Test 3

If disposable income is $3,000 and saving is $1,200, how much is consumption? $4,200 $1,800 $2,100 -$1,200

1800

discretionary spending

The part of the budget that works its way through the appropriations process of Congress each year and includes national defense, transportation, science, environment, and income security.

average propensity to save

The percentage of income that is saved (S ÷Y ).

Cost-push inflation

occurs when a supply shock hits the economy, shifting the SRAS curve to the left. Cost-push inflation makes using policies to expand aggregate demand to restore full employment difficult because of the additional inflationary pressures added to the economy.

cyclically balanced budget

Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recession

Investment demand is assumed to be independent of income, but certain factors can shift investment demand, such as:

Expectations Technological change Operating costs Capital goods on hand

expansionary fiscal policy

Policies that increase aggregate demand to expand output in an economy. These include increasing government spending, increasing transfer payments, and/or decreasing taxes.

demand-pull inflation

Results when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises.

deficit

The amount by which annual government expenditures exceed tax revenues.

marginal propensity to save

The change in saving associated with a given change in income (ΔS ÷ΔY )

annually balanced budget

Expenditures and taxes would have to be equal each year.

contractionary fiscal policy

Policies that decrease aggregate demand to contract output in an economy. These include reducing government spending, reducing transfer payments, and/or raising taxes.

supply-side fiscal policies

Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, supply-side policies take longer to impact the economy.

surplus

The amount by which annual tax revenues exceed government expenditures.

marginal propensity to consume

The change in consumption associated with a given change in income (ΔC ÷ΔY ).

marginal propensity to consume

The change in consumption associated with a given change in income.

marginal propensity to save

The change in saving associated with a given change in income.

The inflationary gap is the reduction in _____ that will move the economy back to full employment.

aggregate spending

Demand-pull inflation

occurs when aggregate demand expands so much that equilibrium output exceeds full employment output. Temporarily, the economy can expand beyond full employment as workers incur overtime and more workers are added. But as wages rise, the economy will move to a new long-run equilibrium, where prices are permanently higher.

In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.

recognition

In the long run, aggregate supply is vertical (LRAS).

t

If the marginal propensity to consume is 3/4, the simple multiplier is 1/4 1.33 4 3

4

If the marginal propensity to consume is 4/5, the simple multiplier is a. 1/6 b. 6 c. 5/6 d. 6/5 e. 5

5

Which of the following programs is NOT included in discretionary spending? national defense transportation social security environment

social security

Withdrawals decrease spending in an economy, and include savings (S), taxes (T), and imports (M).

t

aggregate expenditures (AE)

t

disposable income (Yd)

t

Which of the following appears in the full Keynesian model but not in the simple aggregate expenditures model?

taxes The full aggregate expenditures model adds government spending, taxes, and the foreign sector to the simple aggregate expenditures model.

Firms decide how much to invest by comparing the rate of return on their projects with: the interest rate. the before-tax rate of return. the productivity of the workers assigned to the projects. their total profit.

the interest rate

From 2008 to 2009, the falling stock market reduced the wealth of U.S. households, causing the United States: to move up along its consumption schedule. to shift its consumption schedule downward. to shift its consumption schedule upward. to move down along its consumption schedule.

to shift its consumption schedule downward.

The crowding-out effect can be mitigated if the funds from deficit spending are:

used for public investment.

The long-run supply curve is: A) vertical. B) horizontal. C) elastic. D) inelastic.

vertical

As baby boomers keep retiring in coming years, it is likely that fiscal imbalance will:

worsen. The increasing liabilities of the U.S. federal government means that fiscal imbalance will worsen.

In the simple aggregate expenditures model with no government and no international trade, at the macroeconomic equilibrium, if business investment equals $4 trillion, saving equals: Please choose the correct answer from the following choices, and then select the submit answer button.

