Econ 111-762 Exam 3

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The presence of​ ________ means that the federal deficit is larger than it otherwise would be in a​ recession, and smaller than it otherwise would be in an expansion.

automatic stabilizers

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

Government spending and taxes that increase or decrease without any actions taken by the government are referred to as

automatic stabilizers.

The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers.

Fiscal policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

During​ recessions, government spending usually

increases because unemployment payments increase.

Other things remaining the​ same, an increase in the price level

increases the quantity of real GDP supplied.

Which of the following raises the largest percentage of federal government​ revenue?

individual income taxes

The largest source of federal government revenue in 2014 was

individual income taxes.

In the dynamic aggregate demand and aggregate supply​ model, if aggregate demand increases faster than potential real​ GDP, there will be

inflation

Low government borrowing costs would be relevant for the decision regarding whether a government increases infrastructure investment because

infrastructure investments are​ long-term and expensive investments that require the use of borrowed funds.

When aggregate expenditure is greater than GDP​,

inventories fall, and GDP and employment increase

At the new short run​ equilibrium, the unemployment rate will be ______ compared to the unemployment rate at the initial​ equilibrium, prior to the increase in exports.

lower

If the economy is at macroeconomic​ equilibrium, then real GDP

might be equal​ to, greater​ than, or less than potential GDP

A change in the price level will cause the​ long-run aggregate supply curve to

move along a stationary LRAS curve

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in the price level will cause a ____________ the aggregate demand curve.

movement up along

The aggregate demand curve would shift to the left if

net taxes were increased.

A macroeconomic equilibrium occurs when the

quantity of real GDP demanded equals the quantity of real GDP supplied even if they are not equal to potential GDP.

At the new​ long-run equilibrium,

real GDP and the unemployment rate will remain the​ same, but price level will be higher compared to the initial​ equilibrium, prior to the increase in exports.

Potential GDP refers to the level of

real GDP in the long run

An increase in aggregate demand causes an increase in​ ________ only in the short​ run, but causes an increase in​ ________ in both the short run and the long run.

real​ GDP; the price level

In the dynamic aggregate demand and aggregate supply​ model, if aggregate demand increases slower than potential real​ GDP, there will be

recession

The​ ________ curve has a positive slope because as prices of final goods and services​ rise, prices of inputs rise more slowly.

short run aggregate supply

Which aggregate supply curve has a positive​ slope?

short run only

The basic aggregate demand and aggregate supply curve model helps explain

short term fluctuations in real GDP and the price level.

Each year that the federal government runs a​ surplus, the federal debt

shrinks

If current projections of federal spending on Social Security and Medicare are​ accurate, policymakers are faced with the choice of

significantly restraining spending on these programs​ and/or greatly increasing taxes on households and firms.

The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle

stabilize the economy.

When the aggregate demand curve and the​ short-run aggregate supply curve​ intersect,

the economy is in​ short-run macroeconomic equilibrium.

Economic policies are effective at changing output when

the economy is not producing at capacity.

The difference between what a government spends and what it collects in taxes in a year is

the government budget deficit or surplus.

The use of fiscal policy to stabilize the economy is limited because

the legislative process can be​ slow, which means that it is difficult to make fiscal policy actions in a timely way.

The key idea of the aggregate expenditure model is that in any particular​ year, the level of GDP is determined mainly by

the level of aggregate expenditure.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a​ result,

the long run aggregate supply curve will shift to the right.

A recession tends to cause the federal budget deficit to​ ________ because tax revenues​ ________ and government spending on transfer payments​ _________.

​increase; fall; rise

If the government wants to reduce​ unemployment, government purchases should be​ ________ and/or taxes should be​ ________.

​increased; decreased

An increase in technology​ ________ potential GDP and​ ________ aggregate supply.

​increases; increases

The tax increases necessary to fund future Social Security and Medicare benefit payments would be

​large, and could discourage work​ effort, entrepreneurship, and​ investment, thereby slowing economic growth.

