Test 3 Homework

Assume that the U.S. economy is at its full-employment level of output, and there is a fall in net exports. Click on the area that represents the short-run equilibrium for the U.S. economy.

It is the one to the left on the green line Distinguish between the short-run and long-run effects of a change in aggregate demand. While in the short run, both the output and price levels fall, wage rates eventually begin to decrease. The high rate of unemployment puts a downward pressure on wages. Lower wages increase aggregate supply. Thus, output returns to the full employment level but with a significant fall in prices.

Which of the following serves as an automatic stabilizer in the economy? a) The inflation rate. b) The progressive income tax system. c) Interest rates. d) Exchange rates.

b) The progressive income tax system.

Assuming that we are not producing at full capacity, an increase in demand (a shift to the right in AD) will result in which of the following? (multiple answers) a) An increase in real GDP b) An increase in the inflation rate c) A shift in the AS curve d) Movement along the AS curve

a) An increase in real GDP b) An increase in the inflation rate d) Movement along the AS curve

Which of the following will be affected by a change in the average price level or inflation rate? (multiple answers) a) Consumption b) Investment c) Government d) Net Exports e) Saving

a) Consumption b) Investment d) Net Exports e) Saving These are the reasons for why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports. (Government spending is assumed to be determined from outside the model). Saving would likely change too, but it is not one of the spending components of GDP.

The built-in stabilizers in the economy tend to a) Dampen the irregular swings in real GDP. b) Overcompensate for the irregular swings in real GDP c) Magnify somewhat the irregular swings in real GDP. d) Fully offset irregular swings in real GDP.

a) Dampen the irregular swings in real GDP.

Which of the following would cause AD to decrease, that is, shift to the left? a) Increase in income taxes b) Decrease in income taxes c) Optimism about future income d) Lower GDP deflator

a) Increase in income taxes An increase in income taxes leads to less disposable income for consumers. Therefore, consumers are able to purchase less at any given price level, which causes the AD curve to shift to the left. (b and c are shifts to the right, d is a movement along the curve)

A fall in interest rates is likely to change investment spending, real GDP, prices, inflation, and employment in the short run in which of the following ways? a) Increase investment, real GDP, prices, inflation, and employment b) Decrease investment, real GDP, prices, inflation, and employment c) Increase investment and real GDP, but decrease prices, inflation, and employment d) Decrease investment and real GDP, but increase prices, inflation, and employment

a) Increase investment, real GDP, prices, inflation, and employment

The economy can be at equilibrium and in a recession at the same time. a) True b) False

a) True

Unplanned spending could be identified as a) a decrease in inventories. b) spending on machines and factories. c) autonomous consumer spending. d) none of the above.

a) a decrease in inventories.

An MPC value of less than 1.0 indicates that as income increases a) consumption also increases, though not as much as income b) consumption also increases, and at the same rate as the increase in income c) consumption also increases, and by more than the increase in income d) consumption will go in the opposite direction and decrease

a) consumption also increases, though not as much as income

If the government were to increase spending AND taxes by the same amount, RGDP would a) go up by the increase in government spending. b) not change since the increase in taxes would counter the increase in spending. c) go up by the increase in government spending times the multiplier. d) go down by the increase in taxes times the multiplier.

a) go up by the increase in government spending.

If the spending multiplier is 2 and the recession GDP gap is $100 billion. To achieve full-employment output exactly, government should a) increase government expenditures by $50 billion. b) reduce taxes by $200 billion. c) increase government expenditures by $100 billion. d) reduce taxes by $50 billion.

a) increase government expenditures by $50 billion.

Discretionary fiscal policy refers to a) intentional changes in taxes and government expenditures made by Congress to stabilize the economy. b) any change in government spending or taxes that destabilizes the economy. c) the changes in taxes and transfers that occur as GDP changes. d) all of the above.

a) intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

When total spending is greater than GDP a) inventories fall, production rises, and GDP rises to catch up to total spending. b) inventories fall, and total spending falls back down to the level of GDP. c) inventories rise, production rises, and GDP rises to catch up to total spending. d) total spending can never be greater than GDP.

a) inventories fall, production rises, and GDP rises to catch up to total spending.

Equilibrium GDP is attained when a) leakages equal injections. b) the economy is at full employment. c) the trade deficit is zero. d) all of the above.

a) leakages equal injections.

In contrast to consumer spending, investment spending is a) small and relatively unstable. b) small and relatively stable. c) large and relatively stable. d) large and relatively unstable.

a) small and relatively unstable.

