Econ 111-762 Exam 3
The presence of ________ means that the federal deficit is larger than it otherwise would be in a recession, and smaller than it otherwise would be in an expansion.
automatic stabilizers
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers.
Government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilizers.
The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of
automatic stabilizers.
Fiscal policy refers to changes in
federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
During recessions, government spending usually
increases because unemployment payments increase.
Other things remaining the same, an increase in the price level
increases the quantity of real GDP supplied.
Which of the following raises the largest percentage of federal government revenue?
individual income taxes
The largest source of federal government revenue in 2014 was
individual income taxes.
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be
inflation
Low government borrowing costs would be relevant for the decision regarding whether a government increases infrastructure investment because
infrastructure investments are long-term and expensive investments that require the use of borrowed funds.
When aggregate expenditure is greater than GDP,
inventories fall, and GDP and employment increase
At the new short run equilibrium, the unemployment rate will be ______ compared to the unemployment rate at the initial equilibrium, prior to the increase in exports.
lower
If the economy is at macroeconomic equilibrium, then real GDP
might be equal to, greater than, or less than potential GDP
A change in the price level will cause the long-run aggregate supply curve to
move along a stationary LRAS curve
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in the price level will cause a ____________ the aggregate demand curve.
movement up along
The aggregate demand curve would shift to the left if
net taxes were increased.
A macroeconomic equilibrium occurs when the
quantity of real GDP demanded equals the quantity of real GDP supplied even if they are not equal to potential GDP.
At the new long-run equilibrium,
real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
Potential GDP refers to the level of
real GDP in the long run
An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.
real GDP; the price level
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be
recession
The ________ curve has a positive slope because as prices of final goods and services rise, prices of inputs rise more slowly.
short run aggregate supply
Which aggregate supply curve has a positive slope?
short run only
The basic aggregate demand and aggregate supply curve model helps explain
short term fluctuations in real GDP and the price level.
Each year that the federal government runs a surplus, the federal debt
shrinks
If current projections of federal spending on Social Security and Medicare are accurate, policymakers are faced with the choice of
significantly restraining spending on these programs and/or greatly increasing taxes on households and firms.
The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle
stabilize the economy.
When the aggregate demand curve and the short-run aggregate supply curve intersect,
the economy is in short-run macroeconomic equilibrium.
Economic policies are effective at changing output when
the economy is not producing at capacity.
The difference between what a government spends and what it collects in taxes in a year is
the government budget deficit or surplus.
The use of fiscal policy to stabilize the economy is limited because
the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.
The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by
the level of aggregate expenditure.
Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,
the long run aggregate supply curve will shift to the right.
A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments _________.
increase; fall; rise
If the government wants to reduce unemployment, government purchases should be ________ and/or taxes should be ________.
increased; decreased
An increase in technology ________ potential GDP and ________ aggregate supply.
increases; increases
The tax increases necessary to fund future Social Security and Medicare benefit payments would be
large, and could discourage work effort, entrepreneurship, and investment, thereby slowing economic growth.
The presence of automatic stabilizers means that the federal deficit is ________ than it otherwise would be in a recession and ________ than it otherwise would be in an expansion.
larger; smaller
When the interest rate is high, planned investment is ________ so output is ________.
low; low
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
lower; lower
When the economy enters a recession, your employer is ___________ to reduce your wages because _______.
unlikely; lower wages reduce productivity and morale
If European economies enter a recession,
U.S. aggregate demand decreases and the U.S. AD curve shifts leftward
A "strong dollar" means that the
U.S. dollar exchanges for more units of foreign currencies.
A recessionary gap occurs when ________ so that real GDP is ________ potential GDP.
aggregate demand decreases; less than
An increase in government purchases shifts the ________ curve to the ________.
aggregate demand; right
What is an expansionary fiscal policy?
Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
Which of the following is not a main determinant of net exports?
Expectations of future profitability in the United States.
___________________ would cause a similar shift in the aggregate demand curve.
A decrease in taxes
The aggregate demand curve slopes downward for all of the following reasons except:
A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports.
What are the four main determinants of investment?
Expectations of future profitability, interest rates, taxes and cash flow.
The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?
AE = C + I + G + NX
Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run?
Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?
Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. (Mark all that apply.)
B. Increased consumer optimism C. Lower interest rates D. Lower taxes F. Decrease in the U.S. exchange rate relative to other currencies
Which of the following are examples of discretionary fiscal policy? (Check all that apply.)
B. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. D. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. E.The president and Congress reduce tax rates to increase the amount of investment spending.
Which of the following is considered contractionary fiscal policy?
Congress increases the income tax rate
What is a contractionary fiscal policy?
Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
Which of the following statements about the Social Security, Medicare, and Medicaid programs is true?
Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially.
How does a budget deficit act as an automatic stabilizer and reduce the severity of a recession?
D. All of the Above A. Consumers spend more than they would in the absence of social insurance programs, like unemployment. B. Transfer payments to households increase. C. During recessions, tax obligations fall due to falling wages and profits.
Which of the following will increase planned investment spending on the part of firms?
E. A and B only A. Increased optimism about future demand for its product B. A lower real interest rate
If the government increases expenditure without raising taxes, this will
E. A and B only A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector.
Which of the following is one explanation as to why the aggregate demand curve slopes downward?
Decreases in the price level raise real wealth and increase consumption spending.
Suppose Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by the following? A survey shows a sharp rise in consumer confidence that income growth will be increasing.
Demand is expected to increase
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
Does judging whether a deficit is excessive depend in part on whether the country is in a recession?
During a recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger.
At a short run macroeconomic equilibrium, real GDP is always equal to potential GDP.
False
What is fiscal policy?
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
The term "crowding out" refers to a situation where:
Government spending increases interest rates and decreases private investment.
Which of the following statements is correct if real GDP in the United States declined by more during the 2007-2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
What changes should they make if they decide a contractionary fiscal policy is necessary?
In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
What actions can Congress and the president take to move the economy back to potential GDP?
Increase government spending or decrease taxes.
If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?
Inventories will decline, and GDP and employment will rise.
What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?
Inventories decrease, GDP increases, and employment increases.
Which can be changed more quickly: monetary policy or fiscal policy?
Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in 1983?
No. It could be that the economy contracted, so less income was earned and less was paid in tax.
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
How important is it to pay off this debt?
Not very important if the debt is at a sustainable level, and the interest payments are relatively constant.
Long-run macroeconomic equilibrium occurs when
aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run aggregate supply curve.
What relevance does your answer have to how the Bureau of Economic Analysis calculates data on U.S. imports?
Producers increasingly rely on global supply chains, so there are flaws in accounting for imports and exports.
How would an increase in interest rates affect investment?
Real investment spending declines.
Government transfer payments include which of the following?
Social Security and Medicare programs
Suppose the economy enters a recession. If government policymakers--Congress, the president, and members of the Federal Reserved--do not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run? i. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run.
Statement ii is correct.
Consider the following four statements. i. The iPhone is made in China, using Chinese-made parts. ii. The iPhone is made in the United States, using U.S.-made parts. iii. The iPhone is made in the United States, using Chinese-made parts. iv. The iPhone is made China, using parts that are all made outside of China. Which of the statements above is correct?
Statement iv is correct. The iPhone is assembled in China using parts shipped to China from many countries.
Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment insurance?
The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle.
What is the difference between the federal budget deficit and federal government debt?
The federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.
Who is responsible for fiscal policy?
The federal government controls fiscal policy.
Aggregate demand increases if
The government increases spending.
Which of the following is NOT a determinate of consumption?
The growth rate of GDP relative to growth rates in other countries
Why might increases taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?
The legislative process experiences longer delays than monetary policy.
An economics student raises the following objection: "The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following?
The student is confusing saving with investment.
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. The corporate income tax rate is increased
This is a part of a contractionary fiscal policy
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. The individual income tax is decreased
This is a part of expansionary fiscal policy
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. Defense spending is increased
This is not a part of fiscal policy
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. Families are allowed to deduct all their expenses for daycare from their federal income tax
This is not a part of fiscal policy
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. The Federal Reserve lowers the target for the federal funds rate
This is not part of fiscal policy
The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?
This will shift the aggregate demand curve to the left.
If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?
This will shift the aggregate demand curve to the right.
Why do few economists argue that it would be a good idea to balance the federal budget every year?
To keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession.
At a long run macroeconomic equilibrium, real GDP is always equal to potential GDP.
True
The combination of a strong U.S. dollar and weak growth overseas might result in lower U.S. exports because
U.S. exports become more expensive for foreign buyers while income, and purchasing power, in other countries is rising only slowly.
