Exam 2 Macro

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when:

AD increase but not when AD decrease

Refer to the above figures with consumption schedules in figure (A) and saving schedules in figure (B), which correspond to each other across different levels of disposable income. If, in figure (A), line A2 shifts to A3 because of the so-called wealth effect, then in figure (B) line:

B2 will shift to B1

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

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?

Decrease government spending and increase taxes

the set of fiscal policies that would be most contractionary would be a(n):

Decrease in government spending and an increase in taxes

When the federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is:

Discretionary fiscal policy

In year 1, the actual budget deficit was $200 billion and the cyclically-adjusted deficit was $150 billion. In year 2, the actual budget deficit was $225 billion and the cyclically-adjusted deficit was $175 billion. It can be concluded that fiscal policy from year 1 to year 2 became more:

Expansionary

if congress passes legislation to increase government spending to counter the effect of a recession, then this would be an example of a(n):

Expansionary fiscal policy

two basic determinants of investment spending are

Expected returns and real interest rates

When the federal government uses taxation and spending actions to stimulate the economy it is conducting

Fiscal policy

Refer to the diagram, which applies to a private closed economy. If gross investment is lg1, the equilibrium GDO and the level of consumption will be

H and HF, respectively

the economy experiences an increase in the price level and an increase in real domestic output. Which is a likely explanation?

Net exports have increase

A firm invest in a new machine that costs $5,00 a year but which is expected to produce an increase in total revenue of $5,200 a year. The current real rate of interest is 7 percent. The firm should:

Not undertake the investment because the expected rate of return of 4 percent is less than the real rate of interest

refer tot he graph above. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?

P2 and Q2

Refer to the data above. At the $300 level of disposable income

There is a dissaving of $10

Refer to the diagram for a private closed economy. The $400 level of GDP is

Unsustainable because aggregate expenditures are less than GDP

refer to the above graph. what combination would most likely cause a shift from AD1 to AD2

a decrease in taxes and an increase in government spending

Refer to the above figures with consumption schedules in figure (A) and saving schedules in figure (B), which correspond to each other across different levels of disposable income. If, in figure (A), consumption increases along line A2 then in figure (B) there would be:

a movement up along line B2

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP that will a $1 decline in taxes because

a portion of a tax cut will be saved

collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to

a price level that is inflexible downward

The following factors explain the inverse relationship between the price level and the total demand for output, except:

a substitution effect

The multiplier effect relates

changes in spending to changes in real GDP

Refer to the diagrams. Other things equal, curve B will shift upward when

curve A shifts to the right

Without a change in discretionary fiscal policy, we would expect that if the economy goes into recession, then the:

cyclically-adjusted deficit would stay the same while the actual deficit would increase

the intent of contractionary fiscal policy is to

decrease aggregate demand

a decrease in government spending will cause a(n)

decrease in aggregate demand

In the aggregate expenditures model of the economy, a downward shift in aggregate expenditures can be cause by a

decrease in government spending or an increase in taxes

Given the expected rate of return on all possible investment opportunities in the economy, a(n)

decrease in the real rate of interest will tend to increase the level of investment

Refer to the table. A decrease in government purchases of $5 would

decrease real GDP by $15

The U.S. is experiencing a recession and congress decides to adopt an expansionary fiscal policy to stimulate the economy. in this case, the crowding-out effect suggest that investment spending would

decrease thus, partially offsetting the fiscal policy

The U.S. economy was able to achieve full employment with relative price level stability between 1996 and 200 because aggregate

demand increased and aggregate supply increase

Demand-pull inflation is illustrated in the short run aggregate supply-aggregate demand model as a shift of the aggregate

demand to the right

If at some level of GDP the economy is experiencing an unintended decrease in inventories

domestic output will increase

Refer to the diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE2, the

economy is in equilibrium, at full employment

A federal budget deficit exists when

federal government spending exceeds tax revenues in a given year

The short-run version of aggregate supply assumes that product prices are

flexible while resource prices are fixed

An economy characterized by high unemployment is likely to be

having a recessionary expenditure gap

Statement about the multiplier

if an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round the multiplier in the economy is 4

The cyclically-adjusted budget deficit in an economy is zero. if this economy goes into recession, then the actual government budget will be:

in deficit

if the price of crude oil decreases, then this would most likely

increase aggregate supply in the U.S.

other things equal, an increase in an economy's exports will

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP

If congress passed new laws significantly increasing the regulation of business, this action would tend to

increase per-unit production costs and shift the aggregate supply curve to the left

