econ test 2

Tax Multiplier

-MPC/MPS The ratio of change in the equilibrium level of output to a change in taxes.

Spending Multiplier

1/MPS

Assume an economy's MPC is 0.25 and there is a recessionary gap of 150 billion. By how much must a government cut taxes to eliminate this gap?

441 billion 1/MPS then 1- (answer) then you times this by the tax or spending multiplier

all else equal, a decrease in aggregate demand, assuming constant aggregate supply, will result in ______ in the price level

A decline

Assume real GDP falls short of employment output by 500 billion dollars, and MPS is .8 a) calculate minimum increase in gov spending to bring full employment b)now assume we reduce taxes, will reduction of taxes be larger or smaller than the government spending change you originally calculated

A) For part A we would take 1/MPS or in this case 1/ 1 - 0.8 = 1/0.2 this would equal 5. After this we now know the equation Gtriangle is equal to AG / Spending multiplier so therefore we would get 500 billion divided by 5. This meaning that an increase in government spending would be equal to 500 billion / 5 which equals 100 billion for part A. As for part B, we would use the tax multiplier equation being -MPC/MPS which in this case would equal -0.8/0.2 which would therefore equal -4. To find this we take triangleAD and make it equal to AD/ -T. For this equation this would be 500 billion / -4. This equals -125.

which of the following would shift aggregate demand to the right? a.the value of dollar increases b.stock market increases by 20% c.college graduates can't find jobs d.decline in consumer confidence

B

In a private open economy, the formula for aggregate expenditures is

C+Ig+Xn

Expansionary vs contractionary

Expansionary means gov spending increases while taxes decrease (used in times of recession) Contractionary means government spending goes down while taxes increase(used in inflationary period)

Marginal propensity to consume is the slope of the savings function. True or False

False

The manipulation of taxes and federal spending in order to stimulate the economy or reduce inflation is known as expansionary or contractionary _______________ policy.

Fiscal

In the immediate short run for aggregate supply, both input and output prices are

Fixed

In reaction to the recession of 2007 - 2009, the government issued $100 billion in tax rebate checks. How did the government expect that this policy would impact aggregate expenditures?

Increase consumption thereby increasing aggregate expenditures

The two components of aggregate expenditures in a private closed economy are consumption and gross private ___

Investment

Businesses became more pessimistic during the Great Recession of 2007-2009. As a result:

Investment demand fell

In economic terms "extra" or "change in" equals

Marginal

In economic terms, _____________ means "extra" or "a change in."

Marginal

Market versus Aggregate demand

Market: Physical units, one good Aggregate: Measures final goods services, and lots of goods

Marginal Prosperity to Consume (MPC) plus marginal prosperity to save (MPS) must always equal:

ONE

In a private closed economy, C + Ig+ GDP, but two other characteristics of GDP at equilibrium are that saving and ________ investment are equal and there are no _____ changes in inventories

Planned; unplanned

ON AD-AS graph, what variable is on the verticle axis?

Price Level

Input prices are _________ in the short run and _________ in the immediate run

Sticky;sticky

The equilibrium price level and equilibrium output is determined by the intersection of aggregate demand curve and aggregate " " curve

Supply

What causes the aggregate demand curve's shape?

The Aggregate Demand Curve has a downward slope which indicates an inverse (negative) relationship between the price level and the amount of real output purchased. It has the downward curve because of the real balances effect, interest rate effect, and foreign purchases effect.

recessionary expenditure gap

The amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, noninflationary level.

What is the difference between the national debt and the budget deficit? Define both terms in your explanation.

The budget deficit is when government spending exceeds the tax revenue in any given year. The national debt is the concept explaining the accumulation of the yearly budget outcomes. When we have a national debt, it means we have had an accumulation of budget deficits.

What causes the market demand curve's shape?

The market demand curve is downward sloping due to the Law of Demand (the inverse relationship between price and quantity demanded). It is downward sloping because of diminishing marginal utility, substitution effect, income effect, and common sense (we will buy more of something the cheaper it becomes).

An inflationary gap is the amount by which aggregate expenditures at the full-employment GDP exceed those required to achieve full-employment. True or False

True

Dissaving is consuming in excess of after-tax income. True or False

True

Marginal propensity to consume (MPC) plus marginal propensity to save (MPS) must always equal one. True or False

True

Tax reductions and increases in government spending are both tools of fiscal policy to positively stimulate the economy. True or False

True

In the long run for aggregate supply, both input and output prices are

Variable

All else equal, a decrease in aggregate demand, assuming constant aggregate supply, will result in _______ in the price level.

a decline

Economists use what term to mean "total" or "combined"?

aggregate

Define Inflationary expenditure gap

amount by which an economy's aggregate expenditures at the full employment GDP exceed those just necessary to achieve the full employment level of GDP.

Assume an economy's MPC is 0.25 and there is an inflationary gap of $200 billion. Which of the following will close the gap? (Round your final answer to the nearest whole number)

decrease government spending by $150 billion

When the level of GDP is above the equilibrium level, businesses will respond to the unintended accumulation of unsold goods by:

decreasing the rate of production

When the level of GDP is above the equilibrium level, businesses will respond to the unintended accumulation of unsold goods by:

decreasing the rate of production

An increase in aggregate demand beyond the full employment level of output that causes inflation is called

demand pull inflation

An increase in aggregate demand beyond the full-employment level of output that causes inflation is called:

demand-pull inflation

crowding-out effect may result from _____ fiscal policy

discretionary expansionary

A decrease in the price level that leads to a change in the interest rate, and therefore to a change in the quantity of aggregate demand will cause

downward movement along aggregate demand curve

The real balance effect causes the aggregate demand to be

downward sloping

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

An economy's potential output is also known as:

full employment output

U.s fed budget surplus occurs when

government revenue exceeds outlays

two components of aggregate expenditures in a private closed economy are consumption and..

gross private investment

Three time horizons of aggregate supply

immediate short run short run long run

The government may decrease government spending or increase taxes in order to eliminate a(n)

inflationary GDP gap

When real ______, households tend to barrow more consume more, and save less

interest rates fall

consumer price index

main measure of inflation in the US

A decrease in aggregate demand with constant aggregate supply can result in

recession

decrease in aggregate demand with constant aggregate supply can result in:

recession

Marginal propensity to save is equal to a change in ___________ divided by a change in income.

savings

Marginal prosperity to save is equal to change in ________ divided by change in income

savings

The equilibrium price level and equilibrium output is determined by the intersection of the aggregate demand curve and the aggregate _____________ curve.

supply

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

An increase in investment spending will shift the aggregate expenditure schedule schedule _____ the equilibrium level of real GDP

upward and increase