Macro Test 3 Chapters 7,8,12

All of the following are instruments of fiscal policy except

an interest rate cut

If 50 percent of the population in a country is employed and average labor productivity equals $30,000, then real GDP per person equals:

$15,000

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time. Which of the turning points are peaks? http://ezto.mheducation.com/13252700599867950654.tp4?REQUEST=SHOWmedia&conId=13252699132921847&media=10-09-01r.pn

(A), (C), and (E)

A change in government purchases shifts the aggregate demand curve by an amount equal to the:

change in government purchases * spending multiplier.

From the homepage of the National Bureau of Economic Research (www.nber.org (Links to an external site.)Links to an external site.) obtain data on real world dates for the business cycles. The data suggest that recessions (contractions) are:

considerably shorter than expansions.

The four components of aggregate demand are:

consumption, investment, government spending, and net exports.

The use of government expenditures and taxes to influence the level of economic activity is called

fiscal policy.

The use of government purchases, transfer payments, and taxes to influence the level of economic activity is called

fiscal policy.

Economic growth is represented by a movement

from C to D.

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

government purchases

The three major categories of government spending are

government purchases, transfer payments, and net interest.

If the share of population employed in two countries is the same, average living standards will be higher in the country with:

higher average labor productivity.

Real GDP per person can increase:

if the share of population employed and/or average labor productivity increases.

The short run in macroeconomic analysis is a period

in which wages and some other prices do not respond to changes in economic conditions

An expansionary fiscal policy is likely to

increase borrowing by the Treasury through the sale of bonds.

In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

increase government spending

Contractionary fiscal policy includes

increasing taxes and decreasing government expenditures.

Three equivalent ways to measure GDP are total _____, total _____, and total ______.

production; income; expenditure

Among the most important indicators used by the NBER Business Cycle Dating Committee to determine the beginning of a recession were each of the following indicators EXCEPT:

the consumer price index.

Recognition lags in fiscal policy stem largely from

the difficulty of collecting economic data in a timely and accurate fashion.

At output level YK,

the economy is in short-run equilibrium and it operates with a recessionary gap

Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. As a result,

the economy is in short-run equilibrium and it operates with an inflationary gap.

The rise and fall of real GDP over the course of the business cycle suggests that

the economy may not always be in long-run equilibrium

Suppose the economy is initially at point A. Now suppose that there is an increase in government purchases. In the short-run,

the price level rises to Pb and real GDP increases to Yb.

Suppose a country has a national debt of $2,000 billion, a GDP of $28,000 billion, and a budget deficit of $115 billion. How much will its new national debt be?

$2,115 billion

Suppose a country has a national debt of $5,000 billion, a GDP of $20,000 billion, and a budget surplus of $130 billion. How much will its new national debt be?

$4,870 billion

If the government wishes to increase GDP by $1,000b, and the MPC is 0.6, it should increase its spending by:

$400b

Suppose a country decreases government purchases by $400 billion. Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion. This contractionary policy action shifts the aggregate demand curve to the left by

$600 billion.

The population of Alpha totals one million people, 40 percent of whom are employed. Average output per worker in Alpha is $20,000. Real GDP per person in Alpha totals:

$8,000

If the government increase government purchases by $360b, and the MPC is 0.6, it expects to increase aggregate spending and real GDP by:

$900b.

Which of the following equations is correct?

% growth rate of output per capita = % growth rate of output - % growth rate of population

The marginal propensity to consume:

-is the amount by which consumption increases when (after-tax) income increases by $1. -is closely linked to the multiplier effect of government spending. -is a value between 0 and 1.

Calculate the government-spending multiplier for each marginal propensity to consume, if the marginal propensity to consume (MPC) is 0.2 and 0.8 respective.

1.25; 5

What are the four sources of aggregate demand?

Consumption, private investment, government purchases, and net exports

An expansionary fiscal policy I. includes an increase in government spending. II. includes tax cuts. III. increases a government budget deficit or reduces a government budget surplus.

I, II, and III

Which of the following is true of cyclical unemployment?

It occurs only during a recession.

