Macro Exam 2

In the simple Keynesian model with an MPC equal to 0.80, a $50 billion increase in investment spending leads to a maximum:

$250 billion increase in equilibrium income

In the simple, two-sector model, if C= $120 billion + .75(Y) and I = $30 billion, then break-even disposable income (Y^D=Y) is equal to:

$480 billion

If equilibrium income is $8,000 billion, full-employment income (natural real GDP) is $8,500 billion, and the MPS is 0.10, the simple Keynesian model predicts that a(n):

$50 billion increase in government spending will close the recessionary gap

In the simple, two-sector model, if C = $120 billion + .75(Y) and I = $30 billion, then equilibrium income (Y) is equal to:

$600 billion

If the marginal propensity to consume is 0.925 , then a $100 increase in disposable income leads to a:

$92.50 increase in consumption spending

In the simple Keynesian model with government spending (G) and lump-sum taxes (T), the tax multiplier is equal to _________.

-MPC/MPS

If the MPC = 0.8, the MPS = _____ and the autonomous spending multiplier = _________.

0.2; 5

If equilibrium income falls by $1,000 when investment spending falls by $250, the autonomous spending multiplier is equal to:

4

Given a marginal propensity to save equal to 0.25, the simple Keynesian model leads to the conclusion that the autonomous spending multiplier is equal to __________, meaning that a $100 increase in autonomous investment spending could potentially lead to a(n) ___________ increase in equilibrium income.

4; $400

When the marginal propensity to consume (MPC) is 0.80, the autonomous spending multiplier is ___________.

5

In the simple Keynesian model, when the MPC is 0.8, the autonomous spending multiplier is ___________ and the tax multiplier is ___________.

5; -4

Which of the following events would lead to a rightward shift of the short-run aggregate supply curve?

A beneficial supply shock

real balance, or wealth, effect

As the price level decreases, the purchasing power of money balances increases and people can purchase more goods and services.

Which of the following is NOT an assumption of the classical model?

Demand creates its own supply

The event that brought Keynesian economics to the forefront was the:

Great Depression

If equilibrium real GDP falls short of full-employment (natural) real GDP by $60 million when the MPC = 0.75, which of the following would eliminate the recessionary gap that exists according to the Keynesian model?

Increase G by $15 million, AND Decrease T by $20 million, AND Increase both G and T by $60 million

Which of the following summarizes the process for closing an inflationary gap if the economy is self-regulating?

Labor shortages put upward pressure on wages, which leads to higher costs of production and a decrease in short-run aggregate supply

Supply-side economics emphasizes:

Low marginal tax rates, AND increasing incentives to work, save, and invest, AND long-run effects on aggregate supply rather than short-run effects on aggregate demand

All of the following equations are correct EXCEPT

MPC = C/Y^D

An increase in consumer confidence when the SRAS curve is upward sloping

leads to an increase in both the price level and real GDP

Assume the government cuts taxes by $125 billion. If the MPC = 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model?

Real GDP increases by $500 billion

Ceteris paribus, when the short-run aggregate supply curve is upward-sloping, an adverse supply shock:

leads to an increase in the price level and a decrease in the real GDP

The basic Classical model and the notion that a market economy is self-regulating began with:

The publication of Adam Smith's The Wealth of Nations

The economy's natural rate of unemployment is:

The unemployment rate associated with the full-employment level of output, AND greater than zero because there is some structural and frictional unemployment even when the economy is at full-employment real GDP, AND equal to the actual of unemployment in the long run, according to many mainstream economists

If a constitutional amendment was passed requiring a balanced budget for the federal government, then:

if the government starts with a balanced budget, any increase in government spending would have to be financed by an equal increase in taxes

Which of the following summarizes the process for closing a recessionary gap if the economy is self-regulating?

Unemployed resources put downward pressure on resource prices, which leads to lower costs of production and in an increase in short-run aggregate supply

When tax receipts are less than government expenditures during a single year, the result is:

a budget deficit

When tax receipts are greater than government expenditures during a single year, the result is:

a budget surplus

An $8 billion decrease in investment spending when the MPC is 0.75 may potentially lead to:

a decrease in equilibrium income of up to $32 billion

Ceteris Paribus, the aggregate demand curve will shift to the left as a result of:

a decrease in household wealth

Ceteris paribus, a rightward shift of the short-run aggregate supply (SRAS) curve causes:

a decrease in the price level, which in turn causes quantity demanded to rise

Ceteris paribus, an increase in the price level leads to:

a decrease in the purchasing power of the dollar AND a decrease in the quantity demanded of real GDP (only these two)

The international trade effect occurs in an open economy because an increase in the U.S. price level relative to foreign price levels leads to:

a decrease in the quantity of U.S. goods demanded by both Americans and foreigners

