Econ Exam 3
The Jones family has a disposable income of $60,000 annually. Currently, the Jones family spends 80% of new disposable income on consumption. Assume that their marginal propensity to consume is 0.8 and that their autonomous consumption spending is equal to $10,000. What is the amount of the Jones family's annual consumer spending?
$ 58000
Suppose that the federal administration plans to fight a deep, ongoing recession with a nationwide plan of increasing infrastructure. Congress approves it and adjusts the budget accordingly to put the plan in motion immediately. Aggregate demand spending components include consumption (C), investment (I), government (G), and exports (X) minus imports (M). Analyze what the aggregate demand and aggregate supply model predicts about the infrastructure plan to answer three questions. Does the level of G increase (+), decrease (-), or stay constant (0)? What likely happens to the aggregate demand (AD) curve? What likely happens to the level of unemployment?
+ The curve shifts to the right (an increase in AD). unemployment decreases
For each of the scenarios, please decide whether there will be an increase, decrease, or no change in aggregate demand. 1. The United States government decides to increase the federal tax rate by 4% for all earners. 2. The newest release of the Consumer Confidence Index shows a steady increase in consumer confidence about the economy. 3. A manufacturing boom during the late 1990s has created an oversupply of tractors, a necessary implement in agricultural production. 4. The Federal Reserve, the agency charged with regulating banking and monetary policy in the United States, decides to increase the amount of money available in the economy.
1. aggregate demand decreases 2. aggregate demand increases 3. aggregate demand decreases 4. aggregate demand increases
Determine if these statements are true or false. 1. The Federal Reserve chooses how much banks lend. 2. The Federal Reserve serves as a lender of last resort 3. The Federal Reserve loans money to banks 4. The Federal Reserves sets a Target for the federal funds rate 5. The federal funds rate matters only to banks
1. f 2. f 3. t 4. f 5. t
Determine whether each of the following statements is true or false. 1. The federal reserve choose how much banks lend. 2. the federal funds matter only to banks 3. the federal reserve loans money to banks 4. the federal reserve sets a target for the federal funds rate 5. the federal reserve has more influence over short term interest rates than long term interest rates
1. f 2. f 3. t 4.f 5. t
Why are persistent budget deficits worrisome?
All of the above.
Classify each scenario based on whether it increases or decreases aggregate demand (AD).
Increases Aggregate Demand a billion dollars falls from the sky interest rates decrease the government buys airplanes income taxes fall interest rates fall for businesses only Decreases Aggregate Demand consumers expect income taxes to rise in the future businesses believe that consumer demand will fall in the future the relative price of foreign goods decreases
All else equal, how would an increase in the marginal propensity to consume (MPC) affect the government purchases multiplier?
It increases the government purchases multiplier.
Classify each factor according to whether it is associated with a movement along the aggregate demand curve or a shift of the aggregate demand curve.
Movement along the aggregate demand curve the wealth effect the international trade effect inflation the interest rate effect deflation Shift of the aggregate demand curve a fall in government purchases a fall in taxes a fall in household expectations a fall in business expectations a fall in the growth rate of domestic GDP relative to foreign GDP a fall in the value of the domestic currency relative to foreign currencies
Consider the graph of a hypothetical economy operating at its long‑run potential GDP. Now assume government spending in the economy increases by $100 billion, which in turn causes household consumption in the economy to increase by an additional $100 billion. Shift the appropriate curve or curves to illustrate the new equilibrium in the economy.
Shift to the right twice
Which hypothetical scenario describes a positive demand shock?
The Canadian government passes a tax cut of 4% for all citizens, resulting in an increase in their disposable income.
Classify each of the tasks according to whether or not they are tasks of the Federal Reserve.
Task of the Federal Reserve managing the United States money supply acting as a lender of last resort engaging in monetary policy Not tasks of the Federal Reserve creating the federal budget printing paper currency engaging in fiscal policy managing India's money supply
Household behavior with respect to changes in income can be described by the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). These variables can be used to predict the eventual changes in equilibrium output after the change in income has occurred.
The greater the MPC, the larger the resulting change in output for a given change in expenditure.
Which scenario would lead to a decrease in the long‑run aggregate supply curve in the hypothetical country of Saigonia?
The most successful Saigonian candy makers relocate their means of production outside of Saigonia.
Identify all of the statements that are examples of fiscal policy.
There is an increase in income tax rates. The estate tax is repealed. Government increases military spending. Public money is used to build a high-speed train that connects Los Angeles and Las Vegas.
Identify the statements about macroeconomic equilibrium as either true or false.
True When aggregate expenditure is less than GDP, inventories rise. If aggregate expenditure equals GDP, then inventories do not change. If economy‑wide spending increases, firms may increase production by hiring new workers to meet this increase in sales. False Macroeconomic equilibrium occurs when consumer spending is equal to consumer saving. Falling inventories signal that GDP is greater than aggregate expenditure.
Which best describes why the multiplier exists?
When people spend money, that money ends up in the pockets or bank accounts of other people or organizations, who then use that money in some way.
Identify how each of the scenarios affects short‑run aggregate supply. a. The U.S. government increases the minimum wag b. Widespread adoption of the Internet by businesses increases productivity and efficiency. c. The government decreases the payroll tax paid by employers. d. The U.S. government decreases the personal income tax rate paid by households.
a. decrease b. increase c. increase d. no change
Which term refers to the interest the Federal Reserve Bank (Fed) charges banks for loans? Select the charge the Fed levies on banks borrowing funds that would result in the largest increase in the money supply.
discount rate two percentage points below the private level
What are the goals of monetary policy according to the amended Federal Reserve Act? The Federal Reserve is charged with achieving these goals by
maximum employment, stable prices, and moderate long term interest rates keeping the growth rate of money and loans consistent with the growth rate of potential GDP.
Seven quarters ago, in time period 1 on the graph, Ruritania's economy emerged from a recession and experienced a period of growth. The economy is now heading back into recession. The Ministry of Economics is debating various fiscal policy measures, each of which has an expected lag time before becoming effective. If no action is taken, the business cycle would follow the path illustrated by the individual points on the graph. Identify which of the policies are more likely to make Ruritania's economic situation better or and which would make it worse.
Better A lengthy process of spending reforms designed to evaluate all areas of government is expected to take a year to complete. The Parliament will need another six months to approve the plan, which will result in spending cuts. A tax cut that requires three months to be approved by the Ruritanian Parliament and thereafter six months to be implemented and take effect. Worse An increase in government spending that requires nine months to be approved by the Ruritanian Parliament and thereafter one year to be implemented and take effect. A decrease in government spending coupled with an increase in taxes that require three months to be approved by the Ruritanian Parliament and thereafter three months to be implemented and take effect.
Income and Expenditure — End of Chapter Problem How will planned investment spending change as the following events occur? The interest rate falls as a result of Federal Reserve policy. The U.S. Environmental Protection Agency (EPA) decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide. Baby boomers begin to retire in large numbers and reduce their savings, resulting in higher interest rates. Match each event to its effect on planned investment spending.
Increase planned investment spending Federal Reserve policy lowers interest rates. The EPA requires sulfur dioxide emissions reductions. Decrease planned investment spending Baby boomers' retirement increases interest rates.
Fiscal Policy — End of Chapter Problem The CARES Act was the largest in both nominal and real measures of fiscal relief/stimulus passed in U.S. history. The package will cost more than $2 trillion as it stabilizes consumer spending during a period of unprecedented unemployment. Simultaneously, the global pandemic caused a supply-side shock as supply chains experienced delays as households stocked up on basic necessities. In terms of AD/AS, explain if the CARES Act would cause a significant rise in the price level?
It is unlikely that there will be a significant increase in the price level, even though the SRAS curve has shifted to the left. The shift of AD to the right was small as the payments to households were used for precautionary savings.
