con

If planned investment spending is $2 trillion and inventories decrease by $0.5 trillion then, actual investment spending is:

$1.5 trillion.

Consider a simple economy: MPC = 0.75, income =$400 billion and aggregate consumption spending= $400 billion. The autonomous consumption is:

$100 billion.

Use the "Consumption and Disposable Personal Income" Figure 16-2. When disposable personal income is $1,200 billion, consumption is _______ billion.

$800

if the government spending multiplier is 5 in Econoland , the value of the tax multiplier must be

(1-MPC)=.2 because Gov spending= 1/(1/5) or .2 = 5. Use it in -.2/(1-.2)= -4

Tax Multiplier

- MPC / (1 - MPC)

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. The tax multiplier is:

.8/(1-.8)=4

Government Spending Multiplier

1 / (1 - MPC)

If the marginal propensity to consume is 0.9, then the tax multiplier will be

9.

Suppose the economy is operating at potential GDP and there is an increase in the money supply. Which of the following best describes the adjustment process that follows?

Aggregate output will rise above potential output, nominal wages will rise, and the SRAS will shift leftward.

Which of the following will cause a decrease in unplanned inventory investment?

An unexpected increase in consumer spending.

Congress increases the personal income tax in order to balance the budget. Which of the following is likely to result?

Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand

Government spending increases to provide funding for tuition assistance for qualified college students. Which of the following is likely to result?

Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

The multiplier effect of changes in government transfers is equal to

MPC/(1 - MPC).

Assume that the MPC = 0.8 and the government increases spending by $100 billion, financing this spending with a $100 billion tax increase. Which of the following will be the likely effect of this action?

Real GDP will expand by $100 billion

_____ inventories typically indicate _______ changes to unplanned inventory investment and a _________ economy.

Rising; positive; slowing

Use the "Short-Run and Long-Run Effects of Monetary Policy" Figure 19-12. If the economy is initially at E2 and the central bank makes no change in its monetary policy, then:

SRAS1 will eventually shift to the left, closing the existing inflationary gap, but raising the aggregate price level.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following would most likely be the end result?

The economy could move into a recession.

Suppose the government increases spending more than is necessary to close a recessionary gap. Which of the following is likely to be the end result?

The economy will experience inflation.

Which of the following policies will shift the AD curve to the left?

The government increases its level of taxation in the economy.

Suppose the marginal propensity to consume changes from 0.75 to 0.90. How will this affect the consumption function?

The slope will get steeper.

A movement along the aggregate demand curve is caused by a

a change in the aggregate price level.

Use the "Fiscal Policy Options" Figure 20-8. If the aggregate demand curve is AD":

a contractionary fiscal policy may be warranted.

Holding everything else constant, the multiplier effect for

aggregate autonomous spending is greater than that for taxes

Use the "Fiscal Policy Options" Figure 20-8. If the aggregate demand curve is AD'

an expansionary fiscal policy may be warranted.

Suppose the economy is currently experiencing a recessionary gap. Which of the following fiscal policy options is most likely to increase real GDP by the largest amount?

an increase in government purchases

Which of the following will shift the AD curve to the right?

an increase in wealth

A movement along the short-run AS curve occurs, holding everything else constant, if there is a:

change in the aggregate price level.

Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of:

cutting taxes by $25 billion to take the economy back to potential output.

Suppose the economy is experiencing a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes.

Consider an economy where the households save 20% of their income. If the government lowers its transfers by $100 billion, then the real GDP will:

fall by $400 billion.

Use the "Aggregate Supply" Figure 18-2. At point F, potential output is:

greater than actual output and unemployment is high.

The multiplier effect of government purchases of goods and services

has a more direct and greater impact than an equal amount of tax changes

The AD curve will shift left:

if there is a decrease in household wealth.

Sticky wages and prices occur:

in the short run.

Use the "Policy Alternatives" Figure 19-11. In Panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government

increase the level of government purchases of goods and services.

As an inflationary gap is eliminated through self-correcting adjustment, the equilibrium price level ________ and the equilibrium real output ________.

increases; decreases

A fall in the market interest rate makes any investment project

more profitable, regardless of whether the funds were borrowed or came from retained earnings.

A fall in the market interest rate makes any investment project:

more profitable, regardless of whether the funds were borrowed or came from retained earnings.

Use the "Fiscal Policy Options" Figure 20-8. If the aggregate demand curve is AD

no change in discretionary fiscal policy is warranted.

If an economy is operating at an output level below its potential output level, holding everything else constant, one would expect in the long run:

nominal wages to fall.

When actual output is above potential output, in the absence of deliberate monetary or fiscal policy:

nominal wages will increase, and the short-run aggregate supply curve will shift to the left.

If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then in the long run, one will find:

nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP.

contractionary fiscal policy

reduces aggregate demand by decreasing government purchases.

he fact that tax receipts fall during a recession:

reduces the adverse effect of the initial fall in aggregate demand.

Use the "Inflationary and Recessionary Gaps" Figure 19-9. In Panel (a), an expansionary policy designed to move the economy from Y1 to Yp would attempt to:

shift aggregate demand to the right.

An increase in wealth or an increase in government spending will result in a:

shift right of the aggregate demand curve.

Planned investment spending will decrease if:

the interest rate rises.

All else equal, the higher the current production capacity in the economy:

the lower is planned investment spending.

When planned investment is less than actual investment, then there must be:

unplanned inventory investment.

Changes in short-run aggregate supply can be caused by changes in:

wages.

Decreasing funding to explore space:

will shift the aggregate demand curve to the left.