Saving equals $4 trillion because at macroeconomic equilibrium in the simple aggregate expenditures model, business investment equals saving.

saving

The difference between income and consumption; the amount of disposable income not spent.

government budget constraint

The government budget is limited by the fact that G − T = ΔM + ΔB + Δ A.

recessionary gap

The increase in aggregate spending needed (when expanded by the multiplier) to bring a depressed economy back to full employment.

public debt

The portion of the national debt that is held by the public, including individuals, companies, pension funds, along with foreign entities and foreign governments. This debt is also referred to as net debt or federal debt held by the public.

decision lag

The time it takes Congress and the administration to decide on a policy once a problem is recognized.

recognition lag

The time it takes for policymakers to confirm that the economy is in a recession or a recovery. Short-term variations in key economic indicators are typical and sometimes represent nothing more than randomness in the data.

implementation lag

The time required to turn fiscal policy into law and eventually have an impact on the economy.

Wealth effect:

When price levels rise, the purchasing power of money saved falls.

Export Price Effect

When the U.S. aggregate price level rises, American goods become more expensive in the global marketplace. Higher prices mean that our goods are less competitive with the goods made in other countries.

Because Susom received a raise in pay from $30,000 to $50,000, his consumption increased from $29,000 to $45,000. What is Susom's marginal propensity to save?

First, calculate Susom's saving. When income was $30,000, his consumption was $29,000, so his saving was $1,000. When his income increased, his consumption increased, and his new level of saving was $50,000 − $45,000, or $5,000. Susom's marginal propensity to save is 0.2, which is determined by dividing the change in saving by the change in income. The equation is MPS = ($5,000 − $1,000)/($50,000 − $30,000) = $4,000/$20,000 = 0.2.

injections

Increments of spending, including investment, government spending, and exports.

All of the following are tools of fiscal policy except one. Which is the exception? Transfer payments Interest rates Government spending Taxes

Interest rates

Which of the following must be true of a commodity for it to be used as money? Its value must differ for all users. It must not be divisible. It must be perishable. It must be readily accepted by many people.

It must be readily accepted by many people.

aggregate supply

The real GDP that firms will produce at varying price levels. The aggregate supply curve is positively sloped in the short run but vertical in the long run.

government budget

constraint The government budget is limited by the fact that G − T = ΔM + ΔB + Δ A.

long-run aggregate supply (LRAS)

curve The long-run aggregate supply curve is vertical at full employment because the economy has reached its capacity to produce.

Which of the following items is NOT a determinant of aggregate demand? A) consumption B) investment C) government saving D) government spending

government saving

The shift in aggregate demand depicted may be due to a(n): (moves horizontally along the x axis aka the output) increase in consumer confidence. increase in exports. decrease in interest rates. increase in income taxes.

increase in income taxes.

A(n) _____ in productivity and a(n) _____ in taxes on producers will shift short-run aggregate supply to the right. increase; decrease increase; increase decrease; decrease decrease; increase

increase; decrease

Supply-side fiscal policies include all of the following EXCEPT: A) investment in human capital. B) projects that include the encouragement of new technologies. C) increasing transfer payments. D) policies that encourage investment in research and development

increasing transfer payments.

Government purchases do not depend on the _____

level of income in the economy(autonomous)

A long-run macroeconomic equilibrium

occurs at the intersection of the LRAS and AD curves, at full employment.

Investment levels depend primarily on the_________

rate of return on capital

Firms buy new capital goods only if they expect

this investment to yield a greater return than other possible uses of their funds

Since 1980 the annual change in consumption spending has typically been from:

0% to +10%. Consumption spending has typically increased between 0% and 10% annually.

How much will $200 in new spending change equilibrium income if the marginal propensity to save is 0.5?

1/(.5)= 2 * 200 = 400

How much will $200 in new spending change equilibrium income if the marginal propensity to save is 0.5?

1/(1-.5) *200

If the recessionary gap is $200 billion and the multiplier is 2, what is the increase in aggregate spending needed to bring the economy to full employment? Please choose the correct answer from the following choices, and then select the submit answer button.

200 billion

In a simple aggregate expenditures model with no government and no international trade, if saving is $2 trillion and consumer spending is $6 trillion, what are aggregate expenditures?

8 trillion

functional finance

An approach that focuses on fostering economic growth and stable prices, while keeping the economy as close as possible to full employment.