ADAS graph1.png (Graph) What are the prevailing price level and the output level in the economy?

Price level = P2; real GDP = Y2

Suppose a country's potential level of real GDP grows at a rate of 6% per year. Use the rule of 72 to calculate how long it takes for the country's potential output to double

12 years

Use the rule of 72 to determine how long it takes for real GDP to double if real GDP grows at 3% per year.

24 years

The sum of all past federal deficits minus any surpluses is called the

national debt.

The economy's potential output corresponds to the level of

natural employment

At output level Y1,

potential output is greater than actual output.

The long-run aggregate supply curve is vertical at

potential output.

An economy adjusts on its own to close a recessionary gap because there is

pressure on nominal wages to fall and this shifts the SRAS curve rightward.

Wage and price stickiness

prevents the economy from producing its potential level of real GDP.

The aggregate demand curve shows the relationship between spending (real GDP) and the ______.

price level

According to the wealth effect, if the average price level rises, the value of consumers'

real wealth and consumption spending fall.

A sustained period of significant decline in economic activity or real GDP is a (an)

recession.

Suppose the economy experiences an inflationary gap. Policymakers who believe that government (the governments budget as percent of GDP) is too big would favor which of the following fiscal policies to close the gap?

reduction in government spending

Typically unemployment _____ during a recession and _____ during an expansion.

rises; falls

All other things unchanged, an increase in government spending will

shift the aggregate demand curve to the right.

The multiplier effect occurs when:

spending by one person causes others to spend more too, increasing the impact of the initial spending on the economy.

The aggregate demand curve shifts when there are changes in:

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

Inflationary and recessionary gaps that do NOT create a permanent change are closed by the economy's self-correcting adjustments mechanism that shift

the SRAS curve

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of

the aggregate demand and the short-run aggregate supply curves.

Economist John Maynard Keynes is famous for saying, "In the long run, we are all dead." He is referring to:

the length of time it can take the economy to recover to potential GDP without policy intervention

Potential output is:

the maximum sustainable amount of output.

Economic growth is defined as

the process by which a country's potential output grows over time.

Aggregate demand is defined as

the relationship between the total quantity of goods and services demanded and the price level, all other determinants of spending unchanged.

Assume that the economy is initially at Y1. A nonintervention policy (allowing the economy to self-correct) would result in the restoration of potential output by allowing the

the short-run aggregate supply curve to shift to the right.

Which of the following contributes to implementation lag for discretionary fiscal policy?

the time it takes to secure legislative approval for policy actions

At output level YK,

the unemployment rate exceeds the natural (normal) rate of unemployment.

Suppose the economy is initially at point A. All of the following statements are true except

there is no structural or frictional unemployment.

A contractionary fiscal policy shifts the aggregate demand curve

to the left and is used to close an inflationary gap

In the Keynesian model a recessionary gap will develop if there is:

too little spending.

Payments to households that do not require anything in exchange are called

transfer payments.

A recessionary gap can be closed with

using an expansionary fiscal policy.

In the short-run, an output gap occurs because

wages and some prices have not adjusted sufficiently to maintain output at its potential level.

If the rate of growth of output is 10% and the rate of growth of per capita real GDP is 6%, what is the rate of growth of population?

4

Which of the following will increase the short-run aggregate supply?

A decrease in the price of capital

Which of the following is correct:

A deficit value is a flow value while debt is a stock value.

Suppose the economy is initially in short-run equilibrium at B. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any?

A stabilization policy would return real GDP to its potential at a price level of Pa while a nonintervention policy would return real GDP to its potential at a price level of Pd

Suppose the economy is initially in short-run equilibrium at K. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any?

A stabilization policy would return real GDP to its potential at a price level of Pj while a nonintervention policy would return real GDP to its potential at a price level of Ph.

Which of the following will not cause a change in aggregate demand?

An increase in an economy's price level

Which of the following factors contribute to economic growth?

An increase in the availability of natural resources

Which of the following will decrease the short-run aggregate supply?

An increase in wages

Which of the following describes a (discretionary) fiscal policy action/program?

Congress authorizes a temporary increase in unemployment insurance benefits for an additional seven weeks.

