STUDY: UNIT III EXAM. CHAPTERS 10, 12, and 13 CONCEPTS

In the diagram, the economy's short-run AS curve is line ___, and its long-run AS curve is line ___. 1; 3 2; 4 3; 4 2; 1

2; 1

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes the net export effect. the supply-side effects of fiscal policy. the crowding-out effect. built-in stability.

the crowding-out effect.

The investment demand curve will shift to the right as the result of an increase in the real interest rate. an increase in business taxes. the availability of excess production capacity. businesses becoming more optimistic about future business conditions.

businesses becoming more optimistic about future business conditions.

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

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

The investment schedule in the given table indicates that if the real interest rate is 8 percent, then $30 billion of investment will be undertaken. $30 billion will be both saved and invested. we cannot tell what volume of investment will be profitable. $60 billion of investment will be undertaken.

$30 billion of investment will be undertaken.

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by $2 billion. $3 billion. $2/3 billion. $6 billion.

$6 billion.

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

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Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by C. A and B. A. B.

A and B.

Which of the following is correct? APS + MPC = 1. APC + APS = 1. APS + MPS = 1. APC + MPS = 1.

APC + APS = 1.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Cost-push inflation is depicted by A. B. C. B and C.

B.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in productivity is depicted by B. C. A. B and C.

C.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decrease in resource prices is depicted by C. B. B and C. A.

C.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by B and C. A. C. B.

C.

The investment demand curve will shift to the left as a result of an increase in the excess production capacity available in industry. a decrease in labor costs. increased business optimism with respect to future economic conditions. a decrease in business taxes.

an increase in the excess production capacity available in industry.

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be increased government spending or increased taxation, but not a combination of the two actions. decreased government spending or decreased taxation, or a combination of the two actions. increased government spending or decreased taxation, or a combination of the two actions. increased government spending or increased taxation, or a combination of the two actions.

increased government spending or decreased taxation, or a combination of the two actions.

Contractionary fiscal policy is so named because it is aimed at reducing aggregate demand and thus achieving price stability. is expressly designed to expand real GDP. involves a contraction of the nation's money supply. necessarily reduces the size of government.

is aimed at reducing aggregate demand and thus achieving price stability.

The economy's long-run aggregate supply curve slopes downward and to the right. its vertical. is horizontal. slopes upward and to the right.

its vertical.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the wealth effect. multiplier effect. net export effect. real-balances effect.

multiplier effect.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the flatter is the economy's aggregate supply curve. smaller is the economy's MPC. smaller is the economy's MPS. less is the economy's built-in stability.

smaller is the economy's MPS.

The APC can be defined as the fraction of a change in income that is spent. specific level of total income that is consumed. specific level of total income that is not consumed. change in income that is not spent.

specific level of total income that is consumed.

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system decreases real interest rates in the economy. increases crowding out in the economy. offsets the timing problem for fiscal policy. serves as an automatic stabilizer for the economy.

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Discretionary fiscal policy refers to intentional changes in taxes and government expenditures made by Congress to stabilize the economy. the changes in taxes and transfers that occur as GDP changes. any change in government spending or taxes that destabilizes the economy. the authority that the president has to change personal income tax rates.

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Due to automatic stabilizers, when the nation's total income rises, government transfer spending decreases and tax revenues increase. and tax revenues increase. and tax revenues decrease. increases and tax revenues decrease.

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

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The multiplier is 1/MPS. 1/MPC. 1/(1 + MPC). 1/(1 − MPS).

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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 7.5 percent. 15 percent. 10 percent. 20 percent.

15 percent.

If the MPC is 0.75, the multiplier will be 2. 4. 3. 3.5.

4.

The accompanying table gives budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. The public debt declined in year 4. 5. 3. 6.

6.

The multiplier effect indicates that an increase in total income will generate a larger change in aggregate expenditures. a change in spending will increase aggregate income by the same amount. a decline in the interest rate will cause a proportionately larger increase in investment. a change in spending will change aggregate income by a larger amount.

a change in spending will change aggregate income by a larger amount.

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S. aggregate supply curve would shift to the left. aggregate supply curve would shift to the right. aggregate demand curve would shift to the left. aggregate demand curve would shift to the right.

aggregate demand curve would shift to the right.

The MPC can be defined as that fraction of a given total income that is not consumed. change in income that is spent. given total income that is consumed. change in income that is not spent.

change in income that is spent.

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

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

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP gap here? decrease government spending and increase taxes increase government spending and decrease taxes increase government spending and taxes decrease government spending and taxes

decrease government spending and increase taxes

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 $200 billion. To obtain full employment under these conditions, the government should reduce tax rates and/or increase government spending. encourage personal saving by increasing the interest rate on government bonds. discourage private investment by increasing corporate income taxes. decrease government expenditures.

reduce tax rates and/or increase government spending.

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by reducing government expenditures by $125 billion. increasing taxes by $50 billion. reducing government expenditures by $20 billion. increasing taxes by $250 billion.

reducing government expenditures by $20 billion.

If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift leftward by $40 billion at each price level. rightward by $40 billion at each price level. rightward by $20 billion at each price level. leftward by $20 billion at each price level.

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In the diagram, a shift from AS2 to AS3 might be caused by a(n) increase in business taxes and costly government regulation. decrease in interest rates. decrease in the prices of domestic resources. decrease in the price level.

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With a marginal propensity to save of 0.4, the marginal propensity to consume will beWith a marginal propensity to save of 0.4, the marginal propensity to consume will be the reciprocal of the MPS. 0.4 minus 1.0. 1.0 minus 0.4. 0.4.

1.0 minus 0.4.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by B and C. A. B. C.

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Refer to the figure. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation? shift aggregate demand by increasing taxes shift aggregate supply by increasing taxes shift aggregate demand by increasing government spending shift aggregate demand by decreasing taxes

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Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand? $50 billion $20 billion $12 billion $33.3 billion

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The accompanying table gives budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. As a percentage of GDP, the budget deficit was 3.9 percent in year 4. public debt was 3 percent in year 6. public debt was 12.5 percent in year 1. budget surplus was less than 1 percent in year 6.

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The crowding-out effect of expansionary fiscal policy suggests that it is very difficult to have excessive aggregate spending in the U.S. economy. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. tax increases are paid primarily out of saving and therefore are not an effective fiscal device. consumer and investment spending always vary inversely.

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The effect of contractionary fiscal policy is shown as a leftward shift in the economy's aggregate demand curve. movement along an existing aggregate demand curve. rightward shift in the economy's aggregate demand curve. rightward shift in the economy's aggregate supply curve.

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Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing a negative GDP gap. an adverse supply shock. a positive GDP gap. inflation.

a negative GDP gap.

In the diagram, a shift from AS1 to AS2 might be caused by an increase in the prices of imported resources. a decrease in the prices of domestic resources. stricter government regulations. an increase in business taxes.

a decrease in the prices of domestic resources.

The table gives aggregate demand and supply schedules for a hypothetical economy. If the price level is 250 and producers supply $450 of real output, a shortage of real output of $150 will occur. a shortage of real output of $100 will occur. a surplus of real output of $150 will occur. neither a shortage nor a surplus of real output will occur.

a surplus of real output of $150 will occur.

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the paradox of thrift. net export effect. crowding-out effect. equation-of-exchange effect.

crowding-out effect.

Fiscal policy refers to altering of the interest rate to change aggregate demand fact that equal increases in government spending and taxation will be contractionary. deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability. deliberate changes in government spending and taxes to achieve greater equality in the distribution of income.

deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.

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

rightward by $50 billion at each price level.