Ceteris paribus, the short-run aggregate supply curve shows:

a direct personal relationship between the quantity supplied of all goods and services and the price level

Economists who believe that the economy is self-regulating generally advocate:

a laissez-faire approach to macroeconomic policy

An economy in long-run equilibrium is producing:

a level of real GDP equal to its natural real GDP

A breakthrough in technology used in production that shifts SRAS to the right results in:

a lower price level at a higher level of real GDP

In The General Theory of Employment, Interest, and Money, Keynes disagreed with the Classical notion that:

a market economy is self-regulating and always automatically moves to macroeconomic equilibrium at the full-employment level of real GDP

The relationship between the quantity of real GDP demanded by all sectors of the economy and the price level is given by the:

aggregate demand curve

According to Keynes, equilibrium income and output are determined by:

aggregate demand in the short run

In the long run, when prices are perfectly flexible:

aggregate supply is vertical and a market economy is self-correcting

In the basic Keynesian model, ceteris paribus, an increase in disposable income leads to:

an increase in both consumption spending and saving

If the short-run aggregate supply curve (SRAS) is horizontal, then an increase in aggregate demand leads to:

an increase in real output, no change in the price level, and a decrease in unemployment

Ceteris paribus, an increase in the price level causes:

an increase in the quantity of real GDP supplied (movement along SRAS)

If the actual unemployment rate is less than the natural unemployment rate:

an inflationary gap exists and wages are likely to rise

international trade effect

as the domestic price level decreases, assuming no change in foreign prices, the U.S. tends to export more and import less, and spending on domestic output increases; if U.S. prices rise relative to foreign prices, the opposite occurs

Changes in government spending and taxing that counteract the business cycle and occur as a result of changing economic conditions are:

automatic (built-in) stabilizers

The increase in personal income tax payments that occurs when an economic expansion causes incomes to rise is an example of:

automatic, contractionary fiscal policy

The part of consumption spending that is independent of disposable income is called:

autonomous consumption

Economists that advocate a macroeconomic policy of laissez-faire:

believe the economy is self-regulating and will automatically move to equilibrium at natural real GDP in the long run

Keynes believed that an economy may achieve equilibrium at a level of real GDP below the full-employment level:

because of insufficient aggregate demand

In the AD/AS model, economic growth is best illustrated by a:

rightward shift of the long-run aggregate supply curve

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

change in consumer spending divided by the change in disposable income

Fiscal policy is BEST defined as:

changes in government spending and taxing for the purpose of achieving certain macroeconomic goals

Suppose the economy is initially at full-employment equilibrium. Which of the following events could cause a recessionary gap, ceteris paribus?

consumers spend less due to declining consumer confidence in the economy

Interest on the national debt:

creates income for bondholders, but liabilities for taxpayers

Reductions in private consumption spending and/or investing spending that occur as a result of increased government taxing, spending, and borrowing is referred to as:

crowding out

An increase in investment spending causes the aggregate ___________ curve to shift to the ___________ in the short run, ceteris paribus

demand; right

Suppose Congress believes that the economy is entering a recession and approves a budget that includes increased overall government spending with no corresponding increase in taxes in order to stimulate aggregate demand. This is an example of:

discretionary, expansionary fiscal policy

In the Keynesian model, the primary determinant of consumer spending is:

disposable income

In the simple Keynesian model, consumption spending depends on __________ and saving depends on ___________.

disposable income; disposable income

When the economy's rate of unemployment is HIGHER than the natural rate, this creates:

downward pressure on wages to eliminate the surplus in the labor market

A rightward shift of the long-run aggregate supply curve illustrates:

economic growth

Increases in government spending and lower taxes represent _____________, while decreases in government spending and higher taxes represent ___________.

expansionary fiscal policy; contractionary fiscal policy

If actual (equilibrium) real GDP is less than the full-employment, or natural, level of real GDP, then wages and other input prices are expected to:

fall and SRAS to shift to the right until long-run equilibrium is achieved

A balanced budget amendment to the U.S. Constitution would require that:

federal government spending be financed by tax revenue

The Classical model leads to the conclusion that:

government should take a laissez-faire approach with respect to the macroeconomy.

