Macro Exam 3 (Ch. 9, 11, 12)

Assuming we are producing near full capacity, an increase in demand (a shift to the right in AD) will result in which of the following? Multiple answers: You can select more than one option A An increase in real GDP B An increase in the inflation rate C A shift in the AS curve D Movement along the AS curve

A An increase in real GDP B An increase in the inflation rate D Movement along the AS curve

Even though I lost my job, causing my income to drop significantly, I still continued to pay my rent. This spending is an example of _____________. A Autonomous consumer spending B Investment spending C Induced consumer spending D Spending based on expectations

A Autonomous consumer spending

Which of the following spending components of GDP will be affected by a change in the average price level or inflation rate? Multiple answers: You can select more than one option A Consumption B Investment C Government D Net Exports E Saving

A Consumption B Investment D Net Exports

The built-in stabilizers in the economy tend to A Dampen the irregular swings in real GDP. B Overcompensate for the irregular swings in real GDP C Magnify somewhat the irregular swings in real GDP. D Fully offset irregular swings in real GDP.

A Dampen the irregular swings in real GDP.

An decrease in Aggregate Supply results in a __________. A Higher inflation and lower real GDP B Higher inflation and higher real GDP C Lower inflation and higher real GDP D Lower inflation and lower real GDP

A Higher inflation and lower real GDP

A decrease in the savings rate will likely cause an ______________ in the slope of the consumption function in the income expenditure model. A Increase B Decrease

A Increase

Which of the following would cause AD to decrease, that is, shift to the left? A Increase in income taxes B Decrease in income taxes C Optimism about future income D Lower GDP deflator

A Increase in income taxes

A fall in interest rates is likely to change investment, real GDP, prices, inflation, and employment in the short run in the following manners. A Increase investment, real GDP, prices, inflation, and employment B Decrease investment, real GDP, prices, inflation, and employment C Increase investment and real GDP, but decrease prices, inflation, and employment D Decrease investment and real GDP, but increase prices, inflation, and employment

A Increase investment, real GDP, prices, inflation, and employment

An increase in net exports will cause GDP to ______________. Assume that the marginal propensity to consume increases from .9 to .95. An increase in net exports will now have a ______________ effect on GDP. A Increase; larger B Increase; smaller C Decrease; larger D Decrease; smaller E Increase; one can not tell

A Increase; larger

If aggregate expenditure is greater than real GDP, we could expect which of the following to occur? A Inventories to decline and real GDP to increase in the future B Inventories to increase and real GDP to increase in the future C Inventories to decline and real GDP to decline in the future D Inventories to increase and real GDP to decline in the future

A Inventories to decline and real GDP to increase in the future

Investment is driven by all of the following except ____________. A The buying of stocks and bonds on the open market B Change in interest rates C Change in expectations of future returns D Opportunity cost of investing

A The buying of stocks and bonds on the open market

What is the effect of an increase in investment spending on the overall price level in the income-expenditure model? A There is no effect because prices are not changing by assumption B Prices will increase, because increased investment spending leads to higher GDP levels and higher prices. C Prices will increase, as an increase in investment spending will lead to higher interest rates and therefore higher prices. D Prices will decrease, as higher investment spending will lead to greater efficiency in the economy.

A There is no effect because prices are not changing by assumption

If there is an increase in spending by government of 200 billion and the mpc is .75 then A autonomous spending is 200 billion, the multiplier is 4 and RGDP goes up by 800 billion. B induced spending is 200 billion, the multiplier is 3/4, and RGDP goes up by 150 billion. C autonomous spending is 200 billion, the multiplier is 4/3 and income goes up by 266 billion. D none of the above are correct.

A autonomous spending is 200 billion, the multiplier is 4 and RGDP goes up by 800 billion.

An MPC value of less than 1.0 indicates that as income increases A consumption also increases, though not as much as income B consumption also increases, and at the same rate as the increase in income C consumption also increases, and by more than the increase in income D consumption will go in the opposite direction and decrease

A consumption also increases, though not as much as income

If the government were to increase spending AND taxes by the same amount, RGDP would A go up by the increase in government spending. B not change since the increase in taxes would counter the increase in spending. C go up by the increase in government spending times the multiplier. D go down by the increase in taxes times the multiplier.

A go up by the increase in government spending.

If the spending multiplier is 2 and the recession GDP gap is $100 billion. To achieve full-employment output exactly, government should A increase government expenditures by $50 billion. B reduce taxes by $200 billion. C increase government expenditures by $100 billion. D reduce taxes by $50 billion.

A increase government expenditures by $50 billion.

Discretionary fiscal policy refers to A intentional changes in taxes and government expenditures made by Congress to stabilize the economy. B any change in government spending or taxes that destabilizes the economy. C the changes in taxes and transfers that occur as GDP changes. D the authority that the president has to change personal income tax rates.

A intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. If the multiplier is 2, by how much should the government cut spending to achieve its objective? A 36 billion dollars B 18 billion dollars C 9 billion dollars D 6 billion dollars

B 18 billion dollars

If equilibrium GDP is 18 trillion and the mpc is .8 what will be the required amount of autonomous spending to raise the level of income to 19 trillion? A 100 billion B 200 billion C 500 billion D 125 billion

B 200 billion

Increased consumer worries about job security may affect consumption spending and be most likely to cause which of the following? A A decrease in employment and perhaps an increase in inflation B A decrease in employment and perhaps a decrease in inflation C An increase in employment and perhaps an increase in inflation D An increase in employment and perhaps a decrease in inflation

B A decrease in employment and perhaps a decrease in inflation

An increase in the marginal propensity to save will cause all of the following except __________. A A decrease in the spending multiplier B A parallel shift down in the aggregate expenditure curve C The decrease in the slope of the aggregate expenditure curve D A decline in the marginal propensity to consume

B A parallel shift down in the aggregate expenditure curve

How would we model the effect of a new costly regulation on businesses? A A shift left of the AD curve B A shift left of the AS curve C A shift right of the AD curve D A shift right of the AS curve

B A shift left of the AS curve

What will an increase in U.S. prices likely cause? A An increase in U.S. exports B An increase in U.S. imports C An increase in the marginal propensity to save D A decrease in marginal propensity to consume

B An increase in U.S. imports

A booming stock market may affect consumption spending and be most likely to cause which of the following? A A decrease in employment and perhaps an increase in inflation B An increase in employment and perhaps an increase in inflation C A decrease in employment and perhaps a decrease in inflation D An increase in employment and perhaps a decrease in inflation

B An increase in employment and perhaps an increase in inflation

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n) A Supply-side fiscal policy B Expansionary fiscal policy C Contractionary fiscal policy D Nondiscretionary fiscal policy

B Expansionary fiscal policy

Fiscal policy is mainly undertaken by the Federal Reserve. A True B False

B False

In 2008, President Obama spent only 787 billion dollars to close the 2 trillion dollar RGDP gap so that little increase in spending would not even make a dent which is why it took more than 6 years to get the economy back to full employment. A True B False

B False

An increase in Aggregate Demand results in a ____________. A Higher inflation and lower real GDP B Higher inflation and higher real GDP C Lower inflation and higher real GDP D Lower inflation and lower real GDP

B Higher inflation and higher real GDP

To boost the economy, the government may propose a reduction in the income tax, which will _____________. A Increase the marginal propensity to save, which will raise funds available for investment B Increase the marginal propensity to consume, which will raise the consumption C Lower the marginal propensity to save, which will lower funds available for investment D Lower the marginal propensity to consume and thus raise consumption

B Increase the marginal propensity to consume, which will raise the consumption

If inventories are rising, we can assume that which of the following is true? A Consumption and investment is greater than production, suggesting output will rise B Production is greater than consumption and investment, suggesting output will fall C Consumption and investment is less than production, suggesting output will rise D Production is less than consumption and investment, suggesting output will fall

B Production is greater than consumption and investment, suggesting output will fall

Which of the following serves as an automatic stabilizer in the economy? A The inflation rate. B The progressive income tax system. C Interest rates. D Exchange rates.

B The progressive income tax system.

.An equal increase in government spending and taxes would result in A a decrease in RGDP B an increase in RGDP C no change in RGDP D an uncertain change in RGDP

B an increase in RGDP

Due to automatic stabilizers, when the nation's total income rises, government transfer spending A increases and tax revenues decrease. B decreases and tax revenues increase. C stays the same and tax revenues decrease. D stays the same and tax revenues increase.

B decreases and tax revenues increase.

A tax reduction of a specific amount will be more expansionary the A smaller is the economy's MPC. B larger is the economy's MPC. C smaller is the economy's multiplier. D less is the economy's built-in stability.

B larger is the economy's MPC.

The spending multiplier is calculated as A 1/(1 + mpc). B 1/mpc. C 1/mps. D 1/(1 - mps).

C 1/mps.

If the recessionary gap is 2 trillion dollars and the multiplier is 2, then total spending would have to rise by A 1 trillion dollars. B 2 trillion dollars times the multiplier. C 2 trillion dollars. D .5 trillion dollars.

C 2 trillion dollars.

If the mpc is .75 then the size of the spending multiplier is A 3/4 B 3 C 4 D 4/3

C 4

In 2007, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this change in terms of AS/AD? A Movement along the AD curve to the right B A shift in the AS curve to the right C A shift in the AD curve to the left D A shift in the AD curve to the right

C A shift in the AD curve to the left

People tend to like higher incomes and lower inflation. What kind of change in our model results in higher incomes and lower inflation? A An increase in AD B A decrease in AD C An increase in AS D A decrease in AS

C An increase in AS

Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in: A An increase in real GDP and an increase in inflation. B An increase in real GDP and a decrease in inflation. C An increase in real GDP and an ambiguous effect on inflation. D A decrease in consumption and no change in inflation.

C An increase in real GDP and an ambiguous effect on inflation.

