Test 3 ALL
Give several examples of fiscal policy from the Great Depression and the more recent Great Recession.
An example is the Economic Stimulus Act of 2008, in which the government attempted to boost the economy by sending taxpayers $600 or $1,200 depending on their marital status and number of dependents. The total cost was $152 billion. Another example is the Social Security Act of 1935, in which the government established a permanent system of universal retirement pensions (Social Security), unemployment insurance and welfare benefits for the handicapped and needy children in families without a father present.
Draw the AS/AD model. Show and state the effect on the price level and RGDP from a decrease in consumer confidence.
OPEC increase in the production of oil → oil price decreases →costs of production for the economy decreases → AS curve shifts to the right
Draw the AS/AD model to show the economy at full employment. Show and explain how it would go into a recession from the demand side (don't forget that you have to identify the new inflation rate and RGDP).
AD shifts to the left→RGDP level decreases and Inflation rate decreases
Calculate the change in income from an increase in government spending of 500 billion dollars on the economy if the multiplier is 2. Calculate the change in income if the 500 billion dollars was a tax cut, the multiplier is 2 and the mpc is .9.
Change in GDP = K x Change in G The change in GDP equals to the multiplier times the change in the autonomous government spending. Change in GDP =500*2=1000 billion Change in GDP = (-mpc) x K x change in T When the government decreases taxes it is allowing us to keep the money that we used to pay into the government, so we will spend most of that money but not all of it. Change in GDP = (-0.9)*2*500 =900 billion
Using the AS/AD model, show the economy at full employment and show the effect of an OPEC increase in the production of oil.
Decrease in consumer confidence→AD curve shifts to the left→Price level and RGDP decrease
If the multiplier is 2 and the mpc is .9, what effect would there be on the economy if government spending went up by 1 trillion dollars and taxes also went up by 1 trillion dollars?
K x change in G + (-mpc) x K x change in t = 10 x 1 + (-0.9) x 10 x 1 = 1 Trillion
If the economy is in equilibrium, does that mean that it is also at full employment RGDP?
No. The full employment RGDP is the level where we would like to go. The equilibrium income is the place where we have total spending = RGDP. However, the RGDP might be or not be at the ideal level.
What information does the AD curve give us?
The AD curve is downward sloping to reflect the inverse relationship between the inflation rate and RGDP.
Define and talk about fiscal policy and the importance of the spending multiplier and how it works. How is the simple multiplier calculated?
The central government's ability to change the tax rates and or government spending to shift the aggregate demand curve (AD curve) to the left or right to bring the economy back to full employment equilibrium. It makes the fiscal policy works. GDP = C + I + G + Xn G up → Income Earned Up→ Induced Spending Up → Income Earned Up→... Spending Multiplier (K) = 1/(1-mpc)
Using the AS/AD model, show the economy at full employment and show the effect of a decrease in worker productivity.
Worker productivity decreases→costs of production increases→AS shifts to the left
Would a change in the production of oil (just one product) affect the entire economy? Why or why not?
Yes, change in the production of oil would shift the AS curve which may lead to a new level of economy equilibrium by causing an new inflation rate and RGDP
Assuming that we are not producing at full capacity, an increase in demand (a shift to the right in AD) will result in which of the following? (multiple answers) a) An increase in real GDP b) An increase in the inflation rate c) A shift in the AS curve d) Movement along the AS curve
a) An increase in real GDP b) An increase in the inflation rate d) Movement along the AS curve
The economy can be at equilibrium and in a recession at the same time. a) True b) False
a) True
If the government were to increase spending AND taxes by the same amount, RGDP would a) go up by the increase in government spending. b) not change since the increase in taxes would counter the increase in spending. c) go up by the increase in government spending times the multiplier. d) go down by the increase in taxes times the multiplier.
a) go up by the increase in government spending.
Spending that is not caused by a change in income is called: (word answer)
autonomous spending
An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. If the multiplier is 2, by how much should the government cut spending to achieve its objective? a) 36 billion dollars b) 18 billion dollars c) 9 billion dollars d) 6 billion dollars
b) 18 billion dollars
A decrease in consumer confidence about job security may affect consumption spending and be most likely to cause which of the following? a) A decrease in employment and perhaps an increase in inflation b) A decrease in employment and perhaps a decrease in inflation c) An increase in employment and perhaps an increase in inflation d) An increase in employment and perhaps a decrease in inflation
b) A decrease in employment and perhaps a decrease in inflation
An economy cannot be in equilibrium and recession at the same time. a) True b) False
b) False
In 2008, President Obama spent only 787 billion dollars to close the 2 trillion dollar RGDP gap so that little increase in spending would not even make a dent which is why it took more than 6 years to get the economy back to full employment. a) True b) False
b) False
The spending multiplier is calculated as a) 1/(1 + mpc). b) 1/mpc. c) 1/mps. d) 1/(1 - mps).
c) 1/mps.
