer?
unemployment compensation payments to unemployed autoworkers
At levels of GDP higher than the income-expenditure equilibrium,
unplanned investment is positive.
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.
The short-run aggregate supply curve is positively sloped because:
wages are sticky or don't readily adjust to changes in economic conditions in the short run.
When government borrowing raises interest rates and therefore dampens private investment, then:
we say that crowding out has occurred.
An expansionary fiscal policy:
would shift AD to the right and increase the size of the government budget deficit.
(Table: Income-Expenditure Equilibrium) The Table: The Income-Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. At which income level would there be negative unplanned investment?
$ 80 billion
(Figure: Aggregate Expenditures I) Refer to the Figure: Aggregate Expenditures I. When real GDP is $700 billion, there will be a:
$125 million increase in unplanned inventory investment.
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. __(Scenario: Consumption Spending) According to the Scenario: Consumption Spending, if income increases by $2000, consumption will increase by:
$1600
In an economy with no taxes or imports, if disposable income increases by $1000 and consumption increases by $600, the multiplier is:
2.5
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, in panel (a), an expansionary policy designed to move the economy from Y1 to Yp would attempt to shift the:
aggregate demand curve to the right by increasing aggregate demand.
During the Great Depression, the United States moved to the:
left along its short-run aggregate supply curve.
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, the slope of the consumption function is called the:
marginal propensity to consume.
During the Great Depression, the United States experienced a ________ the short-run aggregate supply curve; during the 1979 oil crisis, the United States experienced a _________ in the short-run aggregate supply curve.
movement down along; a leftward shift
Time lags in the implementation of fiscal policy:
must be considered by policy makers in the implementation of fiscal policy.
(Figure: An Increase in Aggregate Demand) According to the Figure: An Increase in Aggregate Demand, the short-run equilibrium at Y2 and P2:
results in an inflationary gap.
(Figure: Income-Expenditure Equilibrium) According to the Figure: Income-Expenditure Equilibrium, if planned investment spending increases by $100, income-expenditure equilibrium occurs at GDP of:
$2250
If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:
$30,000
If the marginal propensity to save is 0.25, and the government increases its purchases of goods and services by $100 million, then real GDP increases by:
$400 million.
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, if real GDP is $8 trillion, consumption is _______ trillion and saving is _______ trillion.
$5; $3
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, if real GDP is $12 trillion, consumption is _______ trillion.
$7
You and a coworker have been trying to develop a linear equation that describes the local household consumption function. Your coworker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would occur if a household had disposable income of $1000?
$850
The correct formula for the Output Gap is:
((Aggregate output - Potential ouput)/Potential output) x 100
(Figure: Shifts of the AD-AS Curves) According to the Figure: Shifts of the AD-AS Curves, a short run increase in net exports is illustrated by:
(a)
(Table: Aggregate Spending) According to the Table: Aggregate Spending, suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the table show consumption spending (C) and planned investment (IPlanned). If real GDP is $2500, what is the level of unplanned inventory investment?
-$200
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. According to the Scenario: Consumption Spending, if disposable income is $1000, saving is:
-$300
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, the marginal propensity to consume in this example is:
0.5
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, the slope of the aggregate expenditures curve in the aggregate expenditures model shown in this figure is:
0.6
(Table: Disposable Income and Consumption) Refer to the Table: Disposable Income and Consumption. The MPC is equal to:
0.6
(Table: Income and Consumption) According to the Table: Income and Consumption, when disposable personal income is $300, the MPC is:
0.80
If the slope of the aggregate expenditures curve = 0.9, the multiplier is equal to:
10
Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:
5
If a CD store has 10,000 CDs at the start of the period and 15,000 CDs at the end of the period, then its inventory investment during the period was:
5000
(Figure: Fiscal Policy I) According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, then:
AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.
(Table: Individual and Aggregate Consumption Functions) According to the Table: Individual and Aggregate Consumption Functions, which represents Fred's individual consumption function?
C = 100 + 0.7YD.
Aggregate consumption function
C = A + MPC x YD
Suppose the economy is operating at an output level of $5400 billion. Assume furthermore that potential output is $5000. Which would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75?
Decrease spending by $100 billion.
Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, which policy would bring the economy to potential output?
Decrease taxes by $25 billion.
(T/F) Suppose we are in an economy with no taxes or imports. If the marginal propensity to consume is 0.9 and investment spending increases by $50 billion, the change in real GDP will be $5 billion.
False
In the basic equation of national income accounting, the government directly controls _____ and influences ______.
G; C and I
Real aggregate spending
GDP = Y = C + I
The supply of loanable funds increases when people decide to be thriftier. What is most likely to occur?
Interest rates decrease, and investment spending increases.