According to the Circular Flow diagram, leakages out of the spending stream could be a) taxes. b) investment. c) government transfer payment. d) none of the above are examples of leakages.

a) taxes.

GDP rises faster than total spending because a) the marginal propensity to consume is less than unity. b) induced spending is negative. c) autonomous spending is less than induced spending. d) all of the above.

a) the marginal propensity to consume is less than unity.

The marginal propensity to consume is defined as the amount spent of each new dollar earned. a) true b) false

a) true

GDP is equal to the value of the money spent as long as a) unplanned spending equals zero. b) unplanned spending equals planned spending. c) planned spending equals zero. d) none of the above.

a) unplanned spending equals zero.

Spending that is not caused by a change in income is called: (word answer)

autonomous spending

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. If the multiplier is 2, by how much should the government cut spending to achieve its objective? a) 36 billion dollars b) 18 billion dollars c) 9 billion dollars d) 6 billion dollars

b) 18 billion dollars

A decrease in consumer confidence about job security may affect consumption spending and be most likely to cause which of the following? a) A decrease in employment and perhaps an increase in inflation b) A decrease in employment and perhaps a decrease in inflation c) An increase in employment and perhaps an increase in inflation d) An increase in employment and perhaps a decrease in inflation

b) A decrease in employment and perhaps a decrease in inflation

How would we model the effect of a new costly regulation on businesses? a) A shift left of the AD curve b) A shift left of the AS curve c) A shift right of the AD curve d) A shift right of the AS curve

b) A shift left of the AS curve

A booming stock market may affect consumption spending and be most likely to cause which of the following? a) A decrease in employment and perhaps an increase in inflation b) An increase in employment and perhaps an increase in inflation c) A decrease in employment and perhaps a decrease in inflation d) An increase in employment and perhaps a decrease in inflation

b) An increase in employment and perhaps an increase in inflation

Which of the following represents movement along the aggregate demand curve? Select all that apply. a) Optimistic consumers decide to spend more. b) As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending. c) Falling inflation that decreases interest rates causing investment spending to rise. d) Businesses increase investment spending. e) Government increases spending. f) People from around the world want to buy more Teslas as the inflation rate in the U.S. falls.

b) As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending. c) Falling inflation that decreases interest rates causing investment spending to rise. f) People from around the world want to buy more Teslas as the inflation rate in the U.S. falls. {shifting along a curve means changes in the X or Y variable, shifting the whole curve means changes in things not on the axis}

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n) a) Supply-side fiscal policy b) Expansionary fiscal policy c) Contractionary fiscal policy d) Nondiscretionary fiscal policy

b) Expansionary fiscal policy

An economy cannot be in equilibrium and recession at the same time. a) True b) False

b) False

Fiscal policy is mainly undertaken by the Federal Reserve. a) True b) False

b) False

In 2008, President Obama spent only 787 billion dollars to close the 2 trillion dollar RGDP gap so that little increase in spending would not even make a dent which is why it took more than 6 years to get the economy back to full employment. a) True b) False

b) False

The aggregate demand curve slopes downward because ______________. (multiple answers) a) Actions of the Federal Reserve Bank b) The inflation rate affects the real value of currency c) The inflation rate affects interest rates d) The inflation rate affects imports and exports

b) The inflation rate affects the real value of currency c) The inflation rate affects interest rates d) The inflation rate affects imports and exports Answer (a) is not correct - diminishing marginal utility explains why the demand for a particular good slopes down, but does not explain why the aggregate demand curve slopes down. . Answers b, c and d are the three effects of why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports.

Put into order the following events. a) total spending is greater than GDP b) a rise in optimism among consumers and businesses about the future c) an increase in induced spending d) an increase in autonomous consumer and business spending e) GDP and Total spending rise but GDP rises faster until the two are equal f) a decrease in unplanned spending (inventories start to fall) g) an increase in production and income h)the adjustment stops until there is another exogenous change in spending

b) a rise in optimism among consumers and businesses about the future d) an increase in autonomous consumer and business spending a) total spending is greater than GDP f) a decrease in unplanned spending (inventories start to fall) g) an increase in production and income c) an increase in induced spending e) GDP and Total spending rise but GDP rises faster until the two are equal h)the adjustment stops until there is another exogenous change in spending

An equal increase in government spending and taxes would result in a) a decrease in RGDP b) an increase in RGDP c) no change in RGDP d) an uncertain change in RGDP

b) an increase in RGDP

Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in a) an increase in real GDP and an increase in inflation. b) an increase in real GDP and a decrease in inflation. c) an increase in real GDP and an ambiguous effect on inflation. d) a decrease in consumption and no change in inflation.

b) an increase in real GDP and a decrease in inflation.

Due to automatic stabilizers, when the nation's total income rises, government transfer spending a) increases and tax revenues decrease. b) decreases and tax revenues increase. c) stays the same and tax revenues decrease. d) stays the same and tax revenues increase.

b) decreases and tax revenues increase.

An increase in aggregate demand results in ____________ a) higher inflation and lower real GDP. b) higher inflation and higher real GDP. c) lower inflation and higher real GDP. d) lower inflation and lower real GDP.

b) higher inflation and higher real GDP.

A tax reduction of a specific amount will be more expansionary the a) smaller is the economy's MPC. b) larger is the economy's MPC. c) smaller is the economy's multiplier. d) less is the economy's built-in stability.

b) larger is the economy's MPC.

According to the Circular Flow diagram, when total spending equals GDP a) the economy is at full employment. b) the economy is in equilibrium. c) autonomous spending equals induced spending. d) all of the above are true.

b) the economy is in equilibrium.

The figure below shows the effect of an increase in total national spending. What is the level of output after the increase in spending? a) $14 trillion b) $16 trillion c) $17 trillion d) Cannot be determined

c) $17 trillion The aggregate demand curve will shift to the right. Before the increase in aggregate demand, the graph shows an equilibrium below full employment. When the aggregate demand curve shifts to the right, the equilibrium shifts out to the full employment level. Due to the rise in spending, businesses will find themselves in positions where prices have to be raised in order for them to be willing to increase production. The new equilibrium will yield a higher real GDP (at $17 trillion) and a higher price level.

The spending multiplier is calculated as a) 1/(1 + mpc). b) 1/mpc. c) 1/mps. d) 1/(1 - mps).

c) 1/mps.

If the recessionary gap is 2 trillion dollars and the multiplier is 2, then TOTAL spending would have to rise by a) 1 trillion dollars. b) 2 trillion dollars times the multiplier. c) 2 trillion dollars. d) .5 trillion dollars.

c) 2 trillion dollars.

In 2008, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this using the AS/AD model? a) Movement along the AD curve to the right b) A shift in the AS curve to the right c) A shift in the AD curve to the left d) A shift in the AD curve to the right

c) A shift in the AD curve to the left While there is a decrease in wealth here, it is caused by a decrease in assets other than money. The wealth effect that moves us along the Aggregate Demand curve talks about money holdings, that is wealth derived from cash and deposits. If the wealth is reduced by changes in the values of other assets, such as real estate or stock holdings, then the AD curve shifts.

How would we model an increase in the amount of capital available in an economy? a) A shift left of the AD curve b) A shift left of the AS curve c) A shift right of the AS curve d) A shift right of the AS curve

c) A shift right of the AS curve

People tend to like higher incomes and lower inflation. What kind of change in our model results in higher incomes and lower inflation? a) An increase in AD b) An decrease in AD c) An increase in AS d) An decrease in AS

c) An increase in AS

Why does the aggregate supply curve become very steep at high levels of real GDP? a) Most producers are monopolists and will charge as high a price as possible. b) Producers produce a fixed amount of goods no matter what the price is. c) At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices. d) Real GDP is unrelated to spending decisions in the short run.

c) At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices.

A decrease in government spending will cause a(n) a) Increase in the quantity of real output demanded b) Decrease in the quantity of real output demanded c) Decrease in aggregate demand d) Decrease in aggregate supply

c) Decrease in aggregate demand

Which of the following changes would cause a shift in the aggregate demand curve? I. Increase in investment II. Decrease in productivity III. Increase in consumption a) I only b) II and III only c) I and III only d) I and II only e) I, II, and III

c) I and III only A shift in the aggregate demand curve is caused by changes in factors influencing the amount of spending in the economy. Thus, both investment spending and consumption spending will shift the aggregate demand curve. A change in productivity will affect the amount that businesses can produce at each price level. Thus, a decrease in productivity will reduce aggregate supply and shift the aggregate supply curve to the left.

As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________. a) Movement along the aggregate demand curve b) A shift in aggregate supply c) Movement along the aggregate supply curve d) A shift in the aggregate demand curve

c) Movement along the aggregate supply curve d) A shift in the aggregate demand curve

In the graph above, assume that the economy starts out at Y1 and INF1. Following expansionary fiscal policy the economy would end up at a) Y4 and INF2. b) Y1 and INF1. c) Y2 and INF2. d) Y3 and INF1.

c) Y2 and INF2.

