Test 2

During a period of deflation,

People on fixed incomes are better off.

Internal market forces include

Population growth, spending behavior, and invention.

External shocks include all of the following except

Population growth.

The Producer Price Index (PPI) is the best index to measure average price changes faced by

Producers.

According to Keynes, which of the following should the government do when the economy overheats?

Raise taxes.

A growth recession is said to occur when the economy grows at a

Rate less than the long-term average

Debt ceilings are designed to

Reduce the deficit.

The multiplier process can occur when a decrease in investment spending

Reduces household incomes, causing consumers to buy fewer goods and services.

If the MPC is 0.75, a $200 million transfer payment decrease ultimately

Reduces spending by $600 million.

The real balances effect says that an increase in the price level

Reduces the real value of a fixed amount of savings, which reduces the purchase of goods and services

Debt service

Refers to the annual interest payments on the debt.

Crowding out is most likely to occur when the federal government

Runs a deficit and sells bonds to make up the difference.

Controversies between Keynesian, monetarist, and supply-side theories focus on the

Shape and sensitivity of aggregate demand and aggregate supply curves.

If the recessionary GDP gap is $500, then the proper fiscal stimulus when faced with an upward-sloping AS curve is to

Shift the AD curve rightward by more than $500.

A basic conclusion of Keynesian analysis is that

Small macro disturbances can lead to much larger macro problems.

Which of the following is a likely macroeconomic consequence of inflation?

Speculation.

Say's Law states that

Supply creates its own demand.

There is a trade-off between unemployment and inflation when the aggregate

Supply curve is upward-sloping.

Individual employment and training programs are levers most likely to be advocated by

Supply-side economists

If tax policies become less favorable, then

The AD curve will shift to the left.

If wealth rises,

The AD curve will shift to the right.

The marginal propensity to consume is

The change in consumption divided by the change in disposable income.

In the short run, one reason why we do not define "full employment" as 0 percent unemployment is because

The closer the economy gets to capacity output, the greater the risk of inflation.

Unlike the classical economists, Keynes asserted that

The economy was inherently unstable.

Your real income is

The purchasing power of the money you receive.

A positively sloped aggregate supply curve reflects

The rising costs associated with increased capacity utilization.

Which of the following is the best indication that the government is pursuing restrictive fiscal policy?

The structural deficit decreases.

Money illusion is the

Use of nominal dollars rather than real dollars to gauge income or wealth.

Real GDP is the

Value of final output produced, adjusted for changing prices.

If the marginal propensity to save is 0.10 and the initial decline in investment is $100, by how much will aggregate demand eventually decrease? $100.

$1,000.

According to Figure 9.1, saving equals zero at an income level of

$2,000 billion.

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.80, the government should increase transfer payments by

$25 billion.

If the multiplier equals 2 and the AD shortfall is $6 million, the desired fiscal stimulus is

$3 million.

Assume you have $5,000 in a savings account at the beginning of the year and the price level is equal to 100. If the price level is equal to 125 at the end of the year, the real value of your savings is closest to

$4,000.

Suppose the consumption function is C = $200 + 0.85YD. If disposable income is $400, consumption is

$540.

If nominal GDP is $9,600 billion and the GDP deflator is 118.5, real GDP is

$8,101.3 billion.

Given that C = $1,000 + 0.60YD, if the level of disposable income is $1,000, the level of saving is

-$600.

If the nominal interest rate is 6 percent and the anticipated rate of inflation is 6 percent, the real interest rate is

0 percent.

If disposable income increases from $9,000 billion to $11,000 billion, and consumption increases from $9,500 billion to $11,000 billion, the MPC must be

0.75.

The inflation rate is the

Annual percentage rate increase in the average price level.

Interest payments on the national debt

Are a redistribution of income from taxpayers to bondholders.

Which government sector has the ability to respond countercyclically to the economy?

Federal only.

The structural deficit represents

Federal revenues minus federal expenditures at full employment under current fiscal policy.

A tax cut intended to increase aggregate demand is an example of

Fiscal stimulus.

According to classical theory,

Flexible wages and prices allow a laissez faire economy to adjust wages and prices to shifts in aggregate demand.

In contrast to the structural deficit, the cyclical deficit reflects

Fluctuations in economic activity.

Ceteris paribus, if average prices in the U.S. economy fall, then the

Foreign trade effect will lead to a higher quantity of U.S. output demanded.

Fiscal policy is the use of

Government spending and taxes to alter macroeconomic outcomes.