If the recessionary gap is 2 trillion dollars and the multiplier is 2, then TOTAL spending would have to rise by a) 1 trillion dollars. b) 2 trillion dollars times the multiplier. c) 2 trillion dollars. d) .5 trillion dollars.
c) 2 trillion dollars.
In the graph above, assume that the economy starts out at Y1 and INF1. Following expansionary fiscal policy the economy would end up at a) Y4 and INF2. b) Y1 and INF1. c) Y2 and INF2. d) Y3 and INF1.
c) Y2 and INF2.
The causes of the business cycle can be traced back to a) a change in GDP. b) a change in unplanned spending. c) a change in autonomous spending. d) all of the above.
c) a change in autonomous spending.
Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely a) crowd out future public investment. b) reduce the economy's future productive capacity. c) complement private investment. d) crowd out private investment.
c) complement private investment.
The size ranking, biggest to smallest, of the four spending groups is a) consumer, investment, net exports, government. b) government, consumer, investment, net exports. c) consumer, government, investment, net exports. d) none of the above.
c) consumer, government, investment, net exports.
What would be the change in RGDP from a 100 billion dollar decrease in government spending AND a 100 billion dollar decrease in taxes if the multiplier is 5. a) zero. b) decrease by 500 billion. c) decrease by 100 billion. d) increase by 100 billion.
c) decrease by 100 billion.
Inflation caused by an increase in aggregate spending is referred to as a) anticipated inflation. b) supply-side inflation. c) demand-side inflation d) hyperinflation.
c) demand-side inflation
According to the Circular Flow diagram, when total spending is less than GDP a) inventories rise, production falls, and total spending rises to catch up to GDP. b) inventories fall, total spending falls back down to the level of GDP. c) inventories rise, production falls, and GDP falls to meet total spending. d) total spending can never be less than GDP.
c) inventories rise, production falls, and GDP falls to meet total spending.
People really dislike falling income and rising inflation. What kind of change in our model will make people really unhappy? a) An increase in AD b) An decrease in AD c) An increase in AS d) An decrease in AS
d) An decrease in AS
The circular flow model shows that the economy is in equilibrium when a) total spending equals GDP. b) leakages equal injections. c) inventories are constant. d) all of the above.
d) all of the above.
The multiplier is useful in determining the a) full-employment unemployment rate. b) level of business inventories. c) change in the rate of inflation from a change in the interest rate. d) change in GDP resulting from a change in autonomous spending.
d) change in GDP resulting from a change in autonomous spending.
To calculate the change in RGDP from an increase in taxes use the formula a) change in RGDP = the multiplier minus the increase in taxes. b) change in RGDP = minus the change in taxes times the mpc. c) change in RGDP = the multiplier times the mpc. d) change in RGDP = minus the multiplier times mpc times the change in taxes.
d) change in RGDP = minus the multiplier times mpc times the change in taxes.
The largest component of total expenditures in the United States is a) gross investment. b) government spending. c) net exports. d) consumer spending.
d) consumer spending.
When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be a) passive b) automatic c) non discretionary d) countercyclical
d) countercyclical
Equilibrium GDP is attained when a) the economy is at full employment. b) the trade deficit is zero. c) either A or B may be true. d) none of the above are true.
d) none of the above are true.
Explain the role of the marginal propensity to consume in bringing the economy back to equilibrium from a decrease in total spending and give a reason for this decrease in spending.
each decrease in income of one dollar our spending only decreases by 90 cents, so once again the GDP goes down faster than spending so that they are once again equal and the economy is back again to equilibrium.
List all of the factors that shift the AD curve to the right making sure to include the direction of the exogenous variable. Do the same thing for the factors that shift the AD to the left.
the AD curve will shift in response to changes in exogenous factors and in this case these would be autonomous ( non-income related) changes in spending from any of the four spending groups: consumer, government, investment, and net export spending. The AD curve shifts to the right for decreases in interest rates, taxes, the general price level, and exchange rates. It will also shift to the right for increases in consumer and business confidence, expected inflation, and the RGDP of other countries.
