ECON EXAM #3 -7,12,8

If 50 percent of the population in a country is employed and average labor productivity equals $30,000, then real GDP per person equals

$15,000

growth of output rate per capita

% growth rate of output - % growth rate of population

government spending multiplier

1/1-mpc

Which of the following applies to economic growth? I. Economic growth allows people to buy more goods and services. II. Economic growth is the expansion of the economy's production possibilities. III. Economic growth is represented by a movement from a point inside the production possibilities curve to a point on the curve.

I and II only

A contractionary fiscal policy I. decreases a government budget deficit or increases a government budget surplus. II. includes tax cuts. III. may include discretionary cuts in transfer payments.

I and III only

An expansionary fiscal policy I. includes an increase in government spending. II. includes tax cuts. III. increases a government budget deficit or reduces a government budget surplus.

I, II, and III

Which of the following is a source of wage stickiness? I. fixed wage contracts II. minimum wage laws III. workers and firms want to avoid complexity of negotiating contracts frequently

I, II, and III

Which of the following statements is true of the economy in the long run? In the long run, I. real GDP eventually moves to potential output because all wages and prices are assumed to be flexible. II. the economy can achieve its natural level of employment and potential output at any price level. III. there is no cyclical unemployment.

I, II, and III

In the long run, economic growth will lead to I. the opportunity to produce more consumer goods. II. the opportunity to produce more capital goods. III. a higher material standard of living. IV. a more equitable distribution of income.

I, II, and III only

Suppose a country's real GDP increases. At the same time, its population also increases. What happens to its standard of living?

Its standard of living could rise if population growth is smaller than output growth

Consider two fiscal policy actions. I. a $400 billion reduction in income taxes II. a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand?

Policy II because it affects aggregate demand directly

Inflationary and recessionary gaps that do NOT create a permanent change are closed by the economy's self-correcting adjustments mechanism that shift

SRAS curve

According to the international trade effect, holding everything else unchanged,

The aggregate supply curve will shift to the right.

Stagflation is a situation where

The price level increase while real GDP decrease.

A change in the price level, all other things unchanged, causes

a movement along the aggregate demand curve.

Which of the following will decrease the short-run aggregate supply? Select one: a. An increase in wages b. An increase in the labor force c. A decrease in net exports d. A decrease in the personal income tax rates

a. An increase in wages

In the U.S., between 1990 and 2007, capital stock and the level of technology increased dramatically. During the same period, employment and real wages rose. What do these set of events suggest? Select one: a. The demand for labor increased by more than the increase in supply of labor over this period. b. The demand for labor increased by less than the increase in supply of labor over this period. c. The demand for labor decreased while the supply of labor increased over this period. d. The demand for labor and the supply of labor decreased over this period.

a. The demand for labor increased by more than the increase in supply of labor over this period.

Discretionary fiscal policy

a. deliberate government efforts to stabilize the economy through government spending and taxes

An expansionary fiscal policy is likely to Select one: a. increase borrowing by the Treasury through the sale of bonds. b. decrease borrowing by the Treasury through the purchase of bonds. c. increase borrowing by the Treasury through the purchase of bonds. d. decrease borrowing by the Treasury through the sale of bonds.

a. increase borrowing by the Treasury through the sale of bonds

An example of an automatic stabilizer is Select one: a. personal income taxes. b. inheritance taxes. c. veterans' benefits. d. corporate dividends.

a. personal income taxes.

Which of the following contributes to implementation lag for discretionary fiscal policy? Select one: a. the time it takes to secure legislative approval for policy actions b. the time it takes for economic agents to respond to policy actions c. the difficulty of collecting economic data in a timely manner d. the time it takes to borrow funds to finance the fiscal policy

a. the time it takes to secure legislative approval for policy actions

Which of the following contributes to implementation lag for discretionary fiscal policy? Select one: a. the time it takes to secure legislative approval for policy actions b. the time it takes for economic agents to respond to policy actions c. the difficulty of collecting economic data in a timely manner d. the time it takes to borrow funds to finance the fiscal policy

a. the time it takes to secure legislative approval for policy actions

Aggregate demand is the total value of real GDP that

all sectors of the economy are willing to purchase at various average price levels, all other things unchanged.

Suppose an economy's exports increase and its imports decrease. All other things unchanged, this results in

an increase in net exports which will shift the aggregate demand curve to the right.

Which of the following will increase the short-run aggregate supply? Select one: a. An increase in wages b. A decrease in the price of capital c. An increase in government spending on education d. An increase in consumption spending

b. A decrease in the price of capital

Which of the following statements characterizes government purchases in the United States between 2001 and 2011? Select one: a. Government purchases as a share of GDP have declined. b. Government purchases as a share of GDP have increased. c. Government purchases as a share of GDP have remained constant. d. Government purchases have fluctuated widely over this period.

b. Government purchases as a share of GDP have increased.