Price stability

Has been officially set by Congress at 3 percent or less.

When the price of a good decreases more slowly than an index of average prices decreases, the good's relative price

Has risen while its absolute price has fallen.

Keynesians would recommend

Higher taxes when there is excess aggregate demand.

Which of the following is an example of the multiplier at work as a result of an increase in consumption expenditures?

Households and businesses receive income from consumption expenditures; they spend a portion of this new income; these expenditures, in turn, generate income for other businesses and households, which in turn spend a portion of the new income, and so on.

Which of the following is illustrated by the aggregate demand curve?

How total quantity of output demanded varies with the average price level.

Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will

Increase by $100 billion.

Automatic stabilizers tend to stabilize the level of economic activity because they

Increase spending during recessions and reduce spending during inflationary periods.

Which of the following economic perspectives focuses on the need for government to use spending and taxes to shift aggregate demand and thus correct problems of unemployment and inflation?

Keynesian.

The opportunity cost of the debt is

Less of an issue if the economy is below full employment since crowding out is less likely to occur.

If a bank has already lent money at fixed interest rates, then during a period of higher-than-expected inflation, it experiences

Negative real income effects.

The balanced budget multiplier is equal to

1.

Suppose an economy can be described by the consumption function C = 250 + 0.90YD and I = $300. What is the multiplier?

10.

If the CPI increases from 110 to 125 for one year, the rate of inflation for that year is

13.6 percent.

If consumers spend 80 cents out of every extra dollar received, the multiplier is

5.

Using Figure 11.1, which fiscal policy action would increase aggregate demand from AD1 to AD3?

A decrease in taxes.

A leakage is

A diversion of income from spending on domestic output.

When unwanted business inventories pile up, which of the following is likely to occur?

A lower price level.

A tax cut has a smaller impact on aggregate demand than an increase in government purchases of the same size because

A portion of the tax cut is saved.

Which of the following is most likely to reduce a federal budget surplus?

A recession.

With an increase in deficit spending, the

Aggregate demand curve shifts to the right.

A mortgage that adjusts the nominal interest rate to changing rates of inflation is

An ARM

A budget surplus is

An excess of government revenues over government expenditures in a given time period.

Which of the following can eliminate a recessionary GDP gap, ceteris paribus?

An increase in consumption expenditure.

Which of the following fiscal policies would cause a decrease in aggregate expenditures?

An increase in taxes and a decrease in government spending.

Which of the following explains why redistribution occurs during inflation?

Because all prices do not change at the same rate, people buy different combinations of goods and services and own different combinations of wealth.

The movement of taxpayers into higher tax brackets as nominal incomes grow is

Bracket creep.

Leakages include

Business saving.

At the time it occurs, external financing of the debt allows the economy to

Consume beyond the production possibilities curve.

The crowding out effect refers to a decrease in

Consumption or investment as a result of an increase in government borrowing.

The components of aggregate demand are

Consumption, government spending, net exports, and investment.

When natural disasters, such as hurricanes on the U.S. Gulf Coast or an earthquake in Japan, disrupt supply chains and push up the costs of production, this may result in

Cost-push inflation.

Which of the following is eliminated when output equals full-employment GDP?

Cyclical unemployment.

If aggregate demand decreases and aggregate supply decreases, the level of real output will

Decrease, but the price level is indeterminate.

Assuming an upward-sloping AS curve, if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant, then the price level

Decreases and output decreases.

Which of the following is not an automatic stabilizer?

Defense spending.

Ceteris paribus, the price level will decrease if the aggregate

Demand curve shifts to the left.

If consumers attempt to buy more goods than the economy can produce, the result is

Demand-pull inflation.

Which of the following forces did Keynes assert had the strongest influence on consumption decisions?

Disposable income

The desired fiscal restraint is equal to

Excess AD divided by the multiplier.

The investment demand curve would shift to the left because of

Expectations of a recession.

Crowding in is the result of

Falling interest rates.

If the price of your cell phone service increases from $70 to $105 over a period of one year and your income rises from $1,500 to $1,525, your nominal income has

Increased, but your real income has decreased.

According to Keynes, unemployment results from

Insufficient spending on the part of consumers, business, and government.

Uncontrollable government spending includes

Interest payments on the national debt.

Classical economists assume that

Interest rate adjustment will cause business investment to equal consumer saving.

Consumer spending

Is affected by consumer confidence.

The GDP deflator

Is the broadest price index, covering all output.