If a friend of yours asked you to explain why the US economy goes from recession to inflation over and over, could you explain why?
"When there is a change in any of the factors that affect autonomous spending, like consumer and business confidence or taxes or interest rates, spending in one or all of the spending groups changes. When that happens total spending will either be greater than or less than the number of goods produced and the business firms will change their level of production—which is a change in GDP. In late 2007 consumers and businesses stopped spending as a result of the housing crash and bank failures. With so little spending inventories starting rising, and it did not take long for firms to cut back on production by laying off hundreds of thousands of workers. The bottom line is simple: the swings in GDP from booms to busts is caused by changes in autonomous spending by government, consumers, planned investment spending, or net export spending."
What are the main differences between the use of taxes versus government spending for fluctuations in the business cycle?
An increase in gov't spending is better for recession than a decrease in taxes (expansionary fiscal policy) In recession, it's hard to get people or businesses to spend money, so the tax cut will result in more saving. Business will not spend any tax savings to produce goods and services that people aren't buying Tax cut only helps employed people Tax cut →spend on consumer goods→little to promote economic growth. Gov't spending→infrastructurepromote economic growth An increase in taxes is better for inflation than a decrease in gov't spending (contractionary fiscal policy) Raising taxes→get people to stop spending Cut gov't spending→little effect on people's spending→hurt people who depend on those public services
Using the AS/AD model show and explain the implementation and consequences of effective fiscal policy for fighting a recession or inflation.
An increase in government spending or a decrease in taxes or both This action re-established full employment equilibrium at YFE and a new, higher inflation rate of 3%.
Why does the AS curve slope upward at an increasing rate?
At low levels of economic activity, RGDP, there is ample unemployment of all four resources, so starting up a business does not incur high start-up costs, so inflation will not rise much if at all. But as the economy heats up and moves closer and closer to full employment, the unemployment rate falls lower and lower and new start-up costs are rising faster and faster causing higher and higher inflation.
List the 4 spending groups and their percentages of GDP
Consumer Spending 70%; Government Spending 25%; Net Export Spending -5%; Investment Spending 10%
What would be the required change in government spending and taxes if the recession gap was 2 trillion dollars and the government wanted there to be no effect on the budget?
If we wanted have no effect on the budget, we must have the increase in government spending equals to the increase in taxes. Thus, we have Change in G = Change in T K x Change in G + (-mpc) x K x change in G = 2 Suppose mpc=0.5, so K=2. Then we can plug them into the equation above. 2* change in G + (-0.5)*2* Change in G= 2 1* = Change in G = 2 Change in G = 2 trillion
Assume that the U.S. economy is at its full-employment level of output, and there is a fall in net exports. Click on the area that represents the short-run equilibrium for the U.S. economy.
It is the one to the left on the green line Distinguish between the short-run and long-run effects of a change in aggregate demand. While in the short run, both the output and price levels fall, wage rates eventually begin to decrease. The high rate of unemployment puts a downward pressure on wages. Lower wages increase aggregate supply. Thus, output returns to the full employment level but with a significant fall in prices.
The Confidence Index showed that business confidence fell recently. Use the AS/AD model to show and explain what effect this would have on the equilibrium levels of GDP and inflation.
Optimistic on investment→spending less on investment→DAD shifts to the left
Using the AS/AD model show the economy at full employment. Show and explain the affect on the AS/AD model from an increase in consumer and business optimism of the future economic outlook. Make sure to explain what happens to either or both of the two curves and the adjustment to the new equilibrium GDP and inflation rate.
Optimistic on investment→spending more on investment→DAD shifts to the right If the investment is spent on improving productivity→DAS shifts to the right Optimistic on economic outlook→spending more on consumer goods and services→DAD shifts to the right
What factor(s) could impede the effectiveness of the spending multiplier, especially in a recession?
People's losing confidence, which might decrease mpc and K.
What is the role of the automatic stabilizers? How do they work?
Recession → Budget automatically goes into deficit→ Tax revenues fall when people are out of work & Gov't spending rises due to social programs → Act as a brake on the recession → Keep the economy a further recession
What information does the AS curve give us?
The AS curve shows the positive relationship between RGDP and inflation from the producers' point of view, and as such it represents the behavior of firms in their production of goods and services.
List all of the factors that shift the AS curve to the right making sure to include the direction of the exogenous variable. Repeat this for the factors that shift the AS curve to the left.
The AS shifts in response to changes in the costs of production which include wages, rent, interest, profit, energy sources, productivity, taxes, subsidies, new technology, and natural disasters.
How would we model the effect of a new costly regulation on businesses? a) A shift left of the AD curve b) A shift left of the AS curve c) A shift right of the AD curve d) A shift right of the AS curve
b) A shift left of the AS curve
What does the AS/AD model determine?
The main function of this model is the determination of equilibrium GDP and rate of inflation
What are the three ways to say that the macro-economy is in equilibrium?
Total Spending = GDP; Injections are equal to leakages; Inventories are constant. All three ways are the same: the money spent = the value of things produced
If total spending is greater than RGDP how does the economy respond and how does it get back to equilibrium?
Total spending is greater than RGDP, inventories fall, firms increase production, RGDP increase to catch up the total spending Firms realize inventories are going down so they need to increase production so GDP rises so total spending therefore rises
If total spending is less than RGDP how does the economy respond and how does it get back to equilibrium?
Total spending is less than RGDP, inventories increase, firms decrease production, RGDP falls to meet with total spending Firms realize inventories are high, so they decrease production, induced the autonomous spending decreases then, which decreases GDP, so then total spending decreases. GDP decreases faster than total spending bc of MPC
Explain the difference and the importance of planned and unplanned investment spending.
Unplanned spending = changes in inventories planned spending is spending by firms on plants and equipments; unplanned spending is the changes in inventories. We can detect that whether the economy is in equilibrium by looking the unplanned investment spending. GDP is equal to the dollar value of total spending, but something provided in one year does not mean that it is bought in the same year. But if something is produced, it must be either bought or held as inventory, so when we can add up all the planned spending and unplanned spending, it must equal GDP.
What role do inventories play in the economy?
We can see that if economy is in equilibrium by checking whether inventories is constant the first sign that firms have that autonomous spending has changed. Is also the force of the adjustment mechanism firms use to get back to equilibrium
What assumption concerning the central banks do we make for us to draw the AD curve downward sloping?
When the income level (RGDP) is low, the Federal Reserve Bank will follow an easy money policy, thus raising the money supply to keep interest rates low causing more spending and raising RGDP.
Would a change in labor productivity (just one factor of production) affect the entire economy? why or why not?
Yes. The improvement of labor productivity would lower the production costs of the entire economy....
Start with RGDP and go around the circle describing and explaining each type of spending and the leakages and injections until you get back to total spending.
[look at leakages and injections from outside stream]if at the end total spending = GDP then you are at equilibrium RGDP goes to our income. Our income, we pay taxes into the government—our first example of money going off the spending circle: a leakage. But the government pays out transfer payments such as social security, unemployment payments, and other social programs, so this is money that comes back into the circle in the form of an injection and together with what consumers did not pay in taxes creates disposable income. Of disposable income there are two choices of where it can go: we can spend it or we can save it. What is spent by consumers, called CONSUMER SPENDING, stays on the spending circle and it is the largest component of total spending. In the U.S. consumer spending is about 70% of total spending. What is saved goes into the bank—off the circle, another leakage. Some of that money is borrowed and spent by businesses in the form of investment—an injection back onto the circle. The next big spending component of total spending is the government. What the government spends beyond what it takes in in taxes is borrowed, so both taxes paid by consumers and money saved by consumers come back into the spending circle—injections—in the form of GOVERNMENT SPENDING. This is about 25% of total spending. And the last component of total spending is NET EXPORTS: exports minus imports. Imports cost the society money so spending goes out of the spending stream, but exports earn the economy money so money comes back in. Since the U.S. usually runs a trade deficit, this is about a negative 5% of GDP.
Which of the following will be affected by a change in the average price level or inflation rate? (multiple answers) a) Consumption b) Investment c) Government d) Net Exports e) Saving
a) Consumption b) Investment d) Net Exports e) Saving These are the reasons for why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports. (Government spending is assumed to be determined from outside the model). Saving would likely change too, but it is not one of the spending components of GDP.
The built-in stabilizers in the economy tend to a) Dampen the irregular swings in real GDP. b) Overcompensate for the irregular swings in real GDP c) Magnify somewhat the irregular swings in real GDP. d) Fully offset irregular swings in real GDP.
a) Dampen the irregular swings in real GDP.
Which of the following would cause AD to decrease, that is, shift to the left? a) Increase in income taxes b) Decrease in income taxes c) Optimism about future income d) Lower GDP deflator
a) Increase in income taxes An increase in income taxes leads to less disposable income for consumers. Therefore, consumers are able to purchase less at any given price level, which causes the AD curve to shift to the left. (b and c are shifts to the right, d is a movement along the curve)
A fall in interest rates is likely to change investment spending, real GDP, prices, inflation, and employment in the short run in which of the following ways? a) Increase investment, real GDP, prices, inflation, and employment b) Decrease investment, real GDP, prices, inflation, and employment c) Increase investment and real GDP, but decrease prices, inflation, and employment d) Decrease investment and real GDP, but increase prices, inflation, and employment
a) Increase investment, real GDP, prices, inflation, and employment
Unplanned spending could be identified as a) a decrease in inventories. b) spending on machines and factories. c) autonomous consumer spending. d) none of the above.
a) a decrease in inventories.
An MPC value of less than 1.0 indicates that as income increases a) consumption also increases, though not as much as income b) consumption also increases, and at the same rate as the increase in income c) consumption also increases, and by more than the increase in income d) consumption will go in the opposite direction and decrease
a) consumption also increases, though not as much as income
If the spending multiplier is 2 and the recession GDP gap is $100 billion. To achieve full-employment output exactly, government should a) increase government expenditures by $50 billion. b) reduce taxes by $200 billion. c) increase government expenditures by $100 billion. d) reduce taxes by $50 billion.
a) increase government expenditures by $50 billion.
Discretionary fiscal policy refers to a) intentional changes in taxes and government expenditures made by Congress to stabilize the economy. b) any change in government spending or taxes that destabilizes the economy. c) the changes in taxes and transfers that occur as GDP changes. d) all of the above.
a) intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
When total spending is greater than GDP a) inventories fall, production rises, and GDP rises to catch up to total spending. b) inventories fall, and total spending falls back down to the level of GDP. c) inventories rise, production rises, and GDP rises to catch up to total spending. d) total spending can never be greater than GDP.
a) inventories fall, production rises, and GDP rises to catch up to total spending.
Equilibrium GDP is attained when a) leakages equal injections. b) the economy is at full employment. c) the trade deficit is zero. d) all of the above.
a) leakages equal injections.
In contrast to consumer spending, investment spending is a) small and relatively unstable. b) small and relatively stable. c) large and relatively stable. d) large and relatively unstable.
a) small and relatively unstable.
According to the Circular Flow diagram, leakages out of the spending stream could be a) taxes. b) investment. c) government transfer payment. d) none of the above are examples of leakages.
a) taxes.
GDP rises faster than total spending because a) the marginal propensity to consume is less than unity. b) induced spending is negative. c) autonomous spending is less than induced spending. d) all of the above.
a) the marginal propensity to consume is less than unity.
The marginal propensity to consume is defined as the amount spent of each new dollar earned. a) true b) false
a) true
GDP is equal to the value of the money spent as long as a) unplanned spending equals zero. b) unplanned spending equals planned spending. c) planned spending equals zero. d) none of the above.
a) unplanned spending equals zero.
A booming stock market may affect consumption spending and be most likely to cause which of the following? a) A decrease in employment and perhaps an increase in inflation b) An increase in employment and perhaps an increase in inflation c) A decrease in employment and perhaps a decrease in inflation d) An increase in employment and perhaps a decrease in inflation
b) An increase in employment and perhaps an increase in inflation
Which of the following represents movement along the aggregate demand curve? Select all that apply. a) Optimistic consumers decide to spend more. b) As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending. c) Falling inflation that decreases interest rates causing investment spending to rise. d) Businesses increase investment spending. e) Government increases spending. f) People from around the world want to buy more Teslas as the inflation rate in the U.S. falls.
b) As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending. c) Falling inflation that decreases interest rates causing investment spending to rise. f) People from around the world want to buy more Teslas as the inflation rate in the U.S. falls. {shifting along a curve means changes in the X or Y variable, shifting the whole curve means changes in things not on the axis}
If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n) a) Supply-side fiscal policy b) Expansionary fiscal policy c) Contractionary fiscal policy d) Nondiscretionary fiscal policy
b) Expansionary fiscal policy
Fiscal policy is mainly undertaken by the Federal Reserve. a) True b) False
b) False
The aggregate demand curve slopes downward because ______________. (multiple answers) a) Actions of the Federal Reserve Bank b) The inflation rate affects the real value of currency c) The inflation rate affects interest rates d) The inflation rate affects imports and exports
b) The inflation rate affects the real value of currency c) The inflation rate affects interest rates d) The inflation rate affects imports and exports Answer (a) is not correct - diminishing marginal utility explains why the demand for a particular good slopes down, but does not explain why the aggregate demand curve slopes down. . Answers b, c and d are the three effects of why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports.
Which of the following serves as an automatic stabilizer in the economy? a) The inflation rate. b) The progressive income tax system. c) Interest rates. d) Exchange rates.
b) The progressive income tax system.
Put into order the following events. a) total spending is greater than GDP b) a rise in optimism among consumers and businesses about the future c) an increase in induced spending d) an increase in autonomous consumer and business spending e) GDP and Total spending rise but GDP rises faster until the two are equal f) a decrease in unplanned spending (inventories start to fall) g) an increase in production and income h)the adjustment stops until there is another exogenous change in spending
b) a rise in optimism among consumers and businesses about the future d) an increase in autonomous consumer and business spending a) total spending is greater than GDP f) a decrease in unplanned spending (inventories start to fall) g) an increase in production and income c) an increase in induced spending e) GDP and Total spending rise but GDP rises faster until the two are equal h)the adjustment stops until there is another exogenous change in spending
An equal increase in government spending and taxes would result in a) a decrease in RGDP b) an increase in RGDP c) no change in RGDP d) an uncertain change in RGDP
b) an increase in RGDP
Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in a) an increase in real GDP and an increase in inflation. b) an increase in real GDP and a decrease in inflation. c) an increase in real GDP and an ambiguous effect on inflation. d) a decrease in consumption and no change in inflation.
b) an increase in real GDP and a decrease in inflation.
Due to automatic stabilizers, when the nation's total income rises, government transfer spending a) increases and tax revenues decrease. b) decreases and tax revenues increase. c) stays the same and tax revenues decrease. d) stays the same and tax revenues increase.
b) decreases and tax revenues increase.
An increase in aggregate demand results in ____________ a) higher inflation and lower real GDP. b) higher inflation and higher real GDP. c) lower inflation and higher real GDP. d) lower inflation and lower real GDP.
b) higher inflation and higher real GDP.
A tax reduction of a specific amount will be more expansionary the a) smaller is the economy's MPC. b) larger is the economy's MPC. c) smaller is the economy's multiplier. d) less is the economy's built-in stability.
b) larger is the economy's MPC.
According to the Circular Flow diagram, when total spending equals GDP a) the economy is at full employment. b) the economy is in equilibrium. c) autonomous spending equals induced spending. d) all of the above are true.
b) the economy is in equilibrium.
The figure below shows the effect of an increase in total national spending. What is the level of output after the increase in spending? a) $14 trillion b) $16 trillion c) $17 trillion d) Cannot be determined
c) $17 trillion The aggregate demand curve will shift to the right. Before the increase in aggregate demand, the graph shows an equilibrium below full employment. When the aggregate demand curve shifts to the right, the equilibrium shifts out to the full employment level. Due to the rise in spending, businesses will find themselves in positions where prices have to be raised in order for them to be willing to increase production. The new equilibrium will yield a higher real GDP (at $17 trillion) and a higher price level.
In 2008, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this using the AS/AD model? a) Movement along the AD curve to the right b) A shift in the AS curve to the right c) A shift in the AD curve to the left d) A shift in the AD curve to the right
c) A shift in the AD curve to the left While there is a decrease in wealth here, it is caused by a decrease in assets other than money. The wealth effect that moves us along the Aggregate Demand curve talks about money holdings, that is wealth derived from cash and deposits. If the wealth is reduced by changes in the values of other assets, such as real estate or stock holdings, then the AD curve shifts.
How would we model an increase in the amount of capital available in an economy? a) A shift left of the AD curve b) A shift left of the AS curve c) A shift right of the AS curve d) A shift right of the AS curve
c) A shift right of the AS curve
People tend to like higher incomes and lower inflation. What kind of change in our model results in higher incomes and lower inflation? a) An increase in AD b) An decrease in AD c) An increase in AS d) An decrease in AS
c) An increase in AS
Why does the aggregate supply curve become very steep at high levels of real GDP? a) Most producers are monopolists and will charge as high a price as possible. b) Producers produce a fixed amount of goods no matter what the price is. c) At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices. d) Real GDP is unrelated to spending decisions in the short run.
c) At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices.
