Econ 202 Exam 2 Ch12

Assume that the MPC is 0.75, actual GDP is $14 trillion and potential GDP is $17 trillion. Policymakers want to use tax cuts to stimulate the economy and get GDP back to its potential level. How big should the tax cut be?

$1 trillion

If the MPC = 0.75, then the government expenditure multiplier must be:

4

Refer to Figure 12-1 Which of the following movement results in stagflation?

A to B

What type of relationship exists between expected future income and consumption?

Positive

Consider the mythical economy of "Nelsonville". Suppose that, in 2009, real GDP was $14 trillion and the price level was 150. In 2010, real GDP $13 trillion and the price level was 160. What must have happened in Nelsonville?

SRAS must have decreased

Sticky wages occur because:

all of these are true

Which of the following would cause aggregate to shift to the right?

decreased corporate income taxes

Lower interest rates motivate:

firms to invest more in new factories and working capital

U.S. net exports rise when

foreign incomes rise

How would we need the value of the dollar (relative to other currencies) to change to get US aggregate demand to increase?

the dollar weakens relative to foreign currencies

If you were told the MPC was =0.75 and the government engaged in a tax decrease of $400B, then the overall change in GDP would be

$1200B

If the MPC is 0.8, and the government spends an additional $100b, the overall effect on GDP will be:

$500b

Refer to Figure 12-1 Suppose the economy is at point C. If consumption spending decreases in the economy, where will the eventual long run equilibrium be?

A

The downward sloping aggregate demand curve can be explained in part through the:

All of these are true

When the economy produces less than its potential output, it is:

All of these are true -producing a quantity less than the long-run aggregate supply quantity -not in long-run equilibrium -called a recession

Something that would cause the long-run aggregate supply curve to shift to the right would be:

All of these would shift the long-run aggregate supply curve to the right

Which of the following best describes the "interest rate effect" concerning the AD curve?

An increase in the price level raises the interest rate and reduces investment spending

Refer to Figure 12-1 Suppose the economy is at point A. If there is an unexpected increase in oil prices, then the economy will move to point _____ in the short run, and point ____ in the long run.

B; A

Refer to Figure 12-1 Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long run equilibrium be?

C

Refer to Figure 12-1 Suppose the economy is at point A. If taxes are cut in the economy, where will the eventual long run equilibrium be?

C

Refer to Figure 12-1 At which of the labeled points (A, B, C, and D) is unemployment the lowest?

D

Refer to Figure 12-1 Suppose the economy is at point A. If there is an increase in consumer confidence, then the economy will move to point ____ in the short run, and point _____ in the long run.

D; C

Suppose the economy is at a short run equilibrium GDP that lies beyond potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

More than one of the above is correct

Consumption spending is:

Negatively related to the overall price level

When wages increase the _____ curve shifts to the _____.

SRAS; left

Refer to Figure 12-1 Suppose the economy is at point B. Which of the following statement is FALSE?

The automatic mechanism will cause the AD curve to shift to the right

Which of the following best describes "potential GDP"?

The level of output produced by an economy when business are operating at normal capacity

The impact of Hurricane Katrina on consumers in the economy was to make them very 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

Which of the following best describes the "wealth effect"?

When the price level falls, the real value of household wealth rises

If aggregate demand just increased (shifted to the right), which of the following may have caused the increase?

a decrease in interest rates

If the MPC is 0.9, and the government cuts spending by $200b, the overall effect on GDP will be:

a decrease of $2,000b

Which of the following would lead to an increase in Investment spending?

a reduction in business taxes

The effect of a shift in the aggregate demand curve due to an increase in consumer confidence will be:

an increase in both prices and output in the short run

Which of the following will shift aggregate demand to the left, ceteris paribus?

an increase in interest rates

On the long run aggregate supply curve,

an increase in the price level has no effect on the aggregate quantity of GDP supplied

If aggregate demand just increased (shifted to the right), which of the following may have caused the increase?

an increase in wealth in the economy

Th slope of the short-run aggregate supply curve shows that:

as overall price levels increase, firms are willing to produce more

If the marginal propensity to consume was 0.9, it would mean that

consumers spend $9 out of every $10 of additional disposable income

Which of the following is a component of aggregate demand?

consumption

If the government wishes to decrease GDP by $2,000b, and the MPC is 0.6, it should:

decrease its spending by $800b

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish Kronor to purchase on 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; increase

When the government considers whether it should change its spending in response to a recession it must weigh the tradeoff between _____ and _____.