The causes of the business cycle can be traced back to a) a change in GDP. b) a change in unplanned spending. c) a change in autonomous spending. d) all of the above.

c) a change in autonomous spending.

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely a) crowd out future public investment. b) reduce the economy's future productive capacity. c) complement private investment. d) crowd out private investment.

c) complement private investment.

The size ranking, biggest to smallest, of the four spending groups is a) consumer, investment, net exports, government. b) government, consumer, investment, net exports. c) consumer, government, investment, net exports. d) none of the above.

c) consumer, government, investment, net exports.

What would be the change in RGDP from a 100 billion dollar decrease in government spending AND a 100 billion dollar decrease in taxes if the multiplier is 5. a) zero. b) decrease by 500 billion. c) decrease by 100 billion. d) increase by 100 billion.

c) decrease by 100 billion.

Inflation caused by an increase in aggregate spending is referred to as a) anticipated inflation. b) supply-side inflation. c) demand-side inflation d) hyperinflation.

c) demand-side inflation

According to the Circular Flow diagram, when total spending is less than GDP a) inventories rise, production falls, and total spending rises to catch up to GDP. b) inventories fall, total spending falls back down to the level of GDP. c) inventories rise, production falls, and GDP falls to meet total spending. d) total spending can never be less than GDP.

c) inventories rise, production falls, and GDP falls to meet total spending.

Expansionary fiscal policy is so named because it a) is aimed at achieving greater price stability. b) involves an expansion of the nation's money supply. c) is designed to expand real GDP. d) necessarily expands the size of government.

c) is designed to expand real GDP.

When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be a) passive b) automatic c) non discretionary d) countercyclical

d) countercyclical

One advantage of automatic stabilization policy over discretionary fiscal policy is that it a) makes the actual budget a better reflection of the condition of the economy than the standardized budget. b) does not produce a cyclical deficit as discretionary policy does. c) is not subject to the timing problems of discretionary policy. d) has a greater multiplier effect than discretionary policy.

c) is not subject to the timing problems of discretionary policy.

A rightward shift in the aggregate supply curve is best explained by an increase in a) the price of imported resources. b) business taxes. c) productivity. d) nominal wages.

c) productivity.

If the economy is in a 4 trillion dollar recessionary gap, and the multiplier is 2, then to close the gap a) the increase in spending would have to be greater than the decrease in taxes b) would require a 2 trillion dollar increase in spending or a 2 trillion dollar decrease in taxes. c) the debt would get larger from a decrease in taxes than it would from an increase in spending. d) none of the above are true.

c) the debt would get larger from a decrease in taxes than it would from an increase in spending.

People really dislike falling income and rising inflation. What kind of change in our model will make people really unhappy? a) An increase in AD b) An decrease in AD c) An increase in AS d) An decrease in AS

d) An decrease in AS

The circular flow model shows that the economy is in equilibrium when a) total spending equals GDP. b) leakages equal injections. c) inventories are constant. d) all of the above.

d) all of the above.

Which of the following supports government spending over tax cuts for recession a) government spending goes to infrastructure. b) government spending goes to the unemployed. c) government spending has a larger multiplier effect. d) all of the above.

d) all of the above.

The multiplier is useful in determining the a) full-employment unemployment rate. b) level of business inventories. c) change in the rate of inflation from a change in the interest rate. d) change in GDP resulting from a change in autonomous spending.

d) change in GDP resulting from a change in autonomous spending.

To calculate the change in RGDP from an increase in taxes use the formula a) change in RGDP = the multiplier minus the increase in taxes. b) change in RGDP = minus the change in taxes times the mpc. c) change in RGDP = the multiplier times the mpc. d) change in RGDP = minus the multiplier times mpc times the change in taxes.

d) change in RGDP = minus the multiplier times mpc times the change in taxes.

The largest component of total expenditures in the United States is a) gross investment. b) government spending. c) net exports. d) consumer spending.

d) consumer spending.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the a) net export effect. b) wealth effect c) real-balance effect d) multiplier effect

d) multiplier effect

Equilibrium GDP is attained when a) the economy is at full employment. b) the trade deficit is zero. c) either A or B may be true. d) none of the above are true.

d) none of the above are true.

According to the Circular Flow diagram, injections into the spending stream include a) net exports. b) savings. c) taxes. d) none of the above.

d) none of the above.

If the mpc is .9 then out of each 100 dollars of income consumers will a) spend .9 dollars. b) save 90 dollars. c) spend 80 dollars. d) spend 90 dollars.

d) spend 90 dollars.