Exam 5

A tax multiplier equal to -4.30 would imply that a $100 tax increase would lead to a: a. 4.3 percent decrease in real GDP. b. $430 increase in real GDP. c. $430 decline in real GDP. d. 43 percent decrease in real GDP. e. 4.3 percent increase in real GDP.

$430 decline in real GDP.

Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a: a. $1,000 billion increase in aggregate demand. b. $500 billion decrease in aggregate demand. c. $500 billion increase in aggregate demand. d. $1,000 billion decrease in aggregate demand.

$500 billion increase in aggregate demand.

Find the tax multiplier if the MPC is 0.75. a. -3. b. 0.33. c. 4. d. 3. e. -4.

-3.

If your income increases from $30,000 to $35,000 and your consumption increases from $11,000 to $12,000, your marginal propensity to consume (MPC) is: a. 0.5. b. 0.2. c. 0.8. d. 0.4. e. 1.0.

0.2.

Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC) is given by the formula: a. (MPC - 1)/MPC. b. 1 - [1/(1 - MPC)]. c. MPC - 1. d. 1/MPC.

1 - [1/(1 - MPC)].

The balanced budget multiplier is always equal to: a. 1. b. 0.50. c. 0.75. d. 1/MPC.

1.

In Exhibit 10-4, which of the following is not consistent with a shift in the aggregate demand curve from AD1 to AD2? a. An increase in net exports. b. A decrease in consumer spending. c. An increase in government spending. d. An increase in investment.

A decrease in consumer spending.

Which of the following are inherent in classical theory? a. Long-run full employment. b. Flexible prices. c. All of the above. d. Flexible wages.

All of the above.

Which of the following could be expected to shift the aggregate demand curve? a. Consumption spending decreases. b. All of the above. c. Net exports fall. d. An increase in government spending. Feedback

All of the above.

Which of the following policies is a supply-side policy? a. Reduction in resource prices. b. Subsidies to produce technological advances. c. Reduction in taxes. d. All of the above. e. Reduction in regulation.

All of the above.

What can cause a shift in the aggregate demand curve?

Consumption, Investments, Government Spending, Change in Net exports

Which of the following is not a reason for the downward slope of the aggregate demand curve? a. Government spending effect b. Real balances effect c. Interest-rate effect d. Net exports effect

Government spending effect

The curve that reflects the view that when tax rates are too high, lowering them not only creates greater incentive for suppliers to increase production, but ends up generating higher tax revenues, is known as the: a. consumption curve. b. Phillips curve. c. Engel curve. d. Laffer curve. e. Rational expectations curve.

Laffer curve.

Which of the following would cause a rightward shift in the aggregate supply curve? a. Increased investment spending. b. Greater government regulation. c. Lower oil prices. d. Larger-than-expected wage increases.

Lower oil prices

Which of the following is not a component of the aggregate demand curve? a. Government spending (G). b. Investment (I). c. Consumption (C). d. Net exports (X-M). e. Saving.

Saving.

Suppose an increase in government spending stimulates real GDP without affecting the price level. What is the relevant range of the aggregate supply curve in this case? a. The monetarist range. b. The classical range. c. The intermediate range. d. The Keynesian range.

The Keynesian range.

Which of the following is the best example of an automatic stabilizer? a. Defense spending. b. Foreign aid c. Welfare payments. d. Highway construction.

Welfare payments

According to Keynes, what will restore a depressed economy to full employment

a shift in aggregate demand

The curve shows the level of real GDP purchased by households, businesses, government, and foreigners at different price levels during a time period, ceteris paribus

aggregate demand curve

If the economy is experiencing demand-pull inflation, then the appropriate government policy would be to shift the: a. aggregate supply curve by using a tax cut coupled with spending cuts. b. aggregate demand curve by using a tax increase coupled with spending cuts. c. aggregate demand curve by using a tax cut coupled with spending cuts. d. aggregate demand curve by using a tax increase coupled with more spending. e. aggregate demand curve by using a tax cut coupled with more spending.

aggregate demand curve by using a tax increase coupled with spending cuts.

The curve that shows the level of real GDP produced at different price levels during a time period, ceteris paribus

aggregate supply curve

Cost-push inflation occurs when the: a. aggregate demand curve shifts leftward while the aggregate supply curve is fixed. b. aggregate demand curve shifts rightward while the aggregate supply curve is fixed. c. aggregate supply curve shifts leftward while aggregate demand curve is fixed. d. aggregate supply curve shifts rightward. Feedback

aggregate supply curve shifts leftward while aggregate demand curve is fixed.

The aggregate supply curve: a. is vertical in the classical range. b. is horizontal in the Keynesian range. c. shows the level of real GDP produced in the economy at different possible price levels during a period of time. d. all of the above.

all of the above.

Demand-pull inflation is caused by: a. an decrease in aggregate supply. b. an increase in aggregate supply. c. an increase in aggregate demand. d. an decrease in aggregate demand.

an increase in aggregate demand.

In the intermediate range of the aggregate supply curve, higher aggregate demand will increase: a. real GDP without raising the price level. b. the price level but reduce real GDP. c. the price level without affecting real GDP. d. both the price level and real GDP. Feedback

both the price level and real GDP.

Shifts in the aggregate demand and aggregate supply curves determines

business cycle

Fiscal policy is government action to influence aggregate demand and in turn to influence the level of real GDP and the price level, through: a. changes in government spending and/or tax revenues. b. regulation of net exports. c. encouraging businesses to invest. d. expanding and contracting the money supply.

changes in government spending and/or tax revenues.

