EC202 Final
The consumption function shows how much A) all households plan to consume at each level of real disposable income. B) all households plan to consume at each possible real interest rate. C) real disposable income people will earn at each income tax bracket. D) all households plan to consume at each level of savings.
A) all households plan to consume at each level of real disposable income.
Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, ________. A) long-run aggregate supply decreases B) real GDP remains at potential GDP C) real GDP increases above potential GDP D) real GDP decreases below potential GDP
C) real GDP increases above potential GDP
If taxes are increased, the AD curve A) is not affected because a change in taxes is a nominal change not real change. B) shifts rightward and aggregate demand decreases. C) shifts leftward and aggregate demand decreases. D) does not shift but there is a movement down along the curve.
C) shifts leftward and aggregate demand decreases.
Suppose that the money wage in the economy increases by 8 percent. As a result the A) long-run aggregate supply will decrease. B) long-run and the short-run aggregate supply both decrease. C) short-run aggregate supply will decrease. D) long-run aggregate supply will increase and the short-run aggregate supply will decrease.
C) short-run aggregate supply will decrease.
When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand, A) there will be no unemployment. B) workers will overestimate the real wage rate. C) unemployment will be at the natural rate. D) workers will underestimate the real wage rate.
C) unemployment will be at the natural rate.
An increase in the tax on interest income ________ the supply of loanable funds and ________ the equilibrium investment. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
D) decreases; decreases
An income tax ________ potential GDP by shifting the ________ curve ________. A) increases; labor demand; rightward B) decreases; labor demand; leftward C) increases; labor supply; rightward D) decreases; labor supply; leftward
D) decreases; labor supply; leftward
When autonomous expenditure increases, equilibrium aggregate expenditure A) decreases by an equal amount to offset the unplanned portion. B) increases by an equal amount. C) decreases by a greater amount due to the multiplier. D) increases by a greater amount due to the multiplier.
D) increases by a greater amount due to the multiplier.
For a given level of anticipated inflation and natural unemployment rate, the short- run Phillips curve shows the relationship between A) potential GDP and real GDP. B) real GDP growth and the unemployment rate. C) inflation and money growth. D) inflation and the unemployment rate.
D) inflation and the unemployment rate.
In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would happen if the fiscal cliff occurred? A) The aggregate demand curve shifts leftward, the price level falls and real GDP decreases. B) The aggregate demand curve shifts rightward, the price level rises and real GDP increases. C) The short run aggregate supply curve shift leftward, the price level rises and real GDP decreases. D) The short run aggregate supply curve shifts rightward, the price level falls and real GDP increases.
A) The aggregate demand curve shifts leftward, the price level falls and real GDP decreases.
In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally, A) both the short-run and long-run aggregate supply curves shift rightward. B) only the long-run aggregate supply curve shifts rightward. C) only the short-run aggregate supply curve shifts rightward. D) neither the short-run nor the long-run supply curve shift.
A) both the short-run and long-run aggregate supply curves shift rightward.
In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." These rate cuts are designed to A) decrease the real long-term interest rate and increase real GDP. B) increase the exchange rate and decrease government spending. C) increase bank reserves and the exchange rate. D) decrease the exchange rate and investment.
A) decrease the real long-term interest rate and increase real GDP.
The marginal propensity to consume is the A) fraction of a change in disposable income spent on consumption expenditure. B) amount saving increases when consumption expenditure decreases. C) fraction of a change in saving spent on consumption expenditure. D) fraction of a change in consumption expenditure that is not saved.
A) fraction of a change in disposable income spent on consumption expenditure.
If firms' inventories are less than they planned, aggregate planned expenditure is ________ real GDP and firms ________ their production. A) greater than; increase B) greater than; decrease C) less than; increase D) less than; decrease
A) greater than; increase
In the short run, an increase in government expenditure on goods and services ________ real GDP and ________ the price level. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls
A) increases; rises
When the labor market is at full employment, A) real GDP equals potential GDP. B) the price level is stable. C) the price level equals the potential price level. D) the SAS curve is horizontal.
A) real GDP equals potential GDP.
One characteristic of automatic fiscal policy is that it A) requires no legislative action by Congress to be made effective. B) automatically produces surpluses during recessions and deficits during inflation. C) has no effect on unemployment. D) reduces the size of the federal government debt during times of recession.
A) requires no legislative action by Congress to be made effective.
