Macroeconomics Test #3-FS
When a household's disposable income increases by $4,000, the savings increase by $1,000. The marginal propensity to consume is: 0 0.25 0.50 0.75 1
.75
Fiscal policy is concerned with A. government spending and taxation only B. government spending and money only C. money and taxation only D. government spending, taxation, and money E. money only
government spending and taxation only
The equilibrium interest rate is determined by the Fed Congress the demand for money alone the supply of money alone both the supply of and demand for money
BOTH THE SUPPLY OF AND DEMAND OF MONEY
If the multiplier is 4, a $10 billion increase in autonomous investment will cause a $10 billion increase in equilibrium investment $40 billion increase in equilibrium investment $40 billion increase in equilibrium real GDP demanded $400 billion increase in equilibrium real GDP demanded $40 billion increase in consumption spending
$40 BILLION INCREASE INEQUIL. REAL GDP DEMANDED
If the marginal propensity to save is 0.4, then the simple spending multiplier is: 1 1.4 1.5 2 2.5
2.5
If the marginal propensity to consume is 3/4, the simple multiplier is 3 7 4 25 3/10
4
If the marginal propensity to consume is 4/5, the simple multiplier is 1/6 6 5/6 6/5 5
5
If the simple multiplier is 8, the marginal propensity to consume is A. 1/8 B. 1/4 C. 4/5 D. 7/8 E. 8
7/8
The difference between consumption spending and disposable income decreases as income increases stays proportionally the same as income increases decreases if the interest rate increases equals the amount of taxes paid equals saving
= SAVING
Most government transfer programs are also government spending programs examples of monetary policy rather than fiscal policy designed mainly to offset macroeconomic instability discretionary fiscal policies automatic stabilizers
AS
The rate of unemployment that occurs when the economy is producing its potential GDP is called the natural rate of unemployment is zero is thought to be approximately 10% can be kept at zero through fiscal policy is equal to the rate of stagflation in most years
CALLED NATURAL UNEMPLOYMENT RATE
In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run A. increase in both the price level and real GDP B. decrease in both the price level and real GDP C. increase in real GDP and a decrease in the price level D. decrease in real GDP and an increase in the price level E. increase in the price level only
DECREASE IN BOTH PRICE LEVEL AND REAL GDP
Which of the following would cause a downward movement along the money demand curve? an increase in the interest rate a decrease in the interest rate a decrease in real GDP an increase in real GDP an increase in the price level
DECREASE IN INTEREST RATE
Which of the following, other things constant, will shift the money demand curve to the left? an increase in the interest rate a decrease in the interest rate a decrease in real GDP an increase in real GDP an increase in the price level
DECREASE IN REAL GDP
Which of the following, other things constant, will shift the money demand curve to the left? an increase in the interest rate a decrease in the interest rate a decrease in real GDP an increase in real GDP an increase in the price level
DECREASE IN REAL GDP
Consumption spending depends mainly on the level of national income disposable income personal income personal income taxes imports
DI
The money demand curve shifts to the right whenever there is a decrease in the interest rate. True OR False
FALSE
Which of the following are used in fiscal policy? transfer payments only taxes and government purchases government purchases only government purchases, transfer payments, and taxes taxes and transfer payments
GOV. PURCHASES, TRANSFER PAYMENTS, & TAXES
Which of the following are used in fiscal policy? transfer payments only taxes and government purchases government purchases only government purchases, transfer payments, and taxes taxes and transfer payments
GOV. PURCHASES, TRANSFER PAYMENTS, AND TAXES
Which of the following is not investment spending? A. an increase in business inventories B. the extensive renovation of an old factory building C. the purchase of stock in Potomac Electric Company D. the construction of a new apartment building E. the purchase of a new silo for a farm
