Econ Test 3

When the U.S. price level rises, Canadian consumers are more likely to buy cars made in Mexico than cars made in the United States.

Foreign purchases effect

The problem of time lags in enacting and applying fiscal policy is

In the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed.

A decline in the real interest rate will cause GDP to

Increase

A sizable, sustained increase in stock prices will cause GDP to

Increase

Is the following scenario attributed to the real-balances effect, the interest-rate effect, or the foreign purchases effect. A higher price level increases the cost of borrowing, which causes people to buy fewer cars.

Interest-rate effect

Equilibrium real GDP occurs where C + Ig = GDP in a private closed economy because

At this level of output, production creates sufficient total spending to purchase that output.

If Ca is $100, Ig is $60, Xn is −$10, and G is $40, what is the economy's equilibrium GDP?

$190

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.67?

$24 billion

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80?

$40 billion

The sum of the MPC and the MPS must equal 1 because

All additional income must be spent or saved.

What type of tax system would have the most built-in stability?

Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising or falling incomes.

What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?

Real GDP and disposable income are higher.

The economy's current level of equilibrium GDP is $780 billion. The full-employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that the economy faces _ expenditure gap of _

A recessionary, $5 billion

According to the "wealth effect," a change in consumer wealth causes

A shift in consumer spending and a shift of the aggregate demand curve.

What is the multiplier

1/(1-MPC)

In year 1, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise?

0.8

If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:

15 billion

The crowding-out effect is

A reduction in investment spending caused by an increase in interest rates arising from an increase in government spending.

An overall decrease in the expected rate of return on investment will cause GDP to

Decrease

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A hurricane destroys manufacturing plants.

Supply decreases

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will the following affect the equilibrium price level and equilibrium level of real output in the short run? A decrease in aggregate demand.

The price level does not change, but real output declines.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will the following affect the equilibrium price level and equilibrium level of real output in the short run? Equal increases in aggregate demand and aggregate supply.

The price level does not change, but real output increases.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will the following affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand that exceeds an increase in aggregate supply.

The price level increases somewhat, with a relatively large change in output.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will the following affect the equilibrium price level and equilibrium level of real output in the short run? A decrease in aggregate supply, with no change in aggregate demand.

The price level rises and real output decreases.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will the following affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand.

The price level rises rapidly and there is little change in real output.

Which of the following statements is true concerning the real-balances effect and the wealth effect? The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve. The real-balances effect causes shifts of the aggregate demand curve, whereas the wealth effect explains the shape of the aggregate demand curve. The real-balances effect and the wealth effect explain the shape of the aggregate demand curve. The real-balances effect and the wealth effect cause shifts of the aggregate demand curve.

The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve.

A sharp, sustained increase in stock prices. The consumption schedule will shift: The saving schedule will shift:

Upward, downward

Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year's net revenue. What is the expected rate of return

10%

Expectations of a near-term policy reversal weaken fiscal policy because

Consumers may hesitate to increase their spending because they believe that tax rates will rise again.

Consumption schedule The variable on the vertical (y) axis is _ and the variable on the horizontal (x) axis is _ These variables are _ related

Consumption, disposable income, directly

According to the "real-balances effect," if prices

Decline, the purchasing power of assets will rise, so spending at each income level should rise.

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A stock market crash reduces people's wealth.

Demand decreases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Consumers become more pessimistic about the economy.

Demand decreases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Government spending increases.

Demand increases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The United States enters into an arms race with China, resulting in a significant increase in military spending.

Demand increases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The spread of democracy around the world increases consumer confidence in the United States.

Demand increases

A 5-year increase in the minimum age for collecting Social Security benefits The consumption schedule will shift: The saving schedule will shift:

Downward, upward

A large decrease in real estate values, including private homes. The consumption schedule will shift: The saving schedule will shift:

Downward, upward

If C + Ig exceeds GDP, the economy will

Draw down inventories faster than planned, ordering will increase, and real GDP will rise.

The two expenditure components of real GDP purposely excluded in a private closed economy are

Net exports and the government sector.

A political business cycle is the idea that

Politicians are more interested in reelection than in stabilizing the economy.

If real GDP in an economy is currently $220, Ca is $100, Ig is $60, Xn is −$10, and G is $40, will the economy's real GDP rise, fall, or stay the same?

Real GDP will fall

Is the following scenario attributed to the real-balances effect, the interest-rate effect, or the foreign purchases effect. A lower price level causes restaurants to become busier as more people purchase restaurant meals.

Real-balances effect

A depression abroad will tend to _ our exports, which in turn will _ net exports, which in turn will _ equilibrium real GDP

Reduce, reduce, reduce

Government's fiscal policy options for ending severe demand-pull inflation include

Reducing government spending, increasing taxes, or both.

Saving schedule The variable on the vertical (y) axis is _ and the variable on the horizontal (x) axis is _ These variables are _ related

Saving, disposable income, directly

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A revolution in Iran results in a significant reduction in the world's supply of oil.

Supply decreases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Employers are required to provide paid sick leave to part-time as well as full-time employees.

Supply decreases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A new computer chip is developed that is faster and cheaper than previous chips.

Supply increases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Manufacturing firms expect steel prices to decrease significantly.

Supply increases

For the following event, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Technological changes enable workers to be more productive.

Supply increases

Built-in (automatic) stabilizers work by changing _ so that changes in GDP are reduced.

Taxes and government payouts

The difference between the MPC and the APC is that

The MPC is the change in consumption divided by the change in income, whereas the APC is total consumption divided by total income.

Suppose that full-employment (and full-capacity) output in an economy is $220. If Ca is $150, Ig is $60, Xn is −$10, and G is $40, what will be the macroeconomic result?

There will be an inflationary expenditure gap and employment levels will be above the full-employment level.

A substantial increase in household borrowing to finance auto purchases. The consumption schedule will shift: The saving schedule will shift:

Upward, downward

An economywide expectation that a recession is over and that a robust expansion will occur. The consumption schedule will shift: The saving schedule will shift:

Upward, downward