If the government's outlays are $1.5 trillion and its tax revenues are $2.2 trillion, the government is running a budget A) surplus of $0.7 trillion. B) surplus of $3.7 trillion. C) deficit of $0.7 trillion. D) deficit of $3.7 trillion.
A) surplus of $0.7 trillion.
Income taxes in the United States are part of automatic fiscal policy because A) tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand. B) tax revenues decrease when income increases, intensifying the increase in aggregate demand. C) the President can increase tax rates whenever the President deems such a policy appropriate. D) tax rates can be adjusted by the Congress to counteract economic fluctuations.
A) tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand.
The relationship between the multiplier and the MPC is A) that as the MPC increases, so does the value of the multiplier. B) that as the MPC increases, the value of the multiplier decreases. C) unrelated because the multiplier relates to the MPS not the MPC. D) converging at higher incomes.
A) that as the MPC increases, so does the value of the multiplier.
A key issue in the presidential election of 2012 between President Obama and Mr. Romney concerned tax rates. President Obama favored increasing taxes, especially on the rich. As a result of a tax increase, A) the aggregate demand curve shifts leftward. B) the aggregate demand curve shifts rightward. C) the aggregate supply curve shifts leftward. D) the aggregate supply curve shifts rightward.
A) the aggregate demand curve shifts leftward.
Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If the inflation rate turns out to be 8 percent instead, A) there is a movement upward along the short-run Phillips curve. B) there is a movement downward along the short-run Phillips curve. C) there is a downward shift of the short-run Phillips curve. D) None of the above answers are correct.
A) there is a movement upward along the short-run Phillips curve.
Once supply side effects are taken into account, tax cuts for labor income can change I. the supply of labor II. potential GDP. A) I only B) I and II C) II only D) Neither I nor II.
B) I and II
Which of the following is true? A) MPS = MPC B) MPS + MPC = 1 C) MPS + MPC = 0 D) MPS - MPC = 1
B) MPS + MPC = 1
If the money wage rate rises, then the A) SAS curve shifts rightward. B) SAS curve shifts leftward. C) LAS curve shifts rightward. D) LAS curve shifts leftward.
B) SAS curve shifts leftward.
Along the long-run Phillips curve, A) actual inflation is greater than expected inflation. B) actual inflation is equal to expected inflation. C) actual inflation is less than expected inflation. D) None of the above answers is correct.
B) actual inflation is equal to expected inflation.
An economy is at full employment. Which of the following events can create a recessionary gap? A) an increase in foreign income B) an increase in taxes C) a decrease in the quantity of capital D) a decrease in money wages
B) an increase in taxes
Which of the following increases aggregate demand and shifts the AD curve rightward? A) a fall in the price level B) an increase in the quantity of money and a resulting fall in the interest rate C) predictions of a recession that lead to expectations of lower future income D) an increase in the exchange rate that makes imports less expensive
B) an increase in the quantity of money and a resulting fall in the interest rate
A short-run macroeconomic equilibrium occurs A) at the intersection of the short-run aggregate supply curve and the long-run aggregate supply curve. B) at the intersection of the short-run aggregate supply curve and the aggregate demand curve. C) at the intersection of the short-run aggregate supply curve, the long-run aggregate supply curve, and the aggregate demand curve. D) when the rate at which prices of goods and services increase equals the rate at which money wage rates increase.
B) at the intersection of the short-run aggregate supply curve and the aggregate demand curve.
Unemployment insurance are payments made to unemployed workers. Typically workers are paid for no more than 26 weeks. In December 2012, the federal government passed legislation that would extend the payments to a maximum of 73 weeks. This extension is an example of A) automatic fiscal policy. B) discretionary fiscal policy. C) non-needs spending. D) contractionary fiscal policy.
B) discretionary fiscal policy.
Saving equals A) disposable income minus taxes. B) disposable income minus consumption expenditure. C) disposable income plus consumption expenditure. D) consumption expenditure minus disposable income.
B) disposable income minus consumption expenditure.
The AD curve slopes A) downward due to the wealth and price effects. B) downward due to the wealth and substitution effects. C) upward due to the price and substitution effects. D) upward due to the wealth and substitution effects.
B) downward due to the wealth and substitution effects.
The multiplier is 2.5 and the SAS curve is upward sloping. Investment increases by $20 billion. In the short run, equilibrium real GDP will A) increase by $50 billion. B) increase by less than $50 billion. C) decrease by $50 billion. D) decrease by less than $50 billion.
B) increase by less than $50 billion.
