Chapter 9, 8, and 10

The formula for the simple spending multiplier is:

1/(1 - MPC).

(Figure: Determining SRAS Shifts) Which statement is NOT correct?

An increase in aggregate demand would lead to deflation.

________ inflation occurs when a supply shock reduces aggregate supply.

Cost-push

_____ is the part of the budget that works its way through Congress each year; it includes such programs as national defense, transportation, Medicaid, and education.

Discretionary spending

Which of the following may be an explanation for the shift in aggregate demand from A to B?

Interest rates fall and boost investment.

The largest category of federal government spending in 2012 was:

Social Security.

_____ is the change in consumption associated with a change in income.

The marginal propensity to consume

______ is the total accumulation of past budget deficits less surpluses.

The public debt

The collapse of home values that began in 2008 led to ____ in Americans' consumption and _____ in their saving rates.

a decrease; an increase

According to Keynes, as income grows:

both consumption spending and saving grow.

If the stock market collapses, consumption will:

decrease because people feel less wealthy.

Suppose the government raises income taxes, so consumers have less take-home pay. This policy action will cause a(n):

decrease in aggregate demand.

Saving is equal to:

disposable income minus consumption.

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

disposable income; consumption

MPC + MPS:

equals 1.

(Figure: Determining Fiscal Policy) The best discretionary fiscal policy option is:

expansionary fiscal policy that leads to full employment.

The _____ lag is the time required to turn fiscal policy into law and affect the economy.

implementation

The shift in aggregate demand depicted may be due to a(n): (from right to left)

increase in income taxes.

Expansionary fiscal policy is typically used to __________ aggregate demand in order to ____________.

increase; escape a recession

The $787 billion stimulus package passed in the United States in 2009 focused more on spending than on taxes partly because:

increased spending leads to a larger increase in GDP than the same reduction in taxes

Government spending on Social Security:

increases aggregate demand.

As income increases, consumption ______

increases at a slower rate

The largest source of federal government revenues is:

individual income taxes.

The spending reduction necessary to bring an overheated economy back to full employment is called the:

inflationary gap.

The GDP gap divided by the multiplier yields the:

inflationary or recessionary gap.

In the simple Keynesian model, equilibrium exists when:

investment spending equals saving.

Crowding out:

leads to higher interest rates.

If the amount of regulation in an economy increases, the aggregate supply curve shifts _____ and output supplied will be _____.

left; reduced

Transfer payments are:

monies paid directly to individuals by the government.

The _____ is the sum of past _____.

public debt; budget deficits

High family debt:

reduces the tendency to consume.

Public choice theorists primarily examine the:

relationship between economics and political decision making.

An increase in taxes:

removes money from the economy's spending stream.

When taxes are decreased, disposable income _______ and consumption spending ______________ multiplied by the change in disposable income.

rises; rises by the marginal propensity to consume

Cost-push inflation occurs when:

rising resource costs reduce short-run aggregate supply.

When the economy is in equilibrium in the simple Keynesian model:

saving is equal to investment.

The government can finance a budget deficit by:

selling assets.

Consumption spending is:

spending by individuals and households on both durable and nondurable goods.

Automatic stabilizers are designed so that as income falls:

spending does not fall as much as income.

Between 1929 and 1933, government spending _____ and net exports _____.

stayed the same; declined

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:

supply-side fiscal policy.

A problem with supply-side fiscal policies is that they:

take longer to work than demand-side fiscal policies.

Investment spending:

tends to be volatile

The idea that new spending creates more new spending is known as:

the multiplier effect.

If the government borrows money from the Federal Reserve:

the quantity of money in circulation will rise.

Cost-push inflation is a situation in which:

the short-run aggregate supply curve shifts leftward.

A depression economy has considerable slack, so:

unemployment is high.

Contractionary fiscal policy:

decreases aggregate demand.

A shift of the aggregate _______ curve to the ________ would cause inflation to rise and employment to increase.

demand; right

Which of the following is NOT a reason the aggregate demand curve is negatively sloped?

income effect

When the price of a given product declines, the consumer's spendable income rises because it takes less income to purchase the same quantity. This is called the:

income effect.

Which of the following equations is correct?

AE = C + I + G + (X - M)

_____ will most likely increase the economy's long-run aggregate supply.

Advances in technology

In macroeconomics, the long run is:

a period long enough that participants in the economy will have enough time to gain all relevant information and enough time to act correctly on that information.

A solution to the simultaneous emergence of deflation and unemployment is to use policies that shift the:

aggregate demand curve to the right.

The curve that shows how much GDP is demanded at various price levels is called:

aggregate demand.

According to Keynes, what determines the level of employment and income?

aggregate expenditures

John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income.

aggregate spending

Supply-side fiscal policies include all of the following EXCEPT:

increasing transfer payments.

Aggregate expenditures are equal to:

the total of consumption plus investment plus government expenditures plus exports minus imports.