ECO2013 Exam 3 Practice

Suppose the price level is fixed, the MPC is 0.8, and the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should

increase government expenditures by $40 billion.

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by

increasing government spending by $4 billion.

The group of three economists appointed by the president to provide fiscal policy recommendations is the

Council of Economic Advisers.

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. Because of the ratchet effect,

contractionary fiscal policy that shifts aggregate demand to AD1 will cause real GDP to fall below its full-employment level.

Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of

built-in stability.

Money supply M1 does not include the currency held by

commercial banks.

In the diagram, a shift from AS1 to AS3 might be caused by a(n)

increase in the prices of imported resources.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

One reason that near monies are important is because

they can be easily converted into money or vice versa, and thereby can influence the stability of the economy.

The shape of the immediate-short-run aggregate supply curve implies that

total output depends on the volume of spending.

A $70 price tag on a sweater in a department store window is an example of money functioning as a

unit of account.

In the accompanying graph, which line might represent an aggregate demand curve?

1

The immediate-short-run aggregate supply curve is

horizontal

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. The per-unit cost of production in this economy is

$0.10.

Item Billions of Dollars Checkable Deposits $597 Small TIme Deposits 818 Currency 639 Money-Market Mutual Funds Held By Businesses 1,045 Savings Deposits, Including Money-Market Deposit Accounts 2,866 Money-Market Mutual Funds Held By Individuals 979 Refer to the accompanying table. The size of the M1 money supply is

$1,236 billion.

Item Billions of Dollars Checkable Deposits $2,000 Small TIme Deposits 350 Currency Held By The Public 80 Savings Deposits, Including Money-Market Deposit Accounts 1,300 Money-Market Mutual Funds Held By Individuals 600 Money-Market Mutual Funds Held By Businesses 700 The accompanying table contains hypothetical data for an economy. The size of the M1 money supply is

$2,080.

Item Billions of Dollars Checkable Deposits $2,000 Small TIme Deposits 350 Currency Held By The Public 80 Savings Deposits, Including Money-Market Deposit Accounts 1,300 Money-Market Mutual Funds Held By Individuals 600 Money-Market Mutual Funds Held By Businesses 700 The accompanying table contains hypothetical data for an economy. The size of the M2 money supply is

$4,330.

Item Billions of Dollars Checkable Deposits $597 Small TIme Deposits 818 Currency 639 Money-Market Mutual Funds Held By Businesses 1,045 Savings Deposits, Including Money-Market Deposit Accounts 2,866 Money-Market Mutual Funds Held By Individuals 979 Refer to the accompanying table. The value of the money included in M2 but not counted in M1 is

$4,663 billion.

Item Billions of Dollars Checkable Deposits $597 Small TIme Deposits 818 Currency 639 Money-Market Mutual Funds Held By Businesses 1,045 Savings Deposits, Including Money-Market Deposit Accounts 2,866 Money-Market Mutual Funds Held By Individuals 979 Refer to the accompanying table. The size of the M2 money supply is

$5,899 billion.

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand?

$50 billion

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. The M2 money supply is composed of items

1, 2, 4, 5, and 6.

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. Which items are included in the M2 money supply but not the M1 money supply?

1, 2, and 5

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is

2.

In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line

3. horizontal line

In the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______.

3; 2; 1

In the accompanying graph, the long-run aggregate supply curve would be represented by which line?

4

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines

4 and 3.

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. The M1 money supply is composed of items

4 and 6.

Real-Balances Effect Household Expectations Interest-Rate Effect Personal Income Tax Rates Profit Expectations National Incomes Abroad Government Spending Foreign Purchases Effect Exchange Rates Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. A change in net export spending would most likely be caused by changes in

6 and 9.

Which of the following statements is correct?

Built-in stability only partially offsets fluctuations in economic activity.

Which definition(s) of the money supply include(s) only items that are directly and immediately usable as a medium of exchange?

M1

Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?

M1 increases and M2 stays the same

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level?

Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs.

Which of the following is incorrect?

When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

Which of the following represents the most contractionary fiscal policy?

a $30 billion decrease in government spending.

