ECON 101 Chapter 13

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5.

Which of the following is TRUE with respect to short-run and long-run aggregate supply?

The economy can be on both curves simultaneously.

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _____ by _____

increase; $160 billion

Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a

shift to the left.

Suppose that political instability in the Middle East interrupts the supply of oil. The _____ curve shifts _____, output _____, and prices _____.

short-run aggregate supply; left; decreases; increase

The aggregate demand curve

slopes downward.

In the short run, wages and some prices are considered to be

sticky.

Potential output is the level of real GDP that

the economy would produce if all prices, including nominal wages, were fully flexible

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services

Stagflation may result from:

an increase in the price of oil.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output the government should

decrease spending by $10 billion

In the long run, nominal wages are:

flexible, because contracts and informal agreements are renegotiated in the long run.

In the long run, wages and prices are considered to be:

flexible.

Aggregate demand will shift to the RIGHT if:

government purchases increase.

The short run in macroeconomic analysis is a period:

in which many production costs can be taken as fixed

(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the Aggregate Demand Curve. A movement from point A on AD1 to point C on AD2 could have resulted from a(n):

increase in the total quantity of consumer goods and services demanded

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs.

increase spending

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy?

Raise tax rates to close the inflationary gap.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of

SRAS and aggregate demand.

Which of the following represents the government budget balance most accurately?

T - G - TR

Suppose that the aggregate output level is lower than potential output. Which of the following is FALSE?

The short-run aggregate supply curve will gradually shift to the left

A decrease in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

a decrease; a decrease

Over the past few decades in the United States, large federal budget deficits most often have been caused by

a depressed economy.

The wealth effect suggests:

a negative relationship between the price level and consumption spending

A change in _____ would cause a shift in the short-run aggregate supply curve.

commodity prices

The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:

consumption and investment spending

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will

decrease by $120 billion

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run in_____ real GDP and _____ the price level.

decrease; increase

When the economy is in a recession, tax receipts _____ and unemployment insurance payments _____.

decrease; increase

Contractionary fiscal policy includes

decreasing government expenditures

The federal budget tends to move toward _____ as the economy ____.

deficit; contracts

The decision to build more aircraft carriers to keep employment high is an example of

expansionary fiscal policy.

A positive demand shock leads to:

higher prices and higher employment.

The relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world is called _____ demand.

increase; demand

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by:

increased government purchases

When the budget is in deficit, the government generally

increases the public debt.

Besides consumption, the component(s) of aggregate demand is (are):

investment expenditures, government expenditures, and net exports

The short-run aggregate supply curve will shift to the:

left if nominal wages increase.

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

less than

A change in taxes shifts the aggregate demand curve by _____ than a change in government spending for goods and services and has a _____ effect on real GDP.

less; larger no right less; smaller more; larger more; smaller

Because of the role of automatic stabilizers and discretionary fiscal policy, the historical record of the United States since 1970 shows that the budget tends to

move into a deficit during recessions.

When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as _____ fall(s) and the _____ aggregate _____ curve shifts to the _____.

nominal wages; short-run; supply; right

Profit per unit equals:

price per unit minus cost per unit.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD"

the economy is in long-run equilibrium. no an expansionary fiscal policy may be warranted. the economy is in a recessionary gap. a contractionary fiscal policy may be warranted.

The aggregate supply curve shows the relationship of prices to

the quantity of output producers are willing to provide.

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $700 billion

there is a recessionary gap.

Producing a short-run level of aggregate output that exceeds the economy's potential output results in a(n) _____ adjustment in _____.

upward; nominal wages

The long-run aggregate supply curve is:

vertical.

Nominal wages are sticky because:

wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant