econ quiz 4

A Treasury note was purchased for $500. If the holder is paid interest of $20 every 6 months, what is the annual rate of return in percentage terms?

40/$500 = 0.08, or 8%.

Which of the following would likely cause the aggregate demand curve to shift to the left?

Decreased consumer confidence

If unemployment is high and spending is sluggish, what type of fiscal policy should be enacted?

Expansionary fiscal policy, which includes increases in government spending or decreases in taxes, which will shift AD to the right

Which of the following is a decision a firm would make in the short run?

How much to produce

The theory of Ricardian equivalence predicts that:

Reductions in income taxes will not increase aggregate demand because people will save the majority of the extra income.

Suppose that a statement by the chair of Federal Reserve Board about the state of the economy causes a loss in consumer confidence. What will be the long-run impact on the economy if the government allows the economy to adjust without a policy response?

Output will return to its initial level in the long run, but the price level will be lower.

Why is the short-run aggregate supply curve shaped the way it is?

Prices of final goods and services change more quickly than input prices.

Discretionary fiscal policy:

can magnify the automatic stabilization effects of existing policies.

Aggregate demand consists of:

consumption, investment, government spending, and net exports.

If the government wished to shift aggregate demand to the left, it might:

decrease military spending.

In the macroeconomic model of aggregate supply and aggregate demand, quantity is:

a measure of total output.

After the housing bubble popped in 2007, the National Bureau of Economic Research did not officially declare a recession until a year later. This announcement is an example of:

an information lag.

The slope of the short-run aggregate supply curve indicates that:

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

All else equal, a shift in the aggregate supply curve _______ price and _______ output.

decreases; increases

If the government were to increase spending, aggregate _______ would shift to the _______.

demand; right

In macroeconomics, the long run refers to:

how long it takes for the prices of inputs to fully adjust to changes in economic conditions.

Deficits count government spending shortfalls _______, while public debt counts _______.

in a year; the total amount owed from all years

When are firms willing to change the aggregate quantity of output supplied based on price?

in the short run only

In the late 1990s, the United States experienced a technology boom. In part, the boom was due to a revolution in communication technology that resulted in a massive expansion of the internet; in part, the boom was due to households and firms purchasing new computer equipment in anticipation of Y2K (Y2K stands for year 2000. As that year approached, many people feared that computer programs storing year values as two-digit figures (such as 99) would cause problems.). The economy would be affected because these events would:

increase aggregate demand increase aggregate supply ultimately this will: increase GDP, but the effect on the price is not certain.

After a devastating hurricane hits the Gulf Coast of Florida, Congress authorizes $50 billion in emergency spending to help families rebuild. Assuming the government already spends more than it makes in revenue, this plan will:

increase the debt and deficit by $50 billion each.

A sudden increase in immigration would be considered a(n):

long-run supply shock.

The introduction of the power loom during the Industrial Revolution caused the _______ aggregate supply curve to shift to the _______.

long-run; right

Widespread adoption of mobile phones over the last 20 years has caused the _______ aggregate supply curve to _______.

long-run; shift to the right

People, banks, and governments invest in U.S. securities mainly because of the:

low risk of owning them.

Stagflation refers to a situation in which an economy is experiencing _______ economic growth and _______ inflation.

low; high

Higher interest rates:

make it more expensive to borrow

Higher interest rates occur at higher price levels, which explains the _______ relationship between the price level and investment spending.

negative

Consumption spending is _______ the overall price level.

negatively related to

Ricardian equivalence predicts that:

people will not change their behavior if the government cuts taxes but does not change its spending.

In the macroeconomic model of aggregate supply and aggregate demand:

quantity represents GDP.

Increases in the overall price level:

reduce consumption.

In 2009, the U.S. government passed a bill that increased government spending. In response, the aggregate demand curve most likely:

shifted to the right.

"Sticky prices" refer to the fact that:

some inputs take longer to adjust to the price level than the output created.

Contractionary fiscal policy could involve a combination of government:

spending cuts and income tax increases.

Expenditures by _______ will remain unaffected as the U.S. price level increases.

the government

People buy Treasury bills because:

they provide a known rate of return.

Disposable income is:

total income minus taxes.

