Macroeconomics Exam 3

In 2018, the U.S. public debt was about

$21.5 trillion

Refer to the diagram for a private closed economy. The equilibrium level of GDP is

$300.

Refer to the table. The value of the near monies that are part of M2 is

$350. (money market mutual fund balance held by individual+saving deposits including money market deposits+ small denominated time deposits)

C = 40 + 0.8Y Ig = 60 − 2i i = 10 (Advanced analysis) The equations are for a private closed economy, where C is consumption, Y is the gross domestic product, Ig is gross investment, and i is the interest rate. Given that the interest rate is 10 (percent), the amount that businesses will want to invest will be

$40. plug i into i

The table shows the consumption schedule for a hypothetical economy. All figures are in billions of dollars. If planned investments were fixed at $16, taxes were zero, government purchases of goods and services were zero, and net exports were zero, then equilibrium real GDP would be $630 initially. If government purchases were then raised from $0 to $10, and lump-sum taxes also increased from $0 to $10, other things constant, then the equilibrium real GDP would become

$640.

Suppose that the federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?

All of these are possible outcomes.

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 productivity is depicted by

B

The Federal Reserve System is an

Independent agency of government

(Last Word) In The General Theory of Employment, Interest, and Money,

John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.

Which of the following financial institutions was acquired by Bank of America as a result of the financial crisis of 2007-2008?

Merrill Lynch

In a mixed open economy, changes in which of the following all affect the equilibrium GDP in the same direction?

Sa, T, and M

Which of the following institutions does not provide checkable-deposit services to the general public?

U.S. Treasury

The table contains budget information for a hypothetical economy. All data are in billions of dollars. The budget deficit was $75 billion in

Year 5. (look at tax revenues vs government spending)

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to

a rightward shift of the aggregate demand curve in the AD-AS model.

Checkable deposits are money because they are

acceptable as payment.

Refer to the diagram, where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion, while the actual GDP is $200 billion, the

actual budget deficit exceeds the cyclically adjusted budget deficit.

A decrease in consumer spending can be expected to shift the

aggregate expenditures curve downward and the aggregate demand curve leftward.

(Consider This) One major advantage of credit cards used for transactions is that they

allow consumers to coordinate timing and payment for purchases.

In the accompanying graph, which of the following factors will shift AS1 to AS3?

an increase in input prices

Refer to the diagram for a private closed economy. The upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects

an increase in investment expenditures.

Refer to the diagram for a private closed economy. The MPC and MPS are

both 0.5.

Checkable deposits are included in

both M1 and M2

State and local governments are limited in their ability to respond to recessions because of

constitutional and other requirements to balance their budgets.

Which of the following is the basic economic policy function of the Federal Reserve Banks?

controlling the supply of money

Refer to the graph. A shift from AS1 to AS2 would be consistent with what economic event in U.S. history?

cost-push inflation in the early 1970s

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. If productivity increased such that 3,000 units are now produced with the quantity of inputs still equal to 60, then per-unit production costs would

decrease and aggregate supply would increase.

When the excess capacity of business expands unintentionally, aggregate

demand will decrease.

The American Recovery and Reinvestment Act of 2009 is a clear example of

discretionary fiscal policy that made the cyclically adjusted budget become more negative.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to

do nothing since the economy appears to be achieving full-employment real output.

If at some level of GDP the economy is experiencing an unintended decrease in inventories,

domestic output will increase.

If a lump-sum tax of $40 billion is levied at each level of income and the MPC is 0.75, then the saving schedule will shift

downward by $10 billion.

The economy's long-run AS curve assumes that wages and other resource prices

eventually rise and fall to match upward or downward changes in the price level.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

increase aggregate demand.

Other things equal, a reduction in personal and business taxes can be expected to

increase both aggregate demand and aggregate supply.

Other things equal, an increase in an economy's exports will

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

The crowding-out effect suggests that

increases in government spending may reduce private investment.

Refer to the table. If the full-employment real GDP is $40, the

inflationary expenditure gap is $10.

Refer to the diagrams. Curve A

is an investment demand curve, and curve B is an investment schedule.

The purchasing power of the dollar

is the reciprocal of the price level.

A decline in investment will shift the AD curve to the

left by a multiple of the change in investment.

In a recessionary expenditure gap, the equilibrium level of real GDP is

less than full-employment GDP.

The real-balances effect on aggregate demand suggests that a

lower price level will increase the real value of many financial assets and therefore cause an increase in spending.

In the aggregate-expenditures model, the average price level is

not shown on the AE graphs.

A rightward shift in the aggregate supply curve is best explained by an increase in

productivity.

In Year 1, the actual budget deficit was $150 billion and the cyclically adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically adjusted deficit was $125 billion. It can be concluded that from Year 1 to Year 2,

real GDP increased.

If actual investment exceeds planned investment in a private closed economy, then

real GDP will decrease.

The goal of expansionary fiscal policy is to increase

real GDP.

The amount by which an aggregate expenditures schedule must shift upward to achieve the full-employment GDP is a(n)

recessionary expenditure gap.

The accompanying graph depicts an economy in the

short run

Contractionary fiscal policy would tend to make a budget deficit become

smaller

Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400,

the budget will be balanced.

The so-called negative taxes are better known as

transfer payments

When a consumer wants to compare the price of one product with another, money is primarily functioning as a

unit of account.

Refer to the graph. The equilibrium for this economy is

at price level P2 and output Q2.

Refer to the graph. Automatic stability in this economy could be enhanced by

changing the tax system so that the tax line has a steeper slope.

The U.S. public debt

consists of the historical accumulation of all past federal deficits and surpluses.

The cyclically adjusted surplus in the U.S. went from +1.2 percent of GDP in 2000 to −1.2 percent of GDP in 2002. This suggests that the government during that period

cut taxes and/or increased spending.

In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________.

declined by 27 percent; rose to 25 percent.

Other things being equal, a decrease in an economy's exports will

decrease domestic aggregate expenditures and the equilibrium level of GDP.

A decrease in government spending will cause a(n)

decrease in aggregate demand.

The set of fiscal policies that would be most contractionary would be a(n)

decrease in government spending and an increase in taxes.

From the perspective of classical macroeconomic theory, insufficient aggregate spending would

decrease prices, wages, and interest rates, and thus increase aggregate spending to equal the full-employment level of output.

When national income in other nations decreases, aggregate demand in our economy

decreases because our exports will decrease.

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion.

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations.

Investment and saving are, respectively,

injections and leakages

The short-run aggregate supply curve represents circumstances where

input prices are fixed, but output prices are flexible.

Refer to the diagrams. The location of curve B depends on the

interest rate together with the location of curve A.

In the aggregate expenditures model, which of the following variables is assumed to be independent of real GDP?

investment

The M2 definition of money includes

items 2, 3, 4, 6, 7, and 8. ( Savings deposits Currency (coins and paper money) in circulation Small-denominated (under $100,000) time deposits Checkable deposits Money market deposit accounts Money market mutual fund balances held by individuals

One of the potential consequences of the public debt is that it may

lead to additional future taxes that reduce economic incentives.

Refer to the diagrams. Other things equal, an interest rate increase will

leave curve A in place but shift curve B downward.

The crowding-out effect from government borrowing to finance the public debt is reduced when

public investment complements private investment.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

In an effort to stop the U.S. recession of 2007-2009, the federal government

reduced taxes and increased government spending.

Recessions have contributed to the public debt by

reducing national income and therefore tax revenues.

The most likely way the public debt burdens future generations, if at all, is by

reducing the current level of investment.

Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a

rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve.

(Last Word) The Glass-Steagall Act of 1933:

separated high-risk and low-risk financial activities across different firms.

An increase in investment spending caused by higher expected rates of return will

shift the aggregate expenditures curve upward and the aggregate demand curve to the right.

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. The per-unit cost of production is

$0.75.

Refer to the given table. The value of the dollar in year 3 is

$1.25.

The marginal propensity to save is 0.2. Equilibrium GDP will decrease by $50 billion if the aggregate expenditures schedule decreases by

$10 billion.

The table gives information about the relationship between input quantities and real domestic output in a hypothetical economy. If the price of each input is $5, the per-unit cost of production in the economy is

$2.50.

In the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______.

3; 2; 1

(Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is

4. (1)/(1-MPC) (1)/(1-0.75)=1/0.25=4

Most economists believe that fiscal policy is

Not as good as monetary policy for month-to-month stabilization

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Which of the following is a true statement?

Fiscal policy swung from contractionary to expansionary in 2002.

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion,

GDP will remain at $400 billion unless aggregate expenditures change.

"Subprime mortgage loans" refer to

High-interest-rate loans to home buyers with above-average credit risk.

In the accompanying graph, which line might represent an aggregate demand curve?

1 (diagonal down to the right)

As of March 2019, the supply of money (M1) in the United States was about

$3,760 billion.

Refer to the accompanying information for a closed economy. If both government spending and taxes are zero, the equilibrium level of GDP is

$300. (look to see where S and Ig equal)

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand?

