Econ Exam 3 - Chapters 8-10

Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is

$0.1 trillion

If $1,000 of additional spending occurs and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.

$5,000

The slope of the saving schedule is

1 minus the marginal propensity to consume.

If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume?

0.6

If the marginal propensity to consume is 0.9, then the spending multiplier is

10

The 45-degree line in the Keynesian model represents

AE = Y.

(Figure: Determining SRAS Shifts) Which statement is NOT correct?

An increase in aggregate demand would lead to deflation.

Which of these illustrates the paradox of thrift?

Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decrease because income is lower.

_____ government spending, _____ transfer payments, and _____ taxes are all examples of expansionary fiscal policy.

Increasing; increasing; lowering

The largest category of federal government spending in 2018 was

Social Security.

Which of these did classical economists believe would happen if the economy experienced a downturn?

The economy would self-correct.

According to the crowding-out effect, if the government sells bonds to finance spending, _____ can eventually fall.

consumption and investment

A(n) _____ in government spending, a _____ domestic currency, and _____ interest rates will shift the aggregate demand curve to the left.

decrease; stronger; higher

If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income

decreases by $10 billion

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

disposable income; consumption

In the Keynesian model, the principal determinant of saving is

income.

An expansionary fiscal policy can result in

inflation and higher GDP.

Firms decide how much to invest by comparing the rate of return on their projects with the

interest rate.

The _____ is the sum of past _____ less surpluses.

national debt; budget deficits

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is _____ policy.

supply-side fiscal

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

$900

_____ inflation occurs when a supply shock reduces aggregate supply.

Cost-push

Suppose policymakers wish to use fiscal policy to fight inflation. Which statement is MOST accurate?

The way to lower the inflation rate is to decrease aggregate demand, which causes a rise in unemployment.

What would cause inflation and employment to increase?

a rightward shift of the aggregate demand curve

Which of these will shift the aggregate supply curve to the right?

an increase in the investment of human capital

If aggregate expenditures equal $7,600 and aggregate income equals $8,000, businesses will produce

less, lowering both employment and income.

The focus of supply-side fiscal policies is on

long-run economic growth.

The _____ is the change in consumption associated with a change in income.

marginal propensity to consume

If the marginal propensity to consume is 0.85, the value of the spending multiplier will be

6.67.

The long-run aggregate supply curve is vertical because

the economy will gravitate to the position of full employment when all variables are flexible.

If the government always balances its budget

the effect of an increase in government spending on aggregate expenditures is weakened.

After the acceptance of Keynesian analysis, the government

took actions toward macroeconomic policy that grew significantly.

The largest source of federal government revenues is _____ taxes.

individual income

During cost-push inflation, aggregate output _____ and the aggregate price level _____.

falls; rises

Which policy do supply-side economists believe is the best for increasing the standard of living?

increasing investment in capital that boosts worker productivity

(Figure: Consumption Spending) At point A in the graph provided (Consumption/Income graph, point A is at the intersection of both lines)

saving is zero.

The aggregate demand curve

shows the amount of real GDP that will be demanded at each possible price level.