Marginal Propensities to Consume and Save

Average propensities to consume and save represent the proportion of income that is consumed or saved.

aggregate expenditures

Consist of consumer spending, business investment spending, government spending, and net foreign spending (exports minus imports): GDP = C + I + G + (X − M).

he determinants of aggregate demand include the components of aggregate spending:

Consumption spending Investment spending Government spending Net exports

negative relationship between_____ and the ______

market interest rate.......the demand for investment

Consequently, annual saving (S)

t

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion, the marginal propensity to save is: 0.2. 0.75. 0.25. There is not enough information to answer this question.

.25

If the marginal propensity to consume is 0.5 and taxes are decreased by a lump sum of $100 billion, what will be the increase in income?

100*.5 =50 50 1/(1-.5)= 100

If the inflationary gap is $100 billion and the multiplier is 2, what is the reduction in aggregate spending needed to reach full employment?

200

(aggregate demand shift) Which of the following may be an explanation for the shift in aggregate demand from line A to line B? (moves vertically along the y axis aka aggregate price level) Prices fall and increase real wealth. Consumer confidence declines and consumption spending falls. Goods and services become less competitive and exports fall. Interest rates fall and boost investments.

Interest rates fall and boost investments.

Inflationary (expansionary) Gap

when economy produces output ABOVE full employment. Results in higher prices, which can lead to other economic problems

Which of the following is a supply-side fiscal policy?

repealing unnecessary government regulations

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is: A) aggregate shifts policy. B) contractionary policy. C) supply-side fiscal policy. D) consumption policy.

supply-side fiscal policy.

Economists typically describe the tax multiplier as being smaller than the spending multiplier. Consider the case of a tax increase: Consumers pay for a higher tax in part by reducing their saving as well as consumption. The reduction in saving dampens the impact of the tax on equilibrium income because those funds were previously withdrawn from the spending stream. The result is that a tax increase (or decrease, for that matter) will have less of a direct impact on income, employment, and output than will an equivalent change in government spending.

t

In equilibrium, all injections must equal all withdrawals: I + G + X = S + T + M

t

The aggregate supply curve shows the real GDP firms will produce at varying price levels.

t

The spending multiplier exists because new spending generates income that results in more spending and income, based on the marginal propensities to consume and save.

t

How much money did the federal government spend if tax revenues were $3.5 trillion, the change in the money supply was $0.3 trillion, the change in bonds was $0.2 trillion, and there was no sale of government assets?

$4 trillion Use the formula for the government budget constraint and the numbers given above to solve for G. The equation is G − $3.5 trillion = $0.3 trillion + $0.2 trillion + $0; so G = $0.5 trillion + $3.5 trillion = $4 trillion.

Net exports depends on

income in other countries

Investment

investment Spending by businesses that adds to the productive capacity of the economy. Investment depends on factors such as its rate of return, the level of technology, and business expectations about the economy

Investment consists of spending on

1)new factories and new equipment 2)new housing 3)New change in inventories

Investment is _______ of the level of income

autonomous

expected annual return

(expected annual dollar earnings/purchase price)*100

Fiscal policies that _____ allow the economy to expand without generating price pressures.

promote investment in new capital equipment

average

propensity to consume The percentage of income that is consumed (C ÷Y ).

If productivity increases, this would cause the _____ curve to shift to the _____.

short-run aggregate supply; right

The part of the national debt held by _____ constitutes a claim on government assets.

the public

Reducing tax rates may result in all of the following, EXCEPT:

decreases in aggregate supply because market prices are higher.

_____ are increments of spending, including investment, government spending, and exports.

injections

All of the following are tools of fiscal policy except one. Which is the exception? a. Taxes b. transfer payments c. interest rates d. government purchases of goods e. government purchases of services

interest rates

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? increase spending by $10 billion reduce spending by $25 billion increase spending by $25 billion reduce spending by $100 billion

reduce spending by $25 billion

Which of the following is an example of contractionary fiscal policy? building a new interstate highway increasing federal spending to renovate college campuses reducing military spending sending taxpayers a $600 rebate

reducing military spending

What is mandatory spending?

spending authorized by permanent laws

Automatic stabilizers are designed so that as income falls: spending rises to a degree that a recession automatically ends. spending does not fall as much as income. the rate of a decrease in spending accelerates. government spending falls so that the budget is always balanced.

spending does not fall as much as income.

Which of the following was the largest federal government outlay in 2015?

ss

In the short run, aggregate supply is upward-sloping (SRAS).

t

Injections increase spending in an economy, and include investment (I), government spending (G), and exports (X).

t

Investment levels depend mainly on the rate of return on capital. Investments earning a high rate of return are the investments undertaken first

t

There is no relationship between ________and _____

the level of income.....investment. Why? Because you can always borrow

Recessionary(Contracting) Gap

the spending needed to close the GDP gap when boosted by the multiplie

What is the implementation lag?

the time required to turn fiscal policy into law and eventually affect the economy This is the implementation lag.

What is the average propensity to save if saving is $10,000 and income is $100,000?

.1

Factors that cause entire consumption function shift?

1)wealth 2)expectations about future prices and income 3)Household Debt 4)taxes

If the spending multiplier is 4, then the marginal propensity to _____ is 0.75. Please choose the correct answer from the following choices, and then select the submit answer button.

consume A spending multiplier of 5 means that one person's spending becomes another's income; the other person spends a portion of that income and so on until the sum of increased spending in the economy is 5 times the original amount.

In the summer of 2011 the economic recovery seemed to be stalled, and the government's budget deficit was rising. Some politicians were calling for higher taxes; others said that was a bad idea because an increase in taxes would result in: Please choose the correct answer from the following choices, and then select the submit answer button.

decreased consumption and decreased saving.

Fiscal policies that _____ allow the economy to expand without generating price pressures.

encourage the development and transfer of new technologies

Which of the following items is NOT a determinant of aggregate demand? investment government saving government spending consumption

government saving

externally held debt Public debt

held by foreigners, including foreign industries, banks, and governments

According to the wealth effect, as prices fall, people feel wealthier and purchase more goods and services.

true

internally held debt .

Public debt owned by domestic banks, corporations, mutual funds, pension plans, and individuals.

In the United States, fiscal policy is enacted by:

congress

Other Determinants of Consumption and Saving

Wealth, expectations, household debt and taxes

Whenever the economy moves away from its full employment equilibrium, one of two gaps is created: Recessionary gap: The increase in aggregate spending (that is then multiplied) to bring a depressed economy to full employment. Inflationary gap: The reduction in aggregate spending (again expanded by the multiplier) needed to reduce income to full employment levels

t

Suppose that government spending decreases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will decrease by $40 billion $160 billion $1,000 billion $200 billion

$1,000 billion

As interest rates _______, investment ________

fall......rises

If Belinda's marginal propensity to save is 0.2, what is her marginal propensity to consume?

.8

According to the Laffer curve, which two tax rates will generate the same tax revenue?

0% and 100% According to the Laffer curve, tax rates of 0% and 100% will both yield zero tax revenue.

Factors that shift the LRAS curve:

Increase in technology Greater human capital Trade Innovation and R&D

How does increased deficit spending lead to a reduction in consumer spending, according to the crowding-out effect?

Increased government spending leads to increased government borrowing, which leads to increased interest rates, which in turn lead to decreased consumer spending.

The aggregate expenditures model states that income is the main determinant of consumption and saving. But other factors also can shift the consumption schedule, such as:

Wealth Expectations Household debt Taxes

paradox of thrift

When investment is positively related to income and households intend to save more, they reduce consumption. Consequently, income and output decrease, reducing investment such that savings actually end up decreasing.

The long-run aggregate supply curve represents the full-employment capacity of the economy.

true

MACROECONOMIC EQUILIBRIUM

Macroeconomic equilibrium occurs where short-run aggregate supply and aggregate demand cross. The spending multiplier exists because new spending generates new round-by-round spending (based on the marginal propensities to consume and save) that creates additional income. The formula for the spending multiplier is 1/(1 − MPC) = 1/MPS. The effect of the multiplier on aggregate output is larger when the economy is in a deep recession or a depression. Policymakers can increase output by enacting policies that expand government spending, consumption, investment, or net exports, or reduce taxes. Demand-pull inflation occurs when aggregate demand expands beyond that necessary for full employment. Cost-push inflation occurs when short-run aggregate supply shifts to the left, causing the price level to rise along with rising unemployment.

discretionary fiscal policy

Policies that involve adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation.