The presence of automatic stabilizers means that the federal deficit is​ ________ than it otherwise would be in a recession and​ ________ than it otherwise would be in an expansion.

​larger; smaller

When the interest rate is​ high, planned investment is​ ________ so output is​ ________.

​low; low

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ ________.

​lower; lower

When the economy enters a​ recession, your employer is​ ___________ to reduce your wages because​ _______.

​unlikely; lower wages reduce productivity and morale

If European economies enter a​ recession,

U.S. aggregate demand decreases and the U.S. AD curve shifts leftward

A​ "strong dollar" means that the

U.S. dollar exchanges for more units of foreign currencies.

A recessionary gap occurs when​ ________ so that real GDP is​ ________ potential GDP.

aggregate demand​ decreases; less than

An increase in government purchases shifts the​ ________ curve to the​ ________.

aggregate​ demand; right

What is an expansionary fiscal​ policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

Which of the following is not a main determinant of net​ exports?

Expectations of future profitability in the United States.

___________________ would cause a similar shift in the aggregate demand curve.

A decrease in taxes

The aggregate demand curve slopes downward for all of the following reasons​ except:

A lower price level makes imports from other countries less​ expensive, and U.S. citizens buy more imports.

What are the four main determinants of​ investment?

Expectations of future​ profitability, interest​ rates, taxes and cash flow.

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending​ categories?

AE​ = C​ + I​ + G​ + NX

Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short​ run?

Aggregate demand will​ fall, the equilibrium price level will​ fall, and the equilibrium level of GDP will fall.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short​ run?

Aggregate demand will​ rise, the equilibrium price level will​ rise, and the equilibrium level of GDP will rise.

Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. ​(Mark all that​ apply.)

B. Increased consumer optimism C. Lower interest rates D. Lower taxes F. Decrease in the U.S. exchange rate relative to other currencies

Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.)

B. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. D. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. E.The president and Congress reduce tax rates to increase the amount of investment spending.

Which of the following is considered contractionary fiscal​ policy?

Congress increases the income tax rate

What is a contractionary fiscal​ policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

Which of the following statements about the Social​ Security, Medicare, and Medicaid programs is​ true?

Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially.

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession?

D. All of the Above A. Consumers spend more than they would in the absence of social insurance​ programs, like unemployment. B. Transfer payments to households increase. C. During​ recessions, tax obligations fall due to falling wages and profits.

Which of the following will increase planned investment spending on the part of​ firms?

E. A and B only A. Increased optimism about future demand for its product B. A lower real interest rate

If the government increases expenditure without raising​ taxes, this will

E. A and B only A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector.

Which of the following is one explanation as to why the aggregate demand curve slopes​ downward?

Decreases in the price level raise real wealth and increase consumption spending.

Suppose Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by the​ following? A survey shows a sharp rise in consumer confidence that income growth will be increasing.

Demand is expected to increase

Which of the following best explains how the economy will adjust from the​ short-run equilibrium point to the new​ long-run equilibrium​ point?

Due to the higher price​ level, workers will demand higher​ wages, and firms will raise prices and cause SRAS to shift to the left to point C.

Does judging whether a deficit is excessive depend in part on whether the country is in a​ recession?

During a​ recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger.

At a short run macroeconomic​ equilibrium, real GDP is always equal to potential GDP.

False

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

The term​ "crowding out" refers to a situation​ where:

Government spending increases interest rates and decreases private investment.

Which of the following statements is correct if real GDP in the United States declined by more during the 2007-2009 recession than did real GDP in​ Canada, China, and other trading partners of the United​ States?

Imports to the United States fell more than the U.S.​ exports, leading to an increase in net exports.

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

What actions can Congress and the president take to move the economy back to potential​ GDP?

Increase government spending or decrease taxes.

If aggregate expenditure is greater than​ GDP, how will the economy reach macroeconomic​ equilibrium?

Inventories will​ decline, and GDP and employment will rise.

