Econ chapter 30

Which of the following shows the correct effect on the IS curve of a decrease in personal income tax rates?

a movement from point C to point D

The IS curve is constructed by:

adding up the level of aggregate expenditure at each real interest rate.

If government expenditure rises by $27.5 billion and the multiplier in the economy is 2.5, then:

real GDP rises by $68.75 billion, and the IS curve shifts to the right.

If actual GDP is greater than potential GDP:

the economy can experience inflation.

You are driving to see your grandparents when you get caught in traffic caused by construction on the interstate. The construction is an example of:

government expenditure

Which of the following causes shifts in the IS curve?

Spending shocks occur.

Which of these would NOT cause the MP curve to shift upward?

The Federal Reserve lowering the federal funds rate

The intersection of the IS curve and the MP curve determine:

macroeconomic equilibrium.

Which of these would increase investment?

A rise in business confidence due to what managers are seeing in the market

How do interest rates affect investment in the economy?

Lower interest rates lower the cost of borrowing for firms, and so investment rises.

If the U.S. government lowers personal income tax rates:

disposable income increases, and this leads to an increase in consumption and a right shift of the IS curve.

Planned investment is the:

expenditure on capital goods by businesses.

The risk premium is the:

extra interest charged by lenders to account for risk.

An increase in aggregate expenditure will shift the economy to a new equilibrium with a _____ level of GDP and a more _____ output gap. Please choose the correct answer from the following choices, and then select the submit answer button.

higher; positive

Aggregate expenditure:

is the total amount of goods and services that people want to buy across the whole economy.

When the real interest rate falls, borrowers need to repay their bank _____ money for new borrowing. This is one of the reasons that low interest rates cause people to _____ their spending on high-cost products

less; increase

Any change in aggregate expenditure at a given real interest rate and level of income is a:

spending shock.

Which of the following cause shifts in the MP curve?

financial shocks

If the potential GDP of the United States is $12 trillion and the actual GDP is $11 trillion, what is the output gap?

-8.33%

Which of these would increase consumption?

A lower real interest rate

Which of the following cause(s) shifts in the MP curve?

changes in monetary policy

If the U.S. GDP is $13 trillion, the government will spend an extra $250 billion, and the multiplier is 2, what will the new GDP be?

$13.5 trillion

Which of the following changes could create a more positive output gap?(i) The U.S. dollar appreciates. (ii) The U.S. dollar depreciates. (iii) Trading partners reduce tariffs on U.S. exports. (iv) Monetary policy actions boost the economy.

(ii), (iii), and (iv)

If government spending rises by $62 billion and GDP rises by $110 billion, then the multiplier in the economy is approximately:

1.77

If the MP curve is a horizontal line at 5.3% and the risk-free interest rate is 3.4%, what is the interest rate spread?

1.9%

If the risk-free rate is 1.5% and the risk premium is 2%, the MP curve is at:

3.5%.

If the potential GDP of the United States is $12 trillion and the actual GDP is $13 trillion, what is the output gap?

8.33% _content_hint: The output gap is equal to (actual output − potential output) ÷ (potential output) × 100.

Which of these would increase net exports for the United States?

A decrease in the exchange rate for U.S. dollars

If the Fed becomes less open about its fiscal policy, leading lenders to wonder about the future of interest rates, what will happen to the economy?

Risk premiums will increase.

If the U.S. dollar depreciated against the Mexican peso (Mexico is one of America's major trading partners), what would happen to the U.S. economy?

The IS curve would shift to the right.

Suppose that over the course of a year, the inflation rate increases from 1% to 2%. Over the same year, the government reduces the nominal interest rate from 4% to 3%. How will the economy change because of this?

The MP curve will shift downward.

A good proxy for the risk-free interest rate is the interest rate on a:

loan to the U.S. government.

The higher the opportunity cost of consumption, the:

lower the aggregate expenditures.