PURCHASE OF STOCK IN POTOMAC ELECTRIC COMPANY
Fiscal policy uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP uses the federal government's powers over the money supply and interest rates to affect employment, the price level, and GDP can affect employment and prices, but not the level of GDP can affect employment and the level of GDP, but not the price level is most effective when employed by state governments rather than by the federal government
USES THE FED. GOV.'S POWERS OF SPENDING AND TAXATION TO AFFECT EMPLOYM., PRICE LEVEL, AND GDP
Fiscal policy focuses on manipulating A. aggregate demand to smooth out business fluctuations B. aggregate supply to smooth out business fluctuations C. both aggregate supply and aggregate demand to smooth out business fluctuations D. aggregate demand to stimulate the economy and aggregate supply to contract it E. short-run aggregate supply to stimulate the economy and aggregate demand to contract it
aggregate demand to smooth out business fluctuations
The components of planned aggregate spending are: A. Consumption spending, savings, investment, and net taxes B. Consumption spending, savings, investment, and net exports C. Consumption spending, savings, government purchases, and net exports D. Consumption spending, investment, government purchases, and net taxes E. Consumption spending, investment, government purchases, and net exports
consumption spending, investment, government purchases, and net exports
Discretionary fiscal policy is policy that A. is developed in secret B. applies to some states but not others C. applies to some industries but not others D. works automatically without public announcement or plan E. is an intentional change in taxation or government spending
is an intentional change in taxation or government spending
Supply-side economics emphasized government policies to A. stimulate aggregate demand B. increase minimum wage to improve labor productivity C. stimulate growth by stimulating long run aggregate supply D. lower interest rates E. increase tax revenues of government in order to increase government purchases
stimulate growth by stimulating long run aggregate supply
As the interest rate increases, A.the demand for investment curve shifts to the right B. the demand for investment curve shifts to the left C. there is a movement downward along the demand for investment curve D. there is a movement upward along the demand for investment curve E. GDP increases
there is a movement upward along the demand for investment curve
If the multiplier is 3, a $20 billion increase in autonomous consumption will cause a $20 billion increase in equilibrium consumption $60 billion increase in equilibrium consumption $20 billion increase in equilibrium real GDP demanded $60 billion increase in equilibrium real GDP demanded $60 billion decrease in autonomous saving
$60 BILLION INCREASE IN EQUIL. REAL GDP DEMANDED
If the multiplier is 3, a $20 billion increase in autonomous consumption will cause a A. $20 billion increase in equilibrium consumption B. $60 billion increase in equilibrium consumption C. $20 billion increase in equilibrium real GDP demanded D. $60 billion increase in equilibrium real GDP demanded E. $60 billion decrease in autonomous saving
$60 BILLION INCREASE IN EQUILIBRIUM REAL GDP DEMANDED
The opposite of a laissez-faire economic policy is active government intervention a reliance on prices to adjust to changing market conditions classical economics neoclassical economics quantity supplied creates its own quantity demanded
ACTIVE GOV. INTERVENTION
Which of the following best explains why the demand for money depends upon the interest rate? Money is an interest-earning asset. Money is not an interest-earning asset. The alternatives to holding money are not interest-earning assets. The alternatives to holding money earn more interest than money does. People must pay interest on loans.
ALTERNATIVES TO HOLDING MONEY EARN MORE INTEREST THAN MONEY DOES
Which of the following best explains why the demand for money depends upon the interest rate? Money is an interest-earning asset. Money is not an interest-earning asset. The alternatives to holding money are not interest-earning assets. The alternatives to holding money earn more interest than money does. People must pay interest on loans.