What is the effect on​ inventories, GDP, and employment when aggregate expenditure​ (total spending) exceeds​ GDP?

Inventories​ decrease, GDP​ increases, and employment increases.

Which can be changed more​ quickly: monetary policy or fiscal​ policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in​ 1983?

No. It could be that the economy​ contracted, so less income was earned and less was paid in tax.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

How important is it to pay off this​ debt?

Not very important if the debt is at a sustainable​ level, and the interest payments are relatively constant.

​Long-run macroeconomic equilibrium occurs when

aggregate demand equals​ short-run aggregate supply and they intersect at a point on the​ long-run aggregate supply curve.

What relevance does your answer have to how the Bureau of Economic Analysis calculates data on U.S.​ imports?

Producers increasingly rely on global supply​ chains, so there are flaws in accounting for imports and exports.

How would an increase in interest rates affect​ investment?

Real investment spending declines.

Government transfer payments include which of the​ following?

Social Security and Medicare programs

Suppose the economy enters a recession. If government policymakers--Congress, the​ president, and members of the Federal Reserved--do not take any policy actions in response to the​ recession, what is the likely​ result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long​ run? i. The unemployment rate will rise and remain higher even in the long​ run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run.

Statement ii is correct.

Consider the following four statements. i. The iPhone is made in​ China, using​ Chinese-made parts. ii. The iPhone is made in the United​ States, using​ U.S.-made parts. iii. The iPhone is made in the United​ States, using​ Chinese-made parts. iv. The iPhone is made​ China, using parts that are all made outside of China. Which of the statements above is​ correct?

Statement iv is correct. The iPhone is assembled in China using parts shipped to China from many countries.

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment​ insurance?

The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle.

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

Aggregate demand increases if

The government increases spending.

Which of the following is NOT a determinate of consumption?

The growth rate of GDP relative to growth rates in other countries

Why might increases taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing​ inflation?

The legislative process experiences longer delays than monetary policy.

An economics student raises the following​ objection: ​"The textbook said that a higher interest rate lowers​ investment, but this​ doesn't make sense. I know that if I can get a higher interest​ rate, I am certainly going to invest more in my savings​ account." The problem with the​ student's argument is which of the​ following?

The student is confusing saving with investment.

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. The corporate income tax rate is increased

This is a part of a contractionary fiscal policy

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. The individual income tax is decreased

This is a part of expansionary fiscal policy

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. Defense spending is increased

This is not a part of fiscal policy

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. Families are allowed to deduct all their expenses for daycare from their federal income tax

This is not a part of fiscal policy

Identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. The Federal Reserve lowers the target for the federal funds rate

This is not part of fiscal policy

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand​ curve?

This will shift the aggregate demand curve to the left.

If the U.S. dollar decreases in value relative to other​ currencies, how does this affect the aggregate demand​ curve?

This will shift the aggregate demand curve to the right.

Why do few economists argue that it would be a good idea to balance the federal budget every​ year?

To keep a balanced budget during a​ recession, taxes would have to increase and government expenditures would have to​ decrease, which would further reduce aggregate demand and deepen the recession.

At a long run macroeconomic​ equilibrium, real GDP is always equal to potential GDP.

True

The combination of a strong U.S. dollar and weak growth overseas might result in lower U.S. exports because

U.S. exports become more expensive for foreign buyers while​ income, and purchasing​ power, in other countries is rising only slowly.

When incomes rise faster in the United States than in other​ countries,

U.S. net exports will fall.

Which of the following is NOT included in the calculation of total government​ purchases?

Unemployment insurance benefits paid for by the federal government

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short​ run?

Unemployment will decline.

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short​ run?

Unemployment will rise.

Which of the following statements regarding wealth and income is​ correct?

Wealth represents the total value of a​ household's assets minus its liabilities while income is the amount of earnings households receive in the current period

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for​ long-lived capital goods.

Which one of the following is not true when the economy is in macroeconomic​ equilibrium?