faster recovery time; inflation

the "sticky wage theory" help us understand why

firms produce more in the short run when the price level increases

The component of aggregate expenditure that is not like other components because, in general, it does not directly change with macroeconomic changes is

government spending

In general we can note that households with lower wealth tend to have a(n) _______ NPC relative to wealthier households.

higher

If a natural disaster were to cause a negative long-run supply shock to the economy, once the economy adjusts, the new equilibrium will be at a:

higher price level and lower level of output

When foreign incomes decrease then in the domestic economy, ____ will rise, _____ will fall, and _____ will fall.

imports; exports; net exports

Which of the following would cause an increase in investment spending?

increase in the expected profitability of businesses

If the government wishes to increase GDP by $200 billion, and the MPC is 0.9, it should:

increase its spending by $20 billion

Assume that the economy is initially in a long run equilibrium. There is then can increase in investment. As a result, real GDP will _____ in the short run, and ______ in the long run.

increase; decrease to its initial value

As the price level increases, interest rates will _____, which causes a _______ in investment spending, and thus a ______ in the quantity demanded of AD.

increase; decrease; decrease

Last week, six Swedish kronor could purchase one U.S. dollar. This week, four Swedish kronor can purchase one U.S. dollar. This change in value of the dollar will _____ exports from the U.S. to Sweden and _____ U.S. aggregate demand.

increase; increase

Stagflation occurs when

inflation rises and GDP falls

Which component of consumption has a negative or indirect relationship with consumption?

interest rates

Which of the following is not a direct determinant of net export spending?

interest rates

The long-run aggregate supply curve represents the level of output possible if the economy:

is operating at full capacity

When the economy fluctuates around its long-run aggregate supply:

it is called the business cycle

Which of the following is true of the LRAS curve?

it shows the level of potential GDP

Other things equal, if the exchange rate between the United States' dollar and Great Britain's pound goes for 1 dollar for 0.67 pounds to 1 dollar for 0.75 pounds, there is a

leftward shift of the U.S. aggregate demand curve

An increase in the level of immigration into a nation would cause the:

long-run aggregate supply curve to shift to the right

If the aggregate demand curve shifts to the left in the short run then the long-run equilibrium will be at a:

lower price level and same level of output

Suppose the economy is in long-run equilibrium. If there is an increase in technology as well as a decrease in consumer confidence about future income,, then we would expect that in the short run, real GDP

may, rise, fall, or stay the same and the price level will fall

Suppose that the economy begins at a long-run equilibrium, but a shock pushes the economy in a recession. Likewise, we observe that the inflation rate is high during the recession. Which of the following is most likely the shock that caused the recession?

negative supply shock

An economy in which output as decreased and prices have increased would suggest that there has been a:

negative supply side shock

The aggregate supply and aggregate demand model describes the interaction of which macroeconomic variables?

output and the price level

The aggregate supply curve shows the relationship between the:

overall price level in the economy and total production by firms

The short run aggregate supply curve has a(n) ______ slope because as prices of ______ rise, prices of ______ rise more slowly.

positive; final goods and services; inputs

Suppose the economy is at a short run equilibrium GDP that lies beyond potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

prices will increase

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. (Assume that there is no government policy in place)

real GDP; the price level

Which of the following is not a determinant go investment spending?

real income

If government spending were to increase we expect that the aggregate demand curve will:

shift to the right

The long-run aggregate supply curve

shifts right when the economy experiences economic growth

A decrease in the price of oil will cause the:

short-run aggregate supply curve to shift to the right

Suppose the economy is at a short run equilibrium GDP that lies beyond potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

short-run aggregate supply will shift to the left

A year-long drought that destroys most of the summer's crops would be considered a

short-run supply shock

Which of the following is an example of the automatic mechanism through which the economy adjusts to long run equilibrium?

the rightward shift in short run aggregate supply that occurs in response to a recession

An increase in the expected future price of inputs will cause:

the short-run aggregate supply curve to shift to the left

If the aggregate demand curve shifts in the short run moving the economy out of long-run equilibrium

the short-run aggregate supply curve will shift to bring it back into long-run equilibrium

If U.S. prices increase relative to the rest of the world, we would expect imports:

ton increase and exports to fall

Refer to Figure 12-1 Which of the following is FALSE if the economy is at point D?

unemployment is above its natural rate

The long-run aggregate supply curve

vertical

Which of the following could be a cause of consumption increasing?

wealth increases

Suppose the economy is in long-run equilibrium. If there is an increase in the nation's capital stock as well as an increase in optimism about future business conditions, then we would expect that in the short run, real GDPw

will rise and the price level might rise, fall, or stay the same