Macroeconomics exam 2

In the simple keynesian model with an MPC equal to 0.75, a $50 billion increase in investment spending leads to a maximum:

$200 billion increase in equilibrium income.

In the simple, two-sector model, C= $120 billion + .75(Y) and I= $130 billion, then break-even disposable income is equal to:

$480 billion

If disposable income is $800 billion and consumption spending is $1,000 billion, then personal saving is _______________

-$200 billion

When the MPC is 0.90, the MPS is

0.10

The MPS=________ and the autonomous spending multiplier=_______ if the MPC=0.8

0.2; 5

in the simple, two-sector model, C=$120 billion + .75(Y) and I=$130 billion, then equilibrium income (Y) is equal to:

1,000 billion

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

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

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

The severity of recessions is reduced.

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.

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

a laissez-faire approach to macroeconomic policy

Which of the following summarizes the process for closing an inflationary gap if the economy is self-regulating? a.Labor shortages put upward pressure on wages, which leads to higher costs of production and a decrease in short-run aggregate supply. b.Labor shortages put downward pressure on wages, which leads to increases in employment and spending and an increase in aggregate demand. c.Unemployed resources put upward pressure on the price level, which leads to higher wages, increases in spending and an increase in aggregate demand. d.Unemployed resources put downward pressure on resource prices, which leads to lower costs of production and an increase in short-run aggregate supply.

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

A market economy is self regulating only if: a.prices in all markets can rise to eliminate shortages and fall to eliminate surpluses. b.Say's law is not true. c.government takes an active role in managing the macroeconomy. d.all of the above occurs simultaneously.

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

If the SRAS is horizontal, then:

an increase in aggregate demand causes output and employment to rise.

If total expenditure exceeds total production at the economy's full-employment level of output:

an inflationary gap emerges

Changes in government spending and taxing that occur as economic conditions change and counteract the business cycle are:

automatic (built-in) stabilizers

The increase in unemployment compensation that occurs when a recession causes employment to fall is an example of:

automatic, expansionary fiscal policy

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

autonomous consumption

Which of the following is not an assumption of the Classical model? aFlexible wages b.Demand creates its own supply c.Output prices are flexible d.Say's Law is true

b. Demand creates its own supply

Which of the following is an example of automatic, expansionary fiscal policy? a.Lower taxes caused by tax reform designed to reduce tax rates on middle-income families b.Lower taxes caused by reduced incomes during an economic downturn c.Higher taxes caused by increased incomes during an economic upturn d.Higher taxes caused by tax reform designed to increase tax rates on high-income families

b. lower taxes caused by reduced incomes during an economic downturn

When the economy is operating where total production is less than total expenditures, all of the following are true except: a.the economy is in a state of disequilibrium. b.the level of output produced is greater than what people want to buy. c.businesses will increase production to increase inventories. d.businesses experience an unplanned decrease in inventories

b. the level of output produced is greater than what people want to buy

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.

Suppose the economy is initially at full-employment equilibrium. Which of the following events could cause a recessionary gap, ceteris paribus? a.Investment increases as a result of optimistic business expectations b.Households save less at every level of disposable income c.Consumers spend less due to declining consumer confidence in the economy d.Congress decreases personal income tax rates

c. Consumers spend less due to declining consumer confidence in the economy

Fiscal policy is best defined as:

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

Which of the following summarizes the process for closing a recessionary gap if the economy is self-regulating: a. Labor shortages put upward pressure on wages, which leads to higher costs of production and a decrease in short-run aggregate supply. b.Labor shortages put downward pressure on wages, which leads to increases in employment and spending and an increase in aggregate demand. c.Unemployed resources put upward pressure on the price level, which leads to higher wages, increases in spending and an increase in aggregate demand. d.Unemployed resources put downward pressure on resource prices, which leads to lower costs of production and an increase in short-run aggregate supply

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

Supply-side economics emphasizes: a.low marginal tax rates. b.increasing incentives to work, save, and invest. c.long-run effects on aggregate supply rather than short-run effects on aggregate demand. d.all of the above.

d. all of the above

When a $2,000 increase in income causes a $1,600 increase in consumption spending: a.the marginal propensity to consume (MPC) is 0.80. b.the marginal propensity to save (MPS) is 0.20. c.then MPC + MPS = 1. d.all of the above

d. all of the above

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 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.

increases in government spending and lower taxes represent _______________, while decreases in government spending and higher taxes represent ____________

expansionary fiscal policy; contractionary fiscal policy

The classical model leads to the conclusion that:

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

The Laffer curve suggests that

increases in tax rates may actually reduce tax revenues

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 the economy is initially in equilibrium at the full-employment level of real GDP and the federal government raises business and personal income taxes, ceteris paribus, the aggregate demand curve will shift to the __________, causing the price level to ___________

left; fall

Keynes argued that:

prices and wages are not perfectly flexible in the short run.

The Classical model is based on the assumption that:

prices, wages, and interest rates are flexible

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.

If actual real GDP exceeds the full-employment, or natural, level of real GDP, then wages and other input prices are expected to:

rise and the SRAS to shift to the left until long run equilibrium is achieved

According to Say's Law:

supply creates its own demand

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"

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.

For an economy to be self regulating:

wages and other input prices must be flexible in the long run.

The classical approach argues that recessionary gaps:

will automatically close because wages and other input prices will fall and SRAS will shift to the right.