When the economy is at​ long-run equilibrium, firms will have excess capacity.

In the aggregate expenditure​ model, when is planned investment greater than actual​ investment?

When there is an unplanned decrease in inventories.

Why does the short run aggregate supply curve shift to the right in the long​ run, following a decrease in aggregate​ demand?

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.

Which of the following decreases aggregate demand and shifts the AD curve​ leftward?

a decrease in government expenditures

Which of the following would cause a decrease in aggregate​ demand?

a decrease in government spending

Congress and the president enact a temporary cut in payroll taxes. This is an example of

a discretionary fiscal policy

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy.

The result of a strong dollar will be

a leftward shift of the U.S. aggregate demand curve because it reduces​ exports, a spending component of aggregate demand.

In a column in the Financial Times​, the prime minister and the finance minister of the Netherlands argue that the European​ Union, an organization of 27 countries in​ Europe, should have​ "a commissioner for budgetary​ discipline." They believe​ that: ​"The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive​ deficits." ​Source: Mark Rutte and Jan Kees de​ Jager, "Expulsion from the Eurozone Has to Be the Final​ Penalty," Financial Times​, September​ 7, 2011. An​ "excessive" budget deficit in this context is

a relatively large budget deficit as a percentage of GDP beyond the European​ Union's deficit and debt rules

A supply shock is

a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve.

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

If Inventory investment is higher than firms​ planned,

actual investment is greater than planned investment.

An unplanned increase in inventories results in

actual investment that is greater than planned investment

According to a 2017 Congressional Budget Office​ (CBO) report,​ "By 2047, 22 percent of the population will be age 65 or​ older, CBO​ anticipates, compared with 15 percent​ today." ​Source: Congressional Budget​ Office, "The 2017​ Long-Term Budget​ Outlook," March​ 2017, p. 7. The​ over-65 population is increasing so rapidly because

after​ WWII, there was a​ "baby boom," but after 1965 birthrates fell.

If​ firms' expectations about the future become pessimistic so that they think future profits will be​ lower, then

aggregate demand decreases and the AD curve shifts leftward.

If the government increases​ taxes, the

aggregate demand decreases.

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of

an automatic stabilizer

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of

an automatic stabilizer

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real​ GDP?

an increase in government purchases

Which of the following would cause the short run aggregate supply curve to shift to the left?

an increase in inflation expectations

Which of the following will shift the aggregate demand curve to the​ right, ceteris paribus​?

an increase in net exports

All of the following shift the aggregate demand curve to the right EXCEPT

an increase in taxes

From August 2009 to May​ 2017, the Standard​ & Poor's Index of 500 stock prices increased by more than 135​ percent, while the consumer price index increased by less than 15 percent. These changes would have caused

an increase in the real value of household​ wealth, which shifted the aggregate demand curve to the right.

When actual GDP is below potential GDP the budget deficit increases because​ of:

an increase in transfer payments and a decrease in tax revenues.

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called

automatic stabilizers

The report also​ notes: "In advanced economies an increase in infrastructure investment ... is one of the few remaining policy levers available to support​ growth." When infrastructure investment is described as a​ "policy lever" it means that

because infrastructure investment adds to the productive capacity of the​ economy, policies that promote it can spur economic growth.

In​ 2016, the city of Canfield collected​ $500,000 in taxes and spent​ $450,000. In​ 2016, the city of Canfield had a

budget surplus of​ $50,000.

To reduce a budget​ deficit,

budgetary policies such as increasing taxes and cutting expenditures can be used.

Tax cuts on business income increase aggregate demand by increasing

business investment spending.

The level of aggregate supply in the long run is not affected by

changes in the price level

The​ long-run aggregate supply curve is vertical because in the long​ run,

changes in the price level do not affect potential​ GDP, as potential GDP depends on the size of the labor​ force, capital​ stock, and technology.

A change in the price level

changes the quantity of real GDP supplied.

Stagflation is a

combination of inflation and recession

A decrease in current disposable income will _______________ consumption

decrease

A decrease in expected future income will ___________ consumption

decrease

A decrease in household wealth will ____________ consumption

decrease

The U.S. price level relative to other countries' price levels will _______ next exports

decrease

The exchange rate between the dollar and other currencies will _______ net exports

decrease

The growth rate of U.S. GDP relative to other countries' will _______ next exports

decrease

Higher personal income taxes

decrease aggregate demand

Higher interest rates are likely to

decrease consumer spending and increase consumer saving.

Uncertainty about the future is likely to

decrease current spending.

A tax increase

decreases aggregate demand and the AD curve shifts leftward.

The following is from a message by President Hoover to​ Congress, dated May​ 5, 1932: ​"I need not recount that the revenues of the Government as estimated for the next fiscal year show a decrease of about​ $1,700,000,000 below the fiscal year​ 1929, and inexorably require a broader basis of taxation and a drastic reduction of expenditures in order to balance the Budget. Nothing is more necessary at this time than balancing the​ Budget." According to the​ statement, balancing the Budget would require

decreasing government purchases and increasing taxes.

Active changes in tax and spending by government intended to smooth out the business cycle are called​ ________, and changes in taxes and spending that occur passively over the business cycle are called​ ________.

discretionary fiscal​ policy; automatic stabilizers

If the government raises the amount of​ taxes, holding everything else​ constant, then

disposable income will decrease.

At the beginning of an​ expansion, inventories

fall

The total amount owed by the federal government to the public is the

federal debt.

​"Weak growth​ overseas" means that

foreign economies are growing more slowly than the U.S. economy.

Inventories refer to

goods that have been produced but have not yet been sold.

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand.

Congress and the president carry out fiscal policy through changes in

government purchases and taxes.

If the economy is falling below potential real​ GDP, which of the following would be an appropriate fiscal policy to bring the economy back to​ long-run aggregate​ supply? An increase in

government purchases.

Economist Mark Thoma has​ written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name​ implies." ​Source: Mark​ Thoma, "The Importance of Automatic Stabilizers to the​ Economy," cbsnews.com​, January​ 25, 2010. Automatic stabilizers are

government spending and taxes that automatically increase or decrease along with the business cycle.

Aggregate demand​ (AD) is comprised of expenditure components that​ include:

government​ spending, consumption,​ investment, and net exports.

Each year that the federal government runs a​ deficit, the federal debt

grows

Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their​ readers' questions regarding the federal​ government's debt. Two of the questions​ were: "Why is government debt different from​ mine?" and​ "How important is it to pay off this​ debt?" ​Source: Josh Zumbrun and Nick​ Timiraos, "Q&A: What the​ $18 Trillion National Debt Means for the U.S.​ Economy," Wall Street Journal​, February​ 1, 2015. Government debt is different from household debt because

households cannot tax to bring in revenue and so will default if they​ can't make the payments.

An article in the Wall Street Journal on changes in​ Intel's sales​ noted, "Intel sells its chips to customers in U.S.​ dollars, but many PC makers that buy those chips sell their products in local​ currencies." ​Source: Tess​ Stynes, "Intel​ Earnings: What To​ Watch," Wall Street Journal​, July​ 15, 2015. In these​ circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to

hurt​ Intel's sales because the cost of the chip is more expensive in terms of the foreign​ currency, but the selling price of the product is in the​ lower-valued foreign currency.

What is the key idea in the aggregate expenditure macroeconomic​ model? The key idea in the aggregate expenditure model is that

in any particular​ year, the level of GDP is determined mainly by the level of aggregate expenditure.