A rise in the general price level resulting from an increase in the cost of production

cost push inflation

In Exhibit 11-6, if the aggregate demand curve is at AD3, the government should: a. cut taxes to move to AD2. b. not change its behavior. c. cut taxes to move to AD1. d. raise taxes to move to AD1. e. cut spending to move to AD2.

cut spending to move to AD2.

A rise in the general price level resulting from an excess of total spending

demand pull inflation

According to the Classical economists, where does the economy normally operate?

full employment level

The result of the balanced-budget multiplier is that aggregate demand changes by the amount of the change in: a. government spending plus tax revenue. b. tax revenue. c. government spending. d. government spending minus tax revenue.

government spending.

The value of final goods and services included in real GDP measured in base year dollars

horizontal axis

What kind of supply curve would explain fixed prices and wages?

horizontal supply curve

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.75, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should: a. increase spending by $750 billion. b. increase spending by $250 billion. c. decrease spending by $750 billion. d. increase spending by $1,000 billion.

increase spending by $250 billion.

The government is pursuing an expansionary policy if it: a. increases its spending or increases its tax revenues. b. decreases its spending and increases its tax revenues. c. decreases its spending or reduces its tax revenues. d. increases its spending and/or reduces its tax revenues.

increases its spending and/or reduces its tax revenues.

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume is 0.75, federal policymakers can follow Keynesian economics and restrain inflation by: a. increasing tax revenues by $200 billion. b. decreasing tax revenues by $600 billion. c. increasing government purchases by $150 billion. d. decreasing transfer payments by $200 billion.

increasing tax revenues by $200 billion.

Assuming fixed credit, an increase in the price level translates through higher interest rates into a lower real GDP

interest rate effect

The change in consumption divided by a change in income is called the: a. spending function. b. marginal propensity to spend. c. consumption function. d. marginal propensity to consume. e. changing propensity to consume.

marginal propensity to consume.

A higher domestic price level makes U.S. goods more expensive compared to foreign goods, exports decrease, imports increase, decreasing real GDP

net exports effect

In Exhibit 11-6, if the aggregate demand curve is at AD2, the government should: a. raise taxes to move to AD1. b. cut taxes to move to AD3. c. cut spending to move to AD3. d. not change its behavior. e. cut taxes to move to AD3.

not change its behavior.

The net exports effect is the inverse relationship between net exports and the ____ of an economy. a. potential real GDP b. consumption spending c. price level d. chain-price deflator Feedback

price level

The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the: Select one: a. exports. b. consumption. c. investment. d. price level.

price level.

According to classical theory, if the aggregate demand curve decreased and the economy experienced unemployment, then: a. the supply of money would increase until the economy returned to full employment. b. the government must increase spending to restore full employment. c. the economy would remain in this condition indefinitely. d. prices and wages would fall quickly to restore full employment.

prices and wages would fall quickly to restore full employment.

Consumers spend more on goods and services because lower prices make their dollars more valuable

real balance effect

The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption and more saving is known as the: a. interest rate effect. b. income effect. c. foreign purchases effect. d. real wealth effect. e. aggregate demand effect.

real wealth effect.

What factors can cause a shift in the aggregate supply curve?

resource prices, technology, taxes, subsidies, regulations

Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the: a. left by $1,000 billion. b. left by $750 billion. c. right by $750 billion. d. right by $1,000 billion.

right by $750 billion.

If the economy is experiencing unemployment, then the most appropriate government policy would be to: a. shift the aggregate demand curve by using a tax cut coupled with spending cuts. b. shift the aggregate demand curve by using a tax cut coupled with more spending. c. shift the aggregate supply curve by using a tax cut coupled with spending cuts. d. shift the aggregate demand curve by using a tax increase coupled with more spending. e. shift the aggregate demand curve by using a tax increase coupled with spending cuts.

shift the aggregate demand curve by using a tax cut coupled with more spending.

When the economy is experiencing high inflation and high unemployment at the same time, then it is experiencing: a. deflation. b. stagnation. c. innation. d. stagflation. e. reflation.

stagflation.

Advances in technology will shift the aggregate: a. supply curve leftward. b. supply curve rightward. c. demand curve rightward. d. demand curve leftward.

supply curve rightward.

Lower taxes on businesses will shift the aggregate: a. demand curve rightward. b. supply curve rightward. c. supply curve leftward. d. demand curve leftward.

supply curve rightward.

"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level." This argument is made by the: a. monetarists. b. classical economists. c. Keynesian economists. d. supply-side economists.

supply-side economists.

It is inflationary for government to increase spending if: a. it also cuts taxes. b. the economy is at full employment. c. equilibrium real GDP is well below full employment. d. the aggregate supply curve is flat.

the economy is at full employment.

In Exhibit 10-1, there are plenty of idle resources and no upward pressure on prices in: a. the entire curve. b. the segment labeled cd. c. both segment bc and segment cd. d. the segment labeled bc. e. the segment labeled ab.

the segment labeled ab.

In Exhibit 10-1, resources are fully employed, and competition among producers for resources will lead to a higher price level in: a. the entire curve. b. the segment labeled cd. c. the segment labeled ab. d. the segment labeled bc. e. both segment bc and segment cd.

the segment labeled cd.

is an index of the overall price level, such as the GDP deflator or the CPI

vertical axis

What is the Classical view of the aggregate supply curve?

vertical line at full employment output