When incomes rise faster in the United States than in other countries,
U.S. net exports will fall.
Which of the following is NOT included in the calculation of total government purchases?
Unemployment insurance benefits paid for by the federal government
Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?
Unemployment will decline.
Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?
Unemployment will rise.
Which of the following statements regarding wealth and income is correct?
Wealth represents the total value of a household's assets minus its liabilities while income is the amount of earnings households receive in the current period
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
Which one of the following is not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity.
In the aggregate expenditure model, when is planned investment greater than actual investment?
When there is an unplanned decrease in inventories.
Why does the short run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
Which of the following decreases aggregate demand and shifts the AD curve leftward?
a decrease in government expenditures
Which of the following would cause a decrease in aggregate demand?
a decrease in government spending
Congress and the president enact a temporary cut in payroll taxes. This is an example of
a discretionary fiscal policy
If the government cuts taxes in order to increase aggregate demand, the action is called
a discretionary fiscal policy.
The result of a strong dollar will be
a leftward shift of the U.S. aggregate demand curve because it reduces exports, a spending component of aggregate demand.
In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argue that the European Union, an organization of 27 countries in Europe, should have "a commissioner for budgetary discipline." They believe that: "The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits." Source: Mark Rutte and Jan Kees de Jager, "Expulsion from the Eurozone Has to Be the Final Penalty," Financial Times, September 7, 2011. An "excessive" budget deficit in this context is
a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules
A supply shock is
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
Stagflation occurs when
a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
If Inventory investment is higher than firms planned,
actual investment is greater than planned investment.
An unplanned increase in inventories results in
actual investment that is greater than planned investment
According to a 2017 Congressional Budget Office (CBO) report, "By 2047, 22 percent of the population will be age 65 or older, CBO anticipates, compared with 15 percent today." Source: Congressional Budget Office, "The 2017 Long-Term Budget Outlook," March 2017, p. 7. The over-65 population is increasing so rapidly because
after WWII, there was a "baby boom," but after 1965 birthrates fell.
If firms' expectations about the future become pessimistic so that they think future profits will be lower, then
aggregate demand decreases and the AD curve shifts leftward.
If the government increases taxes, the
aggregate demand decreases.
The revenue the federal government collects from the individual income tax declines during a recession. This is an example of
an automatic stabilizer
The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of
an automatic stabilizer
Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
an increase in government purchases
Which of the following would cause the short run aggregate supply curve to shift to the left?
an increase in inflation expectations
Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
an increase in net exports
All of the following shift the aggregate demand curve to the right EXCEPT
an increase in taxes
From August 2009 to May 2017, the Standard & Poor's Index of 500 stock prices increased by more than 135 percent, while the consumer price index increased by less than 15 percent. These changes would have caused
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right.
When actual GDP is below potential GDP the budget deficit increases because of:
an increase in transfer payments and a decrease in tax revenues.
Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called
automatic stabilizers
The report also notes: "In advanced economies an increase in infrastructure investment ... is one of the few remaining policy levers available to support growth." When infrastructure investment is described as a "policy lever" it means that
because infrastructure investment adds to the productive capacity of the economy, policies that promote it can spur economic growth.
In 2016, the city of Canfield collected $500,000 in taxes and spent $450,000. In 2016, the city of Canfield had a
budget surplus of $50,000.
To reduce a budget deficit,
budgetary policies such as increasing taxes and cutting expenditures can be used.
Tax cuts on business income increase aggregate demand by increasing
business investment spending.
The level of aggregate supply in the long run is not affected by
changes in the price level
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
A change in the price level
changes the quantity of real GDP supplied.
Stagflation is a
combination of inflation and recession
A decrease in current disposable income will _______________ consumption
decrease
A decrease in expected future income will ___________ consumption
decrease
A decrease in household wealth will ____________ consumption
decrease
The U.S. price level relative to other countries' price levels will _______ next exports
decrease
The exchange rate between the dollar and other currencies will _______ net exports
decrease
The growth rate of U.S. GDP relative to other countries' will _______ next exports
decrease
Higher personal income taxes
decrease aggregate demand
Higher interest rates are likely to
decrease consumer spending and increase consumer saving.
Uncertainty about the future is likely to
decrease current spending.
A tax increase
decreases aggregate demand and the AD curve shifts leftward.
