Economics UNIT 2 Exam

In the AD/AS model, economic growth is best illustrated by a

d. rightward shift of the long-run aggregate supply curve.

In the long run, when prices are perfectly flexible:

. aggregate supply is vertical and a market economy is self-correcting.

If the actual unemployment rate is less than the natural unemployment rate:

. an inflationary gap exists and wages are likely to rise

According to Say's Law:

. supply creates its own demand.

If equilibrium income falls by $1,000 when investment spending falls by $250, the autonomous spending multiplier is equal to:

4

When the marginal propensity to consume (MPC) is 0.80, the autonomous spending multiplier is ________.

5

Which of the following events would lead to a rightward shift of the short-run aggregate supply curve?

A decrease in the price of energy

Suppose the economy is initially at full-employment equilibrium. Which of the following events could cause a recessionary gap, ceteris paribus?

Consumers spend less due to declining consumer confidence in the economy

Which of the following is not an assumption of the Classical model?

Demand creates its own supply

Which of the following is an example of automatic, expansionary fiscal policy?

Higher unemployment compensation payments that occur when the economy is in a recession

Which of the following summarizes the process for closing a recessionary gap if the economy is self-regulating?

Unemployed resources put downward pressure on resource prices, which leads to lower costs of production and an increase in short-run aggregate supply

The Classical model leads to the conclusion that:

government should take a laissez-faire approach with respect to the macroeconomy.

Ceteris paribus, a $100 increase in investment spending will generally:

increase equilibrium income by more than $100.

The vertical long-run aggregate supply curve implies that:

natural or full-employment real GDP does not depend on the price level in the long run.

When the economy is operating where total production is less than total expenditures, all of the following are true except:

the level of output produced is greater than what people want to buy.

Given a marginal propensity to save equal to 0.25, the simple Keynesian model leads to the conclusion that the autonomous spending multiplier is equal to ________, meaning that a $100 increase in autonomous investment spending could potentially lead to a(n) ________ increase in equilibrium income.

$400

If the marginal propensity to consume is 0.925, then a $100 increase in disposable income leads to a:

$92.50 increase in consumption.

An $8 billion decrease in investment spending when the MPC is 0.75 may potentially lead to

. a decrease in equilibrium income of up to $32 billion.

Economic growth is illustrated by:

. a rightward shift of the long-run aggregate supply curve.

If the marginal propensity to save is 0.05, then the marginal propensity to consume is:

. 0.95.

Which of the following summarizes the process for closing an inflationary gap if the economy is self-regulating?

Labor shortages put upward pressure on wages, which leads to higher costs of production and a decrease in short-run aggregate supply

When tax receipts are less than government expenditures during a single year, the result is:

a budget deficit.

The short-run aggregate supply curve shows:

a direct relationship between the quantity supplied of all goods and services and the price level.

All of the following equations are correct except:

a. MPC + MPS = 1. b. 1 - MPC = MPS. Correctc. MPC = C/Yd. d. MPS = ∆S/∆Yd

In the long run, continued increases in aggregate demand not matched by similar increases in aggregate supply will cause:

an increase in the price level.

Ceteris paribus, an increase in the price level causes:

an increase in the quantity of real GDP supplied (movement along SRA

Economists that advocate a macroeconomic policy of laissez-faire:

believe the economy is self-regulating and will automatically move to equilibrium at natural real GDP in the long run.

When tax receipts are greater than government expenditures during a single year, the result is:

budget surplus.

Ceteris paribus, when the short-run aggregate supply curve is upward-sloping, an increase in government spending:

c. leads to an increase in both the price level and real GDP.

In a self-regulating economy, inflationary gaps are automatically eliminated in the long run by:

increases in wage rates that cause short-run aggregate supply to shift leftward.

Ceteris paribus, a leftward-shift of the short-run aggregate supply (SRAS) curve causes

. an increase in the price level, which in turn causes quantity demanded to fall.

A balanced budget amendment to the U.S. Constitution would require that:

. federal government spending be financed by tax revenue.

An increase in household wealth when the SRAS curve is upward sloping:

. leads to an increase in both the price level and real GDP

The short-run aggregate supply curve is upward sloping because:

. producers respond to higher prices and profits by increasing output.

The basic Classical model and the notion that a market economy is self-regulating began with

. the publication of Adam Smith's The Wealth of Nations.

If the economy is operating on the LRAS curve (natural real GDP), an increase in aggregate demand will:

d. increase the price level in the long run

Economists who believe that the economy is self-regulating generally advocate:

a laissez-faire approach to macroeconomic policy.

An economy in long-run equilibrium is producing:

a level of real GDP equal to its natural real GDP.

Supply-side economics emphasizes:

a. low marginal tax rates. b. increasing incentives to work, save, and invest. c. long-run effects on aggregate supply rather than short-run effects on aggregate demand. Correctd. all of the above.

Changes in government spending and taxing that counteract the business cycle and occur as a result of changing economic conditions are:

automatic (built-in) stabilizers.

The increase in personal income tax payments that occur when an economic expansion causes incomes to rise is an example of:

automatic, contractionary fiscal policy.

The part of consumption spending that is independent of disposable income is called:

autonomous consumption.

If the price of a major input, such as oil, increases:

c. the SRAS curve shifts to the left.

The marginal propensity to consume (MPC) is defined as the:

change in consumer spending divided by the change in disposable income.

Fiscal policy is best defined as:

changes in government spending and taxing for the purpose of achieving certain macroeconomic goals.

Suppose Congress believes that the economy is entering a recession and approves a budget that includes increased overall government spending (with no corresponding increase in taxes) in order to stimulate aggregate demand. This is an example of:

discretionary, expansionary fiscal policy.

When the economy's rate of unemployment is higher than the natural rate, this creates:

downward pressure on wages to eliminate the surplus in the labor market.

Increases in government spending and lower taxes represent _________________, while decreases in government spending and higher taxes represent ________________.

expansionary fiscal policy; contractionary fiscal policy

If actual (equilibrium) real GDP is less than the full-employment, or natural, level of real GDP, then wages and other input prices are expected to:

fall and SRAS to shift to the right until long-run equilibrium is achieved.

The Laffer curve suggests that:

increasing marginal tax rates may actually reduce tax revenues.

In the Classical model, if the amount of saving exceeds the amount of investment, then:

interest rates will fall to move the credit market to equilibrium.

Assume the economy is initially in equilibrium at the full-employment level of real GDP. If businesses and consumers become pessimistic regarding future economic conditions, ceteris paribus, the aggregate demand curve will shift to the ________, causing the level of output to ________.

left; fall

That total stock of outstanding government securities (bonds) is the:

national debt

The largest source of revenue for the federal government in the U.S. is the:

personal income tax.

A market economy is self-regulating only if:

prices in all markets can rise to eliminate shortages and fall to eliminate surpluses.

The Classical model is based on the assumption that:

prices, wages, and interest rates are flexible.

A _____________________ tax is one for which the marginal tax rate increases as income increases.

progressive

In the Keynesian model, when aggregate expenditure is less than aggregate output, firms are most likely to react by:

reducing production and laying off some workers.

If income increases by $10,000 and the tax bill for the $10,000 increase is $3,000, then:

the marginal tax rate is 30%.

In an economy that has automatic (built-in) stabilizers:

the severity of recessions tends to be reduced.

hen the economy is in a recessionary gap

there is a surplus of labor.

When the wage rate is below the equilibrium wage rate, the Classical model argues that:

upward pressure on wages will eliminate the shortage in the labor market.

The long-run aggregate supply (LRAS) curve is:

vertical at natural real GDP, or potential output

For an economy to be self-regulating:

wages and other input prices must be flexible in the long run.