Macro Economics Chapter 13 & 15

Which of the following causes an increase in short-run aggregate supply?

Firms and workers expect the price level to fall.

Which of the following would cause an increase in the price level in the long run?

Investment increases.

Why is a budget surplus not necessarily a good thing?

It means tax rates may be too high.

Which of the following is true?

Long-run aggregate supply is independent of the price level.

________ outlays comprise government spending that is determined by ongoing government programs like Social Security and Medicare.

Mandatory

Why is foreign government ownership of U.S. debt NOT currently a huge concern among many economists?

The amount of debt held by foreigners is substantially less than the money the United States owes itself.

Why do wealthy citizens contribute much higher tax revenues to the government than poor citizens?

Wealthy citizens have much more taxable income than poor citizens.

Should we be concerned about a growing federal debt?

Yes, because a large federal debt may slow the rate of economic growth in the future.

Are demographics an important factor when planning the federal budget?

Yes, because many government benefits are received by the fast-growing elderly population, causing implications for future levels of taxation and government benefits for everyone.

Mandatory outlays are different than discretionary outlays because

discretionary outlays can be changed during the annual budget process, whereas mandatory outlays cannot.

The part of the government budget that includes both spending and transfer payments is known as ________ outlays.

government

A U.S. federal government budget deficit occurs when

government outlays exceed revenue.

A U.S. federal government budget surplus occurs when

government revenue exceeds outlays.

In recent years, the growth in foreign-owned debt has

helped the U.S. economy by keeping the supply of loanable funds higher than it would be otherwise.

A progressive income tax system is one in which

income tax rates increase as earned income increases.

If short-run equilibrium output is above full-employment output, then in the long run input prices will

increase and output will fall.

Budget deficits tend to

increase during recessions.

An increase in short-run aggregate supply immediately leads to a(n)

increase in real wealth and a movement along the aggregate demand curve.

Increases in productivity will

increase long-run aggregate supply.

An increase in investment spending can be expected to ________ interest rates and cause ________ the aggregate demand curve.

increase; a rightward shift of

Suppose firms increase investment spending to replace worn-out equipment. In the short run, aggregate demand will ________ and output will ________.

increase; increase

If people expect higher incomes in the future, then spending today ________ and aggregate demand ________.

increases; increases

The largest source of tax revenue for the government is ________ taxes.

individual income

The primary source of revenue for the federal government is

individual income taxes.

When a change in the price level leads to a change in saving, this is known as the ________ effect.

interest rate

The aggregate demand curve illustrates the

inverse relationship between the price level and the quantity demanded of real gross domestic product (GDP).

In the long run, the output of an economy

is equal to full-employment output.

Aggregate supply describes a relationship between

output and prices.

Which of the following is considered mandatory government spending?

payments to Social Security recipients

Which of the following is considered discretionary government spending?

payments to government employees

Social Security and Medicare are funded by the collection of ________ taxes.

payroll

If the current short-run equilibrium level of output is greater than full-employment output, we can then expect that in the long run the

price level will rise and short-run aggregate supply will fall.

The United States has a ________ income tax system.

progressive

If policymakers are concerned about the unequal distribution of income within society, then they should prefer a ________ tax system.

progressive income

The U.S. government could reduce its budget deficit by

raising the eligible retirement age to receive Social Security benefits.

Unemployment rises and real gross domestic product (GDP) growth slows during the ________ business cycle.

recession phase of a

An increase in short-run aggregate supply could be the result of a(n)

reduction in expected future prices.

Reforming entitlement programs is difficult because

reforms require changes to existing law, which takes time.

Mandatory outlays

require changes in existing laws if those outlays are to be altered.

The long-run output of an economy depends on

resources, technology, and institutions.

Which of the following is NOT a revenue source for the U.S. federal government?

sales taxes

Aggregate demand is about ________ and aggregate supply is about ________.

spending; production

The slope of the short-run aggregate supply curve can be explained by

sticky input prices and flexible output prices.

Discretionary government spending includes payments made for

the Department of Education.

If the current short-run equilibrium level of output is less than full-employment output, we can then expect that in the long run

the price level will fall.

A marginal tax rate is

the tax rate paid on a worker's next dollar of income.

The U.S. national debt is purchased by entities in the form of

treasury securities.