The following is from a message by President Hoover to Congress, dated May 5, 1932: "I need not recount that the revenues of the Government as estimated for the next fiscal year show a decrease of about $1,700,000,000 below the fiscal year 1929, and inexorably require a broader basis of taxation and a drastic reduction of expenditures in order to balance the Budget. Nothing is more necessary at this time than balancing the Budget." According to the statement, balancing the Budget would require
decreasing government purchases and increasing taxes.
Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.
discretionary fiscal policy; automatic stabilizers
If the government raises the amount of taxes, holding everything else constant, then
disposable income will decrease.
At the beginning of an expansion, inventories
fall
The total amount owed by the federal government to the public is the
federal debt.
"Weak growth overseas" means that
foreign economies are growing more slowly than the U.S. economy.
Inventories refer to
goods that have been produced but have not yet been sold.
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand.
Congress and the president carry out fiscal policy through changes in
government purchases and taxes.
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
government purchases.
Economist Mark Thoma has written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name implies." Source: Mark Thoma, "The Importance of Automatic Stabilizers to the Economy," cbsnews.com, January 25, 2010. Automatic stabilizers are
government spending and taxes that automatically increase or decrease along with the business cycle.
Aggregate demand (AD) is comprised of expenditure components that include:
government spending, consumption, investment, and net exports.
Each year that the federal government runs a deficit, the federal debt
grows
Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their readers' questions regarding the federal government's debt. Two of the questions were: "Why is government debt different from mine?" and "How important is it to pay off this debt?" Source: Josh Zumbrun and Nick Timiraos, "Q&A: What the $18 Trillion National Debt Means for the U.S. Economy," Wall Street Journal, February 1, 2015. Government debt is different from household debt because
households cannot tax to bring in revenue and so will default if they can't make the payments.
An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many PC makers that buy those chips sell their products in local currencies." Source: Tess Stynes, "Intel Earnings: What To Watch," Wall Street Journal, July 15, 2015. In these circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to
hurt Intel's sales because the cost of the chip is more expensive in terms of the foreign currency, but the selling price of the product is in the lower-valued foreign currency.
What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that
in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
In the context of what was happening in the economy in 1929, President Hoover was ______ in saying that, in 1932, nothing was more necessary than balancing the federal government's budget.
incorrect
A decrease in the interest rate will _____________ consumption
increase
A decrease in the price level will ___________ consumption
increase
The increase in the number of people age 65 or older will result in an __________________ in federal spending on Social Security and Medicare as a percentage of GDP.
increase
How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports? An increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) will
increase U.S. net exports by increasing exports to these countries.
The goal of expansionary fiscal policy is
increase aggregate demand
If the reduction in inventories was unplanned, then future production would be expected to
increase as inventories are replenished.
Potential GDP
is independent of the price level.
From an economic point of view, the trend toward delaying marriage and childbearing is not helpful because
it reduces investment spending on new houses and weakens economic growth.
When a government runs a deficit
its debt increases
In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate "would have been stronger if it hadn't been for companies drawing down inventories." Source: Justin Lahart, "Consumers Priming U.S. Pump," Wall Street Journal, July 30, 2015. If companies are "drawing down inventories," aggregate expenditure is likely to have been
larger than GDP
The trend toward delaying marriage and childbearing could be connected with the slow recovery from the 2007-2009 recession because the recovery
left millions of young people unemployed, and unable to afford to marry and have children.
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in state income will cause a _________ the aggregate demand curve
leftward shift of
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in the interest rate will cause a ___________ the aggregated demand curve
leftward shift of
Which of the following would not be considered an automatic stabilizer?
legislation increasing funding for job retraining passed during a recession
At a trough in the business cycle, the macroeconomic equilibrium is ________ the level of potential real GDP.
less than
The ________ curve is vertical.
long run aggregate supply
Potential output is equal to
long-run aggregate supply.
[Related to the Making the Connection] A report from the International Monetary Fund in late 2014 contained the following observations: "Five years after the global financial crisis, the economic recovery continues but remains weak. ... Given ... the current environment of low government borrowing costs ... might this be a good time to increase public infrastructure investment?" Source: International Monetary Fund, "World Economic Outlook: Legacies, Clouds, Uncertainties", October 2014, pp. 75-76. The reference to "low government borrowing costs" means that
low interest rates make borrowing less expensive.
The Federal Reserve sells Treasury securities. This is an example of
not a fiscal policy
The federal government changes the required gasoline mileage for new cars. This is an example of
not a fiscal policy
The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of
not a fiscal policy
If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price level, then the U.S. economy must have been
on the very flat part of the short-run aggregate supply curve.
