MACRO EXAM 3

If the marginal propensity to consume in an economy 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

(Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is

4

*Suppose that an economy produces 300 units of output, employing 50 units of input, and the price of the input is $9 per unit. The level of productivity and the per-unit cost of production are

6 and $1.50, respectively.

In a mixed open economy, the equilibrium GDP exists where

Ca + Ig + Xn + G = GDP.

Marginal Propensity to consumer formula*

Change in consumption over change in disposable income

The group of three economists who provide fiscal policy recommendations to the president is the

Council of Economic Advisers.

If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will

Given MPC =0.5 , Multiplier = 1/(1-0.5) = 2Effect of ∆ G: ∆GDP = multiplier*∆G∆GDP = 2*20 = +$40Effect of Tax increase: ∆GDP = multiplier* ∆C∆GDP = multiplier(T*MPC)∆GDP = 2(200.5) = -$20Net effect of G and T = (+40 ) +(-20)= +20 Increase GDP by $20

If the equilibrium level of GDP in a private open economy is $1,000 billion and consumption is $700 billion at that level of GDP, then

Ig + Xn must equal $300 billion.

If the saving schedule is a straight line, the

MPS must be constant.

Which of the following factors does not help explain the instability of investment?

Purchases of capital goods are usually nondiscretionary and cannot be postponed.

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD2? Higher price level and higher output/GDP

a decrease in taxes and an increase in government spending

Refer to the given data. At the $200 level of disposable income, (DI is $200, Con. is $205)

dissaving is $5.

If at some level of GDP the economy is experiencing an unintended decrease in inventories,

domestic output will increase

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

economy's aggregate supply curve is steep.

In an open mixed economy, the inflationary expenditure gap may be described as the

excess of Ca + Ig + Xn + G at the full-employment GDP.

refer to the accompanying information for a closed economy. The addition of a $100 billion lump-sum tax

has no effect on either the MPC or the multiplier.

The determinants of aggregate supply

include resource prices and resource productivity.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90 billion, and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP gap here?

increase government spending and decrease taxes

Refer to the diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal policy for government to *below potential

increase spending and decrease taxes.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

*In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could

increase taxes by $16 billion

The short-run aggregate supply curve represents circumstances where

input prices are fixed, but output prices are flexible.

A tax reduction of a specific amount will be more expansionary the

larger is the economy's MPC.

Refer to the diagrams. Other things equal, an interest rate decrease will (first graph has a line going down, second graph has a horizontal line)

leave curve A in place but shift curve B upward.

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

more variable than real GDP.

If consumers expect prices to rise and shortages to occur in the future, then there will be a shift

of the consumption schedule upward and of the saving schedule downward.

The short-run version of aggregate supply assumes that

product prices are flexible, while resource prices are fixed.

*Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to *AD3 shows inflation

reduce government expenditures or increase taxes.

The effect of imposing a lump-sum tax is to

reduce the absolute levels of consumption and saving at each level of GDP but to not change the size of the multiplier.

*If the MPS in an economy is 0.4, the government could shift the aggregate demand curve leftward by $50 billion by

reducing government expenditures by $20 billion.

*If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift

rightward by $50 billion at each price level.

If households consume less at each level of disposable income, they are

saving more

If net exports decline from zero to some negative amount, the aggregate expenditures schedule would

shift downward

An increase in investment spending caused by higher expected rates of return will

shift the aggregate expenditures curve upward and the aggregate demand curve to the right.

Contractionary fiscal policy would tend to make a budget deficit become

smaller

If at a particular price level, real output from producers is greater than real output desired by purchasers, then there will be a general

surplus and the price level will fall.

The shape of the immediate-short-run aggregate supply curve implies that

total output depends on the volume of spending.

Assume there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, and an additional $2 billion for every drop of the interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is

$10 billion

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD3?

an increase in taxes and a decrease in government spending

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment?

an increase of $15 billion

Which of the following effects best explains the downward slope of the aggregate demand curve?

an interest-rate effect

The given figure suggests that

as income increases, consumption decreases as a percentage of income.

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

both input and output prices are fixed. *IMMEDIATE-SHORT-RUN HAS BOTH FIXED, SHORT-RUN IN GENERAL HAS FIXED INPUT AND FLEXIBLE OUTPUT