Payments from government accounts to individuals for programs that do not involve a purchase of goods or services are called:

transfer payments.

During a recession, analysts at the CBO project that the economy is operating $750 billion below potential output. Assuming the MPC is 0.6, by how much would the government have to cut taxes to restore potential output?

$500 billion

Suppose the country of Piedmont borrows money to start a brand-new infrastructure program. GDP is currently $400 billion. The plan will take the public debt from $250 billion to $350 billion in ten years, when GDP is projected to be $425 billion. What is the projected debt in ten years as a percentage of GDP?

82.4 percent

A government official observes that there has been a long-run increase in the price level but no change in the level of potential output. This could have been caused by:

A positive demand shock that increased production in the short run.

Use the initial settings (or any other non-zero value) for the Change in Autonomous Spending and MPC. Click the "Spending Rounds" button at the top of the Settings window. Which of the following describes how the Change in Spending value in each row is related to the Disposable Income value in the same row?

Change in Spending in each row is MPC x Disposable Income for that row.

What is the relationship between the deficit and public debt?

Debt is the sum of all deficits and surpluses.

Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.84 and there are no taxes. Step 0. The government spends $9000 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. How much does the baker earn for selling the cake? How much does the baker spend on candlesticks?

How much does the baker earn for selling the cake? $ 7560.00 How much does the baker spend on candlesticks? $ 6350.40

Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.8 and the tax rate is 18%. Step 0. The government spends $6000 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house.

How much does the candlestick maker earn for selling the candlesticks? $ 2582.02 How much does the candlestick maker spend on building materials? $ 1693.80

Which of the following events would cause a long-run supply shock?

Refinery capacity in the United States drops permanently.

Consider three countries. The first country runs small budget surpluses each year. The other two countries run large budget deficits each year. In one of the deficit countries, the national debt-to-GDP ratio has been steady, whereas in the other deficit country, the national debt-to-GDP ratio has been rising. Suppose each of these countries decides to reduce income taxes. Is Ricardian equivalence likely to hold in all of these countries? Ricardian equivalence is most likely to hold in:

The country with the rising debt-to-GDP ratio—people in this country are most likely to fear the tax cut will be unsustainable and therefore temporary.

Suppose OPEC announces it will be expanding the production of oil, decreasing its cost in the world market. How would this be represented in the AD/AS model?

The short-run aggregate supply curve would shift to the right.

In 1974, GDP fell by 0.6 percent and inflation increased from 6.2 percent to 11.0 percent. Was this recession likely caused by a shift in aggregate demand or aggregate supply?

This recession was likely caused by a decrease in aggregate supply

All else equal, Ricardian equivalence predicts:

a low multiplier for tax cuts.

Suppose the change in autonomous spending is due to a city government hiring a landscaping company to plant trees, bushes, and flowers in the middle of a traffic circle at a popular intersection. a) Find the number "$12,600" in the Change in Spending column. Which of the following might describe this $12,600 of new spending? Employees of the landscaping company spend 70% of their disposable income on clothing and groceries. b) Find the number "$5,000.94" in the Change in Spending column. Which of the following might describe this new spending? This represents new spending by the people who just earned $7,938.

a) This number is found in the row for Round A. The $20,000 paid to workers who contributed to the landscaping project (everyone who grew the plants, transported them, planted them, etc.). The government collected $2,000 in taxes, and the workers spent 70%, or $12,600 of the remaining $18,000 of disposable income on items like clothing or groceries. b) If the new spending in Round A represents purchases of groceries or other products, Round B might represent purchases of hotels stays by grocery store employees. The $5000.94 in Round C, then, would represent purchases by people who were paid $7,938 to produce those hotel stays. These employees paid 10% ($793.80) of their income in taxes, and then spent 70% of the remaining $7,144.20.