Income and consumption changes for five people are shown in the table. Given this information, rank the marginal propensities to consume (MPC) for the five people from largest to smallest. Name Income change Consumption change Abe +$10,000 +$6,000 Basil +$5,000 +$1,600 Calvin +$2,000 +$1,600 Dale −$5,000 −$3,500 Ed −$10,000 −$4,000
Largest MPC Calvin Dale Abe Ed Basil Smallest MPC
Which of these methods are used by the Federal Reserve to affect the supply of money in the U.S. economy, and which are not? Place each item under the appropriate title.
Methods the Fed uses to affect the money supply buying and selling bonds on the open market changing the reserve requirements for banks printing paper currency changing the interest rate charged in loans to banks Not a method used by the Fed changing the tax rate or rates minting coin currency altering the velocity of money
Aggregate Demand and Aggregate Supply — End of Chapter Problem Suppose that the economy is currently at potential output. Also suppose that you are an economic policy maker, and that a college economics student asks you to rank, if possible, your most preferred to least preferred type of shock: positive demand shock, negative demand shock, positive supply shock, negative supply shock. How would you rank them?
Most preferred Positive supply shock Positive demand shock Negative demand shock Negative supply shock Least preferred
There are several ways that central banks can increase or decrease the money supply. Match the descriptions below with the corresponding policy tool. It is possible that a description does not apply to any of the terms.
Open Market Operations A central bank purchasing existing bonds. Reserve Requirement An increase in the percentage of deposits that banks must keep on hand. Discount Rate An increase in the interest rate that a central bank charges commercial banks for loans.
The table represents an income‑expenditure table. Fill in the missing numbers and then identify the equilibrium levels of GDP and planned aggregate spending. What is the equilibrium level of GDP? What is the equilibrium level of planned aggregate spending?
Real GDP: 0, 1000, 2000, 3500, 4000 Consumption: 200, 800, 1400, 2300, 2600 Planned Investment: 200, 400, 600, 900, 1000 Planned aggregate: 400, 1200, 2000, 3200, 3600 Unplanned inventory: -400, -200, 0, 300, 400 equilibrium GDP: 2000 equilibrium planned aggregate spending: 2000
How, if at all, did these events affect the long‑run aggregate supply (LRAS) curve? Each phrase should be placed under the appropriate heading.
Shifted the LRAS curve to the left a tsunami destroying much of the existing stock of capital in Japan the 1970s oil crisis significant and sustained increases in income tax rates Shifted the LRAS curve to the right the Internet revolution of the 1990s James Watt's invention of the steam engine in 1775 Did not shift LRAS a central bank increasing the amount of money in circulation
Automatic stabilizers lead to changes in taxation and government spending as economic output varies. How do automatic stabilizers impact tax revenue and government spending during a recession? Suppose that the government is required to balance the budget. Which is an appropriate discretionary approach during a recession, and what effect would it have to the economy?
Tax revenue will fall and government spending will go up. Cut government spending to equal tax revenue, possibly magnifying the effects of a recession.
In an economy without government purchases, transfers, or taxes, and without imports or exports, aggregate autonomous consumer spending is $500 billion, planned investment spending is $250 billion, and the marginal propensity to consume is 0.5. Wat is the new Y* if autonomous consumer spending falls to $450 billion?
Y* =$ 1400
Answer the following questions about the multiplier. a. How much will GDP change after a $545 billion increase in government purchases, if the multiplier is 1.5? b. How much will GDP change after a $400 billion decrease in government purchases, if the multiplier is 1.25? c. If a $300 billion increase in government purchases leads to a $450 billion increase in GDP, what is the value of the multiplier? d. Given a multiplier of 2, if a $200 billion increase in government purchases leads GDP to rise to $1 trillion, what was the initial value of GDP?
a. $ 817.5 billion b. $ -500 billion c. Multiplier= 1.5 d. $ 600 billion
Indicate whether each statement below is true or false. The Keynesian cross model is another name for the aggregate expenditures model. a. MPC = 1 b. In general, people consume more than they save. c. MPC + MPS = 1 d. MPC is constant in the Keynesian cross model. e. A higher multiplier leads to a more stable economy. f. Macroeconomic policy has a larger effect when the multiplier is higher. g. A lower multiplier leads to a more stable economy.
