Macro Exam 3

(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.

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

interest rates

(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

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

less, lowering both employment and income.

(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 (very top of graph)

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

expansionary fiscal policy that leads to full employment.

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

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

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

Automatic stabilizers are designed so that as income falls:

spending does not fall as much as income.

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

$1,000 billion

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

$1,800

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

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

AD0; AD1; Q0; Qf

Which of the following might cause a change in short-run aggregate supply?

Businesses are increasingly optimistic about the future.

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

the interest rate

(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.

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

true

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

true

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 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.