Econ213 exam 2

in the aggregate expenditure model, MPC + MPS equals ________

1

The formula for the AE multiplier is

1/ (1-MPC)

fiscal sustainability

A measure of the present value of all projected future revenues compared to the present value of projected future spending.

surplus

A situation in which quantity supplied is greater than quantity demanded

export price effect

As prices rise, exports become more expensive, and exports drop.

If Canada is using all its resources to their fullest extent, it can produce either 10 million iPads or 5 million HDTVs. If Mexico is using all its resources to their fullest extent, it can produce either 6 million iPads or 6 million HDTVs. Thus:

Canada has a comparative advantage in producing iPads.

Withdrawals

In the circular flow of income, spending by households which does not flow back to domestic firms. Includes savings, taxes and imports.

Keynesian macroeconomic equilibrium

In the simple model, the economy is at rest; spending injections (investment) are equal to withdrawals (saving), or I = S, and there are no net inducements for the economy to change the level of output or income.

Which of these is a limitation of the infant industry argument?

It is difficult to remove the protection after an industry has matured.

what is the formula for disposable income

Y - T

cost-push inflation is caused by

a decrease in short run aggregate supply to an equilibrium point below full employment

one of the factors that increase aggregate demand is the consumption of more imports (T/F)

false

If the price level in the United States increases relative to other countries, then the United States will export

fewer goods and services

In the Keynesian model, the principal determinant of saving is:

income

Which of these has NOT contributed to global integration?

increased nationalism

The _____ is vertical at full employment.

long run aggregate supply curve

components

processed expense items that become part of a finished product

A country has an absolute advantage in the production of a good if it can:

produce more of a good than another country

The total accumulation of past deficits less surpluses is called the:

public debt

an increase in the cost of energy affects both aggregate supply and aggregate demand (T/F)

true

Shifts vs Movements in Demand

*If non-price determinant changes, then demand curve SHIFTS *If the price decreases, then the quantity demanded increases and there is MOVEMENT along the demand curve

The slope of the saving schedule is:

1 minus the marginal propensity to consume.`

shift factors of supply

1. Price of inputs 2. Technology 3. Expectations 4. Taxes and subsidies

If the marginal propensity to consume is 0.6, then the spending multiplier is:

2.5

Short-run aggregate supply (SRAS) curve

A curve that shows a direct relationship between the price level and real GDP supplied in the short run

laffer curve

A relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged.

The 45-degree line in the Keynesian model represents:

AE = Y

deficit

An excess of federal expenditures over federal revenues.

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

discretionary fiscal policy

Changes in taxes or spending that are the result of deliberate changes in government policy.

aggregate expenditures

Consists of the components of GDP as measured by spending (consumption, investment, government purchases, and net exports at a given price level)

Which of the following illustrates the paradox of thrift?

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

If England is said to have an absolute advantage over Brazil in the production of computer chips, this means that, given the same resources,

England can produce more computer chips than Brazil

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

Average Propensity to Consume (APC)

Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income.

Average Propensity to Save (APS)

Fraction (or percentage) of disposable income that households save; saving divided by disposable income.

spending multiplier (K) formula

K= 1 / 1 - MPC

externally held debt

Public debt held by foreigners, which is roughly equal to half of the outstanding U.S. debt held by the public.

internally held debt

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals.

mandatory spending

Required govt spending by permanent laws

Which best describes the barrier to trade known as dumping?

Selling exports abroad at a lower price than the domestic price.

Which is not an argument against specializing in a single good in the real world?

Specialization in a single good makes dumping easier and more effective.

Although both tariffs and quotas are tools used to restrict or reduce trade, which of the statements best describes their differences?

Tariffs are a tax on imported goods, and quotas are limits on the number of imported goods.

national debt

The amount of money a national government owes to other governments or its people

if the economic arguments against tariffs and quotas are that they are very costly for the macroeconomy, why are they imposed?

The costs to individual consumers are small, whereas individual producers gain much from such trade barriers.

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

The marginal propensity to consume

decision lag

The time it takes Congress and the administration to decide on a policy once a problem is recognized.

recognition lag

The time it takes for policy makers to recognize the existence of a boom or a slump

information lag

The time policymakers must wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter (three months) after the fact.

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

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

The solution to simultaneous deflation and unemployment is to shift the:

aggregate demand curve to the right.

Which statement best describes an infant industry?

an emerging or underdeveloped industry that needs protection to survive and become competitive

demand-pull inflation is caused by

an increase in aggregate demand to an equilibrium point beyond full employment

paradox of thrift

an increase in saving can lead to a decrease in expenditures, decreasing output and causing a recession

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

an increase in the investment of human capital

one explanation for the negative slope of the aggregate demand curve is the "wealth effect", What is this effect?

as inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines

wealth effect

as prices rise, purchasing power of wealth falls, reducing consumption

The interest rate effect:

change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

In general, which of the statements is most likely to occur as a result of the proposed tax on imported solar panels?

consumers will face higher prices for solar panels

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

consumption and investment

according to the wealth effect, what happens as the price level falls?

consumption spending increases

Computer game cartridges produced in EconomyLand sell for $50 each. The same cartridges made in MarketLand have a price of $100. If free trade were allowed, we would expect the prices in both countries to:

converge to somewhere between $50 and $100.

_____ inflation occurs when a supply shock reduces aggregate supply.

cost-push

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

decrease; stronger; higher

According to public choice economists, the federal government has expanded because:

deficit spending has reduced the perceived cost of current government operations.