ALTERNATIVES TO HOLDING MONEY EARN MORE INTEREST THAN MONEY DOES
Which of the following would shift the consumption function upward? A.a decrease in disposable income B. an increase in disposable income C. an increase in the interest rate D. expectations of lower future prices E. an increase in net wealth
AN INCREASE IN NET WEALTH
If the exchange rate changes from 75 cents per euro to $1 per euro, the euro appreciated, since its value has increased appreciated, since the price of U.S. dollars has increased appreciated, making U.S. goods more expensive in Euros depreciated, since its value has declined depreciated, since its value has increased
APP. VALUE INCREASED
If the exchange rate changes from 20 cents per franc to 18 cents per franc, the U.S. dollar has appreciated, since its value has increased appreciated, since its value has declined depreciated, making French goods more expensive in U.S. dollars depreciated, since its value has declined depreciated, since its value has increased
APPRECIATED, VALUE INCREASED
If the exchange rate changes from 75 cents per euro to $1 per euro, the euro appreciated, since its value has increased appreciated, since the price of U.S. dollars has increased appreciated, making U.S. goods more expensive in Euros depreciated, since its value has declined depreciated, since its value has increased
APRE, VALUE INCREASED
The distinction between discretionary fiscal policy and the use of automatic stabilizers is that A. only discretionary fiscal policy can stimulate the economy B. only automatic stabilizers can stimulate the economy C. discretionary fiscal policy, once adopted, is built into the structure of the economy D. automatic stabilizers, once adopted, are built into the structure of the economy E. only discretionary fiscal policy can be used by the federal government
AUTOMATIC STABILIZERS, ONCE ADOPTED, ARE BUILT INTO THE STRUCTURE OF THE ECONOMY
During economic contractions, transfer payments such as welfare benefits A. automatically increase, reducing incomes further B. automatically increase, reducing the impact of the contraction on disposable income C. automatically decrease, because tax revenues fall and welfare benefits are no longer affordable D. are decreased, as a discretionary move on the part of Congress to stimulate expansion E. are increased, as a discretionary move on the part of Congress to cushion recipients against the negative effects of economic contraction
AUTOMATICALLY INCREASE, REDUCING THE IMPACT OF THE CONTRACTION ON DISPOSABLE INCOME
As the price level rises, money __________ causing interest rates to __________ and investment spending to __________. demand rises; fall; fall demand rises; rise; fall demand falls; rise; rise supply rises; rise; fall supply falls; fall; rise
DEMAND RISES; RISE; FALL
For an equilibrium interest rate of 5%, an increase in the money supply will most likely: Increase the interest rate above 5% Decrease the interest rate below 5% Increase the demand for money Decrease in investment Decrease the demand for money
DECREASE IR BELOW 5%
The equilibrium interest rate is determined by the Fed Congress the demand for money alone the supply of money alone both the supply of and demand for money
BOTH SUPPLY OF AND DEMAND FOR MONEY
Keynes thought that one macroeconomic problem is that the economy can tend toward an equilibrium level of output that is below the potential level tends toward a potential level of output that is below the equilibrium level makes the potential and equilibrium levels of output equal can be pushed below the equilibrium level of output by fiscal policy can be pushed below the potential level of output by fiscal policy
CAN TEND TOWARD AN EQUIL. LEVEL OF OUTPUT THAT IS BELOW THE POTENT. LEVEL
Along the aggregate consumption function, an increase in income will cause autonomous consumption to rise shift the consumption function upward cause a corresponding downward shift of the saving function cause movement along the given consumption function shift the consumption function downward
CAUSE MOVEMENT ALONG THE GIVEN CONSUMPTION FUNCTION
Along the aggregate consumption function, an increase in income will cause autonomous consumption to rise shift the consumption function upward cause a corresponding downward shift of the saving function cause movement along the given consumption function shift the consumption function downward
CAUSE MOVEMENT ALONG THE GIVEN CONSUMPTION FUNCTION
The MPC is a relationship between a change in consumption and a change in income a change in consumption and a change in saving changes in consumption and changes in saving the ratio of income to consumption at any given level of income the total level of consumption and the total level of saving
CHANGE IN CONS. AND CHANGE IN INCOME
Which of the following would not shift the consumption function? a change in household wealth a change in the price level a change in household disposable income a change in the level of unemployment a change in the rate of interest
CHANGE IN HOUSEHOLD DI
Which of the following best illustrates the use of discretionary fiscal policy? Congress provides $1 billion in relief aid for hurricane victims. Congress appropriates $500 million to help the needy, and the appropriation is financed by a tax on wealth. Income tax receipts are smaller because of a decline in real GDP during a recession. The Federal Reserve tightens credit when it receives news of accelerating inflation. Congress passes a bill authorizing $2 billion in additional spending when it receives news of a deepening recession.