a. False b. True c. True d. True e. False f. True g. True
Please select the type of shock that would produce the indicated shift. a. A leftward shift in the AD curve b. A leftward shift in the SRAS curve c. A rightward shift in the SRAS curve d. A positive shift that leads to a higher aggregate price level. e. A rightward shift in the AD curve f. A negative shift that leads to a lower aggregate price level g. Stagflation h. A negative shift that leads to a higher aggregate price level i. A positive shift that leads to a lower aggregate price level
a. Negative demand shock b. Negative supply shock c. Positive supply shock d. Positive demand shock e. Positive demand shock f. Negative demand shock g. Negative demand shock h. Negative supply shock i. Positive supply shock
Indicate the initial effect of each of the following actions on the level of planned investment spending or unplanned inventory investment. Assume the economy is initially in income-expenditure equilibrium. a. The Federal Reserve raises the interest rate. b. There is a rise in the expected growth rate of real GDP. c. A sizable inflow of foreign funds into the country lowers the interest rate. d. A large economic shutdown of nonessential businesses causes a significant reduction in consumer spending.
a. Planned investment spending will fall. b. Planned investment spending will rise. c. Planned investment spending will rise. d. Unplanned investment spending will rise.
Indicate which group within the Federal Reserve System has responsibility for each action listed below, a. Supervises and regulates member banks b. Distributes coin and currency c. Appointed by the president to serve 14 year terms d. Oversees national banking and consumer credit regulation e. Oversees the buying and selling of government securities as a form of monetary policy f. Comprises the Board of Governors and five regional bank presidents g. Provides information on regional economic conditions through the Beige Book report
a. Regional Federal Reserve District Banks b. Regional Federal Reserve District Banks c. Board of Governors of the Federal Reserve System d. Board of Governors of the Federal Reserve System e. Federal Open Market Committee f. Federal Open Market Committee g. Regional Federal Reserve District Banks
Suppose the economy is initially operating at equilibrium. In each graph, move the appropriate curve to illustrate the given scenario's effect on the economy. a. Shift the AD or SRAS curve to show the effect of an expansionary demand shock. b. Shift the AD or SRAS curve to show the effect of a supply shock that leads to stagflation. c. Shift the AD or SRAS curve to show the effect of a downturn caused by pessimistic expectations about the economy among businesses. d. Shift the AD or SRAS curve to show the effect of a wave of technological innovation that leads to an increase in productivity.
a. ad shifts right b. sras shifts left c. ad shifts left d. sras shits right
Classify the actions as either discretionary spending or an automatic stabilizer. a. Economic growth increases personal and corporate income, increasing tax payments. b. A bill is passed to increase unemployment benefit payments. c. Government spending on welfare increases due to an increase in applicants. d. Congress votes to cut government spending in order to balance the budget. e. A law is enacted that increases Medicare coverage. f. The government cuts taxes to stimulate consumer spending. g. The government increases tax rates to prevent inflation. h. Tax revenue falls as a result of a recession reducing personal income and corporate profits. i. An increased number of layoffs increases government spending on unemployment benefits.
a. automatic stabilizer b. discretionary spending c. automatic stabilizer d. discretionary spending e. discretionary spending f. discretionary spending g. discretionary spending h. automatic stabilizer i. atomatic stabilizer
For each of the scenarios, please indicate whether there will be an increase or decrease in short-run aggregate supply or if there will be no change. a. The production of a new type of blade for combine harvesters, a tractor used to harvest crops, has allowed wheat farmers to increase productivity by 40%. b. The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world's lumber is grown. c. A major hurricane in the Gulf of Mexico destroys several oil rigs.
a. short run aggregate supply increases b. short run aggregate supply decreases c. short run aggregate supply decreases
Please select the appropriate term to complete each statement. A dramatic decrease in tax rates for all Americans over a period of several years leads to a massive, positive demand shock. Before the market has time to adjust, the result of this positive demand shock is ____ As the economy responds to gaps caused by different shocks, the focus shifts to the _______ which is the difference between actual output and potential output. A sudden movement of the AD curve, in a positive or negative direction, is known as ________ Due to several months of negative performance, consumer confidence and expectations in the stock market fall dramatically, leading to a negative demand shock. The resulting situation will create ________ ___________ is a sudden movement of the SRAS curve in either a positive or negative direction. After adjusting to the effects of shocks, the economy experiences an eventual return to equilibrium in the long run. This is due in large part to the ability of the economy to undergo _________
an inflationary gap an output gap a demand shock a recessionary gap A supply shock a self-correction
Consider the economy represented by the aggregate demand-aggregate supply (AD-AS) graph shown, where output is above full employment output (Y*) and unemployment is below the natural rate. If policymakers are concerned about inflation, which countercylical fiscal policy would be appropriate to address this concern?
decrease government spending graph: Shift to the left
Fabriland is currently in the midst of a deep economic recession. The country is dependent on the local textile industry, which has suffered in recent years from increased foreign competition and a mysterious livestock epidemic that wiped out 95% of Fabriland's sheep and cow population. In an effort to help boost the economy and help Fabriland diversify away from textiles, the government decides to increase government spending. Shift the appropriate curve or curves in the model to show how this change affects aggregate demand, aggregate supply, and long‑run aggregate supply. How are price and output affected in the AD/AS model?
graph: AD shift right Price and output both increase.
Manipulate the graph to show what happens when credit markets shrink (i.e., when there is less credit available). Note that the economy starts at full employment (Y full). How does this change in the credit markets affect the price level and unemployment?
graph: AD shifts left It will result in deflation and higher unemployment.
In the accompanying graph, illustrate the impact of an increase in the contracted nominal wage. How do nominal wage changes affect the economy's output at the long-run equilibrium?
graph: SRAS shift left Nominal wages have no impact on output in the long run.
In the economy depicted in the graph, what happens if there is no intervention from policy makers? Use the graph, where LRAS represents long‑run aggregate supply, SRAS represents short‑run aggregate supply, and AD represents aggregate demand, to demonstrate the answers by shifting the appropriate curve or curves.
graph: SRAS shift left Price will increase Output will decrease
Suppose that because of globally adverse meteorological conditions, there are serious concerns of climbing prices in an extensive group of commodities. As a result, people now expect an acute increase in the level of input prices. The figure shows aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS). Move one or more of these curves to describe the short‑run effect this would have in the economy and answer the two questions. In the short run, price level In the short run, real GDP (or aggregate output)
graph: shift left price level increases real GDP decreases
As the marginal propensity to consume (MPC) increases, the spending multiplier If the marginal propensity to consume is 0.300.30, then, assuming there are no taxes or imports, what is the multiplier? Round to the nearest tenth. Given the calculated multiplier, what is the total impact on spending when there is a $1,000 increase in government spending?
increases. multiplier: 1.4 $ 1400
In many countries, one of the roles of the central bank is to provide loans to distressed financial institutions. What is the term for this? Another potential role of central banks is to foster confidence in the banking system by making sure that people can retrieve their money even if a bank goes bankrupt. What is the term for this?
lender of last resort deposit insurance
In a macroeconomic context, what are implicit liabilities? Which of the choices is a significant implicit liability in the United States?
money that the government has promised to pay in the future Social Security
Which tax is the largest source of tax revenue in the United States?
personal income taxes
Suppose the marginal propensity to consume is 0.60.6 and the government votes to increase taxes by $2.5$2.5 billion. Round to the nearest tenth if necessary. Assume the tax rate and the marginal propensity to import are 0. Calculate the tax multiplier. Calculate the resulting change in the equilibrium quantity of real GDP demanded.
tax multiplier: -1.5 $ -3.75 billion
Answer the question. Which of the choices is the most basic rationale for the development of a government stabilization policy? Complete the sentences that address the issue of government intervention in the market to address demand shocks and supply shocks.
to reduce the severity of recessions and inflation After a demand shock, governments can use fiscal policy to return the market to its previous equilibrium. Compromise policy is often used to address supply shocks because supply shocks present conflicting difficulties: government policy makers can address either inflation or unemployment because addressing one will exacerbate the other.