Suppose a country institutes an investment tax credit and that leads to an initial increase in investment spending of $100 billion. Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion. This action is Select one: a. expansionary and will shift the aggregate demand curve to the right by $750 billion. b. expansionary and will shift the aggregate demand curve to the right by $150 billion. c. expansionary and will shift the aggregate demand curve to the left by $7500 billion. d. expansionary and will shift the aggregate demand curve to the left by $150 billion.

b. expansionary and will shift the aggregate demand curve to the right by $150 billion.

The rise and fall of real GDP over the course of the business cycle suggests that Select one: a. the economy is always at full employment. b. the economy may not always be in long-run equilibrium. c. the economy is always at its potential output level. d. wage and price stickiness ensures that the economy moves from a peak to a trough.

b. the economy may not always be in long-run equilibrium.

A transfer payment that rises automatically during a recession is Select one: a. interest payments on the national debt. b. unemployment compensation. c. Social Security payments to retired persons. d. government payments to war veterans.

b. unemployment compensation.

Which of the following describes a discretionary fiscal policy action/program? Select one: a. the progressive income tax system b. the unemployment compensation program c. Congress authorizes a temporary increase in unemployment insurance benefits for an additional seven weeks. d. the system of welfare programs

c. Congress authorizes a temporary increase in unemployment insurance benefits for an additional seven weeks.

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates. Select one: a. The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases. b. The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. c. The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. d. The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

c. The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.

Which of the following statements is true about fiscal policy lags? Select one: a. Automatic stabilizers have a much shorter impact lag than discretionary fiscal policy, but the same implementation lag. b. Although the recognition lag is equally long for discretionary fiscal policy and for automatic stabilizers, the latter avoid implementation lag because automatic stabilizers are triggered automatically. c. Unlike discretionary fiscal policy, automatic stabilizers respond automatically to changes in the economy, thus avoiding the recognition and implementation lags. d. Although automatic stabilizers have a much shorter lag, discretionary fiscal policy instruments have a more potent impact on the economy and should always be used.

c. Unlike discretionary fiscal policy, automatic stabilizers respond automatically to changes in the economy, thus avoiding the recognition and implementation lags.

The determinants of economic growth include all of the following except Select one: a. technological improvement. b. improvements in the quality of factors of production. c. a stable price level. d. increases in the quantity of factors of production.

c. a stable price level.

Which of the following events would be most likely to increase an economy's potential output? Select one: a. a tax increase b. an increase in transfer payments by the government c. an improvement in technology d. an increase in net exports

c. an improvement in technology

Economic growth can be achieved through Select one: a. a decrease in the supply of labor. b. a decrease in the labor force participation rate.. c. an increase in the production of capital goods. d. a reduction in expenditures on research and development

c. an increase in the production of capital goods.

Expansionary fiscal policy includes

c. decreasing taxes and increasing government expenditures

All of the following are examples of automatic stabilizers except: Select one: a. personal income taxes. b. means-tested federal transfer payments. c. government emergency spending d. welfare benefits.

c. government emergency spending

Real GDP per person can increase: Select one: a. only if the share of the population employed increases. b. only if the share of the population employed decreases. c. if the share of population employed and/or average labor productivity increases. d. only if average labor productivity increases.

c. if the share of population employed and/or average labor productivity increases.

Recognition lags in fiscal policy stem largely from Select one: a. the fact that it takes time before a fiscal policy, such as a change in government purchases or a change in taxes, is agreed to and put into effect. b. the fact that it takes time for a policy action to have its full effect on aggregate demand. c. the difficulty of collecting economic data in a timely and accurate fashion. d. households and businesses may not respond to fiscal policy to the extent that policy makers had hoped, for example, they may not be as responsive to a tax cut .

c. the difficulty of collecting economic data in a timely and accurate fashion.

Holding all else constant, a country's standard of living will decline if its Select one: a. nominal GDP grows at a faster rate than real GDP. b. nominal GDP grows at a slower rate than real GDP. c. the rate of population growth exceeds the rate of growth of real GDP. d. the rate of population growth is less than the rate of growth of real GDP.

c. the rate of population growth exceeds the rate of growth of real GDP.

A contractionary fiscal policy shifts the aggregate demand curve

c. to the left and is used to close an inflationary gap

A change in government purchases shifts the aggregate demand curve by an amount equal to the

change in government purchases * spending multiplier.

Automatic stabilizers

changes in taxes or government spending that increase aggregate demand without requiring policymakers to act when the economy goes into recession

The four components of aggregate demand are:

consumption, investment, government spending, and net exports.

During a recession, rising transfer payments and falling tax collections I. help cushion households from the impact of the recession. II. buffers the fall in real GDP (relative to a situation where transfer payments do not rise and tax revenues do not fall). III. tend to increase a budget deficit or reduce a budget surplus. Select one: a. I only b. I and II only c. II and III only d. I, II, and III

d. I, II, and III

Which of the following statements is true regarding the government budget? Select one: a. The government's budget has been in surplus it since the 1960s. b. The government's budget has been in deficit since World War II except for a brief period between 1998 and 2001. c. The government's budget was generally in surplus until the 1990s, then mostly in deficit since. d. The government's budget was generally in surplus in the 1960s, then mostly in deficit since except for a brief period between 1998 and 2001.

d. The government's budget was generally in surplus in the 1960s, then mostly in deficit since except for a brief period between 1998 and 2001.