In the context of what was happening in the economy in​ 1929, President Hoover was ______ in saying​ that, in​ 1932, nothing was more necessary than balancing the federal​ government's budget.

incorrect

A decrease in the interest rate will _____________ consumption

increase

A decrease in the price level will ___________ consumption

increase

The increase in the number of people age 65 or older will result in an __________________ in federal spending on Social Security and Medicare as a percentage of GDP.

increase

How would an increase in the growth rate of GDP in the BRIC nations​ (Brazil, Russia,​ India, and​ China) affect U.S. net​ exports? An increase in the growth rate of GDP in the BRIC nations​ (Brazil, Russia,​ India, and​ China) will

increase U.S. net exports by increasing exports to these countries.

The goal of expansionary fiscal policy is

increase aggregate demand

If the reduction in inventories was​ unplanned, then future production would be expected to

increase as inventories are replenished.

Potential GDP

is independent of the price level.

From an economic point of​ view, the trend toward delaying marriage and childbearing is not helpful because

it reduces investment spending on new houses and weakens economic growth.

When a government runs a deficit

its debt increases

In reporting on real GDP growth in the second quarter of​ 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate​ "would have been stronger if it​ hadn't been for companies drawing down​ inventories." ​Source: Justin​ Lahart, "Consumers Priming U.S.​ Pump," Wall Street Journal​, July​ 30, 2015. If companies are​ "drawing down​ inventories," aggregate expenditure is likely to have been

larger than GDP

The trend toward delaying marriage and childbearing could be connected with the slow recovery from the​ 2007-2009 recession because the recovery

left millions of young people​ unemployed, and unable to afford to marry and have children.

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in state income will cause a _________ the aggregate demand curve

leftward shift of

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in the interest rate will cause a ___________ the aggregated demand curve

leftward shift of

Which of the following would not be considered an automatic​ stabilizer?

legislation increasing funding for job retraining passed during a recession

At a trough in the business​ cycle, the macroeconomic equilibrium is​ ________ the level of potential real GDP.

less than

The​ ________ curve is vertical.

long run aggregate supply

Potential output is equal to

long-run aggregate supply.

[Related to the Making the Connection​] A report from the International Monetary Fund in late 2014 contained the following​ observations: "Five years after the global financial​ crisis, the economic recovery continues but remains weak. ... Given ... the current environment of low government borrowing costs ... might this be a good time to increase public infrastructure​ investment?" ​Source: International Monetary​ Fund, "World Economic​ Outlook: Legacies,​ Clouds, Uncertainties", October​ 2014, pp.​ 75-76. The reference to​ "low government borrowing​ costs" means that

low interest rates make borrowing less expensive.

The Federal Reserve sells Treasury securities. This is an example of

not a fiscal policy

The federal government changes the required gasoline mileage for new cars. This is an example of

not a fiscal policy

The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy

If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price​ level, then the U.S. economy must have been

on the very flat part of the​ short-run aggregate supply curve.

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government.

Consumption is

positively related to household income and wealth and​ households' expectations about the​ future, but negatively related to interest rates.

Longminusrun aggregate supply is equal to

potential output

Crowding out refers to a decline in​ ________ as a result of an increase in​ ________.

private​ expenditures; government purchases

These carmakers are likely to react to the increase in inventories by

producing fewer cars in the future.

The objective of a contractionary fiscal policy is to

reduce inflation.

The objective of an expansionary fiscal policy is to

reduce unemployment.

If investment spending increases by​ $1 million, then the aggregate demand curve shifts

rightward by more than​ $1 million.

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in government purchases will cause a ____________ the aggregate demand curve

rightward shift of

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. A faster income growth in other countries will cause a ____________ of the U.S. aggregate demand curve

righward shift of

Usually at the beginning of a​ recession, inventories

rise

The aggregate demand curve illustrates the relationship between

the price level and the quantity of goods demanded by​ households, firms,​ government, and foreigners.

