Unit 5 Exam Review

If a country's economic data shows that private savings equal $350 million, government spending equals $375 million, taxes equal $300, and the trade surplus equals $125 million, then what does investment equal?

$150 million

A stronger euro is less favorable for:

American tourists traveling in France.

________________________ equalizes the prices of internationally traded goods across countries.

Purchasing power parity

If David Ricardo's theory holds completely true, then any change in budget deficits or budget surpluses would be completely offset by which of the following?

a corresponding change in private saving

If government policy allows a country's currency to be determined in the exchange rate market, then that currency will be subject to:

a floating exchange rate.

Short run speculation in currencies can create ________________________, at least for a time, where an expected appreciation leads to a stronger currency and vice versa.

a self-fulfilling prophecy

A ______________________ means that government spending and taxes are equal.

balanced budget

A typical ____________________________ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes.

contractionary

In 2010, Microsoft will pay corporate income tax to the federal government based on the company's __________________.

corporate profits

A ____________________________ is one economic mechanism by which government borrowing can crowd out private investment.

higher interest rate

A government will likely ____________________________ to encourage investment in technology R&D by private firms?

implement fiscal policy establishing tax incentives

A ________________________________ is calculated as a flat percentage of income earned, regardless of level of income.

proportional tax

When the share of individual income tax collected by the government from people with higher incomes is smaller than the share of tax collected from people with lower incomes, then the tax is ____________________.

regressive

A ___________________________________ can lead to disruptive economic patterns and heavy strains on a country's banking and financial system.

sustained pattern of large budget deficits

For firms engaged in international lending and borrowing, ____________________ can have an enormous effect on profits.

swings in exchange rates

Exchange rates are an effective way to analyze the price of one currency in terms of another currency with _________________________.

the tools of demand and supply

Which of the following is an example of a pegged currency?

Chinese yuan

Which of the following is least likely to benefit the civilian economy?

R&D aimed at producing new weapons

What do goods like gasoline, tobacco, and alcohol typically share in common?

They are all subject to government excise taxes.

When the interest rate in an economy increases, it is likely the result of either:

a decrease in the government's budget surplus or an increase in its budget deficit.

Movements in exchange rates can have a powerful effect on incentives to export and import, and thus on ________________ in the economy as a whole.

aggregate demand

During a recession, if a government uses an expansionary fiscal policy to increase GDP, the:

aggregate demand curve will shift to the right.

Which of the following denotes a common misunderstanding about exchange rates?

an appreciating currency must be better than a depreciating currency

When the interest rate in an economy decreases, it is most likely as a result of:

an increase in the government budget surplus or a decrease in its budget deficit.

A consensus estimate based on a number of studies suggests that if there is an increase in budget deficits (or a fall in budget surplus) by 1% of GDP, it will most likely cause which of the following?

an increase of 0.5-1.0% in the long-term interest rate

If the U.S. economy is producing at a level that is substantially less than potential GDP and the government's budget deficits are increasing aggregate demand, then ____________________________ is not much of a danger.

an inflationary increase in the price level

If an economy moves into a recession, causing that country to produce less than potential GDP, then:

automatic stabilizers will cause tax revenue to decrease and government spending to increase.

If Canada's economy moves into an expansion while its economy is producing more than potential GDP, then:

automatic stabilizers will decrease government spending and increase tax revenue.

When governments are borrowers in financial capital markets, which of the following is least likely to be a possible source of the funds from a macroeconomic point of view?

central bank prints more money

Ricardian equivalence means that:

changes in private savings offset any changes in the government deficit.

If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

expansionary

Assume that laws have been passed that require the federal government to run a balanced budget. During a recession, the government will want to implement _____________________, but may be unable to do so because such a policy would ____________________________.

expansionary fiscal policy; lead to a budget deficit

From a macroeconomic point of view, increases in ____________ are an addition to aggregate demand, while increases in ___________ are a subtraction from aggregate demand.

exports; imports

People or firms use one currency to purchase another currency at the _______________________.

foreign exchange market

The _____________________________ is the largest market in the world economy.

foreign exchange market

A reduction in government borrowing can:

give private investment an opportunity to expand.

From a macroeconomic point of view, which of the following is a source of demand for financial capital?

government borrowing

If a country's GDP decreases, but its debt increases during that year, then the country's debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes.

increase or decrease

Expansionary monetary policy lowers ______________, and increases demand for investment and consumer borrowing, which shifts aggregate demand to the ________________.

interest rates; right

The current level of US government accumulated debt, when measured in nominal dollars:

is higher than it has ever been.

A moderate increase in a budget deficit that leads to a _____________________ is not necessarily a cause for concern.

moderate increase in a trade deficit and a moderate appreciation of the exchange rate

An additional investment in human capital, especially for the low-income nations of the world, will likely directly increase which of the following?

productivity and economic growth

If government tax policy requires Jane to pay $25,000 in taxes on annual income of $200,000 and Mary to pay $10,000 in tax on annual income of $100,000, then the tax policy is:

progressive.

If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is:

regressive.

The time lag for monetary policy is typically ________________ the time lag for fiscal policy.

shorter than

When a government uses a ______________ exchange rate policy, it usually allows the exchange rate to be set by the market.

soft peg

A government began 2013 with a budget deficit and a trade deficit. During the year, the government changed its policy and is now running a budget surplus. If all other factors hold constant, this change in policy will cause:

the exchange rate and the trade deficit to decrease.

A government began 2013 with a budget surplus and a trade deficit. Due to the onset of recession, the government changed its policy and is now running a budget deficit. If all other factors hold constant, this change in policy will cause:

the exchange rate and the trade deficit to increase.

In the national savings and investment identity framework, an inflow of savings from abroad is, by definition, equal to:

the trade deficit.

A ______________________ monetary policy can be used to decrease aggregate demand because it _____________ exports and _________________ imports .

tight; stimulates; reduces

A depreciating U.S. dollar is ________________ because it is worth ___________ in terms of other currencies.

weakening; less

The government can use _____________ in the form of ____________________ to increase the level of aggregate demand in the economy.

an expansionary fiscal policy; an increase in government spending

When government policy moves from a budget deficit to a budget surplus and the trade deficit remains constant:

investment will increase if savings remain constant.

Which of the following terms is used to describe the set of policies that relate to government spending, taxation, and borrowing?

fiscal policies

In a market-oriented economy, private firms will undertake most of the _____________________________, and ________________ should seek to avoid a long series of large budget deficits that might crowd out such investment.

investment in physical capital; fiscal policy

If Australia's exchange rate is stronger than the PPP rate for several years, which of the following will likely result?

its imports will increase

If a nation merges its currency with another nation to create a single currency, what must it give up?

the ability to determine its own nationally-oriented monetary policy

A government collects $700 billion annually in tax revenue. Each year it allocates $130 billion to interest payments that it must pay on its accumulated debt. What percentage of annual tax revenue is allocated to make these interest payments?

0.1857