macro test 3

Taxation and government spending

Fiscal policy is enacted through changes in:

refinancing and taxation

The two reasons why bankruptcy is a false concern about the public debt are:

true

When the economy is experiencing demand-pull inflation, its real GDP tends to be rising. (T/F)

A decrease in wealth

Which of the following would shift the saving schedule upward?

1 - 0.3

With an MPS of 0.3, the MPC will be:

$12 billion

an economy is experiencing a high rate of inflation. the government wants to reduce consumption by $36 billion to reduce inflationary pressure. the MPC is .75. by how much should the government raise taxes to achieve its objective?

budget surplus

an excess of tax revenue over government spending

decrease investment demand

an increase in the cost of acquiring capital goods

multiplier effect reveals

an initial change in spending can cause a larger change in domestic income and output

Productivity equation

output/input

true

A change in business taxes and regulation can affect production costs and aggregate supply. (T/F)

decrease in AD

A decrease in government spending will cause a

supply to increase

A fall in labor costs will cause aggregate:

A change in real value of consumer wealth

A sharp rise in the real value of stock prices, which is independent of a change in the price level, would best be an example of:

1

APC + APS =

Consumption also increases, but not as much as income

An MPC value of less than 1.0 indicates that as income increases:

increase AD

An increase in expected future income will:

dollar depreciation

loss of value of a US dollar with respect to a foreign currency

the multiplier effect

magnifies initial changes in spending into larger changes in aggregate demand

fiscal policy

manipulation of government spending and taxes to stabilize domestic output, employment, and the price level

expected rate of return

marginal benefit of an investment

interest rate

marginal benefit of an investment

MPC, fraction of any change in income consumed

marginal propensity to consume =change in consumption/change in income

it moves to a lower general price level

when the economy moves down its aggregate demand curve-

affects multiplier in an economy

-consumers buy imported products -households pay income taxes -inflation

aggregate demand determinants

-consumption -investment -government spending -net exports

types of fiscal policies

-expansionary -neutral -contractionary

aggregate supply determinants

-input prices -productivity -regulation

the multiplier and marginal propensities

1 / (1-MPC) or 1 / MPS

reasons for investment demand curve shift

1. costs of acquiring, operating, and maintaining capital goods, 2. business taxes 3. technology 4. stock of capital goods on hand 5. business expectations

Decrease (or shift left) in aggregate demand

An increase in personal income tax rates will cause a(n):

Help offset changes in GDP

Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that:

true

Built-in stability is exemplified by the fact that with a progressive tax system, net tax revenues decrease when GDP decreases. (T/F)

Simultaneous Shifts

Changes in wealth, expectations, interest rates, and household debt will shift the consumption schedule in one direction and the saving schedule in the opposite direction.

Increased borrowing by the government

Crowding out is a decrease in private investment caused by:

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Discretionary fiscal policy refers to:

Decreases and tax revenues increase

Due to automatic stabilizers, when the nation's total income rises, government transfer spending:

investment demand curve

shows the total monetary amounts that will be invested by an economy at various possible real interest rates

a decrease in the real rate of interest will reduce the level of investment.

Given the expected rate of return on all possible investment opportunities in the economy:

leftward shift of the AS curve.

Graphically, cost-push inflation is shown as a:

Spending seven-tenths of any increment to its income

If a family's MPC is 0.7, it means that the family is:

.12 [(1)-(30,000 / 3,400)]

If disposable income were $34,000, and consumption were $30,000, then the average propensity to save would be about: APS = 1- APC

increasing government spending by $4 billion.

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:

fall

If the MPS rises, then the MPC will:

Decrease aggregate demand and increase aggregate supply

If the U.S. dollar appreciates in value relative to foreign currencies, then this will:

1

MPC + MPS =

20%

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is

true

The greater the MPC, the greater the multiplier. (T/F)

multiplier effect

a change in a component of total spending leads to a larger change in GDP

real-balance effect

a change in the price level, a higher price level reduces the real value or purchasing power of people's accumulated savings balances

increase in the price level

a decline in the quantity of real output demanded along the aggregate demand curve is a result of a

supply curve rightward

a fall in the price of capital goods used in production will shift the aggregate

demand-pull inflation

a price-level increase due to an increase in aggregate demand

aggregate supply

a schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce

Aggregate Demand

a schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level

aggregate demand- aggregate supply model (AD-AS model)

a variable price-variable output model that allows both the price level and level of real GDP to change

inverse relationship

aggregate demand reflects what kind of relationship between the price level and the amount of real output demanded

expected rate of return (r)

subtracting cost by revenue expectation and divide by cost

APC, the fraction of total income that is consumed

average propensity to consume = consumption/income

APS, fraction of total income that is saved

average propensity to save = saving/income

immediate short run

both input prices as well as output prices are fixed

shift consumption and saving schedules

changes in consumer wealth, consumer expectations, interest rates, household debt, and taxes

expansionary fiscal policy

consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP

consumption = disposable income (C=DI)

each point on the reference line (45 degree line)

a price level that is inflexible downward

efficiency wages are associated with:

crowding-out effect

fiscal policy may increase the interest rate and reduce private spending (investing) which weakens or cancels the stimulus

Contrationary Fiscal Policy

government spending reductions, tax increases, or both designed to decrease aggregate demand and lower or eliminate inflation

size of MPC

greater than zero, but less than one

decrease taxes

to reduce size of government in recession

investment spending may increase or decrease

if business taxes are reduced and the real interest rate increases:

shift to the right

if consumers decide to buy more output at each price level the aggregate demand curve will

$5

if disposable income = 200 consumption = 205 what is the dissavings?

expansionary fiscal policy

if the congress passes legislation to cut taxes to counter the effects of a severe recession, then this would be an example of a:

dollar appreciation

increase in value of US dollar with respect to a foreign currency

long run

input prices and output prices can vary

Expectations of recession

reduce consumption and increase in savings

expectations of higher prices

reduce supply now and increase supply later

increase in consumer spending

shifts the aggregate demand curve to the right can be caused by wealth effect or

wealth effect

shifts the consumption schedule upward and the saving schedule downward

borrowing

shifts the current consumption schedule upward

when real interest rates fall

tendency to borrow more, consume more, and save less (lower interest rates = more people buying cars)

saving (S=DI-C)

the amount by which actual consumption in any year falls short of the 45 degree line

budget deficit

the amount by which government expenditures exceed revenues a particular year is the:

consumption schedule

the amounts households intend to consume at various possible levels of aggregate income.

the consumption schedule

the direct consumption-disposable income relationship

wealth

the dollar amount all assets that it owns minus the dollar amount of its liabilities (debt owed)

amount of savings (S) in that year

vertical distance between 45 degree line and consumption line represents

Higher expected rates of return on investment.

what would shift the investment demand curve to the right

dissaving

when low or negative DIs occur (ex: households can consume more than their current incomes by liquidating accumulated wealth or borrowing)

foreign purchases effect

when the US price level rises relative to foreign price levels, foreigners buy fewer US goods and Americans buy more foreign goods

short run

input prices are fixed but output prices are variable

new expectations of higher future income.

A $2 billion increase in consumption at each level of DI could be caused by:

increase AS

An increase in productivity will:

and saving both decrease

As disposable income decreases, consumption:

15% (2,300 - 2,000) / (2,000)

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is:

Marginal propensity to save is .25

In an economy, for every $1600 decrease in income, spending falls by $1200. It can be concluded that the:

relatively stable

In contrast to investment, consumption is:

multiplier and MPC

Large MPC results in larger increases in spending

multiplier and MPS

Large MPC results in smaller increases in spending

interest-rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases). causes aggregate demand curve to slope downwards

causes downward slop of the aggregate demand curve

changes in price level creates real-balance effect, interest-rate effect, and foreign purchases effect which

multiplier

changes in real GDP / initial change in spending

cost-push inflation

decreases in aggregate supply

discretionary fiscal policy

deliberate manipulation of taxes and government spending by congress to alter real domestic output and employment, control inflation, and stimulate economic growth

MPS, fraction of any change in income saved

marginal propensity to save =change in saving/change in income

disposable income

most significant factor for determining a nation's level of consumption and saving

Change in real GDP formula

multiplier x initial change in spending

input prices increase

the economy experiences an increase in the price level and a decrease In real domestic output

the larger the multiplier

the higher the marginal propensity to consume-

break-even income (S=0)

the income level at which house holds plan to consume their entire incomes (C=DI)

equilibrium price

the price that balances quantity supplied and quantity demanded

increase government spending

to expand the size of government in recession