Saabira earns $52,000 a year and pays an average annual tax rate of 15%. a. Saabira's disposable income is $ 44,200 and the amount of tax she pays to the government is $ 7,800 b. Suppose a recession hits the economy and Saabira's income falls to $44,000 per year due to the fact that she is earning a smaller annual bonus. If she now pays an average annual tax rate of 12%, her disposable income is $ 38,720 and the amount of tax she pays to the government is $5280 c. Saabira's annual salary fell by $ 8,000 and her disposable income fell by $ 5,480 d. In this example, income taxes are an automatic stabilizer.

a. If Saabira pays an average tax rate of 15%, then she takes home 85% of her salary. Her disposable income is 0.85 × $52,000, or $44,200. She pays 0.15 × $52,000, or $7,800, to the government in taxes. b. If Saabira pays an average tax rate of 12%, then she takes home 88% of her salary. Her disposable income is 0.88 × $44,000, or $38,720. She pays 0.12 × $44,000, or $5,280, to the government in taxes. c. Saabira's annual salary fell by $52,000 − $44,000, or $8,000, and her disposable income fell by $44,200 − $38,720, or $5,480. d. Income taxes are an automatic stabilizer because when Saabira's annual salary fell, her tax rate also fell. This caused her disposable income to fall by a smaller amount than her annual salary.

Saabira earns $68,000 a year and pays an average annual tax rate of 15%. a. Saabira's disposable income is $ 57,800 and the amount of tax she pays to the government is $ 10,200 b. Suppose a recession hits the economy and Saabira's income falls to $60,000 per year due to the fact that she is earning a smaller annual bonus. If she now pays an average annual tax rate of 12%, her disposable income is $ 52,800 and the amount of tax she pays to the government is $ 7,200 c. Saabira's annual salary fell by $8,000 and her disposable income fell by $ 5,000 d. In this example, income taxes are an automatic stabilizer.

a. If Saabira pays an average tax rate of 15%, then she takes home 85% of her salary. Her disposable income is 0.85 × $68,000, or $57,800. She pays 0.15 × $68,000, or $10,200, to the government in taxes. b. If Saabira pays an average tax rate of 12%, then she takes home 88% of her salary. Her disposable income is 0.88 × $60,000, or $52,800. She pays 0.12 × $60,000, or $7,200, to the government in taxes. c. Saabira's annual salary fell by $68,000 − $60,000, or $8,000, and her disposable income fell by $57,800 − $52,800, or $5,000.

In the macroeconomic model of aggregate supply and aggregate demand, price is:

calculated as a weighted average of the prices of all goods and services.

The largest component of aggregate demand in the U.S. economy is:

consumption

Which component of GDP will be affected if the government decreases the income tax rate?

consumption

If the government introduces a new bill increasing education spending, it is enacting:

expansionary fiscal policy.

When the U.S. price level decreases relative to the rest of the world:

exports and net exports will increase.

If the government wished to shift aggregate demand to the right, it might:

fund more "shovel-ready" infrastructure projects around the country.

The government borrows money by:

issuing new Treasury securites.

When the economy is producing at a quantity greater than its long-run aggregate supply:

it is pushing some of its resources to operate beyond capacity.

President Obama said the following in November 2010 when announcing a two-year pay freeze for civilian federal employees: "After all, small businesses and families are tightening their belts. Their government should too." This response would:

lower government spending and the deficit but would also reduce economic activity, which is already too low due to the recession.

Suppose the BLS announces that price levels throughout the economy have increased. What response would we expect to see in the AD/AS model?

none of these

If the prices of goods and services increase, long-run aggregate _______ will _______.

supply; stay the same

Discretionary fiscal policy is:

that which the government chooses to adopt.

Fiscal policy is subject to a time lag when:

the current state of the economy is unclear.

When an initial spending change causes a larger change in overall output, this exemplifies:

the multiplier effect.

When the U.S. price level increases, we would expect a(n) _______ the aggregate demand curve.

upward movement along

Sam earns $45,000 per year working at the IRS. Between state and federal taxes, his income is taxed at 35 percent. What is his disposable income?

$29,250

You buy a Treasury note for $950. a. If you receive a payment of $40 every six months, then the annual rate of return is: 8.4 b. If you receive a payment of $30 every six months, then the annual rate of return is: 6.3 c. If you receive a payment of $45 every six months, then the annual rate of return is: 9.5

$80/$950 = 0.084

Consumption:

All of these are true.

Which component of GDP is not correlated with the price level?

Government spending

What is a benefit of giving the government freedom to run a deficit?

It allows the government to be flexible if something unexpected happens.

Why is it helpful to consider public debt as a percentage of GDP rather than as a simple numeric amount?