Laffer curve

A curve that shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at a 100% tax rate.

After the elections of 2010, the U.S. Senate remained controlled by the Democrats, but the majority of the House of Representatives became Republican. You might expect that this would increase the _____ lag associated with fiscal policy. Please choose the correct answer from the following choices, and then select the submit answer button.

Decision Decision lag is the time required for both houses of Congress and the administration to decide on a policy. Having different parts of the Congress controlled by different political parties (or having Congress controlled by one party while the president is of another party) usually results in decisions taking more time.

cost-push inflation

Results when a supply shock hits the economy, reducing short-run aggregate supply, and thus reducing output and increasing the price level.

investment demand depends on:

1)expectation about future revenues and return on investment 2)technological change 3)operating costs 4)capital goods on hand

Which of the following is a supply-side fiscal policy?

Correct: more rapid depreciation schedules for plant and equipment more rapid depreciation schedules for plant and equipment

In 2015, more than 40% of federal government spending was on:

Social Security, Medicare, and Medicaid. Social Security, Medicare, and Medicaid constituted more than 40% of spending in 2015.

aggregate demand

The output of goods and services (real GDP) demanded at different price levels.

According to the full aggregate expenditures model, if investment is $5 trillion, government spending is $2 trillion, exports are $1 trillion, saving is $4 trillion, and taxes are $2 trillion, what are imports?

The sum of investment, government spending, and exports must equal the sum of saving, taxes, and imports. (5+2+1)-(4+2)=2

How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.8? Please choose the correct answer from the following choices, and then select the submit answer button.

This is determined by multiplying the amount of new spending by the multiplier, which is 1/(1 − MPC), or 1/MPS = 1/(1 − 0.8)= 5; 5 × $200 = $1,000.

Interest rate effect:

When price levels rise, people need more money to carry out transactions. The added demand for money drives up interest rates, causing investment spending to fall.

At his second press conference, in June 2011, Federal Reserve Chairman Ben Bernanke was asked if his views on the recessionary gap had changed. The recessionary gap is the increase in _____ needed to bring a depressed economy back to full employment. Please choose the correct answer from the following choices, and then select the submit answer button.

aggregate spending

How large is the government's budget deficit if asset sales are $400 billion, the money supply grows by $400 billion, the government sells $1 trillion in bonds, and tax revenues are $500 billion? Please choose the correct answer from the following choices, and then select the submit answer button.

$1.8 trillion The government's budget deficit is financed by asset sales and bond sales. In this case it equals $1.8 trillion. G − T = $400,000,000 + $1,000,000,000,000 + $400,000,000,000 = $1,800,000,000,000, or $1.8 trillion. Challenge this Qu

In a simple aggregate expenditures model with no government and no international trade, if aggregate expenditures are $5 trillion and consumer spending is $3 trillion, business investment is: Please choose the correct answer from the following choices, and then select the submit answer button.

$2 trillion. AE = C + I. If $5 trillion = $3 trillion + business investment, business investment must be $2 trillion.

Because Mayara received a raise in pay from $90,000 to $100,000, her consumption increased from $50,000 to $55,000. What is Mayara's marginal propensity to consume? Please choose the correct answer from the following choices, and then select the submit answer button.

($55,000 − $50,000)/($100,000 − $90,000) = $5,000/$10,000 .5

Because Mayara received a raise in pay from $90,000 to $100,000, her consumption increased from $50,000 to $55,000. What is Mayara's marginal propensity to consume? Please choose the correct answer from the following choices, and then select the submit answer button.

($55,000 − $50,000)/($100,000 − $90,000) = $5,000/$10,000 = 0.5.

What is the spending multiplier if the marginal propensity to consume is 0.8?

1/1-.8= 5

If the inflationary gap is $50 billion and the multiplier is 4, what is the total reduction in GDP needed to reach full employment?

200 billion

Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate demand from _____ to _____, aggregate output will increase from _____ to _____ AD1; AD0; Q0; Qf AD1; AD0; Qf; Q0 AD0; AD1; Q0; Qf AD0; AD1; Qf; Q0

AD0; AD1; Q0; Qf

Housing and stock market prices have risen substantially in recent years. Explain how this affects aggregate demand in an economy

An increase in home prices and stock values would increase the wealth of those who owned these assets. An increase in wealth provides greater financial security, even if income does not change. All else equal, consumption would rise, which would increase aggregate demand.

