Macro Exam 2

C = $300 billion + 0.75(YD) I = $450 billion G = $200 billion T = $200 billion In equilibrium, output and income will equal _________ billion, and disposable income will equal _________ billion. A. $3,200; $3,000 B. $3,200; $2,400 C. $3,000; $2,400 D. $3,000; $3,200

A. $3,200; $3,000

A laissez-faire policy with respect to the macroeconomy is associated with the: A. Classical view that the economy is self-correcting. B. Keynesian view that the economy is self-correcting. C. Classical view that the economy will not automatically move to equilibrium at full employment. D. Keynesian view that the economy will not automatically move to equilibrium at full employment.

A. Classical view that the economy is self-correcting.

Which of the following describes what happens if the economy depicted above is self- regulating? A. Labor market shortages lead to higher wages which increases costs of production, resulting in a leftward shift in short-run aggregate supply. B. Labor market shortages lead to lower wages which increases costs of production, resulting in a leftward shift in aggregate demand. C. Labor market surpluses put downward pressure on wages which decreases costs of production, resulting in a rightward shift in short-run aggregate supply. D .Labor market surpluses put downward pressure on wages which decreases costs of production, resulting in a rightward shift in aggregate demand.

A. Labor market shortages lead to higher wages which increases costs of production, resulting in a leftward shift in short-run aggregate supply.

When government spending exceeds tax revenue in a given year: A. a budget deficit exists and the national debt increases. B. a budget deficit exists but the national debt stays the same. C. a budget surplus exists and the national debt decreases. D. the federal budget is in balance.

A. a budget deficit exists and the national debt increases.

In The General Theory of Employment, Interest and Money, John Maynard Keynes argued that: A. a market economy may settle at an equilibrium below full employment in the short run. B. a market economy will automatically eliminate recessionary and inflationary gaps through shifts in AD and move toward equilibrium at full employment. C. the Great Depression was primarily a result of falling prices and wages. D. the Civil War illustrated that it is necessary for the national government to actively manage a market economy.

A. a market economy may settle at an equilibrium below full employment in the short run.

If the short-run aggregate supply curve (SRAS) is horizontal at a fixed price level, then: A. an increase in aggregate demand will lead to an increase in output with no increase in the price level, ceteris paribus. B. an increase in aggregate demand will lead to an increase in output with no decrease in the unemployment rate, ceteris paribus. C. changes in aggregate demand will have no impact on output, prices, or employment. D. the economy is in long-run equilibrium.

A. an increase in aggregate demand will lead to an increase in output with no increase in the price level, ceteris paribus.

An example of automatic fiscal policy is: A. an increase in the number of people receiving unemployment benefits during an economic downturn. B. Congress approving a government spending increase in order to stimulate aggregate demand when the economy is in a recession. C. lower interest rates leading to increases in private consumption and investment spending. D. the President issuing an executive order limiting the ability of people to become U.S. citizens.

A. an increase in the number of people receiving unemployment benefits during an economic downturn.

Lower wages and lower input prices lead to: A. decreases in the cost of production and an increase in short-run aggregate supply. B. decreases in the cost of production and a decrease in short-run aggregate supply. C. decreases in consumer confidence and a decrease in aggregate demand. D. decreases in consumer confidence and an increase in aggregate demand.

A. decreases in the cost of production and an increase in short-run aggregate supply.

The significance of Say's Law is that, if it holds true, government policy makers: A. do not have to implement policies designed to increase aggregate demand for the economy to move toward equilibrium at natural real GDP. B. must increase government spending in order to move the economy to an equilibrium at natural real GDP. C. will have to implement price ceilings to lower input prices in order to increase short-run aggregate supply. D. should continue to use fiscal policy to stimulate the demand-side of the economy.

A. do not have to implement policies designed to increase aggregate demand for the economy to move toward equilibrium at natural real GDP.

Changes in government spending or taxing policy for the purpose of influencing macroeconomic outcomes is: A. fiscal policy and is conducted by Congress. B. fiscal policy and is conducted by the Federal Reserve. C. currently unconstitutional but Congress is considering an amendment to make it legal. D. associated with the Classical model.

A. fiscal policy and is conducted by Congress.

Expansionary fiscal policy may not be an effective tool for increasing aggregate demand if: A. increases in government spending crowd out private sector (investment) activity. B. investors are very sensitive to changes in interest rates. C. there are no time lags associated with fiscal policy. D. businesses are very optimistic with respect to future economic conditions.

