exam 3

The marginal propensity to save is 0.2. Equilibrium GDP will decrease by $50 billion if the aggregate expenditures schedule decreases by... a. $10 billion. b. $15 billion. c. $16 billion. d. $40 billion.

a. $10 billion. Reason: Multiplier = 5, gap = 50 (50/5 = 10)

If the MPC is 0.50 and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap is... a. $40 billion. b. $20 billion. c. $60 billion. d. $80 billion.

b. $20 billion. Reason: Multipler = 2, Gap = 40 (40/2 = 20)

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? a. 1.00 b. 0.80 c. 0.50 d. 0.75

b. 0.80 Reason: (1300 - 900 / 1500 - 1000)

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? a. panic of 1907 b. Great Depression c. spectacular economic growth during World War 2 d. economic expansion of the 1920s

b. Great Depression

Which of the following represents the most expansionary fiscal policy? a. a $10 billion tax cut b. a $10 billion increase in government spending c. a $10 billion tax increase d. a $10 billion decrease in government spending

b. a $10 billion increase in government spending

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should... a. increase government expenditures by $100 billion. b. increase government expenditures by $50 billion. c. reduce taxes by $50 billion. d. reduce taxes by $200 billion.

b. increase government expenditures by $50 billion.

Which of the following would most likely shift the aggregate demand curve to the right? a. an increase in stock prices that increases consumer wealth b. increased fear that a recession will cause workers to lose their jobs c. an increase in personal income tax rates d. a reduction in household borrowing because of tighter lending practices

a. an increase in stock prices that increases consumer wealth

The crowding-out effect of expansionary fiscal policy suggests that... a. government spending increases at the expense of private investment. b. imports replace domestic production. c. private investment increases at the expense of government spending. d. saving increases at the expense of investment.

a. government spending increases at the expense of private investment.

If the multiplier in an economy is 5, a $20 billion increase in net exports will... a. increase GDP by $100 billion. b. reduce GDP by $4 billion. c. decrease GDP by $100 billion. d. increase GDP by $20 billion.

a. increase GDP by $100 billion.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should... a. increase tax rates and/or reduce government spending. b. discourage personal saving by reducing the interest rate on government bonds. c. increase government expenditures. d. encourage private investment by reducing corporate income taxes.

a. increase tax rates and/or reduce government spending.

The aggregate supply curve (short run) a. graphs as a horizontal line. b. is steeper above the full-employment output than below it. c. slopes downward and to the right. d. presumes that changes in wages and other resource prices match changes in the price level.

b. is steeper above the full-employment output than below it.

The equilibrium level of GDP is associated with... a. an excess of planned investment over saving. b. no unintended changes in inventories. c. an unintended decrease in business inventories. d. an unintended increase in business inventories.

b. no unintended changes in inventories.

The political business cycle refers to the possibility that... a. incumbent politicians will be reelected regardless of the state of the economy. b. politicians will manipulate the economy to enhance their chances of being reelected. c. there is more inflation during Democratic administrations than during Republican administrations. d. recessions coincide with election years.

b. politicians will manipulate the economy to enhance their chances of being reelected.

Per-unit production cost is... a. real output divided by inputs. b. total input cost divided by units of output. c. units of output divided by total input cost. d. a determinant of aggregate demand.

b. total input cost divided by units of output.

If aggregate demand increases and aggregate supply decreases, the price level... a. will decrease, but real output may increase, decrease, or remain unchanged. b. will increase, but real output may increase, decrease, or remain unchanged. c. and real output will both increase. d. and real output will both decrease.

b. will increase, but real output may increase, decrease, or remain unchanged.

In which of the following sets of circumstances can we confidently expect inflation? a. Aggregate supply and aggregate demand both increase. b. Aggregate supply and aggregate demand both decrease. c. Aggregate supply decreases and aggregate demand increases. d. Aggregate supply increases and aggregate demand decreases.

c. Aggregate supply decreases and aggregate demand increases.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because... a. government spending is more employment-intensive than is either consumption or investment spending. b. government spending increases the money supply and a tax reduction does not. c. a portion of a tax cut will be saved. d. taxes vary directly with income.

c. a portion of a tax cut will be saved.

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. an inflationary; $5 billion b. a recessionary; $10 billion c. a recessionary; $5 billion d. a recessionary; $20 billion e. an inflationary; $20 billion f. an inflationary; $10 billion

c. a recessionary; $5 billion Reason: Recessionary - Eql. GDP < Full-empl. GDP; Multiplier = 4, Gap = 20 (20/4 = 5)

Which one of the following would increase per-unit production cost and therefore shift the aggregate supply curve to the left? a. a reduction in business taxes b. production bottlenecks occurring when producers near full plant capacity c. an increase in the price of imported resources d. deregulation of industry

c. an increase in the price of imported resources

If for some reason households become increasingly thrifty, we could show this by... a. a downshift of the saving schedule. b. an upward shift of the consumption schedule. c. an upward shift of the saving schedule. d. a movement down along a stable consumption function.

c. an upward shift of the saving schedule.

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by... a. increasing government spending by $25 billion. b. increasing government spending by $80 billion. c. decreasing taxes by $25 billion. d. decreasing taxes by $100 billion.

c. decreasing taxes by $25 billion.

Other things equal, a serious recession in the economies of U.S. trading partners will... a. have no perceptible impact on the U.S. economy. b. cause inflation in the U.S. economy. c. depress real output and employment in the U.S. economy. d. stimulate real output and employment in the U.S. economy.

c. depress real output and employment in the U.S. economy.

If the MPS rises, then the MPC will: a. rise. b. stay the same. c. fall.

c. fall.

Graphically, cost-push inflation is shown as a a. leftward shift of the AD curve. b. rightward shift of the AS curve. c. leftward shift of the AS curve. d. rightward shift of the AD curve.

c. leftward shift of the AS curve.

An increase in aggregate expenditures resulting from a decrease in the price level is equivalent to a a. rightward shift of the aggregate demand curve. b. leftward shift of the aggregate demand curve. c. movement downward along a fixed aggregate demand curve. d. decrease in aggregate supply.

c. movement downward along a fixed aggregate demand curve.

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift... a. leftward by $50 billion at each price level. b. rightward by $10 billion at each price level. c. rightward by $50 billion at each price level. d. leftward by $40 billion at each price level.

c. rightward by $50 billion at each price level.

Other things equal, an improvement in productivity will... a. increase the equilibrium price level. b. shift the aggregate supply curve to the left. c. shift the aggregate supply curve to the right. d. shift the aggregate demand curve to the left.

c. shift the aggregate supply curve to the right.

The aggregate supply curve... a. is explained by the interest rate, real-balances, and foreign purchases effects. b. gets steeper as the economy moves from the top of the curve to the bottom of the curve. c. shows the various amounts of real output that businesses will produce at each price level. d. is downsloping because real purchasing power increases as the price level falls.

c. shows the various amounts of real output that businesses will produce at each price level.

Which of the following best describes the built-in stabilizers as they function in the United States? a. The size of the multiplier varies inversely with the level of GDP. b. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. c. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. d. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

d. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

The public debt is held as... a. U.S. securities, corporate bonds, and common stock. b. Federal Reserve Notes. c. U.S. gold certificates. d. Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

d. Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

An appropriate fiscal policy for severe demand-pull inflation is... a. an increase in government spending. b. depreciation of the dollar. c. a reduction in interest rates. d. a tax rate increase.

d. a tax rate increase.

The multiplier is useful in determining the... a. full-employment unemployment rate. b. level of business inventories. c. change in the rate of inflation from a change in the interest rate. d. change in GDP resulting from a change in spending.

d. change in GDP resulting from a change in spending.

The U.S. public debt... a. refers to the debts of all units of government—federal, state, and local. b. consists of the total debt of U.S. households, businesses, and government. c. refers to the collective amount that U.S. citizens and businesses owe to foreigners. d. consists of the historical accumulation of all past federal deficits and surpluses.

d. consists of the historical accumulation of all past federal deficits and surpluses.

Expansionary fiscal policy is so named because it... a. involves an expansion of the nation's money supply. b. necessarily expands the size of government. c. is aimed at achieving greater price stability. d. is designed to expand real GDP.

d. is designed to expand real GDP.

An increase in net exports will shift the AD curve to the... a. left by a multiple of the change in net exports. b. left by the same amount as the change in net exports. c. right by the same amount as the change in net exports. d. right by a multiple of the change in net exports.

d. right by a multiple of the change in net exports.

The aggregate demand curve... a. is upsloping because a higher price level is necessary to make production profitable as production costs rise. b. is downsloping because production costs decline as real output increases. c. shows the amount of expenditures required to induce the production of each possible level of real output. d. shows the amount of real output that will be purchased at each possible price level.

d. shows the amount of real output that will be purchased at each possible price level.