Suppose the economy is initially in short-run equilibrium at K. Which of the following stabilization policies could be used to close the gap?

Decrease personal income taxes

Suppose the economy is initially in short-run equilibrium at B. If policy-makers decide to intervene to close the gap, which of the following can it do?

Decrease the level of government purchases of goods and services.

Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following statements best explains how the economy responds (using self-correction) to restore long-run macroeconomic equilibrium?

Firms and workers will negotiate higher nominal wages to restore lost purchasing power. This shifts the SRAS curve to the left until the gap is eliminated at D.

Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following is false about the economy after it self-adjusts to its new long-run equilibrium?

Firms employ more workers than in the short-run equilibrium

Which of the following statements characterizes government purchases in the United States between 2001 and 2011?

Government purchases as a share of GDP have increased.

Which of the following applies to economic growth? I. Economic growth allows people to buy more goods and services. II. Economic growth is the expansion of the economy's production possibilities. III. Economic growth is represented by a movement from a point inside the production possibilities curve to a point on the curve.

I and II only

A contractionary fiscal policy I. decreases a government budget deficit or increases a government budget surplus. II. includes tax cuts. III. may include discretionary cuts in transfer payments.

I and III only

Which of the following occurs if an economy experiences a recessionary gap? I. Actual real GDP is less than potential output. II. Actual real GDP is greater than potential output. III. Unemployment is less than the natural rate. IV. Unemployment is greater than the natural rate.

I and IV

The movement from point R inside the frontier CD to point P on the frontier CD I. will increase real GDP. II. will increase the size of the nation's labor force. III. represents economic growth.

I only

During a recession, rising transfer payments and falling tax collections I. help cushion households from the impact of the recession. II. buffers the fall in real GDP (relative to a situation where transfer payments do not rise and tax revenues do not fall). III. tend to increase a budget deficit or reduce a budget surplus.

I, II, and III

Suppose the economy is initially in short-run equilibrium at point K. If the policy-makers decide to not intervene but let the economy correct over time, I. real wages will fall as long as unemployment remains above the natural rate. II. lower nominal wages will result in a gradual shift from SRAS2 to SRAS1. III. long-run equilibrium will be established at YP and Ph.

I, II, and III

Which of the following is a source of wage stickiness? I. minimum wage laws II. fixed wage contracts III. workers and firms want to avoid complexity of negotiating contracts frequently

I, II, and III

Which of the following statements is true about the U.S. national debt? I. Relative to the level of economic activity, the debt is below the levels reached during the end of World War II. II. The ratio of debt to GDP rose from 1981 to 1996 and fell in the last years of the twentieth century; it began rising again in 2002. III. Judged by international standards, the U.S. national debt relative to its GDP is above average among developed nations.

I, II, and III

Which of the following statements is true of the economy in the long run? In the long run, I. real GDP eventually moves to potential output because all wages and prices are assumed to be flexible. II. the economy can achieve its natural level of employment and potential output at any price level. III. there is no cyclical unemployment.

I, II, and III

In the long run, economic growth will lead to I. the opportunity to produce more consumer goods. II. the opportunity to produce more capital goods. III. a higher material standard of living. IV. a more equitable distribution of income.

I, II, and III only

"Fracking" is a new technology that allows for more extraction of natural gas and oil than was previously possible. How is this technological discovery likely to affect the economy, assuming this not a temporary change (it has long-term effects.

Increase both SRAS and LRAS, leading to a long-term increase in output and decrease in prices.

Which of the following statements is true regarding expansionary fiscal policy?

It leads to an increase in deficits and debt.

Suppose a country's real GDP increases. At the same time, its population also increases. What happens to its standard of living?

Its standard of living could rise if population growth is smaller than output growth.

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time. Picture Which of the following periods was a recession?

July 1953 through May 1954

Suppose real GDPs in Hauck and Meran are identical at $10 trillion in 2010. Suppose Hauck's economic growth rate is 2% and Meran's is 4% and the rates remain constant over time. Calculate the percentage difference in their levels of potential output in 2046.