As of November 2018, the accumulated national debt in the U.S.:

had passed the $21.5 trillion mark

Which of the following is an example of automatic, expansionary fiscal policy?

higher unemployment compensation payments that occur when the economy is in a recession

Assuming the short-run aggregate supply curve is upward sloping, an adverse (negative) supply shock while aggregate demand remains unchanged, results in a __________ price level, _____________ output (real GDP) and __________ unemployment.

higher; lower; higher

If the economy is in equilibrium at natural real GDP, an economy-wide decrease in the cost of producing outputs will, ceteris paribus:

increase aggregate supply resulting in an increase in real GDP, a decrease in the unemployment rate, and a decrease in the price level

Ceteris paribus, a $100 increase in investment spending will generally:

increase equilibrium income by more than $100

Keynesian economics suggests that the most effective way to eliminate a recessionary gap is for government to:

increase its spending in order to increase aggregate demand

Ceteris paribus, if consumers become more optimistic regarding future job prospects and income, consumer spending will _________ and the aggregate demand curve will shift to the ___________.

increase; right

In a self-regulating economy, inflationary gaps are automatically eliminated in the long run by:

increases in wage rates that cause short-run aggregate supply to shift leftward

The Laffer curve suggests that:

increasing marginal tax rates may actually reduce tax revenues

If the short-run equilibrium level of real GDP is greater than full-employment real GDP, then the economy is in a(n) _________ gap with unemployment ____________ the natural rate of unemployment.

inflationary; below

In the Classical model, if the amount of saving exceeds the amount of investment, then:

interest rates will fall to move the credit market to equilibrium

If disposable income is $1,000 billion and consumption spending is $1,200 billion, then personal saving __________.

is -$200 billion

Assume the economy is initially in equilibrium at the full-employment level of real GDP. If businesses and consumers become pessimistic regarding future economic conditions, ceteris paribus, the aggregate demand curve will shift to the _________, causing the level of output to _________.

left; fall

Keynesian theory asserts that a free market economy with no government intervention:

may experience economic fluctuations in the short run

The total stock of outstanding government securities (bonds) is the:

national debt

The vertical long-run aggregate supply curve implies that:

natural or full-employment real GDP does not depend on the price level in the long run

In the Keynesian view, a decrease in aggregate demand will most likely cause:

output to fall and unemployment to rise

The largest source of revenue for the federal government in the U.S. is the:

personal income tax

Keynes argued that

prices and wages are not perfectly flexible in the short run

A market economy is self-regulating only if:

prices in all markets can rise to eliminate shortages and fall to eliminate surpluses

The Classical model is based on the assumption that:

prices, wages, and interest rates are flexible

The short-run aggregate supply curve is upward sloping because:

producers respond to higher prices and profits by increasing output

In the Keynesian model, when aggregate expenditure is less than aggregate output, firms are most likely to react by:

reducing production and laying off some workers

A ___________ tax is one for which the average tax rate decreases as income increases.

regressive

If the economy is initially in equilibrium at the full-employment level of real GDP and a growing economy boosts consumer and investor confidence, ceteris paribus, the aggregate demand curve will shift to the ____________ causing the price level to ____________.

right; rise

the components of aggregate demand include:

spending by consumers, business firms, government, and foreigners on domestic output

According to Say's Law:

supply creates its own demand

if the price of a major input, such as oil, increases:

the SRAS curve shifts to the left, ceteris paribus

When the actual level of output produced is less than the full-employment level of output

the actual unemployment rate exceeds the natural employment rate

If government spending financed by borrowing causes crowding out, then:

the economy will likely grow at a slower rate due to less capital accumulation

interest rate effect

the interest rate is the price of money and tends to follow the price level

When the economy is operating where total production is less than total expenditures, all of the following are true EXCEPT

the level of output produced is greater than what people plan to buy

When a $2,000 increase in income causes a $1,800 increase in consumption spending:

the marginal propensity to consume (MPC) is 0.9 AND the increase in saving is $200

If households have a tendency to save $5 for every $100 increase in income, then:

the marginal propensity to consume is 0.95 and the simple spending multiplier is 20

If income increases by $10,000 and the tax bill for the $10,000 increase is $3,000, then:

the marginal tax rate is 30%

All of the following help explain why the aggregate demand curve is downward sloping EXCEPT

the nominal balance effect

In the long run, if continued increases in aggregate demand are not matched by similar increases in aggregate supply, then, ceteris paribus:

the price level will increase

The increase in the purchasing power of a given money income that occurs when the domestic price level falls refers to

the real balance effect

In an economy that has automatic (built-in) stabilizers:

the severity of recessions tends to be reduced

When the economy is in a recessionary gap:

there is a surplus of labor

The essence of the Keynesian theory of unemployment is that:

unemployment results from inadequate demand for goods and services throughout the economy

When the wage rate is BELOW the equilibrium wage rate, the Classical model argues that:

upward pressure on wages will eliminate the shortage in the labor market

The long-run aggregate supply (LRAS) curve is:

vertical at natural real GDP, or potential output

For an economy to be self-regulating:

wages and other input prices must be flexible

In the short run, macroeconomic equilibrium occurs:

when aggregate expenditure equals total production in the economy