macro exam 2
b) The fiscal stimulus shifted aggregate demand to the right, but not enough to restore full employment.
(Last Word) In response to the Great Recession, the federal government engaged in significant deficit-funded spending. While it kept the recession from getting worse, and did result in some positive economic growth, it did not fully achieve the desired result. Which of the following best explains why the fiscal policy actions fell short of their objective? a) The fiscal stimulus caused a significant leftward shift of aggregate supply. b) The fiscal stimulus shifted aggregate demand to the right, but not enough to restore full employment. c) Despite the fiscal stimulus, aggregate demand continued to shift to the right. d) Offsetting monetary policy caused the aggregate demand to remain virtually unchanged, meaning that all gains in output came from aggregate supply shifts.
b) a portion of a tax cut will be saved.
A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because a) taxes vary directly with income. b) a portion of a tax cut will be saved. c) government spending increases the money supply and a tax reduction does not. d) government spending is more employment intensive than is either consumption or investment spending.
c) frictionally unemployed.
A college graduate using the summer following graduation to search for a job would best be classified as a) cyclically unemployed. b) not officially a member of the labor force. c) frictionally unemployed. d) structurally unemployed.
c) decreases consumption by moving downward along a specific consumption schedule.
A decline in disposable income: a) increases consumption by moving upward along a specific consumption schedule. b) increases consumption because it shifts the consumption schedule upward. c) decreases consumption by moving downward along a specific consumption schedule. d) decreases consumption because it shifts the consumption schedule downward.
a) economy's aggregate supply curve is steep.
A given reduction in government spending will dampen demand-pull inflation by a greater amount when the a) economy's aggregate supply curve is steep. b) economy's aggregate supply curve is flat. c) unemployment rate is high. d) economy's MPS is large.
b) require no legislative action by Congress to be made effective.
A major advantage of the built-in or automatic stabilizers is that they a) simultaneously stabilize the economy and reduce the absolute size of the public debt. b) require no legislative action by Congress to be made effective. c) automatically produce surpluses during recessions and deficits during inflations. d) guarantee that the federal budget will be balanced over the course of the business cycle.
b) the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.
A recessionary expenditure gap exists if a) the aggregate expenditures schedule intersects the 45-degree line at any level of GDP. b) the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP. c) the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP. d) planned investment exceeds saving at the full-employment GDP.
c) increase the price level by more than real output.
A rightward shift of the AD curve in the very steep upper part of the short-run AS curve will a) increase real output by more than the price level. b) reduce real output by more than the price level. c) increase the price level by more than real output. d) reduce the price level by more than real output.
a) leftward shift of the AS curve.
Graphically, cost-push inflation is shown as a a) leftward shift of the AS curve. b) rightward shift of the AD curve. c) leftward shift of the AD curve. d) rightward shift of the AS curve.
c) leftward shift of the AS curve.
Graphically, cost-push inflation is shown as a a) rightward shift of the AS curve. b) leftward shift of the AD curve. c) leftward shift of the AS curve. d) rightward shift of the AD curve.
d) rightward shift of the AD curve along an upsloping AS curve.
Graphically, demand-pull inflation is shown as a a) leftward shift of the AS curve along a downsloping AD curve. b) rightward shift of the AD curve along a downsloping AS curve. c) leftward shift of the AS curve along an upsloping AD curve. d) rightward shift of the AD curve along an upsloping AS curve.
c) consume is three-fifths.Correct
If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to a) consume is one-half. b) consume is two-fifths. c) consume is three-fifths.Correct d) save is three-fifths.
c) economy's MPS is small.
If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the a) economy's MPC is small. b) economy's MPS is large. c) economy's MPS is small. d) unemployment rate is low.
a) will increase, but real output may increase, decrease, or remain unchanged.
If aggregate demand increases and aggregate supply decreases, the price level a) will increase, but real output may increase, decrease, or remain unchanged. b) will decrease, but real output may increase, decrease, or remain unchanged. c) and real output will both decrease. d) and real output will both increase.
d) shift downward
If net exports decline from zero to some negative amount, the aggregate expenditures schedule would a) become steeper. b) shift upward. c) not move. (Net exports do not affect aggregate expenditures.) d) shift downward
b) output would necessarily rise.
If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium a) price level would necessarily fall. b) output would necessarily rise. c) output would necessarily fall. d) price level would necessarily rise.
a) increasing government spending by $4 billion.
If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by a) increasing government spending by $4 billion. b) decreasing taxes by $4 billion. c) increasing taxes by $4 billion. d) increasing government spending by $40 billion.
a) country's net exports to fall.
If the dollar appreciates relative to foreign currencies, we would expect the a) country's net exports to fall. b) multiplier to decrease. c) country's exports and imports to both fall. d) country's net exports to rise.
d) increase GDP by $100 billion.
If the multiplier in an economy is 5, a $20 billion increase in net exports will a) increase GDP by $20 billion. b) decrease GDP by $100 billion. c) reduce GDP by $4 billion. d) increase GDP by $100 billion.
c) increase tax rates and/or reduce government spending.
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should a) discourage personal saving by reducing the interest rate on government bonds. b) increase government expenditures. c) increase tax rates and/or reduce government spending. d) encourage private investment by reducing corporate income taxes.
a) $20 billion.
In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by a) $20 billion. b) $40.50 billion. c) $10 billion. d) $31.25 billion.
d) more variable than real GDP.
In annual percentage terms, investment spending in the United States is a) less variable than the price level. b) less variable than real GDP. c) less variable than consumption spending. d) more variable than real GDP.
b) not necessarily equal to the full-employment GDP.
In the aggregate expenditures model, the equilibrium GDP is a) always less than the full-employment GDP level. b) not necessarily equal to the full-employment GDP. c) assumed to be equal to the potential GDP level. d) always above the potential GDP level.
c) Aggregate supply decreases and aggregate demand increases.
In which of the following sets of circumstances can we confidently expect inflation? a) Aggregate supply and aggregate demand both increase. b) Aggregate supply increases and aggregate demand decreases. c) Aggregate supply decreases and aggregate demand increases. d) Aggregate supply and aggregate demand both decrease.
a) cost-push inflation.
Inflation initiated by increases in wages or other resource prices is labeled a) cost-push inflation. b) cost-pull inflation. c) demand-pull inflation. d) demand-push inflation.
a) understate unemployment because discouraged workers are not counted as unemployed.
Official unemployment statistics a) understate unemployment because discouraged workers are not counted as unemployed. b) include cyclical and structural unemployment but not frictional unemployment. c) understate unemployment because individuals receiving unemployment compensation are counted as employed. d) overstate unemployment because workers who are involuntarily working part time are counted as being employed.
d) time fiscal action is taken and the time that the action has its effect on the economy.
One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the a) start of the recession and the time it takes to recognize that the recession has started. b) start of a predicted recession and the actual start of the recession. c) time the need for the fiscal action is recognized and the time that the action is taken. d) time fiscal action is taken and the time that the action has its effect on the economy.
a) shift the investment demand curve to the right.
Other things equal, a 10 percent decrease in corporate income taxes will a) shift the investment demand curve to the right. b) decrease the market price of real capital goods. c) have no effect on the location of the investment demand curve. d) shift the investment demand curve to the left.
a) depress real output and employment in the U.S. economy.
Other things equal, a serious recession in the economies of U.S. trading partners will a) depress real output and employment in the U.S. economy. b) stimulate real output and employment in the U.S. economy. c) have no perceptible impact on the U.S. economy. d) cause inflation in the U.S. economy.
b) equal to that associated with a change in investment or consumption.
Other things equal, the multiplier effect associated with a change in government spending is a) the same as that associated with a change in taxes. b) equal to that associated with a change in investment or consumption. c) greater than that associated with a change in investment. d) less than that associated with a change in investment.
d) value of final goods and services produced within the borders of a country, adjusted for price changes.
Real GDP measures the a) total dollar value of all goods and services produced within the borders of a country using current prices. b) total dollar value of all goods and services consumed within the borders of a country, corrected for price changes. c) value of all goods and services produced in the world, using current prices. d) value of final goods and services produced within the borders of a country, adjusted for price changes.
b) Yes, because real income may fall if price increases are proportionately greater than the increases in nominal income.
Recently, a teachers' union argued that the standard of living of teachers working for the school district was falling. The negotiating team for the school board replied that this was not true because the teachers had received significant increases in nominal income through collective bargaining. Could the union statement be correct? a) No, because real income may rise if price increases are proportionately greater than declines in nominal income. b) Yes, because real income may fall if price increases are proportionately greater than the increases in nominal income. c) No, because real income may rise if price increases are proportionately greater than the increases in nominal income. d) Yes, because real income may fall if price increases are proportionately smaller than the increases in nominal income.
c) will rise to $500.
Refer to the accompanying information for a closed economy. If government now spends $80 billion at each level of GDP and taxes remain at zero, the equilibrium GDP a) may either rise or fall. b) will rise to $700. c) will rise to $500. d) will rise to $600.
d net exports are positive.
Refer to the diagram. If (C + Ig) are the private expenditures in the closed economy and Xn2 are the net exports in the open economy, we can conclude that a) net exports are negative. b) trade is balanced. c) exports are negative. d net exports are positive.
a) decrease spending and increase taxes.
Refer to the diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to a) decrease spending and increase taxes. b) increase spending and decrease taxes. c) increase spending and increase taxes. d) decrease spending and decrease taxes.
c) economy is in equilibrium, at full employment.
Refer to the diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE2, the a) recessionary expenditure gap is BC. b) inflationary expenditure gap is eg. c) economy is in equilibrium, at full employment. d) inflationary expenditure gap is ed.
d) higher expected rates of return on investment
Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID2? a) a lower interest rate b) a higher interest rate c) lower expected rates of return on investment d) higher expected rates of return on investment
d) A and B.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by a) C. b) B. c) A. d) A and B.
a) A.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by a) A. b) B. c) B and C. d) C.
b) C.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decrease in resource prices is depicted by a) B and C. b) C. c) B. d) A.
d) C
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by a) B and C. b) B. c) A. d) C
b) A and C.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in a) A. b) A and C. c) C. d) B.
b) Real GDP will fall to X and the price level will remain unchanged, assuming prices are inflexible downward.
Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level? a) Real GDP will fall to Y and the price level will remain unchanged, assuming inflexible prices. b) Real GDP will fall to X and the price level will remain unchanged, assuming prices are inflexible downward. c) Real GDP will fall to Y and the price level will fall to P0, assuming inflexible prices. d) Real GDP will fall to X and the price level will fall to P0, assuming inflexible prices.
b) shift aggregate demand by increasing taxes
Refer to the figure. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation? a) shift aggregate demand by increasing government spending b) shift aggregate demand by increasing taxes c) shift aggregate supply by increasing taxes d) shift aggregate demand by decreasing taxes
a) 0.80.
Refer to the given data for a hypothetical economy. The marginal propensity to consume is a) 0.80. b) 0.75. c) 0.25. d) 0.20.
b) at income level H.
Refer to the given diagram. The economy is dissaving a) in the amount CD. b) at income level H. c) at all income levels greater than E. d) at income level E.
c) CB/AB.
Refer to the given diagram. The marginal propensity to consume is equal to a) CF/CD. b) AE/0E. c) CB/AB. d) CD/CF.
d) several times greater.
Relative to the Obama-era stimulus package for the Great Recession, the combined size of the COVID-19 stimulus was a) slightly greater in inflation-adjusted terms. b) smaller. c) greater in nominal terms but not in inflation-adjusted terms. d) several times greater.
c) Real GDP doesn't change.
Suppose that an economy's output does not change from one year to the next, but the price level doubles. What happens to real GDP? a) Real GDP is halved. b) There is not enough information to determine what happens to real GDP. c) Real GDP doesn't change. d) Real GDP doubles.
a) increase government expenditures by $50 billion.
Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should a) increase government expenditures by $50 billion. b) reduce taxes by $200 billion. c) reduce taxes by $50 billion. d) increase government expenditures by $100 billion.
b) the official unemployment rate will remain unchanged.
Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result, a) the size of the labor force will increase. b) the official unemployment rate will remain unchanged. c) the official unemployment rate will fall. d) the official unemployment rate will rise.
d) all the points at which consumption and income are equal.
The 45-degree line on a graph relating consumption and income shows a) all the points where the MPC is constant. b) all the points at which saving and income are equal. c) the amounts households will plan to save at each possible level of income. d) all the points at which consumption and income are equal.
d) the slope of the consumption schedule or line.
The MPC for an economy is a) 1 divided by the slope of the savings schedule or line. b) the slope of the savings schedule or line. c) 1 divided by the slope of the consumption schedule or line. d) the slope of the consumption schedule or line.
d) short-run fluctuations in output and employment.
The business cycle depicts a) the evolution of technology over time. b) fluctuations in the general price level. c) the phases a business goes through from when it first opens to when it finally closes. d) short-run fluctuations in output and employment.
d) the MPC is constant and the APC declines as income rises.
The consumption schedule is such that a) the MPC and the APC must be equal at all levels of income. b) both the APC and the MPC increase as income rises. c) the APC is constant and the MPC declines as income rises. d) the MPC is constant and the APC declines as income rises.
b) $10 billion
The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered? a) $16 billion b) $10 billion c) $6 billion d) $8 billion
b) does not account for the composition and distribution of output.
The gross domestic product is not a good measure of the standard of living in a nation because it a) includes the cost of health insurance. b) does not account for the composition and distribution of output. c) does not account for the cost of police protection. d) excludes payments for pollution control equipment.
c) businesses becoming more optimistic about future business conditions.
The investment demand curve will shift to the right as the result of a) the availability of excess production capacity. b) an increase in business taxes. c) businesses becoming more optimistic about future business conditions. d) an increase in the real interest rate.
c) personal consumption expenditures.
The largest expenditure component of GDP is a) net exports. b) government purchases. c) personal consumption expenditures. d) gross private domestic investment.
a) the U.S. public (individuals, businesses, financial institutions, and government).
The largest proportion of the U.S. public debt is held by a) the U.S. public (individuals, businesses, financial institutions, and government). b) U.S. government agencies. c) foreign individuals and institutions. d) the Federal Reserve System.
c) that rate of unemployment occurring when the economy is at its potential output.
The natural rate of unemployment is a) found by dividing total unemployment by the size of the labor force. b) higher than the full-employment rate of unemployment. c) that rate of unemployment occurring when the economy is at its potential output. d) lower than the full-employment rate of unemployment.
d) diminished if inflation occurs.
The size of the multiplier associated with an initial increase in spending will be a) the same whether or not inflation occurs. b) enhanced if inflation occurs. c) zero if any increase in the price level occurs. d) diminished if inflation occurs.
a) cyclical unemployment.
The type of unemployment associated with recessions is called a) cyclical unemployment. b) seasonal unemployment. c) structural unemployment. d) frictional unemployment.
d) shift of the consumption schedule.
The wealth effect is shown graphically as a a) movement along an existing investment schedule. b) shift of the investment schedule. c) movement along an existing consumption schedule. d) shift of the consumption schedule.
c) a tax rate increase.
An appropriate fiscal policy for severe demand-pull inflation is a) depreciation of the dollar. b) an increase in government spending. c) a tax rate increase. d) a reduction in interest rates.
d) aggregate expenditures exceed the full-employment level of GDP.
An inflationary expenditure gap is the amount by which a) equilibrium GDP falls short of the full-employment GDP. b) saving exceeds investment at the full-employment GDP. aggregate c) expenditures exceed any given level of GDP. d) aggregate expenditures exceed the full-employment level of GDP.
d) contractionary and worsen the effects of the recession.
Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be a) expansionary and worsen the effects of the recession. b) expansionary and counter the effects of the recession. c) contractionary and counter the effects of the recession. d) contractionary and worsen the effects of the recession.
a) an increase of $15 billion
Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment? a) an increase of $15 billion b) an increase of $25 billion c) a decrease of $12 billion d) an increase of $10 billion
b) saving is zero.
At the point where the consumption schedule intersects the 45-degree line, a) saving equals income. b) saving is zero. c) the MPC equals 1. d) the APC is zero.
c) structural unemployment.
Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called a) frictional unemployment. b) compositional unemployment. c) structural unemployment. d) cyclical unemployment.
b) the interest rate.
When we draw an investment demand curve, we hold constant all of the following except a) the expected rate of return on the investment. b) the interest rate. c) the present stock of capital goods. d) business taxes.
a) an appreciation of the nation's currency relative to foreign currencies
Which event would most likely decrease an economy's exports? a) an appreciation of the nation's currency relative to foreign currencies b) a depreciation of the nation's currency relative to foreign currencies c) a decline in the tariff on products imported from abroad d) an increase the prosperity of trading partners for this economy
c
Which of the diagrams for the U.S. economy best portrays the effects of an increase in foreign spending on U.S. products? a b c d
c) goods and services produced in the underground economy
Which of the following activities is excluded from GDP, causing GDP to understate a nation's production? a) the services of military personnel b) the construction of new buildings c) goods and services produced in the underground economy d) the services of health care workers
d) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
Which of the following best describes the built-in stabilizers as they function in the United States? a) The size of the multiplier varies inversely with the level of GDP. b) Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. c) Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. d) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
a) an increase in government spending on infrastructure that increases private sector productivity
Which of the following fiscal policy actions is most likely to increase aggregate supply? a) an increase in government spending on infrastructure that increases private sector productivity b) an increase in personal income tax rates c) an increase in transfer payments to unemployed workers d) a reduction in interest rates that encourages consumers to purchase more durable goods
c) a $40 billion increase in government spending
Which of the following fiscal policy changes would be the most expansionary? a) a $40 billion tax cut b) a $10 billion tax cut and $30 billion increase in government spending c) a $40 billion increase in government spending d) a $20 billion tax cut and $20 billion increase in government spending
a) A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward.
Which of the following is a true statement? a) A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward. b) As the price level increases, interest rates will rise and therefore consumption and investment spending will also rise. c) Firms and resource suppliers generally find it easier to reduce prices than to raise them. d) An initial increase in aggregate demand may cause a further increase in aggregate demand because higher prices mean higher incomes.
a) decrease government spending and increase taxes
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP gap here? a) decrease government spending and increase taxes b) decrease government spending and taxes c) increase government spending and decrease taxes d) increase government spending and taxes
