MACRO exam 3

The more progressive the tax system, the

greater is the built-in stability for the economy. Correct

The major wave of defaults on home mortgages in 2007 destabilized

many banks, including those that made the loans indirectly. Correct

Input Quantity Real Domestic Output 100 200 150 300 200 400 The table gives information about the relationship between input quantities and real domestic output in a hypothetical economy. If the price of each input is $5, the per-unit cost of production in the economy is

$2.50. Correct

Domestic Output (GDP = DI) Aggregate Expenditures, Closed Economy Exports Imports Net Exports Aggregate Expenditures, Open Economy $ 200 $ 230 $ 30 $ 20 $ -------- $ -------- 250 270 30 20 -------- -------- 300 310 30 20 -------- -------- 350 350 30 20 -------- -------- 400 390 30 20 -------- -------- 450 430 30 20 -------- -------- 500 470 30 20 -------- -------- Complete the accompanying table and answer the question based on the resulting data. All figures are in billions of dollars. If the economy was closed to international trade, the equilibrium GDP and the multiplier would be

$350 and 5. Correct

C = 40 + 0.8Y Ig = 60 − 2i i = 10 (Advanced analysis) The equations are for a private closed economy, where C is consumption, Y is the gross domestic product, Ig is gross investment, and i is the interest rate. Given that the interest rate is 10 (percent), the amount that businesses will want to invest will be

$40

If the economy has a recessionary expenditure gap of $15 billion and the MPS is 0.3, then the equilibrium level of GDP is

$50 billion below the full-employment level. Correct

Price Level C Ig G X M Real GDP 128 $ 18 $ 2 $ 3 $ 1 $ 5 125 20 4 3 2 4 122 22 6 3 3 3 119 24 8 3 4 2 116 26 10 3 5 1 In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. If the amounts of GDP supplied at the price levels shown (in descending order) are $27, $25, $22, $18, and $13, the equilibrium price level will be

125

Government Spending Consumer Expectations Degree of Excess Capacity Personal Income Tax Rates Productivity National Income Abroad Business Taxes Domestic Resource Availability Prices of Imported Products Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. A change in which factor is most likely to change both aggregate demand and aggregate supply?

7

Which of the following is a true statement?

Fiscal policy swung from contractionary to expansionary in 2002. Correct

In a mixed open economy, if aggregate expenditures exceed GDP,

Ig + X + G > Sa + M + T. Correct

(Last Word) In The General Theory of Employment, Interest, and Money,

John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income. Correct

Refer to the diagram. Which tax system has the most built-in stability?

T1 Correct - almost vertical

Which one of the following is true about the U.S. Federal Reserve System?

There are 12 regional Federal Reserve Banks. Correct

An appropriate fiscal policy for a severe recession is

a decrease in tax rates. Correct

Checkable deposits are money because they are

acceptable as payment. Correct

Refer to the diagram for a private closed economy. The upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects

an increase in investment expenditures. Correct

Currency in circulation is part of

both M1 and M2. Correct

The Federal Reserve System performs many functions, but its most important one is

controlling the money supply. Correct

Refer to the graph. A shift from AS1 to AS2 would be consistent with what economic event in U.S. history?

cost-push inflation in the early 1970s Correct

The economy's long-run AS curve assumes that wages and other resource prices

eventually rise and fall to match upward or downward changes in the price level. Correct

The government bailout of large institutions creates the problem of moral hazard, which means that these large firms will

have an incentive to make highly risky investments. Correct

GDP C S Ig $ 100 $ 100 $ 0 $ 80 200 160 40 80 300 220 80 80 400 280 120 80 500 340 160 80 600 400 200 80 700 460 240 80 Refer to the accompanying information for a closed economy. The introduction of $80 billion of government spending would

have no effect on the size of the multiplier. Correct

Other things equal, a reduction in personal and business taxes can be expected to

increase both aggregate demand and aggregate supply. Correct

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

increased by $20 billion. Correct

Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. If there had been partial crowding out, however, then GDP would have

increased by less than $100 billion. Correct

The crowding-out effect of expansionary fiscal policy suggests that

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. Correct

Refer to the diagrams. Curve A

is an investment demand curve, and curve B is an investment schedule

In a recessionary expenditure gap, the equilibrium level of real GDP is

less than full-employment GDP. Correct

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion. Correct

In an effort to stop the U.S. recession of 2007-2009, the federal government

reduced taxes and increased government spending. Correct

The most likely way the public debt burdens future generations, if at all, is by

reducing the current level of investment. Correct

Which would most likely shift the aggregate supply curve? A change in the prices of

resources

The cyclically adjusted budget refers to

the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment. Correct

A private closed economy will expand when

unplanned decreases in inventories occur. Correct

In the aggregate demand-aggregate supply model, the economy's price level is assumed to be

variable, unlike in the aggregate expenditures model. Correct

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. Which of the factors best explain the downward slope of aggregate demand curve?

1, 3, and 8 Correct

Real Domestic Output Demanded (in Billions) Price Level (Index Value) Real Domestic Output Supplied $500 350 $3,500 1,000 300 3,000 1,500 250 2,500 2,000 200 2,000 2,500 150 1,500 3,000 100 1,000 The accompanying table shows the aggregate demand and aggregate supply schedule for a hypothetical economy. If the quantity of real domestic output demanded increased by $1,000 at each price level, the new equilibrium price level and quantity of real domestic output would be

250 and $2,500. Correct

In 2018, about ____ percent of the U.S. public debt was held by people and institutions abroad.

29 Correct

In 2018, foreign ownership of the total public debt of the United States was about

29 percent. Correct

Suppose that the federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?

All of these are possible outcomes. Correct The value of the "wheat dollar" would be unstable depending on crop yields from year to year. Farmers would replace corn and soybean crops with wheat. Wheat would function as money so long as people accept it in exchange for goods and services.

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right. Correct

Money functions as

a store of value, a unit of account, and a medium of exchange. Correct

The M1 money supply is composed of

checkable deposits and currency in circulation. Correct

Refer to the diagram for a private closed economy. In this economy, aggregate expenditures

increase by $2 for every $3 increase in GDP. Correct

Coins held in commercial bank vaults are

not part of the nation's money supply. Correct

Refer to the diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?

offsetting state and local finance Correct

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium

output would necessarily rise. Correct

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. Correct

The American Recovery and Reinvestment Act of 2009 was implemented primarily to

stimulate aggregate demand and employment. Correct