Macro Econ Test 2

In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

$170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand.

ake the following information as given for a small, imaginary economy: •When income is $10,000, consumption spending is $6,500. •When income is $11,000, consumption spending is $7,300. For this economy, an initial increase of $500 in net exports translates into a

$2,500 increase in aggregate demand in the absence of the crowding-out effect

If the multiplier is 5, then the MPC IS

.8

Formula for gov spending is:

1/(1-MPC)

C=100 + .8(Q - T) I = 200 G=400 T=100 EX = 300 IM = 400 Please find Household Consumption and Saving

2100, 400

C=100 + .8(Q - T) I = 200 G=400 T=100 EX = 300 IM = 400 Please find Equilibrium GDP

2600

The spending multiplier for this economy is:

5

To move this economy to Q = 2900 the Government would increase G by:

60

Which of the following would cause prices and real GDP to rise in the short run?

Aggregate demand shifts right

This economy is:

Borrowing from foreigners

Which of the following is included in the aggregate demand for goods and services?

Consumption demand, Investment demand and net exports. ALL OF EMM

Which of the following is correct concerning debt and deficit as stock or flow variables?

Debt is a stock and the deficit is a flow

Demand can shift too much such that output exceeds full employment output. This will likely cause

Demand pull inflation

Which of the following is correct?

Economic fluctuations are easily predicted by competent economists Recessions have never occurred very close together Other measures of spending, income, and production do not fluctuate closely with real GDP NONE OF EM

Keynes argued that recessions and depressions occur because of:

Inadequate aggregate demand.

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to

Increase consumption, which shifts the aggregate-demand curve right.

The "crowding out" argument against deficits suggests that deficits might:

Increase interest rates and therefore decrease investment.

the Summer of 2008, consumers indicated that they were less optimistic about the future of the economy. This change in sentiment would likely

Increase unemployment

When household taxes decrease, consumption

Increases as shown by a shift of the aggregate demand curve to the right.

Which of the following explains why production rises in most years?

Increases in the labor force, increases in the capital stock advances in technological knowledge ALL OF EM

Which of the following are mentioned in the textbook as fiscal policy implementation lags?

Information lag, recognition lag, and decision lag. SO ALL OF EM.

Which is correct?

The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variable do not affect real variables

Which of the following is correct?

The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.

According to the classical model, what shifts the economy back to full employment during a recession?

a fall in the cost of doing business.

If businesses in general decide that they have overbuilt and so now have too much capital, their response to this would initially shift

aggregate demand left.

Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction?

aggregate demand shifts left

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left

Which of the following policy actions shifts the aggregate-demand curve?

an increase in the money supply an increase in taxes an increase in government spending Correct Answer All of the above are correct.

Keynes used the term "animal spirits" to refer to

arbitrary changes in attitudes of household and firms.

Automatic stabilizers

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession

In the last half of 1999, the U.S. unemployment rate was about 4%. Historical exp suggests that this is

below the natural rate, so real GDP growth was likely high.

Aggregate demand shifts left when the government

cuts military expenses.

It is likely that a constitutional amendment that required the government always to run a balanced budget would

eliminate the economy's automatic stabilizers.

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves.

The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change.

in the price level, but not output.

The appearance of the long-run aggregate-supply (LRAS) curve

indicates that Y1 is the natural rate of output

the model of aggregate demand and aggregate supply

is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships.

The long-run aggregate supply curve

is vertical is a graphical rep of the classical dichotomy indicates monetary neutrality in the long run. ALL OF EM

A reduction in U.S net exports would shift U.S. aggregate demand

leftward. In an attempt to stabilize the economy, the government could cut taxes.

If the economy is at A and there is a fall in aggregate demand, in the short run the economy

moves to D (far left point)

The AD/AS model of short-run economic fluctuations focuses on the price level and...

real GDP

The model of short-run economic fluctuations focuses on the price level and

real GDP

The paradox of thrift suggests that if households intend to save more, in the end they will likely

save less

The classical economic theory assumes that an economy in a recession will:

self-adjust back to full employment

Most economists use the aggregate demand and aggregate supply model primarily to analyze

short-run fluctuations in the economy

The long-run aggregate supply curve shifts right if

the capital stock increases

The Employment Act of 1946 states that

the government should promote full employment and production.

Which of the following is not a determinant of the long-run level of real GDP?

the price level

The variable on the vertical and horizontal axes of the aggregate demand and supply graph are

the price level and real output.

Aggregate demand includes

the quantity of goods and services households, firms, the gov, and customers abroad want to buy.

When production costs rise,

the short-run aggregate supply curve shifts to the left.

If the economy starts at A and there is a fall in aggregate demand, the self-correcting mechanism eventually moves the economy

to C in the long run.

The logic of the multiplier effect applies

to any change in spending on any component of GDP.

Keynes argued that aggregate demand is

unstable, because waves of pessimism and optimism create fluctuations in aggregate demand

Keynes argued that aggregate demand is

unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.