Practice test- test 2

What does the "paradox of thrift" say?

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

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

consumption and investment

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. Aggregate demand shifts right. Aggregate supply shifts left. Aggregate supply shifts right.

Aggregate demand shifts left.

Question 3- 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. An increase in government spending has a smaller spending multiplier than an equivalent tax decrease. An increase in government spending has the same spending multiplier as an equivalent tax decrease. Neither an increase in government spending nor a decrease in taxes generates any multiplier at all.

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

_____ occurs when aggregate demand expands so much that equilibrium output exceeds full employment output. Demand-pull inflation Demand-push inflation Cost-push inflation Cost-pull inflation

Demand-pull inflation

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. There is no change to the SRAS curve. The SRAS curve does not shift but there is an upward movement along it. The SRAS curve does not shift but there is a downward movement along it.

The SRAS curve shifts rightward.

If the cost of production increase, there is..... an increase in aggregate supply and the SRAS curve shifts rightward. a decrease in aggregate supply and the SRAS curve shifts leftward. an increase in the quantity of real GDP supplied and a movement up along the SRAS curve. a decrease in the quantity of real GDP supplied and a movement down along the SRAS curve.

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

What would cause inflation and employment to increase? a leftward shift of the AS curve a leftward shift of the AD curve a rightward shift of the AS curve a rightward shift of the AD curve

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 depressionary gap recessionary gap contractionary gap

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. recessionary; increase recessionary; decrease inflationary; increase inflationary; decrease

inflationary; decrease

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

internally

Potential GDP: increases as the price level increases because firms supply more goods and services. decreases as the price level increases because people demand fewer goods and services. might either increase or decrease as the price level increases, depending on whether aggregate demand increases or decreases. is independent of the price level.

is independent of the price level.

- Other things the same, if technology increases, then in the long run.... both output and prices are higher. output is higher and prices are lower. output is lower and prices are higher. both output and prices are lower.

output is higher and prices are lower.

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: a supply shock shifts the short-run aggregate supply curve to the right. total spending expands so much that equilibrium output exceeds full-employment output. a supply shock shifts the short-run aggregate supply curve to the right. rising resource costs reduce short-run aggregate supply.

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 slope of the long-run aggregate supply curve position of the aggregate demand curve

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; unaffected spending; magnified taxes; unaffected taxes; magnified

spending, magnified

The short run aggregate supply curve shows the relationship between.... potential GDP and the price level. potential GDP and real GDP. the quantity of real GDP supplied and the price level. the quantity of real GDP supplied and the interest rate

the quantity of real GDP supplied and the price level.

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 not change until income actually rises. will shift leftward because people will spend less now. will shift rightward because people will increase spending now. and the AS curve will both shift leftward because people will increase their saving.

will shift rightward because people will increase spending now.