A decrease in government spending will cause a(n) a) Increase in the quantity of real output demanded b) Decrease in the quantity of real output demanded c) Decrease in aggregate demand d) Decrease in aggregate supply
c) Decrease in aggregate demand
Which of the following changes would cause a shift in the aggregate demand curve? I. Increase in investment II. Decrease in productivity III. Increase in consumption a) I only b) II and III only c) I and III only d) I and II only e) I, II, and III
c) I and III only A shift in the aggregate demand curve is caused by changes in factors influencing the amount of spending in the economy. Thus, both investment spending and consumption spending will shift the aggregate demand curve. A change in productivity will affect the amount that businesses can produce at each price level. Thus, a decrease in productivity will reduce aggregate supply and shift the aggregate supply curve to the left.
As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________. (multiple answers) a) Movement along the aggregate demand curve b) A shift in aggregate supply c) Movement along the aggregate supply curve d) A shift in the aggregate demand curve
c) Movement along the aggregate supply curve d) A shift in the aggregate demand curve
Expansionary fiscal policy is so named because it a) is aimed at achieving greater price stability. b) involves an expansion of the nation's money supply. c) is designed to expand real GDP. d) necessarily expands the size of government.
c) is designed to expand real GDP.
One advantage of automatic stabilization policy over discretionary fiscal policy is that it a) makes the actual budget a better reflection of the condition of the economy than the standardized budget. b) does not produce a cyclical deficit as discretionary policy does. c) is not subject to the timing problems of discretionary policy. d) has a greater multiplier effect than discretionary policy.
c) is not subject to the timing problems of discretionary policy.
A rightward shift in the aggregate supply curve is best explained by an increase in a) the price of imported resources. b) business taxes. c) productivity. d) nominal wages.
c) productivity.
If the economy is in a 4 trillion dollar recessionary gap, and the multiplier is 2, then to close the gap a) the increase in spending would have to be greater than the decrease in taxes b) would require a 2 trillion dollar increase in spending or a 2 trillion dollar decrease in taxes. c) the debt would get larger from a decrease in taxes than it would from an increase in spending. d) none of the above are true.
c) the debt would get larger from a decrease in taxes than it would from an increase in spending.
Which of the following supports government spending over tax cuts for recession a) government spending goes to infrastructure. b) government spending goes to the unemployed. c) government spending has a larger multiplier effect. d) all of the above.
d) all of the above.
An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the a) net export effect. b) wealth effect c) real-balance effect d) multiplier effect
d) multiplier effect
According to the Circular Flow diagram, injections into the spending stream include a) net exports. b) savings. c) taxes. d) none of the above.
d) none of the above.
If the mpc is .9 then out of each 100 dollars of income consumers will a) spend .9 dollars. b) save 90 dollars. c) spend 80 dollars. d) spend 90 dollars.
d) spend 90 dollars.
Define crowding out and crowding in and explain how fiscal policy may result in either one and what each would mean for the effectiveness of fiscal policy?
don't need to know Crowding out of private investment: When the government borrows money to increase its spending it may raise interest rates. This increase in interest rates forces some firms to cancel their investment projects that were profitable at the lower interest rates but not at the new higher rates. So it amounts to one group of spenders--government--simply crowding out another group--business investment. If this crowding out actually does occur, then fiscal policy would not produce more spending in total and would therefore be ineffective in bringing the recession to an end. Crowding in of private investment: the government infrastructure in education, technology, or transportation, may attract investment spending to an area. Crowding out might be better for economic growth in the future. If the private investment money were to have gone to building a million dollar yacht, another golf course, or a bonus for its executives then it might better be spent by government on healthcare, low income housing, or education.
Explain the concept of the marginal propensity to consume and the role that it plays in bringing the economy back to equilibrium from an increase in total spending and a reason for the spending increase.
marginal propensity to consume is the amount that we spend out of each new dollar. People spend 90% of their income and save the rest of it in the bank. When GDP goes up spending also goes up because of induced spending, but spending only goes up by 90 cents for each new dollar earned so GDP is going up faster than total spending. Eventually GDP catches up to total spending, and the economy is once again at equilibrium