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded. A) left; decrease B) left; increase C) right; increase D) right; decrease

C) right; increase

Which of the following is NOT a spending withdrawal from the economy? exports saving taxes imports

EXPORTS

macroeconomic equilibrium

Occurs at the intersection of the short-run aggregate supply and aggregate demand curves. At this output level, there are no net pressures for the economy to expand or contract.

Export price effect:

Rising price levels cause domestic goods to be more expensive in the global marketplace, resulting in fewer purchases by foreign consumers.

consumption

Spending by individuals and households on both durable goods (e.g., autos, appliances, and electronic equipment) and nondurable goods (e.g., food, clothing, and entertainment).

multiplier

Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1 − MPC) = 1/MPS. The multiplier operates in both directions

The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment. It is equal to the GDP gap divided by the multiplier.

T

AGGREGATE DEMAND

The aggregate demand curve shows the relationship between real GDP and the price level. The aggregate demand curve has a negative slope because of the impact of the price level on financial wealth, exports, and interest rates. The determinants of aggregate demand are consumer spending, investment spending, government expenditures, and net exports. Changes in any of these determinants will shift the aggregate demand curve.

If there is a recessionary gap: Please choose the correct answer from the following choices, and then select the submit answer button.

aggregate spending should be increased.

Which of the following approaches to federal finance would mandate that expenditures and taxes be equal each year?

an annually balanced budget

short-run aggregate supply (SRAS)

curve The short-run aggregate supply curve is positively sloped because many input costs are slow to change (sticky) in the short run.

(Figure: Laffer Curve 3) A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point _____ in the graph. c a b d

d top of the graph

A decrease in aggregate demand caused by contractionary fiscal policy can lead to:

decreased employment. A decrease in aggregate output caused by contractionary fiscal policy can lead to decreased employment.

Presidents Kennedy and Reagan each implemented a policy of supply-side economics. What did this mainly entail?

decreasing marginal tax rates Presidents Kennedy and Reagan decreased marginal tax rates. President Kennedy reduced the top marginal rate from 70% to 50%, and President Reagan reduced the top marginal rate from 50% to 28%.

(Figure: Determining Fiscal Policy) The best discretionary fiscal policy option is: contractionary fiscal policy that leads to full employment. expansionary fiscal policy that leads to full employment. a combination of expansionary and contractionary fiscal policies to achieve full employment and stable prices. only fiscal policies that lead to a lower price level.

expansionary fiscal policy that leads to full employment.

AGGREGATE SUPPLY

he aggregate supply curve shows the real GDP that firms will produce at varying price levels. The vertical long-run aggregate supply (LRAS) curve represents the long-run full-employment capacity of the economy. Increasing resources or improved technology shift the LRAS curve, which represents economic growth. The short-run aggregate supply (SRAS) curve is upward-sloping, reflecting rigidities in the economy because input and output prices are slow to change (sticky). The determinants of short-run aggregate supply include changes in input prices, productivity, taxes, regulations, the market power of firms, and inflationary expectations

A politician who _____ is using the functional finance approach to the federal budget.

ignores the budget and focuses instead on economic growth Functional finance focuses on fostering economic growth and stable prices while keeping the economy as close as possible to full employment.

In February 2009, Congress approved a $787 billion stimulus package. By March 30, 2011, $633.5 had been spent. This illustrates _____ lag.

implementation Once some new policy has become law, it often requires months of planning, budgeting, and implementation to set up a new program. This process, the implementation lag, rarely consumes less than 18 to 24 months.

Legislators determine a course of action to address high inflation. It takes nearly a year to implement this new policy. This is a description of the:

implementation lag.