CONGRESS PASSES BILL
As disposable income increases, consumption and saving both increase consumption increases and saving decreases consumption and saving both decrease consumption decreases but saving increases saving increases, but we cannot predict what happens to consumption
CONSUMPTION AND SAVING INCREASE
The components of planned aggregate spending are: Consumption spending, savings, investment, and net taxes Consumption spending, savings, investment, and net exports Consumption spending, savings, government purchases, and net exports Consumption spending, investment, government purchases, and net taxes Consumption spending, investment, government purchases, and net exports
CONSUMPTION SPENDING, INVESTMENT, GOV. PURCHASES, AND NET EXPORTS
If the Fed decreases the money supply, causing the interest rate to rise, GDP increases by the same amount as the increase in the interest rate decreases by more than the increase in the interest rate because of the multiplier decreases by the same amount as the decrease in investment decreases by more than the decrease in investment because of the multiplier decreases by less than the decrease in investment because of the multiplier
DECREASES BY MORE THAN THE DECREASE IN INVESTMENT BC OF THE MULTIPLIER
An upward shift of the consumption function might be caused by an increase in disposable income a decrease in disposable income a decrease in the price level a decrease in household wealth an increase in the interest rate
DECREASE IN PRICE LEVEL
An upward shift of the consumption function might be caused by an increase in disposable income a decrease in disposable income a decrease in the price level a decrease in household wealth an increase in the interest rate
DECREASE IN PRICE LEVEL
In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run increase in both the price level and real GDP decrease in both the price level and real GDP increase in real GDP and a decrease in the price level decrease in real GDP and an increase in the price level increase in the price level only
DECREASE IN PRICE LEVEL AND REAL GDP
If the exchange rate changes from 1500 lire per U.S. dollar to 1000 lire per U.S. dollar, the U.S. dollar has appreciated, since its value has increased appreciated, since the price of foreign exchange has increased appreciated, making Italian goods cheaper in U.S. dollars depreciated, since its value has declined depreciated, since its value has increased
DEP., VALUE DECLINED
If the exchange rate changes from 1 euro per U.S. dollar to 1.2 euros per U.S. dollar, the Euro has appreciated, since its value has increased appreciated, since the price of U.S. dollars has increased appreciated, making U.S. goods cheaper in Euros depreciated, since its value has declined depreciated, since its value has increased
DEP.. VALUE DECLINED
Which of the following is true of the relationship between disposable income and consumption? Disposable income and consumption are both dependent variables. Disposable income and consumption are both independent variables. Disposable income is the dependent variable and consumption is the independent variable. Consumption is the dependent variable and disposable income is the independent variable. Neither is dependent nor independent since they are related by the equation DI = C + S.
DEPENDENT-CONSUMPTION INDEPENDENT-DI
The most important determinant of a household's consumption spending is its disposable income its total wealth the number of persons in the household its net wealth the ratio of wage to nonwage income the household earns
DI
Which of the following does not limit the effectiveness of discretionary fiscal policy? the difficulty of estimating the natural rate of unemployment time lags involved in enacting appropriate legislation the difficulty of getting an accurate measure of the rate of inflation time lags involved in recognizing the need for fiscal policy the tendency for people to distinguish between temporary and permanent changes in their income
DIFFICULTY MEASURING INFLATION RATE
Which of the following does not limit the effectiveness of discretionary fiscal policy? the difficulty of estimating the natural rate of unemployment time lags involved in enacting appropriate legislation the difficulty of getting an accurate measure of the rate of inflation time lags involved in recognizing the need for fiscal policy the tendency for people to distinguish between temporary and permanent changes in their income
DIFFICULTY OF GETTING ACCURATE MEASURE OF INFLATION RATE
The demand for money varies directly with both the price level and the level of real GDP inversely with both the price level and the level of real GDP inversely with the price level and directly with the level of real GDP directly with the price level and inversely with the level of real GDP inversely with the level of nominal GDP
DIRECTLY WITH THE PRICE LEVEL AND LEVEL OF REAL GDP
The money demand curve slopes downward because the cost of holding money decreases as the interest rate decreases downward because the cost of holding money increases as the interest rate decreases upward because people demand more money as GDP increases upward because people demand more money as GDP decreases downward because people demand more money as the price level increases
DOWNWARD BC THE COST OF HOLDING MONEY DECREASES AS INTEREST RATES DECREASE
The money demand curve slopes downward because the cost of holding money decreases as the interest rate decreases downward because the cost of holding money increases as the interest rate decreases upward because people demand more money as GDP increases upward because people demand more money as GDP decreases downward because people demand more money as the price level increases
DOWNWARD BC THE COST OF HOLDING MONEY DECREASES AS THE INTEREST RATE DECREASES
As the interest rate decreases, the demand for investment curve shifts to the right the demand for investment curve shifts to the left there is a downward movement along the demand for investment curve there is an upward movement along the demand for investment curve GDP decreases
DOWNWARD MOVEMENT ALONG DEMAND FOR INVESTMENT CURVE
Keynes thought that one macroeconomic problem is that the potential and equilibrium levels of output can be the same the equilibrium level of output can never be equal to the potential level over time, the potential level of output may be pulled down to the equilibrium level the potential level of output can fall below the equilibrium level the equilibrium level of output can fall below the potential level
EQUIL LEVEL OF OUTPUT CAN FALL BELOW POTENTIAL LEVEL
Suppose that the multiplier is 4, autonomous investment rises by $50 billion, and autonomous consumption falls by $50 billion at the same time. Which of the following is true? Equilibrium GDP demanded will be the same, but the type of goods produced will be different. Equilibrium GDP demanded will increase by $200 billion. Equilibrium GDP demanded will decrease by $200 billion. Equilibrium GDP demanded will increase by $400 billion. Equilibrium GDP demanded will decrease by $400 billion.