Economists use the term fiscal policy to refer to changes in taxing and spending policies
only by the federal government.
Consumption is
positively related to household income and wealth and households' expectations about the future, but negatively related to interest rates.
Longminusrun aggregate supply is equal to
potential output
Crowding out refers to a decline in ________ as a result of an increase in ________.
private expenditures; government purchases
These carmakers are likely to react to the increase in inventories by
producing fewer cars in the future.
The objective of a contractionary fiscal policy is to
reduce inflation.
The objective of an expansionary fiscal policy is to
reduce unemployment.
If investment spending increases by $1 million, then the aggregate demand curve shifts
rightward by more than $1 million.
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in government purchases will cause a ____________ the aggregate demand curve
rightward shift of
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. A faster income growth in other countries will cause a ____________ of the U.S. aggregate demand curve
righward shift of
Usually at the beginning of a recession, inventories
rise
The aggregate demand curve illustrates the relationship between
the price level and the quantity of goods demanded by households, firms, government, and foreigners.
Explain how each of the following events would affect the long-run aggregate supply curve The price level increases. This is a change in the ___________, the LRAS curve will ______________
the price level, not change
Explain how each of the following events would affect the long-run aggregate supply curve The labor force increases. Because this is a change in ______________________, the LRAS will ________________
the productive capacity of the economy, shift to the right
Explain how each of the following events would affect the long-run aggregate supply curve There is an increase in the quantity of capital goods. Because this is a change in _________, the LRAS will _____________
the productive capacity of the economy, shift to the right
Explain how each of the following events would affect the long-run aggregate supply curve Technological changes occurs. Because this is a change in _____________, the LRAS will ______________
the productivity capacity of the economy, shift to the right
Fiscal policy refers to
the spending and taxing policies used by the government to influence the economy
An article in the Wall Street Journal stated that in China, "carmakers continue to grapple with ... rising inventories." Source: Colum Murphy, "China's Automobile Sales to Slow Further in 2015," Wall Street Journal, January 12, 2015. Carmakers in China might find that their inventories are rising unexpectedly because
their sales are lower than expected.
In an opinion column in the Wall Street Journal, Purdue University President Mitchell Daniels wrote that "today's 20- and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint." Source: Mitchell E, Daniels, "How Student Debt Harms the Economy," Wall Street Journal, January 27, 2015. From an economic point of view, young people might be delaying marriage and childbearing because
their student debt levels are so high they cannot afford to marry and have children.
If planned investment exceeds actual investment,
there will be a decline in inventories.
Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result,
the short-run aggregate supply curve will shift to the left as wages increase.
Increases in the growth rate of domestic GDP compared to the growth rate of foreign GDP will make the aggregate demand curve shift
to the left
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP.
When the economy is experiencing an expansion automatic stabilizers will cause:
transfer payments to decrease and tax revenues to increase.
Two examples of automatic stabilizers in the U.S. are
unemployment insurance payments and the progressive income tax system.
Automatic stabilizers can reduce the severity of a recession because, during a recession,
unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment.
Which of the following is a correct sequence of events during an expansion?
unemployment falls, income rises, tax revenue rises, unemployment benefits fall, and the budget deficit falls
Which of the following is a correct sequence of events during a recession?
unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises
All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except
unions are successful in pushing up wages.
The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle. The primary explanation for this is because:
with unemployment insurance, current disposable income fluctuates less over the business cycle.
Which of the following best explains how the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.
In 2009, Congress and the president enacted "cash for clunkers" legislation that paid people buying new cars up to $4,500 if they traded in an older, low gas-mileage car. Source: Justin Lahart, Trade-In Program Tunes Up Economic Engine," Wall Street Journal, August 4, 2009. Was this piece of legislation an example of fiscal policy?
Yes, because the primary goal of the spending program was to stimulate the national economy.
An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.
contractionary; fall; fall
Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will _____________ exports from the U.S. to Sweden and __________ U.S. aggregate demand.
decrease; decrease
An increase in aggregate demand results in a(n) ________ in the ________.
expansion; short run
Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
higher; higher
In its macroeconomic equilibrium, the economy can be producing at i. below full employment. ii. full employment. iii. above full employment.
i, ii, or iii
If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports.
increase; decrease; increases
