Exam 3 practice test questions

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

budget deficit

The investment demand curve will shift to the left as the result of

business pessimism about future conditions

the multiplier is defined as

change in GDP / initial change in spending.

The multiplier is useful in determining the

change in GDP resulting from a change in spending

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the

smaller is the economy's MPS.

Generally speaking, the greater the MPS, the

smaller would be the increase in income which results from an increase in consumption spending

The so-called wealth effect will result in households:

spending more and saving less

Fiscal policy refers to

deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.

If the government spends $80 billion at each level of GDP, and impose a lump-sum tax of $100

equilibrium GDP will now be $350

The immediate-short-run aggregate supply curve represents circumstances where

both input and output prices are fixed

Unintended changes in inventories

bring actual investment and saving into equality at all levels of GDP

In a private closed economy, when aggregate expenditures exceed GDP,

business inventories will fall

The expenditure multiplier concept of the aggregate expenditures model

magnifies the shifts of the aggregate demand curve.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the

marginal propensity to consume will remain unchanged in each of the three countries.

In annual percentage terms, investment spending in the United States is

more variable than real GDP

Other things equal, a decrease in the real interest rate will

move the economy downward along its existing investment demand curve

The economy is at equilibrium at point B. What would expansionary fiscal policy do?

move the economy from point B towards point A

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. A $2 billion increase in consumption at each level of DI could be caused by

new expectations of higher future income

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy.

nondiscretionary

Which factor does not explain a movement along the AD curve?

the expenditure multiplier effect

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 aggregate supply curve (short-run)

slopes upward and to the right

If the MPC is 0.6, the multiplier will be

2.5

If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is

5

Suppose a family's consumption exceeds its disposable income. This means that its

APC is greater than 1

Which of the following is not true when there is an unplanned decrease in inventories?

Actual investment is greater than planned investment

In which of the following sets of circumstances can we confidently expect inflation?

Aggregate supply decreases and aggregate demand increases

The short-run aggregate supply curve

Becomes steep at output levels above the full-employment output

Which statement about investment spending is false?

During the Great Recession in 2007-2009, when interest rates essentially declined to zero, investment spending rose sharply.

In a mixed open economy, the equilibrium GDP is determined at that point where

Sa + M + T = Ig + X + G.

Refer to the graph. Which of the following changes will shift AD1 to AD2?

a cut in personal and business taxes

With cost-push inflation, there will be

a decrease in real GDP

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

a negative GDP gap

Dissaving occurs where

consumption exceeds income.

The short-run version of aggregate supply assumes that

product prices are flexible, while resource prices are fixed.

When the price level decreases,

the demand for money falls and the interest rate falls.

Which factor explains the variability of investment?

the durability of capital goods

The upward slope of the short-run aggregate supply curve is based on the assumption that

wages and other resource prices do not respond to the price level changes.

If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule

will shift downward

The table illustrates the multiplier process resulting from an autonomous increase in investment by $5. The total change in income resulting from the initial change in investment will be

$20

Other things being equal, the effect of a downward shift of the economy's net export schedule on equilibrium GDP will be similar to a(n)

$25 billion

The investment schedule in the given table indicates that if the real interest rate is 8 percent, then

$30 billion of investment will be undertaken

Ca = 25 + 0.75 (Y − T) Ig = 50 Xn = 10 G = 70 T = 30 (Advanced analysis) The accompanying equations are for a mixed open economy. The lettersY,Ca,Ig,Xn,G, andTstand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. If the economy's tax schedule wasT= 0.2Yrather thanT= 30, the equilibrium GDP would be

$387.5

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

(Advanced analysis) If S = −60 + 0.25Y and Ig = 60, where S is saving, Ig is gross investment, and Y is gross domestic product (GDP), then the equilibrium level of GDP is

$480

If the MPC is 0.80, all taxes are lump-sum taxes, and the equilibrium GDP is $25 billion below the full-employment GDP, then the size of the recessionary expenditure gap is

$5 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?

$6 billion

The table shows a private open economy. All figures are in billions of dollars. If net exports increased by $10 billion at each level of GDP, the equilibrium real GDP would be

$650 billion

If disposable income increases from $912 to $927 billion and MPC = 0.6 then, then consumption will increase by

$9 billion

The after tax MPS shown is

0.33

If the MPC is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be

0.8

Real-Balances Effect Household Expectations Interest-Rate Effect Personal Income Tax Rates Profit Expectations National Incomes Abroad Government Spending Foreign Purchases Effect Exchange Rates Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Changes in which two of the factors would most likely cause a shift in aggregate demand due to a change in consumer spending?

2 and 4

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is

20

In the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______.

3 ; 2 ; 1

An $18 billion increase in spending creates $18 billion of new income in the first round of the multiplier process and $13.5 billion in the second round. The multiplier in the economy is

4

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by

A and B

Which of the following is a true statement?

A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward.

In a mixed open economy, the equilibrium GDP exists where

Ca + Ig + Xn + G = GDP.

Which of the diagrams for the U.S. economy best portrays the effects of declines in the incomes of U.S. trading partners?

D

If the slope of a linear consumption schedule increases in a private closed economy, then it can be concluded that the

MPC has increased

The consumption and saving schedules reveal that the

MPC is greater than zero but less than one

Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that

T + Sa > Ig + G.

Classical macroeconomics was dealt severe blows by:

The Great Recession and Keynes's macroeconomic theory

If the amount of real output demanded at each price level falls by $200, this might have been caused by

a worsening of business expectations

Saving is always equal to

actual investment

If the national incomes of our trading partners increase, then our

aggregate demand increases because net exports

An increase in net exports will shift the

aggregate expenditures curve upward and the aggregate demand curve rightward.

Which event would most likely decrease an economy's export?

an appreciation of the nation's currency relative to foreign currencies

In deriving the aggregate demand curve from the aggregate expenditures model, we note that

an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward).

Which of the following events would most likely reduce aggregate demand?

an increase in real interest rates

An MPC value of less than 1.0 indicates that as income increase,

consumption also increases, though not as much as income

Actual investment is $28 billion and saving is $15 billion at the $166 billion level of output in a private closed economy. At this level,

consumption will be $151 billion

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with

contractionary fiscal policy

The intent of contractionary fiscal policy is to

decrease aggregate demand

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

decrease in government spending and an increase in taxes.

To close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to

decrease the aggregate expenditures schedule by $20 billion

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion

As the consumption and saving schedules relate to real GDP, an increase in taxes will shift

downward both the consumption and saving schedules.

Other things being equal, the effect of a downward shift of the economy's net export schedule on equilibrium GDP will be similar to a(n)

downward shift in the consumption schedule

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the

economy's MPS is small.

A given reduction in government spending will dampen demand-pull inflation by a greater amount when the

economy's aggregate supply curve is steep

The immediate determinants of investment spending are the

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

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

fiscal policy

C = 40 + 0.8 Y Ig = 40 X = 20 M = 30 The equations give info for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in billions of dollars. International trade in this case

has a contractionary effect on GDP

If the price level decrease from 200 to 100, the real output demanded will

increase by $200 billion

Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will

increase by more than $100 billion.

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

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

In the aggregate expenditures model, an increase in government spending may

increase output and employment

In the aggregate expenditure model, a reduction in taxes may

increase saving

Refer to the graph. If the price level is initially at P1, then the economy will adjust by

increasing output produced

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy

Discretionary fiscal policy is so named because it

involves specific changes in taxes and government spending undertaken expressly for stabilization at the option of Congress

The economy's long-run aggregate supply curve

is vertical

The effect of contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve

Graphically, cost-push inflation is shown as a

leftward shift of the AS curve.

In a recessionary expenditure gap, the equilibrium level of real GDP is

less than full-employment GDP.

A firm invests in a new machine that costs $5,000 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

the size of the multiplier is equal to the

reciprocal of the slope of the saving schedule.

Suppose that the economy is in the midst of a recession. Which policy would most likely end the recession and stimulate output growth?

reduction sin federal tax rates on personal and corporate income.

The effect of expansionary fiscal policy is shown as a

rightward shift in the economy's demand curve

Leakages from the income-expenditure stream are

saving, taxes, imports

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

shift the AD curve to the left

Other things equal, an improvement in productivity will:

shift the aggregate supply curve to the right

If Trent's MPC is 0.80, this means that he will

spend eight-tenths of any increase in his disposable income

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate

supply curve would shift to the left

Consumption is $141 billion, planned investment is $15 billion, and saving is $15 billion in a private, closed economy. At this level,

the economy is in equilibrium

The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things equal, in the aggregate expenditures model,

the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level.

Deflation refers to a situation where

the price level falls; it could be caused by a shift of AD to the left

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that

the price level is inflexible downward and a recession has occurred.

when government spending is increased, the amount of the increase in aggregate demand primarily depends on:

the size of the multiplier

Which is not a reason why the stimulus package that the government implemented during the Great Recession of 2007-09 did not have as strong an impact on GDP and unemployment as expected?

the stimulus package cause prices to fall in many sectors