Macroeconomics exam 2 study guide

(True or False) The multiplier is greater than 1 because an increase in autonomous expenditure leads to an induced increase in consumption expenditure.

True

(True or False) The slope of the aggregate expenditure curve is the marginal propensity to consume minus the marginal propensity to import.

True

If prices of goods and services were stated in terms of pounds of salt, then salt is (A) A unit of account. (B) A standard of deferred payment. (C) A store of value. (D) Medium of exchange. (E) Quasi-money.

(A) A unit of account.

Automatic stabilizers: (A) Cushion the decrease in after-tax income when a recession occurs. (B) Magnify the increase in after-tax income when a boom occurs. (C) Require the government to balance the budget. (D) Require the government the use countercyclical policy, such as increasing or decreasing government purchases. (E) None of all above.

(A) Cushion the decrease in after-tax income when a recession occurs.

Because of automatic stabilizers, when income increases: (A) Government expenditures decrease and tax revenues increase. (B) Government expenditures increase and tax revenues decrease. (C) Government expenditures equal tax revenues. (D) The economy will automatically go to full employment.

(A) Government expenditures decrease and tax revenues increase.

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume is 0.75, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1000 billion aggregate demand can restore full employment, the government should: (A) Increase spending by $250 billion. (B) Decrease spending by $750 billion. (C) Increase spending by $1000 billion. (D) Increase spending by $750 billion. (E) Decrease spending by $1000 billion.

(A) Increase spending by $250 billion.

If the government purchases multiplier is 2.5 and government purchases increase by $10 billion but prices do not change, equilibrium expenditure: (A) Increases by $25 billion. (B) Increases by more than $25 billion. (C) Increases by less than $25 billion. (D) Is unaffected. (E) Increases by $2.5 billion.

(A) Increases by $25 billion.

The slope of the consumption function is equal to the (A) MPC. (B) APS. (C) APC. (D) MPS.

(A) MPC.

The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a: (A) Medium of exchange. (B) Standard of deferred payment. (C) Store of value. (D) Unit of account.

(A) Medium of exchange.

Suppose that, due to an increase in expected future profit, investment increases by $10 billion. If the multiplier is 2, the aggregate demand curve will: (A) Shift to the right by the horizontal distance of $20 billion. (B) Shift to the left by the horizontal distance of $20 billion. (C) Shift to the right by a horizontal distance greater than $20 billion. (D) Shift to the right by a horizontal distance less than $20 billion. (E) Not be affected.

(A) Shift to the right by the horizontal distance of $20 billion.

We observe an increase in the price level and an increase in real GDP. Which of the following is a possible explanation? (A) The expectation of future profits has increased. (B) The money supply has decreased. (C) The price of raw materials has increased. (D) The stock of capital has increased.

(A) The expectation of future profits has increased.

Which of the following is a primary function of money? (A) To serve as a unit of account. (B) To serve as an encouragement to work. (C) To reduce the burden of excessive imports. (D) To raise funds for the government.

(A) To serve as a unit of account.

If real GDP is less than aggregate planned expenditure, then (A) Aggregate planned expenditure will decrease. (B) Real GDP will increase. (C) The price level must fall to restore equilibrium. (D) Imports must be too large.

(B) Real GDP will increase.

The net export function for the U.S. shows the relationship between net exports and (A) Real interest rate. (B) The level of U.S. real GDP (C) The unemployment rate. (D) Disposable income.

(B) The level of U.S. real GDP

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally (shift rightward) by $1000 billion and cause inflation. If the marginal propensity to consume is 0.9, federal policymakers could follow Keynesian economics and restrain inflation by decreasing: (A) Government spending by $10 billion. (B) Taxes by $100 billion. (C) Government spending by $100 billion. (D) Taxes by $1000 billion. (E) Government spending by $1000 billion.

(C) Government spending by $100 billion.

Because of automatic stabilizers, when GDP fluctuates the (A) Government's budget remains in balance. (B) Government's deficit fluctuates directly with GDP so that it is larger when GDP increases. (C) Government's deficit fluctuates inversely with GDP so that it is larger when GDP decreases. (D) The economy will automatically go to full employment.

(C) Government's deficit fluctuates inversely with GDP so that it is larger when GDP decreases.

If real GDP is greater than long-run aggregate supply, then the economy is (A) Not in macroeconomic equilibrium. (B) In a full-employment equilibrium. (C) In an above full-employment equilibrium. (D) In an unemployment equilibrium.

(C) In an above full-employment equilibrium.

Which of the following statements is true regarding the relationship among the average propensity to consume (APC), the average propensity to save (APS), the marginal propensity to consume (MPC), and the marginal propensity to save? (A) If the MPC increases, then the MPS must also increase. (B) MPC + APC = 1. (C) MPC + MPS = APC + APS. (D) MPC + MPS > APC + APS.

(C) MPC + MPS = APC + APS.

If the MPC is 0.6, what is the lump-sum tax multiplier? (A) 3 (B) 2.5 (C) -2.5 (D) -1.5 (E) 1.5

(D) -1.5

Suppose that, due to an increase in expected future profit, investment increases by $10 billion. Which of the following would reduce the effect of this increase in autonomous expenditure on equilibrium real GDP? (A) An increase in the marginal propensity to consume. (B) A decrease in the marginal propensity to import. (C) A decrease in the marginal tax rate. (D) A steeper aggregate supply curve. (E) A flatter aggregate supply curve.

(D) A steeper aggregate supply curve.

