macro ch 13 hwk

a.) The figure above shows the current state of a fictitious country's economy. According to the graph, this country appears to be in a state of economic ____________ (equilibrium/recession/expansion). b.) If you were an economic advisor to the president of the country, what type of fiscal policy would you recommend at this time? (Assume you believe that fiscal policy is sometimes appropriate.) (1): -Expansionary fiscal policy -No fiscal policy -Contractionary fiscal policy c.) The appropriate fiscal policy would shift the aggregate demand curve to the (left/right)

a.) recession b.) expansionary fiscal policy c.) right

**causes a right shift in AD** a.) a. Suppose a stock market crash reduces people's wealth. This will: -increase output and lower the price level. -reduce output and raise the price level. -increase output and raise the price level. -reduce output and lower the price level. b.) Suppose the government takes no action to help the economy. Eventually, the price level (decreases/increases/returns to its initial value) and output (decreases/increases/returns to its initial value). c. Suppose, instead, the government decides to take action to help the economy. You can recommend: -cutting taxes and/or cutting spending. -cutting taxes and/or raising spending. -raising taxes and/or raising spending. -raising taxes and/or cutting spending. d.) If the U.S. government makes the appropriate policy response, what happens to the price level and output in the long run. In the long run, the price level (decreases/increases/returns to its initial value) and output (increases/returns to its initial value/decreases).

a.) reduce output and lower the price level. b.) return to its initial value; return to its initial value c.) cutting taxes and/or raising spending. d.) return to its initial value; return to its initial value

If the government were to decrease its spending, it would expect (1): -aggregate demand to fall, and thus GDP to fall. -aggregate demand to rise, and thus GDP to fall. -aggregate demand to fall, and thus GDP to rise. -aggregate demand to rise, and thus GDP to rise.

aggregate demand to fall, and thus GDP to fall.

The aggregate demand curve shifts when there are changes in (1): -the price level. -aggregate spending that are not caused by changes in output or the price level. -planned spending that are caused only by changes in output or the price level. -real GDP or real output and income.

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

Increased government spending on unemployment insurance during a recession is an example of (1): -an automatic stabilizer. -discretionary fiscal policy. -expansionary fiscal policy. -contractionary fiscal policy.

an automatic stabilizer.

Johnny has been working a lot of overtime during the most current economic boom. As a result, his income is high enough for him to move from the 10 percent tax bracket to the 15 percent tax bracket. So, Johnny pays a higher percentage of a higher income to the government this year. The increased amount paid to the government is an example of (1): -discretionary fiscal policy slowing the economy. -automatic stabilizers slowing the economy. -discretionary fiscal policy encouraging economic activity. -automatic stabilizers encouraging economic activity.

automatic stabilizers slowing the economy.

If the government were to reduce its spending, it would be enacting (1): -contractionary fiscal policy. -expansionary fiscal policy. -a budgetary crisis intervention. -expansionary budgetary policy.

contractionary fiscal policy.

The government raises taxes on households making more than $250,000. This is (expansionary/contractionary) fiscal policy that will shift aggregate demand to the (right/left).

contractionary; left

The government slashes funding for the Environmental Protection Agency, without changing any other spending. This is (expansionary/contractionary) fiscal policy that will shift aggregate demand to the (right/left).

contractionary; left

Rising interest rates reduce domestic consumption by $5 billion and reduce investment by $3 billion, thereby initially reducing overall spending by $8 billion. The marginal propensity to consume in the economy is equal to 0.5. After the multiplier effect, aggregate spending (AD) will _____________ (increase/decrease) by $______ billion.

decrese; 16 ((1/(1-0.5) x 8)

Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect planned spending _______. (1): -directly; directly -directly; indirectly -directly; not at all -indirectly; indirectly

directly; indirectly

Government policy actions intended to increase planned spending and output are called ______ policies (1): -aggregate -monetary -fiscal -expansionary

expansionary

The government decides to fill gaps in Medicare by making it available to more people. This is (expansionary/contractionary) fiscal policy that will shift aggregate demand to the (right/left).

expansionary; right

The AD curve would shift to the right in response to an increase in ______ or a decrease in _____. (1): -net taxes; government spending or interest rates -government spending; interest rates or net taxes -net taxes or interest rates; government spending -government spending or net taxes; interest rates

government spending; interest rates or net taxes

When output deviates from potential GDP, automatic stabilizers work to push the economy (1): -in the same direction that correctly timed and formulated discretionary policy would. -in the opposite direction that correctly timed and formulated discretionary policy would. -in unpredictable ways, causing a need for discretionary policy. -even further from its long-run equilibrium.

in the same direction that correctly timed and formulated discretionary policy would.

A fiscal policy action to close a recessionary gap is to (1): -increase taxes. -decrease transfer payments. -increase government purchases. -increase the marginal propensity to consume.

increase government purchases.

A recent stock market boom has increased household wealth by $20 billion, which initially increases consumption by $12 billion, and the marginal propensity to consume in the economy is equal to 0.5. After the multiplier effect, aggregate spending (AD) will ____________ (increase/decrease) by $________ billion.

increase; 24 ((1/(1-0.5) x 12)

"Our fiscal policy was unsuccessful," an economic analyst says, "due to partisan bickering in Congress that delayed the passing of the appropriate measures and our failure to realize we were headed into recession until it was too late." What type of lags is the analyst describing? (2) -Information lag. -Formulation lag. -Implementation lag.

information lag; formulation lag

Contractionary fiscal policy could involve a combination of government (1): -spending increases and income tax increases. -spending increases and income tax cuts. -spending cuts and income tax cuts. -spending cuts and income tax increases.

spending cuts and income tax increases.

One potential problem with using fiscal policy to close recessionary output gaps is that (1): -sustained government deficits can be harmful to long-run economic growth. -decreased government spending can cause inflationary pressure to build. -reductions in interest rates can reduce savings and, therefore, investment. -it may be offset by automatic stabilizers.

sustained government deficits can be harmful to long-run economic growth.

If the marginal propensity to consume equals 0.75, then a $100 increase in after-tax disposable income leads to a _____ increase in consumption (1): $0.25 $0.75 $25 $75

$75

If the government enacts contractionary fiscal policy, it (1): -must want to slow economic activity. -could increase taxes. -expects aggregate demand to decrease. -All of these are true.

All of these are true.

One of the main difficulties with implementing fiscal policy is (1): -the time lag between the time the policy is chosen and the time it gets enacted. -deciding on a policy without all the relevant information. -the danger in overshooting or undershooting the goal of full employment. -All of these are true.

All of these are true.

Sticky wages occur because (1): -employers must wait until the current contract ends to cut someone's pay. -unions often negotiate wages for several years in advance. -wages can only be changed at the end of contracts, as opposed to final good prices which can change anytime. -All of these are true.

All of these are true.

The multiplier effect suggests that (1): -a ripple effect occurs from one person's initial spending. -government spending $1 will create more than a $1 increase in GDP. -a tax cut will increase GDP by more than the amount of the initial tax cut. -All of these are true.

All of these are true.

Automatic stabilizers are the (1): -taxes and government spending that affect fiscal policy without specific action from policymakers. -fiscal policies that government actively chooses to adopt. -expansionary fiscal policies. -Keynesian policies.

taxes and government spending that affect fiscal policy without specific action from policymakers.

A budget deficit is (1): -the amount of money a government spends beyond the net revenue it brings in. -the amount of net revenue a government brings in beyond what it spends. -the total amount of money that a government owes. -the total amount of money that a government is owed.

the amount of money a government spends beyond the net revenue it brings in.

One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is (1): -the automatic adjustment can take a very long time. -the automatic adjustment means a lower level of potential GDP. -the automatic adjustment will cause permanent inflation. -All of these are true.

the automatic adjustment can take a very long time.

Which of the following would likely cause aggregate demand to shift to the left? (1): -Higher interest rates discouraging borrowing -Higher tariffs on all imports into the United States -Greater consumer confidence about the future -All of these would likely cause aggregate demand to shift to the left.

Higher interest rates discouraging borrowing

In the Keynesian model a recessionary gap will develop if there is (1): -too little spending. -too much spending. -an increase in average labor productivity. -a decrease in average labor productivity.

too little spending.

Everything else equal, which will have a larger effect on aggregate demand and GDP: a $100 million reduction in taxes or a $100 million increase in government spending? (1): -The increase in government spending—the tax cut will cause an initial increase in consumption spending of less than $100 million. -The tax cut—the initial increase in consumption spending will be more than $100 million. -The impact will be the same—the tax cut will increase consumption spending by $100 million.

The increase in government spending—the tax cut will cause an initial increase in consumption spending of less than $100 million.

Which of the following is true about an economy's self-correcting tendency? (1): -The absence of long-term contracts will make self-correction work slower in an economy. -The self-correcting tendency usually operates faster during deeper and more severe recessions. -The more slowly the economy adjusts, the more likely it is that stabilization policy will be useful. -An economy's self-correcting tendency always makes active use of stabilization policy unnecessary.

The more slowly the economy adjusts, the more likely it is that stabilization policy will be useful.

If the government were to decrease corporate income tax, we would predict (1): -a downward movement along the aggregate demand curve. -a shift in aggregate demand to the right. -a shift in aggregate demand to the left. -a shift straight down of aggregate demand.

a shift in aggregate demand to the right.