If there is an inflationary gap, which accurately describes the adjustment to long-run equilibrium?
Nominal wages rise, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium.
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. According to the Scenario: A Country's Consumption Function, holding everything else constant, what will happen if aggregate wealth decreases by $100?
The AE curve will shift downward.
Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which would most likely result?
The economy could move into a recession.
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. Specifically when the price level declines, the aggregate expenditure function shifts from "AE planned 1" to "AE planned 2." What is the effect of the reduction in overall prices?
The equilibrium level of real GDP increases from $8 billion to $10 billion.
Disposable income
YD = Y = GDP
(Figure: Shift of the Aggregate Demand Curve) According to the Figure: Shift of the Aggregate Demand Curve, a movement from point C on AD2 to point A on AD1 may have been the result of:
a decrease in investment due to pessimistic GDP forecasts.
A decrease in aggregate demand will generate _______ in real GDP and _______ in the price level in the short run.
a decrease; a decrease
(Figure: The Multiplier) According to the Figure: The Multiplier, if this economy is currently at Y1 and the price level decreases, then:
a downward movement along the AD1 will take place, reflecting a decrease in the price level.
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD′:
an expansionary fiscal policy may be warranted.
The economy is in a recession. Which is a fiscal policy that the government should adopt to strengthen the economy?
an increase in government purchases of goods and services
(Figure: An Increase in Aggregate Demand) According to the Figure: An Increase in Aggregate Demand, at the Y2 level of real GDP:
an inflationary gap exists equal to the difference between Y2 and YP.
If the economy is currently in a recessionary gap, real GDP will be ________ potential output.
below
The cyclically adjusted budget balance refers to the:
budget balance if actual output were equal to potential output.
A movement along the short-run AS curve occurs, holding everything else constant, when there is a:
change in the aggregate price level.
In an economy with no international trade, no government expenditure, no transfers, and no taxes, planned aggregate spending is equal to:
consumption plus planned investment spending.
If the economy exhibited an inflationary gap, the government should follow a(n):
contractionary policy, which would shift the AD curve to the left.
(Figure: Consumption Functions) According to the Figure: Consumption Functions, an economy's consumption function would shift from curve C to curve Cʹʹ when there is a(n):
decrease in wealth.
According to the interest rate effect, a decrease in the price level causes people to _______ their money holdings, which ________ interest rates and _________ investment spending.
decrease; decreases; increases
A reduction in government transfers ________, therefore shifting the aggregate demand curve to the ________.
decreases disposable income and consumption; left
If prices are constant, but there is an increase in the value of financial assets, aggregate:
demand shifts to the right.
A change in taxes or a change in government transfers affects consumption through a change in:
disposable income.
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned Aggregate Spending, if current disposable income decreases in this economy, then the:
economy will move downward along the AE.
The effect of a government deficit on the economy is:
expansionary
Firms will increase production due to an unintended _____ in inventories
fall
Which represents the three consequences of the decline in demand during the Great Depression?
falling prices, declining output, and a surge in unemployment
Social insurance programs are:
government programs intended to protect families against economic hardships.
Consumer spending will rise if:
government transfers rise.
The national debt:
grows when the government runs a deficit.
Government borrowing will not crowd out private investment spending if unemployment is:
high and the fiscal expansion causes an increase in incomes and saving at each interest rate.
The _____ the MPC is, the _____ disposable income "leaks out" into savings at each round of expansion.
higher; less
An unexpected decrease in consumer spending will:
increase unplanned investment spending.
In the short run, a positive demand shock:
increases aggregate output and the aggregate price level.
According to the wealth effect, when prices decrease, the purchasing power of assets:
increases and consumer spending increases.
A government budget surplus would be contractionary because of all EXCEPT that:
increases in government purchases are contractionary.
Stagflation is a combination of:
increasing unemployment and increasing inflation.
(Figure: AD-AS) According to the Figure: AD-AS, consider an economy that is producing an output level of Y1. This economy is in a(n):
inflationary gap, which can be closed by contractionary fiscal policy.
Suppose the level of planned aggregate expenditure in an economy is $1000 and the real GDP is $800. According to the simple model developed in this chapter, where the aggregate price level is assumed to be constant, we can expect:
inventories will decrease.
When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as:
nominal wages fall and the short-run aggregate supply curve shifts to the right.
The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called:
potential output.
Stabilization policies have:
reduced the economic fluctuations caused by demand shocks but have not been effective against supply shocks.
(Figure: Fiscal Policy) According to the Figure: Fiscal Policy Choices, if the government uses fiscal policy for the economy in panel (b) when real GDP is Y1, government spending is likely to be _______ and taxes are likely to be _______.
reduced; increased
A negative short-run supply shock:
reduces aggregate output and increases the aggregate price level.