A. increases in government spending crowd out private sector (investment) activity.

The basic Classical model and the notion that a market economy is self-regulating began with: A. the publication of Adam Smith's The Wealth of Nations. B. John Maynard Keynes in The General Theory of Employment, Interest and Money. C. Karl Marx in Das Capital. D. the writing of John Stuart Mill's On Liberty.

A. the publication of Adam Smith's The Wealth of Nations.

Disposable Income (YD) Consumption Spending (C) $0. $500 $1,000 $1,400 $2,000 $2,300 $3,000. $3,200 $4,000 $4,100 $5,000 $5,000 $6,000. $5,900 In the above example, autonomous consumption is: A. $0. B. $500. C. $1,000. D. $4,000.

B. $500.

Disposable Income (YD) Consumption Spending (C) $0. $500 $1,000 $1,400 $2,000 $2,300 $3,000. $3,200 $4,000 $4,100 $5,000 $5,000 $6,000. $5,900 The algebraic form of the consumption function for the above example is: A. C = $1,000 + 0.75(Yd). B. C = $500 + 0.90(Yd). C. YD=C+S. D. MPC=1-MPS.

B. C = $500 + 0.90(Yd).

When the equilibrium (actual) level of real GDP is less than the natural level of real GDP, then: A. an inflationary gap exists, and the unemployment rate is greater than the natural rate. B. a recessionary gap exists, and the unemployment rate is greater than the natural rate. C. an inflationary gap exists, and the unemployment rate is less than the natural rate. D. a recessionary gap exists, and the unemployment rate is less than the natural rate.

B. a recessionary gap exists, and the unemployment rate is greater than the natural rate.

C = $300 billion + 0.75(YD) I = $450 billion G = $200 billion T = $200 billion IF full-employment (natural) real GDP in this economy is equal to $3,500 billion, then: A. the economy is at full-employment equilibrium. B. a recessionary gap exists. C. an inflationary gap exists. D. this economy can never achieve full employment.

B. a recessionary gap exists.

The relationship between tax rates and tax revenues is shown by the: A. aggregate demand curve. B. aggregate supply curve. C. Laffer Curve. D. Phillip's Curve.

C. Laffer Curve.

If the economy depicted in the graph above is self-correcting, then: A. SRAS will increase, and the economy will move to a new equilibrium at point B. B. AD will increase, and the economy will move to a new equilibrium at point B. C. SRAS will increase, and the economy will move to a new equilibrium at point C. D. AD will increase, and the economy will move to a new equilibrium at point C.

C. SRAS will increase, and the economy will move to a new equilibrium at point C.

Which of the following is not an assumption of the Classical model? A. Flexible prices and wages B. Say's Law is true C. Unemployment does not occur D. Flexible interest rates equate saving and investment

C. Unemployment does not occur

In the Keynesian model of the macroeconomy, both consumption spending and personal saving increase in response to: A. lower interest rates. B. higher interest rates. C. higher disposable income. D. lower disposable income.

C. higher disposable income.

The total stock of outstanding government securities is: A. the budget deficit. B. the cyclical deficit. C. the national debt. D.the structural debt.

C. the national debt.

What is the maximum change in equilibrium real GDP that could occur as result of a one-time $50 billion tax cut if the MPC is 0.75? A. $200 billion decrease B. $200 billion increase C. $150 billion decrease D. $150 billion increase

D. $150 billion increase

Income Tax Liability $10,000 $0 $20,000 ______ $30,000 $4,500 $40,000 $7,200 If the tax rate on $20,000 of taxable income is 12%, then the tax liability on the $20,000 will be _________. A. $1,200 B. $1,667 C. $2,000 D. $2,400

D. $2,400

What is the potential impact on equilibrium income (output) of a $50 billion increase in investment spending when the MPC = 0.90, given the assumptions of the simple Keynesian model? A. $45 billion increase B. $50 billion increase C. $450 billion increase D. $500 billion increase

D. $500 billion increase

C = $300 billion + 0.75(YD) I = $450 billion G = $200 billion T = $200 billion If full-employment real GDP in this economy is $3,500 billion, how much of an increase in government spending would be necessary to achieve equilibrium at full employment, given the simplifying assumptions of the Keynesian model? A. $300 billion B. $450 billion C. $100 billion D. $75 billion