Suppose the marginal propensity to consume (MPC) is either 0.4, 0.85, or 0.65. a. For each value of the MPC, calculate the impact of a one-dollar decrease in taxes on GDP. MPC Impact of a one-dollar decrease in taxes 0.4 ____?____ 0.85 ____?____ 0.65 ____?____ b. For each value of the MPC, calculate the impact on GDP of a $250 million decrease in taxes. MPC Impact on GDP 0.4 $___?___ 0.85 $___?___ 0.65 $___?___ c. Which of the following best describes the relationship between the MPC and the impact of a change in taxes on GDP (1): -the larger the MPC, the larger the impact on GDP of a given change in taxes. -the larger the MPC, the smaller the impact on GDP of a given change in taxes. -the impact on GDP of a change in taxes does not depend on the size of the MPC. -it is impossible to say unless we know the tax rate.

a.) 0.67 (-0.4/0.6)(-$1) 5.67 (-0.85/0.15)(-$1) 1.86 (-0.65/0.35)(-$1) b.) 166.67 (-0.4/0.6)(-$250 million) 1,416.67 (-0.85/0.15)(-$250 million) 464.29 (-0.65/0.35)(-$250 million) c.) the larger the MPC, the larger the impact on GDP of a given change in taxes.

Calculate the resulting change in GDP for each of the following MPCs when the government increases its spending by $250 billion. a.) The marginal propensity to consume (MPC) = 0.2. The change in GDP is $ _______ billion. b.) The marginal propensity to consume (MPC) = 0.5. The change in GDP is $ _______ billion. c.) The marginal propensity to consume (MPC) = 0.8. The change in GDP is $ _______ billion. d.) Comment on the relationship between the MPC and the resulting change in GDP—as the MPC rises, does its effect on GDP increase or decrease? As the MPC rises, its effect on GDP (decreases/stays the same/increases)

a.) 312.5 billion ((1/(1-0.2) x 250) b.) 500 billion ((1/(1-0.5) x 250) c.) 1,250 billion ((1/(1-0.8) x 250) d.) increases

Suppose the marginal propensity to consume (MPC) is either 0.8, 0.4, or 0.92. a. For each value of the MPC, calculate the expenditure multiplier, or the impact of a one-dollar increase in government spending on GDP. MPC expenditure multiplier 0.8 ______?______ 0.4 ______?______ 0.92 ______?______ b. For each value of the MPC, calculate the impact on GDP of a $250 million increase in government spending. MPC Impact on GDP 0.8 $____?____ 0.4 $____?____ 0.92 $____?____ c. Which of the following best describes the relationship between the MPC and the impact of a change in government spending on GDP (1): -the larger the MPC, the larger the impact on GDP of a given change in government spending. -the larger the MPC, the smaller the impact on GDP of a given change in government spending. -the impact on GDP of a change in government spending does not depend on the size of the MPC. -it is impossible to say unless we know the tax rate.

a.) 5 (1/(1-0.8) 1.7 (1/(1-0.4) 12.5 (1/(1-0.92) b.) 1,250 (250 x 5) 3,125 (250 x 12.5) c.) the larger the MPC, the larger the impact on GDP of a given change in government spending.

The diagram in the figure below shows aggregate demand for New Caprica last year (AD1) and this year (AD2). If you were to advise the president of New Caprica on economic policy, how would you answer the following? a.) Current output is $_____ million, and potential output is $______ million. There is (a shortfall/an excess) of output of $______ million. b.) New Caprica is in a (boom/recession). c.) The president should enact (no/contractionary/expansionary) fiscal policy. d.) The aggregate demand curve would shift to the (right/left) if the president used contractionary fiscal policy.

a.) 60; 80; a shortfall; 20 b.) recession c.) expansionary d.) left

The economy is growing far too quickly, as high aggregate demand is causing inflation. a.) What fiscal policy should be pursued in this instance? (Expansionary/Contractionary fiscal policy.) b.) What will be the effect of the appropriate policy on aggregate demand?Aggregate demand will shift to the (left/right).

a.) contractionary b.) left

Assuming that unemployment is high and spending is low: a.) Should the government pursue expansionary or contractionary fiscal policy? b.) What will the appropriate policy do to the aggregate demand curve? Will it shift to the right or to the left? c. Through which component(s) of aggregate demand (Consumption, Investment, Government Spending, or Net Exports) will the change occur?-Consumption. -Government Spending. -Net Exports. -Investment.

a.) expansionary b.) right c.) investment, government spending, and consumption

**causes right shift in SRAS** a.) Suppose a summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans (1): -increase output and raise the price level. -reduce output and lower the price level. -reduce output and raise the price level. -increase output and lower the price level. b.) Suppose the government takes no action to help the economy. Eventually, the price level (increases/returns to its initial value/decreases) and output (increases/decreases/returns to its initial value). c.) If the U.S. government reacts to the record harvests by increasing taxes or decreasing spending, what happens to the price level and output in the long run?In the long run, the price level (decreases/increases/returns to its initial value) and output (increases/decreases/returns to its initial value). d.) The problem associated with the government reacting to the record harvests by increasing taxes or decreasing spending is: -the inflation rate will increase. -the deficit will increase. -the price level will increase. -unemployment will increase.

a.) increase output and lower the price level. b.) return to its initial value; return to its initial value c.) decrease; return to its initial value d.) unemployment will increase.