$50 billion (1/1-0.6)*20=50

The table shows a consumption schedule. All figures are in billions of dollars. If planned investment was $20 billion, government purchases of goods and services were $20 billion, and taxes and net exports were zero, then the equilibrium level of GDP would be

$680 billion.

If P equals the price level expressed as an index number and $V equals the value of the dollar, then

$V = 1/P.

Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Which of the factors best explain the downward slope of aggregate demand curve?

1, 3, and 8 (Real-balances affect, interest rate effect, foreign purchases affect)

The Federal Reserve System was established by the Federal Reserve Act of

1913.

The purchasing power of the dollar would fall by 20 percent if the price index rises by

25 percent.

In 2018, foreign ownership of the total public debt of the United States was about

29 percent.

In 2018, the Federal Reserve and other U.S. (federal) government agencies held about what percentage of U.S. federal debt?

38 percent

The Board of Governors of the Federal Reserve has ____ members.

7

Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. A change in which factor is most likely to change both aggregate demand and aggregate supply?

7 (Business taxes)

Which of the diagrams for the U.S. economy best portrays the effects of declines in the prices of imported resources?

A

What does it mean when economists say that home buyers are "underwater" on their mortgages?

Buyers owe more on their mortgage than the properties are worth.

Refer to the diagram. If aggregate supply is AS1 and aggregate demand is AD0, then

F represents a price level that would result in a shortage of real output of AC.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

Which of the following is not true about the Federal Reserve Banks?

They compete with commercial banks in their basic functions.

Refer to the diagram. Assume that G and T2 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n)

actual budget deficit.

If the national incomes of our trading partners increase, then our

aggregate demand increases because net exports increase.

The basic requirement for an item to function as money is that it be

generally accepted as a medium of exchange.

The government bailout of large institutions creates the problem of moral hazard, which means that these large firms will

have an incentive to make highly risky investments.

Refer to the accompanying information for a closed economy. The introduction of $80 billion of government spending would

have no effect on the size of the multiplier.

Checkable deposits are

included in M1.

If the multiplier in an economy is 5, a $20 billion increase in net exports will

increase GDP by $100 billion.

Given a fixed upsloping AS curve, a rightward shift of the AD curve will

increase both the price level and real output.

In the aggregate expenditures model, a reduction in taxes may

increase saving.

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

increased by $20 billion.

Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. If there had been partial crowding out, however, then GDP would have

increased by less than $100 billion.

In the accompanying figure, if AD1 shifts to AD2, then the equilibrium output

increases from Q1 to Q2 while the price level rises from P1 to P2.

The foreign purchases effect

moves the economy along a fixed aggregate demand curve.

Currency held by banks is part of

neither the M1 nor the M2 definition of the money supply.

Banks lost money during the mortgage default crisis because

of all of these reasons: -of defaulted loans to investors in mortgage-backed securities -they held mortgage-backed securities they had purchased from investment firms. -homebuyers defaulted on mortgages held by the banks.

Refer to the diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?

offsetting state and local finance

The political business cycle refers to the possibility that

politicians will manipulate the economy to enhance their chances of being reelected.

The aggregate demand curve or schedule shows the relationship between the total demand for output and the

price level.

Increases in the federal budget deficit from 2007 to 2009 were caused

primarily by a combination of recession and expansionary fiscal policy.

The American Recovery and Reinvestment Act of 2009 was implemented primarily to

stimulate aggregate demand and employment.

If you place a part of your summer earnings in a savings account, you are using money primarily as a

store of value.

One of the most important views expressed by classical macroeconomists was that

supply creates its own demand.

Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate

supply curve will shift rightward.

A fall in labor costs will cause aggregate

supply to increase

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes

the crowding-out effect.

In the figure, AD1 and AS1 represent the original aggregate supply and demand curves, and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by

the increase in productivity.

Research suggests that

the less independent the central bank, the higher the average annual rate of inflation.

One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has

the power to print money to finance the debt.

The cyclically adjusted budget refers to

the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.

The most basic premise of the aggregate expenditures model is that

the total output produced in the economy depends directly on the level of total spending.

Checkable deposits are classified as money because

they can be readily used in purchasing goods and paying debts.

One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the

time fiscal action is taken and the time that the action has its effect on the economy.

Per-unit production cost is

total input cost divided by units of output.

Stock market price quotations best exemplify money serving as a

unit of account.

The table gives data for a private (no government) closed economy. All figures are in billions of dollars. If planned investment is $18 billion, then at the $660 billion level of disposable income, there will be an

unplanned increase in inventories of $12 billion.