Economic growth can be represented by Select one: a. an increasing equilibrium output level b. a rightward shift of an economy's short-run aggregate supply curve. c. a rightward shift of an economy's long-run aggregate demand curve. d. a rightward shift of an economy's long-run aggregate supply curve.

d. a rightward shift of an economy's long-run aggregate supply curve.

All of the following are instruments of fiscal policy except Select one: a. rebate on payroll taxes. b. education tax credits. c. unemployment insurance benefits. d. an interest rate cut.

d. an interest rate cut.

Which of the following will not increase labor's productivity? Select one: a. education b. technology c. new capital d. growth in output

d. growth in output

Wage and price stickiness Select one: a. gives rise to a vertical long-run aggregate supply curve. b. gives rise to a vertical short-run aggregate supply curve. c. creates a surplus or a shortage of real GDP. d. prevents the economy from producing its potential level of real GDP.

d. prevents the economy from producing its potential level of real GDP

A factor critical to economic growth is Select one: a. increased saving rates. b. increases in human consumption. c. reduced dependence on imports. d. technological change that increases labor productivity

d. technological change that increases labor productivity

More generous unemployment benefits might discourage some workers from participating as employed workers in the labor force. As a consequence, we would see a (or an)

decrease the supply labor.

Suppose fiscal authorities raise state income tax rates. As a result, disposable income falls, thereby

decreasing consumption spending, and causing the aggregate demand curve to shift to the left.

Suppose Congress increases the corporate profit tax rates. This is an example of

discretionary fiscal policy of the contractionary variety.

The use of government expenditures and taxes to influence the level of economic activity

fiscal policy

The use of government purchases, transfer payments, and taxes to influence the level of economic activity

fiscal policy

The three major categories of government spending

government purchases, transfer payments, and net interest

The rule of 72

grows at some exponential rate of z percent will double in value in approximately 72 ÷ z years

What the theory of economic growth focuses on

growth of potential output over the long run, not on fluctuations in the level of economic activity in the short run.

If the share of population employed in two countries is the same, average living standards will be higher in the country with

higher average labor productivity.

The short run in macroeconomic analysis is a period

in which wages and some other prices do not respond to changes in economic conditions.

If the federal budget is initially balanced and government expenditures remain constant, then an increase in GDP will _________ tax revenues and create a budget _________

increase tax revenues and create a budget surplus

The introduction of a new technology that increases the productivity of labor will

increase the demand for labor.

Holding other factors constant, if oil prices rise, then the real wages of oil workers will ______ and employment of oil workers will _____.

increase, increase`

In the long run, increases in output per person (real GDP per capita) arise primarily from

increases in average labor productivity

As the real wage decreases, the quantity of labor demanded ______ and the quantity of labor supplied _______.

increases, decreases

Contractionary fiscal policy includes

increasing taxes and decreasing government expenditures

The government has a balanced budget if

its total revenues are equal to its total expenditures

The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in government spending on aggregate spending (and GDP).

larger, larger

In the long run, the output level is determined by

long-run aggregate supply

The use central bank policies to influence the level of economic activity

monetary policy

sum of all past federal deficits minus any surpluses

national debt

The economy's potential output corresponds to the level of

natural employment

The long-run aggregate supply curve is vertical at

potential output

An economy adjusts on its own to close a recessionary gap because there is

pressure on nominal wages to fall and this shifts the SRAS curve rightward.

The aggregate demand curve shows the relationship between spending (real GDP) and the ______.

price level

Three equivalent ways to measure GDP are total _____, total _____, and total ______.

production; income; expenditure

According to the wealth effect, if the average price level rises, the value of consumers'

real wealth and consumption spending fall.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of

real wealth and consumption spending fall.

All other things unchanged, an increase in government spending will do what

shift the aggregate demand curve to the right.

The multiplier effect occurs when

spending by one person causes others to spend more too, increasing the impact of the initial spending on the economy.

The aggregate demand curve shifts when there are changes in

spending that are not caused by changes in output or the price level

A country's actual output _____ potential output.

temporarily exceed

Recognition lags in fiscal policy stem largely from

the difficulty of collecting economic data in a timely and accurate fashion.

"In the long run, we are all dead."

the length of time it can take the economy to recover to potential GDP without policy intervention.

Suppose the economy is initially at point A. Now suppose that there is an increase in government purchases. In the short-run,

the price level rises to Pb and real GDP increases to Yb.

Economic growth is defined as

the process by which a country's potential output grows over time.

Aggregate demand is defined as

the relationship between the total quantity of goods and services demanded and the price level, all other determinants of spending unchanged

In the Keynesian model a recessionary gap will develop if there is:

too little spending.

Payments to households that do not require anything in exchange

transfer payments

A recessionary gap can be closed by

using an expansionary fiscal policy

In the short-run, an output gap occurs because

wages and some prices have not adjusted sufficiently to maintain output at its potential level