Explain how each of the following events would affect the long-run aggregate supply curve The price level increases. This is a change in the ___________, the LRAS curve will ______________

the price level, not change

Explain how each of the following events would affect the long-run aggregate supply curve The labor force increases. Because this is a change in ______________________, the LRAS will ________________

the productive capacity of the economy, shift to the right

Explain how each of the following events would affect the long-run aggregate supply curve There is an increase in the quantity of capital goods. Because this is a change in _________, the LRAS will _____________

the productive capacity of the economy, shift to the right

Explain how each of the following events would affect the long-run aggregate supply curve Technological changes occurs. Because this is a change in _____________, the LRAS will ______________

the productivity capacity of the economy, shift to the right

Fiscal policy refers to

the spending and taxing policies used by the government to influence the economy

An article in the Wall Street Journal stated that in​ China, "carmakers continue to grapple with ... rising​ inventories." ​Source: Colum​ Murphy, "China's Automobile Sales to Slow Further in​ 2015," Wall Street Journal​, January​ 12, 2015. Carmakers in China might find that their inventories are rising unexpectedly because

their sales are lower than expected.

In an opinion column in the Wall Street Journal​, Purdue University President Mitchell Daniels wrote that​ "today's 20- and​ 30-year-olds are delaying marriage and delaying​ childbearing, both unhelpful trends from an economic and social​ standpoint." ​Source: Mitchell​ E, Daniels,​ "How Student Debt Harms the​ Economy," Wall Street Journal​, January​ 27, 2015. From an economic point of​ view, young people might be delaying marriage and childbearing because

their student debt levels are so high they cannot afford to marry and have children.

If planned investment exceeds actual​ investment,

there will be a decline in inventories.

Workers and firms both expect that prices will be​ 2.5% higher next year than they are this year. As a​ result,

the​ short-run aggregate supply curve will shift to the left as wages increase.

Increases in the growth rate of domestic GDP compared to the growth rate of foreign GDP will make the aggregate demand curve shift

to the left

Macroeconomic equilibrium occurs where

total​ spending, or aggregate​ expenditure, equals total​ production, or GDP.

When the economy is experiencing an expansion automatic stabilizers will​ cause:

transfer payments to decrease and tax revenues to increase.

Two examples of automatic stabilizers in the U.S. are

unemployment insurance payments and the progressive income tax system.

Automatic stabilizers can reduce the severity of a recession​ because, during a​ recession,

unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment.

Which of the following is a correct sequence of events during an​ expansion?

unemployment​ falls, income​ rises, tax revenue​ rises, unemployment benefits​ fall, and the budget deficit falls

Which of the following is a correct sequence of events during a​ recession?

unemployment​ rises, income​ falls, tax revenue​ falls, unemployment benefits​ rise, and the budget deficit rises

All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except

unions are successful in pushing up wages.

The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle. The primary explanation for this is because:

with unemployment​ insurance, current disposable income fluctuates less over the business cycle.

Which of the following best explains how the economy will adjust back to​ long-run equilibrium?

​Short-run aggregate supply will decrease​ (shift leftward) as firms and workers adjust to the new price level.

In​ 2009, Congress and the president enacted​ "cash for​ clunkers" legislation that paid people buying new cars up to​ $4,500 if they traded in an​ older, low​ gas-mileage car. ​Source: Justin​ Lahart, Trade-In Program Tunes Up Economic​ Engine," Wall Street Journal​, August​ 4, 2009. Was this piece of legislation an example of fiscal​ policy?

​Yes, because the primary goal of the spending program was to stimulate the national economy.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

​contractionary; fall; fall

Last​ week, six Swedish kronor could purchase one U.S. dollar. This​ week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will​ _____________ exports from the U.S. to Sweden and​ __________ U.S. aggregate demand.

​decrease; decrease

An increase in aggregate demand results in​ a(n) ________ in the​ ________.

​expansion; short run

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be​ ________ and real GDP to be​ ________.

​higher; higher

In its macroeconomic​ equilibrium, the economy can be producing at i. below full employment. ii. full employment. iii. above full employment.

​i, ii, or iii

If inflation in the United States is lower than inflation in other​ countries, then U.S. exports​ ________ and U.S. imports​ ________, which​ _________ net exports.

​increase; decrease; increases


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