An increase in the MPC from 75% to 80% implies all of the following except which of the following? A A decline in the marginal propensity to save to 20% B An increase in the spending multiplier to 5 C An increase in the spending multiplier to .2 D An increase in the marginal propensity to consume to 80%

C An increase in the spending multiplier to .2

Why does the aggregate supply curve become very steep at high levels of real GDP? A Most producers are monopolists and will charge as high a price as possible. B Producers produce a fixed amount of goods no matter what the price is. C At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices. D Real GDP is unrelated to spending decisions in the short run.

C At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices

A decrease in government spending will cause a(n) A Increase in the quantity of real output demanded B Decrease in the quantity of real output demanded C Decrease in aggregate demand D Decrease in aggregate supply

C Decrease in aggregate demand

Which of the following changes would cause a shift in the aggregate demand curve? I. Increase in investment II. Decrease in productivity III. Increase in consumption A I only B II and III only C I and III only D I and II only E I, II, and III

C I and III only

One advantage of automatic stabilization policy over discretionary policy is that it A Makes the actual budget a better reflection of the condition of the economy than the Standardized budget. B Does not produce a cyclical deficit as discretionary policy does. C Is not subject to the timing problems of discretionary policy. D Has a greater multiplier effect than discretionary policy.

C Is not subject to the timing problems of discretionary policy.

As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________. A Movement along the aggregate demand curve B A shift in aggregate supply C Movement along the aggregate supply curve

C Movement along the aggregate supply curve

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely A crowd out future public investment. B reduce the economy's future productive capacity. C complement private investment. D crowd out private investment.

C complement private investment.

What would be the change in RGDP from a 100 billion dollar decrease in government spending AND a 100 billion dollar decrease in taxes if the multiplier is 5. A zero. B decrease by 500 billion. C decrease by 100 billion. D increase by 100 billion.

C decrease by 100 billion.

Inflation caused by an increase in aggregate spending is referred to as A anticipated inflation. B supply-side inflation. C demand-side inflation D hyperinflation.

C demand-side inflation

Expansionary fiscal policy is so named because it A is aimed at achieving greater price stability. B involves an expansion of the nation's money supply. C is designed to expand real GDP. D necessarily expands the size of government.

C is designed to expand real GDP.

A rightward shift in the aggregate supply curve is best explained by an increase in A the price of imported resources. B business taxes. C productivity. D nominal wages

C productivity.

At the height of the Great Recession the GDP gap was 2 trillion dollars. If the multiplier was 2, then to close the gap autonomous spending would have to be--------and induced spending would have to be-------. A 2 trillion and 2 trillion. B 2 trillion and 0 trillion. C 0 trillion and 2 trillion. D 1 trillion and 1 trillion.

D 1 trillion and 1 trillion.

If the mpc is .5 and autonomous spending is 200 million dollars, what will be the amount of total spending? A 500 million B 200 million C 1000 million D 400 million

D 400 million

People really dislike falling income and rising inflation. What kind of change in our model will make people really unhappy? A An increase in AD B A decrease in AD C An increase in AS D A decrease in AS

D A decrease in AS

Which of the following would likely cause a decrease in consumption in the economy? A An increase in expected income B A fall in income tax rates C A rise in expected income D An increase in interest rates

D An increase in interest rates

If taxes are increased by $50 billion, the effect on the economy will be ___________. A An increase in inflation B A decrease in total spending in the economy of $50 billion C An increase in the international trade deficit D An ultimate decrease in consumption spending of more than $50 billion

D An ultimate decrease in consumption spending of more than $50 billion

An increase in real GDP will be most likely to cause further increases in __________. A Consumption only B Consumption and investment only C Consumption, investment, and net exports only D Consumption and investment, but a decrease in net exports

D Consumption and investment, but a decrease in net exports

An increase in the marginal propensity to consume will make the spending multiplier ______________. An increase in taxes as a portion of income will make the spending multiplier ______________. A Larger; larger B Smaller; smaller C Smaller; larger D Larger; smaller

D Larger; smaller

A decrease in Aggregate Demand results in a _____________. A Higher inflation and lower real GDP B Higher inflation and higher real GDP C Lower inflation and higher real GDP D Lower inflation and lower real GDP

D Lower inflation and lower real GDP

Which of the following supports government spending over tax cuts for recession A government spending goes to infrastructure. B government spending goes to the unemployed. C government spending has a larger multiplier effect. D all of the above.

D all of the above.

The multiplier is useful in determining the A full-employment unemployment rate. B level of business inventories. C change in the rate of inflation from a change in the interest rate. D change in GDP resulting from a change in autonomous spending.

D change in GDP resulting from a change in autonomous spending.

To calculate the change in RGDP from an increase in taxes use the formula A change in RGDP = the multiplier minus the increase in taxes. B change in RGDP = minus the change in taxes X the mpc. C change in RGDP = the multiplier X the mpc. D change in RGDP = minus the multiplier X mpc X the change in taxes.

D change in RGDP = minus the multiplier X mpc X the change in taxes.

When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be A passive B automatic C non discretionary D countercyclical

D countercyclical

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the A net export effect. B wealth effect C real-balance effect D multiplier effect

D multiplier effect