Which of the following might be considered the most expansionary set of fiscal policies? a. increase in government purchases, increase in taxes, and decrease in transfer payments b. decrease in government purchases, increase in taxes, and decrease in transfer payments c. increase in government purchases, decrease in taxes, and increase in transfer payments d. increase in government purchases, increase in taxes, and increase in transfer payments e. decrease in government purchases, decrease in taxes, and decrease in transfer payments

increase in government purchases, decrease in taxes, and increase in transfer payments

In Productovia, aggregate demand increases and aggregate supply decreases. Based on the shifts of these two curves, which of the following is a likely outcome? inflation deflation higher taxes lower imports

inflation

Total potential effect on income

initial change in spending X the multiplier

Factors that shift the SRAS curve:

input prices Productivity Taxes and regulation Market power of firms Inflationary expectations

In a full aggregate expenditures model, the tax multiplier: is smaller than the spending multiplier. is larger than the spending multiplier. is negative. is positive but less than one.

is smaller than the spending multiplier.

A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded. A) left; decrease B) left; increase C) right; increase D) right; decrease

left; decrease

If a household's income rises from $16,000 to $16,700 and its consumption spending rises from $15,800 to $16,400, then its a marginal propensity to consume is 0.86 b marginal propensity to consume is 0.99 c marginal propensity to consume is 0.98 d marginal propensity to save is 0.01 e marginal propensity to save is 0.86

marginal propensity to consume is 0.86

Suppose Congress enacts a new Medicare benefit and finances it by raising payroll taxes such that each year's additional outlay is matched by additional revenue. Would this be considered fiscally sustainable?

no, this is still a pay-as-you go plan, which shifts the burden to future generations The fact that a given (or proposed) fiscal policy's fiscal imbalance is zero does not necessarily mean that it is sustainable; this new Medicare benefit also clearly shifts the burden to future generations. For fiscal policy to be sustainable, the present value of all projected future revenues must equal the present value of projected future spending.

short-run macroeconomic equilibrium

occurs at the intersection of the SRAS and AD curves. Short-run equilibrium can occur below full employment (recession) or above full employment (inflationary pressure).

High taxes and/or heavy regulation: A) can cause firms to boost production so they can cover the added costs. B) raise costs of production so that the aggregate supply curve shifts to the left. C) are not likely to affect firms' behavior, since they are more concerned about profit than taxes or regulation . D) are likely to shift aggregate supply to the right.

raise costs of production so that the aggregate supply curve shifts to the left.

An increase in the rate of interest, other things equal, would a have no effect on investment b increase the amount invested since the rate of return would be lower c increase the amount invested because income would rise d reduce the amount invested because the opportunity costs of investing would be higher e increase the amount invested because the rate of return would be higher

reduce the amount invested because the opportunity costs of investing would be higher

Which of the following, when used as inputs for production, most likely contributes to the positive slope of the short-run aggregate supply curve? Please choose the correct answer from the following choices, and then select the submit answer button. food costs for a restaurant rent paid by a bakery the cost of metals, such as copper, for a company that makes electrical wiring the cost of fuel for a taxi driver

rent

An increase in autonomous investment will a. shift the aggregate expenditure line upward b. shift the aggregate expenditure line downward c. result in an upward movement along the aggregate expenditure line d. result in a downward movement along the aggregate expenditure line e. increase aggregate expenditures only at high levels of income

shift the aggregate expenditure line upward

An increase in the value of the U.S. dollar relative to other currencies will a shift the autonomous net export function upward b shift the autonomous net export function downward c cause a rightward movement along the autonomous net export function d cause a leftward movement along the autonomous net export function e show no movement along or shift of the autonomous net export function

shift the autonomous net export function downward

Personal consumption expenditures (C)

t

Personal consumption expenditures (C) represent about 68% of GDP

t

The aggregate demand curve shows the quantity of goods and services (real GDP) demanded at different price levels.

t

The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment. This is easily confused with the GDP gap, the difference between full employment GDP and real GDP.

t

Market interest rate is

the opportunity cost of investing in capital

A grocery store manager must decide whether to buy four rug cleaners to rent to customers. The manager estimates that the first would yield $200 a year, the second $150, the third $75, and the fourth $20. If the interest rate is 12 percent and each rug cleaner costs $500, how many should the manager buy? a None b One c Two d Three e Four

three

Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to save is 0.2?

−$1,500 This is determined by multiplying the amount of reduced spending by the multiplier, which is 1/(1 − MPC) = 1/MPS = 1/(0.2) = 5; 5 × −$300 = −$1,500.