Which of the following issues prominent in the presidential election of 2012 shifts the aggregate demand curve rightward? A) raising taxes on the rich B) increasing Medicare, Medicaid, and Social Security payments C) loosening immigration policies D) allowing more oil drilling on Federal lands
B) increasing Medicare, Medicaid, and Social Security payments
The multiplier effect exists because a change in autonomous expenditure A) leaves the economy in the form of imports. B) leads to changes in income, which generate further spending. C) prompts further exports. D) will undergo its complete effect in one round.
B) leads to changes in income, which generate further spending.
In the Keynesian model of aggregate expenditure, real GDP is determined by the A) price level. B) level of aggregate demand. C) level of aggregate supply. D) level of taxes.
B) level of aggregate demand.
If the economy is initially at potential GDP and people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then A) only real GDP increases with no change in the price level. B) only the price level rises with no change in real GDP. C) both the price level and real GDP increase. D) neither the price level nor real GDP increase.
B) only the price level rises with no change in real GDP.
The short-run aggregate supply curve is upward sloping because in the short run the A) money wage rate changes but the price level does not. B) price level changes but the money wage rate does not. C) both the money wage rate and the price level change. D) neither the money wage rate nor the price level can change.
B) price level changes but the money wage rate does not.
Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should A) lower the federal funds rate. B) raise the federal funds rate. C) increase the government's budget deficit. D) decrease the government's budget deficit.
B) raise the federal funds rate.
At long-run macroeconomic equilibrium, ________. A) an inflationary gap exists B) real GDP equals potential GDP C) a recessionary gap exists D) real GDP is less than potential GDP but is as close as it is possible to be
B) real GDP equals potential GDP
An increase in the expected inflation rate shifts the A) short-run Phillips curve downward. B) short-run Phillips curve upward. C) long-run Phillips curve upward. D) long-run Phillips curve downward.
B) short-run Phillips curve upward.
In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP. If aggregate demand does not change, then the A) short-run aggregate supply curve will shift rightward as the money wage rate falls. B) short-run aggregate supply curve will shift leftward as the money wage rate rises. C) long-run aggregate supply curve will shift leftward as the money wage rate rises. D) long-run aggregate supply curve will shift leftward as the money wage rate falls.
B) short-run aggregate supply curve will shift leftward as the money wage rate rises.
If people correctly anticipate an increase in aggregate demand, a result is A) an increase in the real value of outstanding government debt. B) workers demanding higher money wages to keep the real wage unchanged. C) a lower rate of inflation in the current time period. D) there are no predictable results associated with an anticipated increase in aggregate demand.
B) workers demanding higher money wages to keep the real wage unchanged.
When disposable income increases from $6 trillion to $6.5 trillion, consumption expenditure increase from $5.5 trillion to $5.9 trillion. The MPC equals A) 0.75. B) 0.76. C) 0.8. D) 0.2.
C) 0.8.
If investment increases by $300 and, in response, equilibrium aggregate expenditure increases by $600, the multiplier is A) 0.2. B) 0.5. C) 2. D) 5.
C) 2.
There are several reasons why the aggregate demand curve is downward sloping. Which of the following correctly describes one of these explanations? A) A rise in the price level raises the purchasing power wealth and increases desired consumption. B) A rise in the price level raises interest rates and increases investment spending. C) A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports D) A rise in the price level lowers the interest rate and increases investment spending.
C) A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports
Suppose the current situation is such that the price level is 120, real GDP is $13 trillion, and GDP along the long-run aggregate supply curve is $12.6 trillion. What will take place to restore the long-run equilibrium? A) The price level will fall until long-run aggregate supply increases to $13 trillion. B) The price level will fall and money wage rates will rise until real GDP along the long- run aggregate supply curve is $13 trillion. C) Money wage rates will rise until real GDP is $12.6 trillion. D) Aggregate demand will increase until both short-run and long-run aggregate supply equal $13 trillion.
C) Money wage rates will rise until real GDP is $12.6 trillion.
Which of the following directly shifts the short-run aggregate supply curve? A) a change in aggregate demand B) a change in the price level C) a change in resource prices D) all of the above
C) a change in resource prices
Your real wealth is measured as the A) amount of assets you have in dollar terms. B) amount of money you have. C) amount of goods and services your wealth will buy. D) amount of goods you have divided by the price level.
C) amount of goods and services your wealth will buy.