It allows us to compare the amount to our ability to pay it back.

If in some year a nation's budget deficit is $9.53 trillion and government spending is $12.22 trillion, how much must it have earned in tax revenue this year?

It must have earned $ 2.69 trillion in tax revenue this year. -$9.53 trillion = Tax revenue - $12.22 trillion.

The wealth effect partially explains why the aggregate _______ curve is _______.

demand; downward-sloping

If a negative demand-side shock and a temporary negative supply-side shock occur simultaneously, what will be the short-run effects on price level and output?

The new level of output will be lower. The new price level cannot be determined

a) If MPC = 0.8 and Autonomous Expenditures rise by $10,000, the total change in aggregate income and planned spending is 50000 b) If the MPC is cut in half to MPC = 0.4 and the change in autonomous expenditures remains $10,000, the total change in aggregate income and planned spending is 16666.67 c) If the MPC is cut in half (falls by 50%), the multiplier and the total change in aggregate income and planned spending: decreases by more than 50%

a) The tool indicates that total income (and total planned spending) increase by $50,000. b) If MPC falls to 0.4, 40% of each amount of disposable income is spent. The tool indicates that the $10,000 of new autonomous expenditures results in $16,666.67 of total new income (and total new planned spending). c) When MPC was cut in half from 0.8 to 0.4, the change in total income resulting from $10,000 of autonomous spending fell from $50,000 to $16,666.67. The multiplier fell from 5.00 to 1.67. Both fell by more than 50%.

Income taxes are an example of:

an automatic stabilizer.

Increased government spending on unemployment insurance during a recession is an example of:

an automatic stabilizer.

When a supply-side shock is assumed to be permanent:

both the LRAS curve and the SRAS curve shift.

Since 1940, the U.S. government has generally had a:

budget deficit.

The government can enact expansionary fiscal policy by:

decreasing income taxes.

After running the numbers on a new Green Job plan, the CBO projects that the government _______ will increase by $40 billion each year, and _______ will increase $400 billion over the project's lifespan.

deficit; debt

With the economy booming, the government starts to worry about the increasing rate of inflation, and decides to cut its spending on highway maintenance and defer it to the future. This is an example of:

discretionary fiscal policy.

If the government increases the income tax rate:

disposable income will decrease.

If an economy is in a recession, the government might _______ spending to _______ aggregate demand.

increase; increase

Treasury bills:

promise a set amount of money to be paid on a fixed date.

The total amount of money that a government owes at any one point in time is called:

public debt.

Suppose a country is in the midst of a serious recession with high unemployment and large government deficits. The president suggests that in times like this the government has the obligation to "tighten its belt" and cut spending since so many families around the country have to do the same thing. In this case, a decrease in government spending will:

push AD to the left and decrease output decrease the price level and costs eventually cause a rightward shift of SRAS

Temporary supply shocks:

shift the short-run aggregate supply curve.

A "supply-side recession (i.e a recession caused by a fall in aggregate supply) could by caused by:

significant increases in corporate taxes famine large increases in oil or food prices migration war

Sticky wages cause the short-run aggregate supply curve to:

slope upward

Stagflation is difficult to recover from because:

wages are sticky downward.

Indicate the four components of GDP:

Consumption, net exports, investment, government spending

Which of the following events would cause the short-run aggregate supply curve to shift?

During an economic boom, congress passes a guest worker law that enables up to 5 million foreign workers to get work permits in the United States. Manufacturing firms expect steel prices to decrease significantly. The Affordable Care Act is amended to require employers to provide health insurance to the part time as well as full time employees.

In the presence of reduced consumer confidence, the government can:

Increase government spending

Suppose the marginal propensity to consume (MPC) is either 0.75, 0.80, or 0.90. a. For each value of the MPC, calculate the impact of a one-dollar decrease in taxes on GDP. MPC: .75, .8. .9 Impact of a one-dollar decrease in taxes: 3, 4, 9 b. For each value of the MPC, calculate the impact on GDP of a $250 million decrease in taxes. MPC: .75, .8, .9 Impact on GDP: 750, 1000, 2250 c. Which of the following best describes the relationship between the MPC and the impact of a change in taxes on GDP. the larger the MPC, the larger the impact on GDP of a given change in taxes.