Approximately what share of U.S. GDP is consumption? 70% 80% 60% 90%

70

A tax decrease on producers will shift the aggregate supply curve to the left.

false

One strength of the use of discretionary fiscal policy is the timing lags. True False

false

When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by $75 billion $300 billion $100 billion $400 billion

$300 billion

When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by a. $75 billion b. $100 billion c. $300 billion d. $400 billion e. $500 billion

$300 billion

If the multiplier is 4, a $10 billion increase in autonomous government spending will cause a a. $10 billion increase in equilibrium investment b. $40 billion increase in equilibrium investment c. $40 billion increase in equilibrium real GDP d. $400 billion increase in equilibrium real GDP e. $40 billion increase in consumption spending

$40 billion increase in equilibrium real GDP

Suppose that investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will increase by a. $40 billion b. $160 billion c. $200 billion d. $250 billion e. $1,000 billion

1,000 billion

fiscal sustainability

A measure of the present value of all projected future revenues compared to the present value of projected future spending.

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which of the following statements is correct? The Japanese economy is not in equilibrium. A small increase in spending will have a more powerful effect in starting a recovery in the United States than in Japan. The Japanese economy is more susceptible to a recession caused by a decrease in spending. The U.S. economy tends to overheat from too much spending.

A small increase in spending will have a more powerful effect in starting a recovery in the United States than in Japan.

withdrawals

Activities that remove spending from the economy, including saving, taxes, and imports

cyclically balanced budget

Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions.

Which of the following might cause a change in short-run aggregate supply? (shifts horizontally to the right along the aggregate output) Consumer incomes decrease. Unions successfully negotiate higher wages. Businesses are increasingly optimistic about the future. Taxes on businesses increase.

Businesses are increasingly optimistic about the future.

balanced budget multiplier

Equal changes in government spending and taxation (a balanced budget) lead to an equal change in income (the balanced budget multiplier is equal to 1).

wealth effect

Households usually hold some of their wealth in financial assets such as savings accounts, bonds, and cash, and a rising aggregate price level means that the purchasing power of this monetary wealth declines, reducing output demanded.

Interest Rate Effect

Interest rates are the prices paid for the use of money. If we assume for a moment that the quantity of money is fixed, then as aggregate prices rise, people will need more money to carry out their economic transactions. As people demand more money, the cost of borrowing money—interest rates—will go up.

public choice theory

The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors.

mandatory spending

Spending authorized by permanent laws that does not go through the same appropriations process as discretionary spending. Mandatory spending includes Social Security, Medicare, and interest on the national debt.

multiplier

Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1 − MPC) = 1/MPS. The multiplier operates in both directions.

automatic stabilizers

Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers.

inflationary gap

The spending reduction necessary (when expanded by the multiplier) to bring an overheated economy back to full employment.

Keynesian macroeconomic equilibrium

The state of an economy at which all injections equal all withdrawals. There are no pressures pushing the economy to a higher or lower level of output.

national debt

The total debt issued by the U.S. Treasury, which represents the total accumulation of past deficits less surpluses. A portion of this debt is held by other government agencies, and the rest is held by the public. It is also referred to as the gross federal debt.

(Figure: Aggregate Expenditures) The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100? Total income exceeds spending, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached. Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached. Total spending exceeds income, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached. Total income exceeds spending, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

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

crowding-out effect

When deficit spending requires the government to borrow, interest rates are driven up, reducing consumer spending and business investment.

Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increase a. by $100 b. by $2,000 c. by $1,000 d. to $1,400 e. to $2,000

d. to $1,400

Fiscal Policy Timing Lags

information lag The time policymakers must wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter (three months) after the fact.

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 in AD1; a rightward shift in AD1; c rightward shift in SRAS2; c leftward shift in SRAS2; a

leftward shift in SRAS2; a

If aggregate expenditures equals $7,600 and aggregate income equals $8,000, businesses will produce: less, lowering employment and raising income. more, raising both employment and income. more, raising employment and lowering income. less, lowering both employment and income.

less, lowering both employment and income.

An increase in wealth will a shift the consumption function upward b make the consumption function steeper c cause a movement upward along the consumption function d cause a movement downward along the consumption function e make the consumption function flatter

shift the consumption function upward