Econ Practice Exam 3

Firms decide how much to invest by comparing the rate of return on their projects with:

the interest rate.

(Figure: Aggregate Expenditures) The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100?

Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

An increase in the value of the U.S. dollar relative to other currencies will a. shift the autonomous net export function upward b. shift the autonomous net export function downward c. cause a rightward movement along the autonomous net export function d. cause a leftward movement along the autonomous net export function e. show no movement along or shift of the autonomous net export function

b. shift the autonomous net export function downward

When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by a. $75 billion b. $100 billion c. $300 billion d. $400 billion e. $500 billion

c. $300 billion

Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increase a. by $100 b. by$2,000 c. by $1,000 d. to $1,400 e. to $2,000

d. to $1,400

Suppose that investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will increase by a. $40 billion b. $160 billion c. $200 billion d. $250 billion e. $1,000 billion

e. $1,000 billion

If the marginal propensity to consume is 4/5, the simple multiplier is a. 1/6 b. 6 c. 5/6 d. 6/5 e. 5

e. 5

(Figure: Shifting the AD and SRAS) Assume the economy depicted in the figure above is in long-run equilibrium, where the aggregate demand curve is AD0 and the short-run aggregate supply curve is SRAS0. If there is a supply shock, such as a drastic increase in the price of oil, this will cause a _____ and a movement to a short-run equilibrium at point _____.

leftward shift in SRAS2; a

Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment?

reduce spending by $25 billion

Which of the following is an example of contractionary fiscal policy?

reducing military spending

If the multiplier is 4, a $10 billion increase in autonomous government spending will cause a a. $10 billion increase in equilibrium investment b. $40 billion increase in equilibrium investment c. $40 billion increase in equilibrium real GDP d. $400 billion increase in equilibrium real GDP e. $40 billion increase in consumption spending

c. $40 billion increase in equilibrium real GDP

Which of the following might be considered the most expansionary set of fiscal policies? a. increase in government purchases, increase in taxes, and decrease in transfer payments b. decrease in government purchases, increase in taxes, and decrease in transfer payments c. increase in government purchases, decrease in taxes, and increase in transfer payments d. increase in government purchases, increase in taxes, and increase in transfer payments e. decrease in government purchases, decrease in taxes, and decrease in transfer payments

c. increase in government purchases, decrease in taxes, and increase in transfer payments

All of the following are tools of fiscal policy except one. Which is the exception? a. Taxes b. transfer payments c. interest rates d. government purchases of goods e. government purchases of services

c. interest rates

A grocery store manager must decide whether to buy four rug cleaners to rent to customers. The manager estimates that the first would yield $200 a year, the second $150, the third $75, and the fourth $20. If the interest rate is 12 percent and each rug cleaner costs $500, how many should the manager buy? a. None b. One c. Two d. Three e. Four

d. Three

An increase in the rate of interest, other things equal, would a. have no effect on investment b. increase the amount invested since the rate of return would be lower c. increase the amount invested because income would rise d. reduce the amount invested because the opportunity costs of investing would be higher e. increase the amount invested because the rate of return would be higher

d. reduce the amount invested because the opportunity costs of investing would be higher

(Figure: Determining Fiscal Policy) The best discretionary fiscal policy option is:

expansionary fiscal policy that leads to full employment.

Which of the following items is NOT a determinant of aggregate demand?

government saving

(Figure: Aggregate Demand Shift) The shift in aggregate demand depicted may be due to a(n):

increase in income taxes.

A(n) _____ in productivity and a(n) _____ in taxes on producers will shift short-run aggregate supply to the right.

increase; decrease

In Productovia, aggregate demand increases and aggregate supply decreases. Based on the shifts of these two curves, which of the following is a likely outcome?

inflation

If aggregate expenditures equals $7,600 and aggregate income equals $8,000, businesses will produce:

less, lowering both employment and income.

Automatic stabilizers are designed so that as income falls:

spending does not fall as much as income.

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion, the marginal propensity to save is:

0.25.

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which of the following statements is correct?

A small increase in spending will have a more powerful effect in starting a recovery in the United States than in Japan.

A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded. A. left; decrease B. left; increase C. right; increase D. right; decrease

A. left; decrease

The long-run supply curve is: A. vertical. B. horizontal. C. elastic. D. inelastic.

A. vertical.

(Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate demand from _____ to _____, aggregate output will increase from _____ to _____.

AD0; AD1; Q0; Qf

High taxes and/or heavy regulation: A. can cause firms to boost production so they can cover the added costs. B. raise costs of production so that the aggregate supply curve shifts to the left. C. are not likely to affect firms' behavior, since they are more concerned about profit then taxes or regulation . D. are likely to shift aggregate supply to the right.

B. raise costs of production so that the aggregate supply curve shifts to the left.

(Figure: Determining SRAS Shifts 2) Which of the following might cause a change in short-run aggregate supply?

Businesses are increasingly optimistic about the future.

Which of the following items is NOT a determinant of aggregate demand? A. consumption B. investment C. government saving D. government spending

C. government saving

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded. A. left; decrease B. left; increase C. right; increase D. right; decrease

C. right; increase

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is: A. aggregate shifts policy. B. contractionary policy. C. supply-side fiscal policy. D. consumption policy.

C. supply-side fiscal policy.

(Figure: Laffer Curve 3) A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point _____ in the graph.

D

A tax decrease on producers will shift the aggregate supply curve to the left.

False

One strength of the use of discretionary fiscal policy is the timing lags.

False

All of the following are tools of fiscal policy except one. Which is the exception?

Interest rates

(Figure: Aggregate Demand Shift) Which of the following may be an explanation for the shift in aggregate demand from line A to line B?

Interest rates fall and boost investments.

From 2008 to 2009, the falling stock market reduced the wealth of U.S. households, causing the United States:

to shift its consumption schedule downward.

The long-run aggregate supply curve represents the full-employment capacity of the economy.

True

If a household's income rises from $16,000 to $16,700 and its consumption spending rises from $15,800 to $16,400, then its a. marginal propensity to consume is 0.86 b. marginal propensity to consume is 0.99 c. marginal propensity to consume is 0.98 d. marginal propensity to save is 0.01 e. marginal propensity to save is 0.86

a. marginal propensity to consume is 0.86

An increase in wealth will a. shift the consumption function upward b. make the consumption function steeper c. cause a movement upward along the consumption function d. cause a movement downward along the consumption function e make the consumption function flatter

a. shift the consumption function upward

If disposable income is $3,000 and saving is $1,200, how much is consumption?

$1,800

When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by

$300 billion

(Table) The table shows data on consumption at various levels of income. The value of the marginal propensity to consume is:

0.9.

If the marginal propensity to consume is 3/4, the simple multiplier is

4

Approximately what share of U.S. GDP is consumption?

70%

Suppose that government spending decreases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will decrease by

???

Supply-side fiscal policies include all of the following EXCEPT: A. investment in human capital. B. projects that include the encouragement of new technologies. C. increasing transfer payments. D. policies that encourage investment in research and development.

C. increasing transfer payments.

According to the wealth effect, as prices fall, people feel wealthier and purchase more goods and services.

True

An increase in autonomous investment will a. shift the aggregate expenditure line upward b. shift the aggregate expenditure line downward c. result in an upward movement along the aggregate expenditure line d. result in a downward movement along the aggregate expenditure line e. increase aggregate expenditures only at high levels of income

a. shift the aggregate expenditure line upward