The multiplier (expenditure multiplier) is the ratio between which two measures?
total change in real GDP due to an autonomous change in aggregate spending AND the size of the autonomous change in aggregate spending
Deriving the Multiplier Algebraically Work It Out: Question 1 of 4 In an economy without government purchases, transfers, or taxes, and without imports or exports, aggregate autonomous consumer spending is $500 billion, planned investment spending is $250 billion, and the marginal propensity to consume is 0.5. Complete the expression for planned aggregate spending. 𝐴𝐸𝑝𝑙𝑎𝑛𝑛𝑒𝑑=$𝛼 billion+𝛽⋅𝑌𝐷+$𝛾 billion
𝛼= 500 𝛽= 0.5 𝛾= 250
Classify the events according to their impact on aggregate demand (AD). 1. A dramatic decline in the average price of houses will 2. Increased concern that a recession is looming will 3. An announcement by the central bank to maintain its existing monetary policy will 4. A reduction in government spending will 5. A dramatic improvement in the stock market, causing investors' wealth to rise, will 6. A recession occurring in a trading partner's economy will 7. An increase in income tax rates on individuals earning more than $450,000 per year will
1. decrease AD 2. decrease AD 3. no change AD 4. decrease AD 5. increase AD 6. decrease AD 7. decrease AD
Classify each statement as true or false. The statements reference bank runs, also known as banking panic. 1. A bank run only occurs when the economy is doing well. 2. A bank run is when many of a bank's customers make large deposits at once. 3. A bank run is when too many of a bank's customers withdraw too much at the same time. 4. Institutions like Federal Deposit Insurance Corporation (FDIC) decrease the frequency of bank runs.
1. f 2. f 3. t 4. t
Classify each statement about the Federal Reserve System as either true or false. 1. The Federal Reserve was established by the US Constitution in the late 1700s 2. The national objectives of the Federal Reserve include promoting economic growth, full employment, stable prices, and moderate interest rates 3. All Federal Reserve actions are subject to veto by the executive branch 4. The Federal Reserve determines monetary policy in the United States 5. The Federal Reserve was created by the Federal Reserve Act of 1913
1. f 2. t 3. f 4. t 5. t
Suppose that the administration in charge of the government proposes increasing spending on infrastructure. Assume that everything else stays the same. The components of aggregate demand (AD) are consumption (C), investment (I), government purchases (G), and net exports (NX). 1. Which component of AD is primarily affected? 2. What likely happens to the AD curve? 3. What likely happens to the level of unemployment?
1. government purchases (G) 2. AD shifts to the right (it increases). 3. unemployment decreases
Consider the little country of Podunk. Many different economic variables influence the consumption decisions Podunkians make. Match each statement with the change it would produce on Podunk's consumption function. 1. Consumers are worried the looming "fiscal cliff" will push the economy into a recession 2. Consumer spending patterns change and consumers save a smaller portion of new disposable income on consumption than in the past 3. After several years in a deep recession, the latest projections from the Podunk Economic Council show the economy at last on an up-swing. 4. Prices on the Podunk Stock Exchange increase. 5. Consumer spending patterns change and consumers spend a smaller portion of new disposable income on consumption than in the past. 6. Interest rates increase, reducing the amount Podunkians are willing to borrow.
1. shift down 2. steeper 3. shift up 4. shift up 5. flatter 6. shift down
Match the given terms to the appropriate statement relating to the various functions of money. Each term is used only once. 1. Money provides a way of measuring a good for value in standardized terms 2. Money permits us to make purchases today and enables us to pay off the purchases at some future point in time 3. Money keeps its overall purchasing power 4. Money is used to complete the transaction between the buyer and seller
1. unit of account 2. standard of deferred payment 3. store of value 4. medium of exchange