If aggregate demand grows only slightly faster than potential GDP, then the economy will ________. A) experience economic growth with high inflation B) experience recession C) experience economic growth with low inflation D) be at a business-cycle peak
C) experience economic growth with low inflation
The structural deficit or surplus is the A) difference between actual government outlays and actual government receipts. B) change in national debt that will result from current budgetary policies. C) government budget deficit or surplus that would occur if the economy were at potential GDP D) actual government budget deficit or surplus minus expenditures for capital improvements.
C) government budget deficit or surplus that would occur if the economy were at potential GDP
In the short run, the Federal Reserve faces a tradeoff between A) economic growth and employment. B) inflation and price stability. C) inflation and unemployment. D) real GDP growth and potential GDP growth.
C) inflation and unemployment.
An increase in the money wage rate shifts the short-run aggregate supply curve ________; an increase in technology shifts the long-run aggregate supply curve ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward
C) leftward; rightward
Because of changes in the ________, the long-run effect of a $10 increase in investment on real GDP equals ________. A) interest rate; zero B) interest rate; $10 C) money wage rate and price level; zero D) money wage rate and price level; $10
C) money wage rate and price level; zero
The short-run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The long-run effect of the decrease in government expenditure changes real GDP by A) a decrease of 600. B) an increase of 600. C) nothing; that is, in the long run real GDP equals $8,000. D) a decrease of $200 because the long-run multiplier is 1.
C) nothing; that is, in the long run real GDP equals $8,000.
A decrease in the money wage rate increases ________ and an increase in the full employment quantity of labor increases ________. A) the SAS and the LAS; only the SAS B) the SAS and the LAS; only the LAS C) only the SAS; the SAS and the LAS D) only the LAS; the SAS and the LAS
C) only the SAS; the SAS and the LAS
The core inflation rate, measured by the core PCE deflator, measures changes in the A) price of only two consumer goods: food and fuel. B) prices of all consumer goods. C) prices of consumer goods except food and fuel.
C) prices of consumer goods except food and fuel.
If there are no taxes or imports and MPC = 0.5, the multiplier equals A) 0.5. B) 5.0. C) 6.0. D) 2.0.
D) 2.0.
In the short run, the intersection of the aggregate demand and the short-run aggregate supply curves, A) determines the equilibrium price level. B) is a point where there is neither a surplus nor a shortage of goods. C) determines the equilibrium level of real GDP. D) All of the above answers are correct.
D) All of the above answers are correct.
Suppose consumers decrease their consumption expenditure because they worry about what their income will be in the future. There is A) a rightward shift of the aggregate demand curve. B) an upward movement along the aggregate demand curve. C) a downward movement along the aggregate demand curve. D) a leftward shift of the aggregate demand curve.
D) a leftward shift of the aggregate demand curve.
In a simple economy in which prices are constant and with no income taxes or imports, the the marginal propensity to consumer is 0.8. In order to increase real GDP by $500 billion, then A) consumption expenditure needs to increase by $500 billion. B) saving needs to be reduced by $500 billion will lead to the increase of $500 billion. C) an increase in investment of $200 billion will lead to the increase of $500 billion. D) an increase in autonomous expenditure of $100 billion will lead to the increase of $500 billion
D) an increase in autonomous expenditure of $100 billion will lead to the increase of $500 billion
All of the following are part of fiscal policy EXCEPT A) setting tax rates. B) setting government spending. C) choosing the size of the government deficit. D) controlling the money supply.
D) controlling the money supply.
Which of the following is one of the Fed's policy goals? A) help the President win reelection B) exchange rate C) monetary base D) price level stability
D) price level stability
We distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. In the long run A) technology is fixed but not in the short run. B) the price level is constant but in the short run it fluctuates. C) the aggregate supply curve is horizontal while in the short run it is upward sloping. D) real GDP equals potential GDP.
D) real GDP equals potential GDP.
What happens if the economy is at its long-run equilibrium and aggregate demand increases?
The increase in aggregate demand means that the AD curve shifts rightward. Initially short-run aggregate supply does not change, so the SAS curve remains stationary. As a result, the price level rises and real GDP increases. The economy is an above full-employment equilibrium. Eventually, however, the tight labor market leads to a rise in the money wage rate. When the money wage rate rises, short-run aggregate supply decreases and the SAS curve shifts leftward. The price level rises and real GDP decreases. In the long run, the short-run aggregate supply decreases so that real GDP returns to potential level of GDP and the only effect is that the price level is permanently higher.