Meran's potential output will be 100% higher than that of Hauck's

Consider two fiscal policy actions. I. a $400 billion reduction in income taxes II. a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand?

Policy II because it affects aggregate demand directly

Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?

Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H.

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.

The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.

Suppose the price (or cost) of an important natural resource such as oil falls. What will be the effect on the short-run aggregate supply curve?

The aggregate supply curve will shift to the right.

ADAS graph1.png Which of the following statements is true?

The economy depicted in the figure experiences a recessionary gap = Yp - Y2.

Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?

The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.

Which of the following statements is true regarding the government budget?

The government's budget was generally in surplus in the 1960s, then mostly in deficit since except for a brief period between 1998 and 2001.

Assume that the economy is initially in long-run equilibrium. What happens in the long-run if the capital stock in this economy increases over time?

The nation's capacity to produce will increase as represented by a rightward shift of the long-run aggregate supply curve.

Stagflation is a situation where

The price level increase while real GDP decrease.

A change in the price level, all other things unchanged, causes

a movement along the aggregate demand curve.

The economy is initially at output level Y1 and there is

a recessionary gap

Economic growth can be represented by

a rightward shift of an economy's long-run aggregate supply curve.

The determinants of economic growth include all of the following except

a stable price level.

Aggregate demand is the total value of real GDP that

all sectors of the economy are willing to purchase at various average price levels, all other things unchanged.

When actual output is greater than potential output there is

an expansionary gap.

Which of the following events would be most likely to increase an economy's potential output?

an improvement in technology

Suppose an economy's exports increase and its imports decrease. All other things unchanged, this results in

an increase in net exports which will shift the aggregate demand curve to the right.

A shift from SRAS1 to SRAS2 could have been caused by all of the following except

an increase in the consumer confidence index.

According to the international trade effect, holding everything else unchanged,

an increase in the domestic price level reduces net exports leading to a movement along the aggregate demand curve.

Suppose the economy is initially in short-run equilibrium at B. A shift from AD1 to AD2 could have been caused by all of the following except

an increase in the price level from Pa to Pb.

The path of real GDP growth over time. img560ebbf21.gif A recession begins:

at t1 and ends at t2.

A country's actual output _____ potential output.

can temporarily exceed

A reduction in exports, due to an increase in the domestic price level relative to the price of good made in other countries, would

cause a movement upward along a given aggregate demand curve.

An expansionary fiscal policy is likely to

decrease a government budget surplus (or increase a budget deficit) and increase borrowing from the government.

Suppose the economy experiences a recessionary gap. Policymakers who believe that government (the governments budget as percent of GDP) is too big would favor which of the following fiscal policies to close the gap?

decreases in income tax rates

Suppose fiscal authorities raise state income tax rates. As a result, disposable income falls, thereby

decreasing consumption spending, and causing the aggregate demand curve to shift to the left.

Expansionary fiscal policy includes

decreasing taxes and increasing government expenditures

Discretionary fiscal policy refers to

deliberate government efforts to stabilize the economy through government spending and taxes.

Suppose Congress increases the corporate profit tax rates. This is an example of

discretionary fiscal policy of the contractionary variety

Suppose a country institutes an investment tax credit and that leads to an initial increase in investment spending of $100 billion. Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion. This action is

expansionary and will shift the aggregate demand curve to the right by $150 billion.

All of the following are examples of automatic stabilizers except:

government emergency spending

The theory of economic growth focuses on the

growth of potential output over the long run, not on fluctuations in the level of economic activity in the short run.

If the federal budget is initially balanced and government expenditures remain constant, then an increase in GDP will _________ tax revenues and create a budget _________.

increase tax revenues and create a budget surplus.

For the United States, future increases in output per person (real GDP per capita) will arise primarily from:

increases in average labor productivity

A movement from point A to point B

is a change in aggregate quantity demanded resulting from a lower price level.

The government has a balanced budget if

its total revenues are equal to its total expenditures.

The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in government spending on aggregate spending (and GDP).

larger; larger

In the long run, the output level is determined by

long-run aggregate supply

The use central bank policies to influence the level of economic activity is called

monetary policy.