MPC Impact of a one-dollar decrease in taxes 0.75/(1 - 0.75) = 3 0.8/(1 - 0.8) = 40 0.9/(1 - 0.9) = 9 3 × $250 = $750 4 × $250 = $1,000 9 × $250 = $2,250

If the government could borrow as much as it liked with a 0 percent interest rate, would the government debt be cost-free?

No, because more borrowing by the government means there is less available for the private sector.

The government decides to reduce income taxes due to a recession in the economy over the past nine months. The reduction in income taxes will effectively boost spending in the economy if:

Ricardian equivalence does not hold—people choose to spend the majority of the extra income they now take home.

Throughout the 19th and 20th centuries, the U.S. economy experienced frequent ups and downs, but over the past 200 years, the real GDP in the United States rose from roughly $8.2 billion to over $16.1 trillion, an increase by a factor of nearly 2,000 times

This growth represents a change in long-run aggregate supply.

Your friend believes buying Treasury bills or Treasury notes will offer protection against rising inflation, in comparison to buying stocks or mutual funds, because the rate of return on the Treasury bills and notes is known at the time of purchase. Do you agree?

This is false because the rate of inflation may exceed the rate of return on the Treasury bill or note, but is less likely to for the stock market.

In 2009, during the height of the U.S. financial crisis, real GDP fell 3.5 percent and the Consumer Price Index fell from 215.3 to 214.9. Was this recession likely caused by a shift in aggregate demand or aggregate supply?

This recession was likely caused by a decrease in aggregate demand.

When the government is considering whether it should change its spending in response to a recession, it must weigh the trade-off between _______ and _______.

a faster recovery time; inflation

A rise in the overall price level means that:

a given number of dollars will buy fewer real goods and services.

Look at the following list of observed phenomena and select the probable cause of each phenomenon.

a. Decrease in the price level and output in the short run-negative demand side shock b. increase in the price level in the long run with no change in output-positive demand side shock c. Increase in output in the short run with a lower price level-Positive temporary supply side shock d. No change in the price level or output in the long run- either positive or negative temporary supply side shock e. Increase in the price level in the long run with a reduction in output-negative permanent supply side shock.

The chapter discusses three types of Treasury securities issued by the government to borrow money. Classify each of the following by the type of security it best represents.

a. These represent loans to the government that mature in less than a year. Treasury bills b. These represent loans to the government that mature in 30 years. Treasury bonds c. These are three-year loans that pay interest every 6 months. Treasury notes d. These can be sold back to the government for a set amount of money on a fixed date. All of the above e. These are less risky than buying stocks and mutual funds. All of the above f. These guarantee a rate of return that exceeds the rate of inflation. None of the above

A supply curve that slopes upward reflects:

aggregate supply in the short run.

Suppose prices in the United States increase relative to other countries. What type of shock is the U.S. economy experiencing?

demand shock

The long-run aggregate supply curve would shift to the right if:

faster 5G mobile technology was widely implemented.

When the price level increases, people:

feel less wealthy.

When the economy experiences a permanent supply side shock that shifts the long-run aggregate supply curve to the right, the short-run aggregate supply curve will:

gradually shift to the right until it reaches long-run aggregate supply and the new long-run equilibrium.

An increase in consumer confidence will:

increase both prices and output in the short run.

In the late 1990s, the United States experienced very high GDP growth, record low unemployment rates, and virtually nonexistent inflation. Based on the conclusions of the AD/AS model, this combination of good economic results can be explained by a:

rightward shift of the short- or long run aggregate supply

The long-run aggregate supply curve:

shifts to the right when the economy experiences economic growth.

A decrease in the price of oil will shift the:

short-run aggregate supply curve to the right.

It is possible for a nation's government to run a budget deficit in some years but not have national debt if the economy initially had a(an):

surplus at least as large as the deficit.

When a supply-side shock is assumed to be temporary:

the SRAS curve shifts

If the government were to increase income taxes, we would predict:

the aggregate demand curve to shift to the left.

If the government does not react to a recession

the economy will recover, but much more slowly.

The aggregate supply curve shows:

the relationship between the overall price level and firms' total production.