A decrease in aggregate demand is harmful in the short run because ________ but not in the long run because ________.

unemployment rises; the price level falls

When the price level rises and U.S. goods become relatively more expensive than foreign goods, there will be a(n)

upward movement along the aggregate demand curve.

The long-run aggregate supply curve is

vertical because full-employment output is independent of the price level.

Consider the wealth effect, interest rate effect, and international trade effect. Of these, the ________ effect is the most significant and the ________ effect is the least significant.

wealth; international trade

An increase in aggregate demand is harmful because

workers with sticky wages are paying more for goods and services.

________ outlays comprise spending that can be altered when the government is setting its annual budget.

Discretionary

Which of the following might be a good reason for running a budget deficit?

A budget deficit allows for consumption to be more evenly distributed over time, which can be helpful during times of recession.

The aggregate demand curve is best represented by which of the following equations?

AD=C+I+G+NX

Which of the following would cause an upward movement along the aggregate demand curve?

An increase in the price level increases the value of real wealth.

Why is a budget deficit not necessarily a bad thing?

Deficits may allow for tax rate stability during recessions.

Which of the following would shift aggregate demand to the right?

Stock market values increase by 20 percent.

Which of the following is true about the price level and aggregate supply?

The price level influences aggregate supply in the short run but not in the long run.

Which of the following would cause an increase in long-run aggregate supply?

The stock of capital increases.

Which of the following would shift aggregate demand to the left?

The value of the dollar increases.

Which of the following would cause an increase in employment in the short run?

There is an increase in government spending.

Discretionary spending is a shrinking part of the federal budget. What is a possible consequence to this development?

There will be more competition for public works and infrastructure projects.

Why are interest payments considered mandatory spending in the federal budget?

They are considered mandatory spending because not making such payments could endanger the government's credit rating, which could make it harder to borrow going forward.

________ are payments made to groups or individuals when no good or service is received in return.

Transfer payments

An increase in expected future prices causes

a decrease in short-run aggregate supply.

A fall in the price level that causes a change in the real value of wealth results in

a downward movement along the aggregate demand curve.

The aggregate demand curve slopes downward because

a higher price level reduces wealth.

A budget is

a plan for spending and earning money.

According to the interest rate effect, an increase in the price level leads to ________ in the interest rate, and therefore to ________ in the quantity of aggregate demand.

a rise; a fall

The wealth effect, interest rate effect, and international trade effect all explain why the

aggregate demand (AD) curve has a negative slope.

The economy is in long-run equilibrium when

aggregate demand intersects both long-run and short-run aggregate supply.

The economy is in short-run equilibrium when

aggregate demand intersects short-run aggregate supply.

A rise in the price level that leads to a change in the interest rate, and therefore to a change in the quantity of aggregate demand, will cause

an upward movement along the aggregate demand curve.

An increase in the general price level will lead to

an upward movement along the short-run aggregate supply curve as firms increase output.

Transfer payments refer to funds that are transferred from one group in society to another group

and these payments represent a growing share of U.S. federal outlays.

Shifts in the long-run aggregate supply curve are caused by

changes in labor productivity.

Shifts in the aggregate demand curve are caused by

changes in spending.

Aggregate demand is determined by adding up the spending of

consumers, firms, the government, and foreigners that buy goods and services produced in the United States.

When the price level rises, ________ declines from the wealth effect, ________ declines from the interest rate effect, and ________ decline(s) from the international trade effect.

consumption; investment; net exports

Which of the following is an example of discretionary spending?

credit card bill

When saving declines, the quantity of investment will ________, and therefore aggregate demand will ________.

decrease; decrease

If the economy is in a recession caused by lower aggregate demand, then in the absence of policy action, the price level will ________, output will ________, and employment will ________ in the long run

decrease; increase; increase

Which federal budget category's portion of total government outlays has decreased since 1960?

defense

A rightward shift of the long-run aggregate supply curve means there has been

economic growth.

Mandatory outlays are sometimes referred to as ________ programs

entitlement

Business-cycle theory focuses on time horizons of less than

five years.

The majority of federal spending is comprised of ________ outlays.

mandatory

The largest portion of the federal budget is dedicated to

mandatory outlays.

The most relevant tax rate for making decisions about earning additional income is the ________ tax rate.

marginal