D. $75 billion

Disposable Income (YD) Consumption Spending (C) $0. $500 $1,000 $1,400 $2,000 $2,300 $3,000. $3,200 $4,000 $4,100 $5,000 $5,000 $6,000. $5,900 In the above example, at disposable income of $2,000, saving is equal to _________; at disposable income of $10,000, saving is equal to _________. A. $0; $400 B. -$300; $400 C. $500; $300 D. -$300; $500

D. -$300; $500

If equilibrium real GDP is equal to $5,000 billion and natural real GDP is equal to $5,450 billion and the MPC is 0.90, which of the following could move the economy to equilibrium at natural real GDP? A. A $45 billion increase in government spending B. A $50 billion decrease in taxes C. A $450 billion increase in government spending financed by a $450 billion increase in taxes D. All of the above E. Answers a. and b. only

D. All of the above

Say's Law can be summarized as: A. markets are efficient. B. laissez-faire is appropriate. C. demand determines income and output. D. supply creates its own demand.

D. supply creates its own demand.

The Keynesian approach to dealing with the massive unemployment during the Great Depression was to: A. allow market forces to initiate the changes in output and input prices necessary to move the economy toward full employment. B. argue in favor of government policies designed to stimulate total spending in the economy in order to increase aggregate demand. C. concentrate fiscal policy efforts on the supply side of the macroeconomy to increase long-run aggregate supply. D. use a mixture of expansionary and contractionary policies in order to achieve a balanced budget.

B. argue in favor of government policies designed to stimulate total spending in the economy in order to increase aggregate demand.

In the Classical model: A. aggregate demand determines the equilibrium level of output and income. B. flexible wages ensure that labor shortages and surpluses (unemployment) will be temporary. C. product prices will rise to eliminate shortages but are not likely to fall to eliminate surpluses. D. household saving is a function of personal disposable income.

B. flexible wages ensure that labor shortages and surpluses (unemployment) will be temporary.

When total production in the economy is less than total expenditures: A. people are not willing and able to buy all output, inventories increase, and firms decrease production and employment. B. people are willing and able to buy all output, inventories decrease, and firms increase production and employment. C. an inflationary gap will emerge and output will decrease. D. a recessionary gap will emerge and output will increase.

B. people are willing and able to buy all output, inventories decrease, and firms increase production and employment.

Keynes argued that during the Great Depression the economy may not automatically correct itself in the short run partly because: A. Say's Law was true. B. prices and wages were not flexible, especially downward. C. the economy was very competitive. D. aggregate supply was not able to increase as fast as aggregate demand.

B. prices and wages were not flexible, especially downward.

Income Tax Liability $10,000 $0 $20,000 ______ $30,000 $4,500 $40,000 $7,200 The data in the above table indicate that the income tax structure is: A. proportional. B. progressive. C. regressive. D. categorical.

B. progressive.

According to Keynes: A. equilibrium income and output are determined by available resources and technology in the short run. B. recessions are a result of insufficient aggregate demand. C. the greatest macroeconomic concern during a recession is inflation. D. whatever is produced will be purchased.

B. recessions are a result of insufficient aggregate demand.

C = $300 billion + 0.75(YD) I = $450 billion G = $200 billion T = $200 billion If full-employment real GDP in this economy is $3,500 billion, how much of a decrease in taxes would be necessary to achieve equilibrium at full employment, given the simplifying assumptions of the Keynesian model? A. $300 billion B. $450 billion C. $100 billion D. $75 billion

C. $100 billion

Disposable Income (YD) Consumption Spending (C) $0. $500 $1,000 $1,400 $2,000 $2,300 $3,000. $3,200 $4,000 $4,100 $5,000 $5,000 $6,000. $5,900 In the above example, break-even disposable income is equal to: A. $3,000. B. $4,000. C. $5,000. D. $6,000.

C. $5,000.

When the marginal propensity to consume is 0.80, the spending multiplier is _______, the tax multiplier is _______, and the balanced-budget multiplier is ______. A. 8; -8; 1 B. 8; -7; 5 C. 5; -4; 1 D. 4; -5; 5

C. 5; -4; 1

Which of the following is an example of supply-side fiscal policy? A. Increases in tax rates designed to increase government revenue, which will enable government to supply more social programs B. Increases in government spending that lead to multiple increases in equilibrium income and output C. Decreases in marginal tax rates designed to increase incentives to work and produce D. Decreases in government spending and taxing in order to decrease the impact of government on the supply-side of the economy

C. Decreases in marginal tax rates designed to increase incentives to work and produce