Income taxes in the United States are automatic stabilizer because: (A) Tax rates can be adjusted by the Congress to counteract economic fluctuation. (B) Tax revenues decrease when income increases intensifying the increase in aggregate demand. (C) The President can increase tax rates whenever the President deems such a policy appropriate. (D) A tax revenue increase when income increases. Thus offsetting some of the increase in aggregate demand. (E) None of all above.

(D) A tax revenue increase when income increases. Thus offsetting some of the increase in aggregate demand.

Macroeconomic equilibrium occurs when the (A) Economy is at full employment. (B) Economy is producing at its physical limit. (C) Aggregate demand curve intersects the short-run aggregate supply curve along its vertical portion. (D) Quantity of real GDP demanded equals the quantity of real GDP supplied.

(D) Quantity of real GDP demanded equals the quantity of real GDP supplied.

If the MPS = 0.25, and investment falls from $100 to $75, real GDP will decrease by: (A) $25. (B) $75. (C) $150. (D) $125. (E) $100.

(E) $100

You are given the following information about the economy of Zeeland: Autonomous consumption expenditure is $100 billion, and the marginal propensity to consume is 0.9. Investment is $460 billion, government purchases of goods and services are $400 billion, and taxes are a constant $400 billion—they do not vary with income. Exports are $350 billion, and imports are 10 percent of income. The government of Zeeland makes no transfer payments: (a) What is the Aggregate Expenditure (AE) function? What is the slope of the Aggregate Expenditure curve? What is the total autonomous expenditure? (b) The government cuts its purchases of goods and services to $300 billion. What is the change in real GDP? What is the government purchases multiplier? (c) The government continues to purchase $400 billion worth of goods and services and cuts taxes to $300 billion. What is the change in real GDP? What is the tax multiplier? (d) The government simultaneous cuts both its purchases of goods and services and taxes to $300 billion. What is the change in real GDP? What is the name of the multiplier now at work, and what is its value?

(a) Answer: AE = 950 + 0.8Y; the slope is 0.8; the total autonomous expenditure is 950 (b) Answer: reduces real GDP by $500 billion; the multiplier is 5 (c) Answer: raises real GDP by $450 billion; the tax multiplier is -4.5) (d) Answer: the change in real GDP is: reduces real GDP by $50 billion; the multiplier is the balanced budget multiplier and it equals 0.5

When all households in the economy decide to increase saving with no associated increase in investment, it turns out that real GDP decreases. This is known as the: (a) Paradox of the thrift (b) Expenditure paradox (c) Negative multiplier effect (d) Autonomous saving effect (e) Positive multiplier effect

(a) Paradox of the thrift

The government wants to increase aggregate expenditure by $12 billion. If the multiplier is 3, by how much should the government increase it's spending on goods and services? (a) $3 billion (b) $4 billion (c) $12 billion (d) $36 billion (e) 48 billion

(b) $4 billion

Suppose the multiplier is 2 and that the aggregate supply curve is positively sloped. Suppose further that, due to an increase in expected future profit, investment increase by $10 billion. Equilibrium real GDP will: (a) Increase by $20 billion (b) Increase by more than $20 billion (c) Increase by less than 20 billion (d) Be unaffected

(c) Increase by less than 20 billion

Autonomous expenditure is not influenced by: (a) The interest rate (b) The foreign exchange rate (c) Real GDP (d) Any other variable (e) Investment

(c) Real GDP

If there is proportional tax in an economy, then the balanced budget multiplier is: (a) Greater than the government purchases multiplier (b) Greater than the transfer payment multiplier but less than the government purchases multiplier (c) Greater than 1 but less than the transfer payment multiplier (d) Less than 1 (e) Equals to 1

(d) Less than 1

The slope of the aggregate expenditure curve is equal to: (a) One minus the marginal propensity to save (b) One minus the marginal propensity to import (c) The marginal propensity to consume out of disposable income, minus the marginal propensity to import (d) The marginal propensity to consume out of real GDP minus the marginal propensity to import

(d) The marginal propensity to consume out of real GDP minus the marginal propensity to import

Suppose a simple model of an economy with the following characteristics: C = 180 + 0.8(Y-T); I = 200; G = 100; X = 500; M = 100 + 0.2Y; T = 100 where C = consumption, Y = GDP, T = taxes, I = investment, G = government spending, X = export, M = import. (1) What is equilibrium GDP (Y)? (2) What is balance budget multiplier? (3) If GDP at the level of full employment is 1600, is there an inflationary gap or deflationary gap? How big?

1 (Answer: Y = 2000) 2 (Answer: 0.5) 3 (Answer: there is an inflationary gap; inflationary gap = 160)

Consider a simple model of an economy with the following characteristics: C = 170 + 0.75(Y - T); T = 20 + 0.2Y; I = 300; G = 300; X = 265; M = 20 + 0.1Y. where C = consumption, Y = gross domestic product (GDP), T = taxes, I = investment, G = government spending, X = export, M = import. (1) What is the equilibrium GDP (Y)? (2) What are the government tax revenues (T)? (3) What is the household's saving (S)? (4) What is the amount of import (M)?

1 (Answer: Y = 2000) 2 (Answer: T = 420) 3 (Answer: S = 225) 4 (Answer: M = 220)

(True or False) As real GDP increases, autonomous expenditure also increases.

False

(True or False) The steeper the aggregate expenditure curve, the lower is the multiplier.

False

(True or False) The tax multiplier is smaller than the autonomous expenditure multiplier.

True