Which one of the following would not shift the aggregate demand curve?

a change in the price level

Refer to the graph. Which of the following changes will shift AD1 to AD2?

a cut in personal and business taxes

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

In the diagram, a shift from AS1 to AS2 might be caused by

a decrease in the prices of domestic resources.

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Money functions as

a store of value, a unit of account, and a medium of exchange.

If you are estimating your total expenses for school next semester, you are using money primarily as

a unit of account.

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.

aggregate demand curve would shift to the right.

Other things equal, if the U.S. dollar were to depreciate, the

aggregate supply curve would shift to the left.

One major advantage of credit cards used for transactions is that they

allow consumers to coordinate timing and payment for purchases.

Which would most likely increase aggregate supply?

an increase in productivity

Which one of the following might offset a crowding-out effect of financing a large public debt?

an increase in public investment

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

Which one of the following would increase per-unit production cost and therefore shift the aggregate supply curve to the left?

an increase in the price of imported resources

Checkable deposits are included in

both M1 and M2.

The immediate-short-run aggregate supply curve represents circumstances where

both input and output prices are fixed.

The long-run aggregate supply analysis assumes that

both input and product prices are variable.

Refer to the diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?

crowding-out effect

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the

crowding-out effect.

Checkable deposits are

debts of commercial banks and savings institutions.

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion.

Countercyclical discretionary fiscal policy calls for

deficits during recessions and surpluses during periods of demand-pull inflation.

Fiscal policy refers to the

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

The aggregate demand curve is

downsloping because of the interest-rate, real-balances, and foreign purchases effects.

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If the government wants to move the level of real GDP back to Y and reduce demand-pull inflation, in the presence of a ratchet effect, it should

enact a contractionary fiscal policy that will shift aggregate demand to the left, but not as far as AD1.

Changes in the national incomes of our trading partners would directly impact our

exports.

The crowding-out effect suggests that

government borrowing to finance the public debt increases the real interest rate and reduces private investment.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

government should undertake neither an expansionary nor a contractionary fiscal policy.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will

increase U.S. imports and decrease U.S. exports.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to

increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Discretionary fiscal policy is so named because it

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults Which of the following are considered to be near monies?

items 2, 4, 7, and 8

A tax reduction of a specific amount will be more expansionary the

larger is the economy's MPC.

A decline in investment will shift the AD curve to the

left by a multiple of the change in investment.

If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift

leftward by $40 billion at each price level.

A contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the

multiplier effect.

Currency held within banks is part of

neither the M1 nor the M2 definition of the money supply.

Joe deposits $200 in currency into his checking account at a bank. This deposit is treated as

no change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits.

Time deposits of $100,000 or more are

not a component of M1 or M2.

The use of a credit card is most similar to

obtaining a short-term loan.

The use of a debit card is most similar to

paying with a check.

The short-run version of aggregate supply assumes that

product prices are flexible, while resource prices are fixed.

Changes in which of the following would not shift the aggregate demand curve?

productivity rates

In the diagram, a shift from AS3 to AS2 might be caused by an increase in

productivity.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion.

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. All else being equal, if the price of each input increased from $4 to $6, productivity would

remain unchanged.

An increase in net exports will shift the AD curve to the

right by a multiple of the change in net exports.

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift

rightward by $50 billion at each price level.

The aggregate demand curve

shows the amount of real output that will be purchased at each possible price level.

The aggregate supply curve

shows the various amounts of real output that businesses will produce at each price level.

The aggregate supply curve (short run)

slopes upward and to the right.

If you place a part of your summer earnings in a savings account, you are using money primarily as a

store of value.

The crowding-out effect is

strongest when the economy is at full employment.

The federal budget deficit is found by

subtracting government tax revenues from government spending in a particular year.

A fall in labor costs will cause aggregate

supply to increase.

An economist who favors smaller government would recommend

tax cuts during recession and reductions in government spending during inflation.

Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. In this economy,

tax revenues vary directly with GDP, but government spending is independent of GDP.

Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400,

the budget will be balanced.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes

the crowding-out effect.

Currency and checkable deposits are

the major components of money supply M1.

Built-in stability means that

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus.