Macroeconomics Test 2

The above table has data from the nation of Atlantica. Based on these data, autonomous consumption is

$1.8 trillion.

What does the "paradox of thrift" say?

An economy that saves too much can end up with lower total savings.

How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected?

An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

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

consumption and investment

All of these programs are considered mandatory spending EXCEPT:

national defense.

In the simple Keynesian model with no government and foreign sectors, assume that full employment occurs at an output level of $20,000. With a marginal propensity to save of 0.20 and equilibrium output at $15,000, by how much will investment spending have to increase to move the economy to full employment?

$1,000

If the national debt is $6 million and this year's deficit is $5 million, what would the new national debt be?

$11 million

If disposable income increases from $5,000 to $5,400 and consumption increases from $4,000 to $4,200, what is the average propensity to consume when disposable income is $5,400?

0.78

Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by $:

20 billion.

If the marginal propensity to save is 0.20, the spending multiplier is:

5.

What is stagflation in economics?

A period of economic recession with rising prices.

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%.Which curve shifts and in which direction?

Aggregate demand shifts left.

_____ occurs when aggregate demand expands so much that equilibrium output exceeds full employment output.

Demand-pull inflation

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?

Income will increase by $10,000.

Which of the following is an example of an expansionary fiscal policy tool?

Increasing government spending and decreasing taxes.

Which of the following best describes the effect on the aggregate supply curve if political negotiations result in a substantial decrease in the price of oil?

The SRAS curve shifts rightward.

Refer to the Figure. Assuming the country begins on the long-run equilibrium, what will happen in the short-run if the price of oil rises significantly?

The economy will move from point C to A.

The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100?

Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

Refer to the figure. The potential level of output occurs at

Y2.

If the cost of production increase, there is

a decrease in aggregate supply and the SRAS curve shifts leftward.

What would cause inflation and employment to increase?

a rightward shift of the AD curve

A recessionary gap is

a situation where the actual level of output is below the potential level of output.

If the ultimate goal of fiscal policy aimed at aggregate supply is achieved, what happens to the aggregate price level and aggregate output?

aggregate price level decreases; aggregate output increases

If the economy is at full employment, increases in government spending:

are primarily absorbed by price increases.

There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations?

fiscal multiplier

What occurs when spending is above the full employment level?

inflationary gap

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ gap exists and will require a(n) _____ in spending to bring the economy back to full employment.

inflationary; decrease

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

internally held

Potential GDP

is independent of the price level.

Assume the economy depicted in the figure above is in long-run equilibrium, where the aggregate demand curve is AD0 and the short-run aggregate supply curve is SRAS0. If there is a supply shock, such as a drastic increase in the price of oil, this will cause a _____ and a movement to a short-run equilibrium at point _____.

leftward shift to SRAS2; a

Other things the same, if technology increases, then in the long run

output is higher and prices are lower.

Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment?

reduce spending by $25 billion

If interest rates rise, the burden of a nation's public debt will _____ and it will be _____ difficult to service its debt.

rise; more

Cost-push inflation occurs when:

rising resource costs reduce short-run aggregate supply.

If an economy is in a recession, what would expansionary fiscal policy do?

shift AD to the right

The "sticky-wage" hypothesis explains the

slope of the short-run aggregate supply curve

When consumer confidence falls in an economy, _____ will decrease which is going to be _____ by the spending multiplier.

spending; magnified

The short run aggregate supply curve shows the relationship between

the quantity of real GDP supplied and the price level.

Which of these is an example of an automatic stabilizer?

unemployed workers claiming unemployment benefits during a recession.

If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve

will shift rightward because people will increase spending now.