Average Propensity to Consume equals

disposable income MINUS savings= ? then DIVIDED BY the disposable income

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

disposable income; consumption

The advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers:

do not require overt action by policymakers.

If the domestic price of a good is below the prices in other countries and free trade is opened up, then in terms of pricing:

domestic consumers lose and domestic producers gain.

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

falls; rises

public debt

government debt held by individuals and institutions outside the government

the ______________, the larger the resulting change in output for a given change in expenditure

greater the MPC

the effects of a quota are similar to that of a tariff in that consumers pay _____ prices and imports _____ as a result of the quota.

higher; fall

saving

income not used for consumption

An increase in the incomes of the countries that purchase U.S.-made products will cause a(n) _____ in the _____ U.S.-made products.

increase; aggregate demand for

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

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

increasing investment in capital that boosts worker productivity

Suppose a tariff is imposed on avocados. This has the effect of _____ the domestic price of avocados, as well as having the effect of _____ the imported price of avocados.

increasing; increasing

The largest source of federal government revenues is:

individual income taxes

Alexander Hamilton argued in the late 1700's for strong controls on imports to protect American industries from competition from more established English industries. This is an example of the _____ argument for trade restriction.

infant industry

An expansionary fiscal policy can result in:

inflation and higher GDP

investment is determined by:

interest rates, the expected rate of return on investment, and business expectations

supply-side fiscal policy

involves the use of government spending and taxes to affect the production (supply) side of the economy

If the amount of regulation in an economy increases, the aggregate supply curve shifts _____ and output supplied will _____.

left; decrease

The focus of supply-side fiscal policies is on:

long-run economic growth

Textile workers in the United States would offer which argument to restrain international trade in textiles?

low foreign wages

if the price level in the United States increases relative to other countries, then the United States will import

more goods and services

High taxes and/or heavy regulation:

raise costs of production so that the aggregate supply curve shifts to the left.

One of the main purposes of a tariff is to:

raise the price of an import above the world price.

The _____ lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession.

recognition lag

The effects of a tariff are:

reduced quantity supplied overall, increased quantity supplied by domestic producers, and a higher price.

Which of the following is an example of contractionary fiscal policy?

reducing military spending

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

reducing; reducing; raising

Decreased interest rates will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

aggregate demand curve

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

The largest category of federal government spending in 2015 was:

social security

what best describes how the effects of import tariffs and import quotas are different?

some foreign producers receive some of the benefits generated by an import quota

consumption

spending by households on goods and services/ makes up around 2/3 of all U.S. GDP, so it is the key component in the AE model

discretionary spending

spending category about which government planners can make choices

investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

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

supply-side fiscal policy

Canada is considering imposing a tax on imports of Chinese solar panels. This action would be best described as a

tariff

Which of the following is NOT involved with implementing fiscal policy in the United States?

the Supreme Court

Which of these is a policy designed to ease the impact of expanded trade and globalization?

the Trade Adjustment Assistance program

If the United States can produce more of both bread and milk than Germany can, then:

the United States can still benefit from trade with Germany because of comparative advantage.

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

Marginal Propensity to Save (MPS)

the amount by which saving changes when disposable income changes

The long-run aggregate supply curve is vertical because:

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

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

the economy would self-correct

If a government always balances its budget:

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

as prices rise in the US, foreigners purchase fewer US goods

the export effect

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1

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

the interest rate

Which of the statements about free trade's effects on the environment is not commonly given as an argument against trade liberalization?

the international trade of agricultural products harms local agriculture in all countries

balanced budget multiplier

the multiplier for a change in government purchases that is matched by an equal change in taxes

crowding-out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

macroeconomic equilibrium

the point where the quantity of aggregate demand equals the quantity of aggregate supply

multiplier

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change

marginal propensity to save (MPS)

the share of each additional dollar of income earned that is devoted to saving rather than consumption

implementation lag

the time needed to execute a change in policy

aggregate demand

the total demand for final goods and services in an economy at a given time

When nations specialize according to their comparative advantage:

total consumption and production in the world increase

if the value of people's stock portfolios increases or if peoples houses appreciate in value, then this very easily could lead to an increase in aggregated demand (T/F)

true

A(n) _____ on imports is a fixed amount per unit of the product assessed by a government at its border.

unit tax

One reason the amount of real output demanded declines when the aggregate price level rises is the resulting reduction in household wealth, called the:

wealth effect

consumer spending is affected by what four major factors besides income?

wealth, consumer confidence, debt, and taxes

inflationary gap

when aggregate output is above potential output

recessionary gap

when aggregate output is below potential output

why does the multiplier exist

when people spend money, the money ends up in the pockets or bank accounts of other people or organizations who then use that money in some way

cost-push inflation

When prices rise due to an increase in the cost of production.

aggregate supply

`the sum of all the supply in the economy

Which of the following events will shift the aggregate demand curve to the right?

a new government program to eliminate poverty

What would cause inflation and employment to increase?

a rightward shift of the AD curve

Autarky

a situation where one country does not engage in trade with other countries

Long Run Aggregate Supply (LRAS) curve

a vertical line at the economy's potential output; aggregate supply when there are no surprises about the price level and all resource contracts can be renegotiated

After the acceptance of Keynesian analysis, the government:

actions toward macroeconomic policy grew significantly.

injections

additions to an economy's circular flow which include investments, government spending, and exports