Refer tot he table. An increase in net exports of $10 would

increase real GDP by $30

In 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

increase taxes by $16 billion

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

increased government spending or decreased taxation, or a combination of the two actions

refer to the figure above. if AD1 shifts to AD2, then the equilibrium output:

increases from Q1 to Q2 while the price level rises form P1 to P2

Refer tot he table. if the full-employment real GDP is $40, the

inflationary expenditure gap is $10

Refer to the diagram. If the full-employment level of GDP is Band aggregate expenditures are at AE1, the

inflationary expenditure gap is ei

IF the expected rate of return on investment decreases, then most likely the

investment schedule will shift downward

If the real interest rate falls, then the

investment schedule will shift upward

Refer to the diagrams. Curve A

is an investment demand curve and curve b in an investment schedule

If an unintended increase in business inventories occurs at some level of GDP, the GDP

is too high for equilibrium

Refer to the diagrams. Other things equal, an interest rate decrease will

leave curve a in place but shift curve B upward

An increase in personal income taxes would shift Ad to the

left because C will decrease

a decrease in expected returns on investment will most likely shift the AD curve to the

left because lg will decrease

The version of aggregate supply that allows for changes in both product prices and resource prices is the

long run

The real-balances effect on aggregate demand suggest that a

lower price level will increase the real value of many financial assets and therefore cause an increase in spending

In the aggregate expenditures model, the equilibrium GDP is

not necessarily equal to the full-employment GDP

In the aggregate-expenditures model, the average price level is

not shown on the AE graphs

the goal of expansionary fiscal policy is to increase

real GDP

Refer to the diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE3, the

recessionary expenditure gap is ed

The foreign purchases effect on aggregate demand suggests that a

rise in out domestic price level will increase out imports and reduce out exports, thereby reducing the net exports component of aggregate demand

Refer to the figure above. The economy is at equilibrium at point A. what fiscal policy would be most appropriate to control demand-pull inflation?

shift aggregate demand by increasing taxes

if net exports decline from zero to some negative amount, the aggregate expenditures schedule would

shift downward

If businesses feel more optimistic about the state of the economy, then this change is likely to

shift the investment demand curve to the right

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

A fall in labor costs will cause aggregate

supply to increase

Fiscal policy is enacted through changes in:

taxation and government spending

A recessionary expenditure gap is

the amount by which the full-employment GDP exceeds the level of aggregate expenditure

a decrease in aggregate supply means

the real domestic output would decrease ad the price level would rise

An investment demand curve shows the varying amounts of investment that would be undertaken at various level of

the real interest rate

If the real interest rate increase

there will be a movement upward along the investment demand curve

One timing problem in using fiscal policy to counter a recession is the "operation lag" that occurs between the

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

When aggregate expenditure is great than GDP, then there will be an

unplanned decrease in inventories and GDP will increase

If an unintended increase in business inventories occurs,

we can expect businesses to lower the level of production

In the Great Recession of 2007-2009, the stock market values shrank, causing a reverse

wealth effect

Refer to the data above. If disposable income is $550, we would expect consumption be

$460

Refer to the consumption schedule above. If disposable income is $42,000, then saving is:

$6,000

Refer to the consumption schedule above. if disposable income were $34,000, then the average propensity to save would be about

.12

Refer to the data above. The marginal propensity to consume is

.60

Refer to the consumptions schedule above. The marginal propensity to consume is:

.75

The following factors help explain the instability of investment

1. business expectations can quickly chance for unpredictable reasons 2. innovations in the economy occur quite irregularly 3. profits of firms are highly variable form one period to the next

If the MPC is 0.75, the multiplier will be

4

In private closed economy, when aggregate expenditures exceed GDP,

business inventories will fall

Assumer there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, an additional $2 billion for every drop of the interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is

$10 billion

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

$10 billion

Refer the table. Exports might be ____ and imports ___

$10; $5

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 MPS is 0.4, then it could increase government spending by:

$20 billion

Refer tot he diagram for a private closed economy. The equilibrium level of GDP is

$300

Assume the MPC is 0.8 if government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by

$40 billion

The public debt is the:

accumulation of all past deficits. minus all past surpluses

An inflationary expenditure gap is the amount by which

aggregate expenditures exceed the full-employment level of GDP

Which would most likely increase aggregate supply

an increase in productivity

Which of the following factors would decrease investment demand

an increase in the cost of acquiring capital goods

The economy starts out with a balanced Federal budget. if the government then implement expansionary fiscal policy, then there will be a

budget deficit