EQUIL. GDP WILL BE THE SAME, TYPES OF GOODS CHANGE
Keynes thought that one macroeconomic problem is that the potential and equilibrium levels of output can be the same the equilibrium level of output can never be equal to the potential level over time, the potential level of output may be pulled down to the equilibrium level the potential level of output can fall below the equilibrium level the equilibrium level of output can fall below the potential level
EQUIL. LEVEL OF OUTPUT CAN FALL BELOW POTENT. LEVEL
One lesson of the Great Depression was that potential GDP could be too low to ensure full employment if the population was growing be too low to ensure full employment in a capitalist economy be too low to ensure full employment in a market economy fall short of full-employment GDP exceed equilibrium GDP
EXCEED EQUIL. GDP
Which of the following will not shift the consumption function upward? a drop in the price level an increase in net wealth a drop in the interest rate expectations of lower future income expectations of higher prices in the future
EXPECTATIONS OF LOWER FUTURE INCOME
Which of the following will not shift the consumption function upward? a drop in the price level an increase in net wealth a drop in the interest rate expectations of lower future income expectations of higher prices in the future
EXPECTATIONS OF LOWER FUTURE INCOME
The consumption function assumes that only disposable income affects consumption only the price level affects consumption many factors other than disposable income affect consumption, and each is allowed to vary along the consumption function factors other than disposable income affect consumption, but those are held constant along the consumption function only consumer expectations affect consumption
FACTORS OTHER THAN DI EFFECT CONSUMPTION BUT THEY ARE HELD CONSTANT AMONG CONS. FUNCT.
If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money. A. rise; greater B. rise; smaller C. not change; greater D. fall; greater E. fall; smaller
FALL GREATER
Classical economists believed that if saving were greater than investment, the interest rate would __________, causing saving to __________ and investment to __________ until the two were equal. rise; decrease; increase fall; decrease; increase fall; increase; decrease rise; increase; decrease fall; increase; increase
FALL, DECREASE, INCREASE
Of the following, the major influence on the supply of money is interest rates prices the transactions demand for money GDP the Fed
FED
If the Fed buys bonds in the open market, then: The federal funds rate is increasing The federal funds rate is decreasing The required reserve ratio is increasing The required reserve ratio is declining The discount rate is increasing
FEDERAL FUNDS RATE DECREASING
If the Fed buys bonds in the open market, then: The federal funds rate is increasing The federal funds rate is decreasing The required reserve ratio is increasing The required reserve ratio is declining The discount rate is increasing
FEDERAL FUNDS RATE INCREASING
If the Fed sells bonds in the open market, then: The federal funds rate is increasing The federal funds rate is decreasing The required reserve ratio is increasing The required reserve ratio is declining The discount rate is increasing
FEDERAL FUNDS RATE INCREASING
The smaller the marginal propensity to save, other things constant, the smaller the marginal propensity to consume the smaller the multiplier the flatter the consumption function the flatter the saving function the steeper the saving function
FLATTER SAVING
What is the opportunity cost of holding money rather than some other financial asset? the forgone interest income the forgone utility time the forgone leisure the forgone profit
FORGONE INTEREST INCOME
_________ unemployment benefits __________ the opportunity cost of not working, so some job seekers may decide to __________ their job searches. Higher, reduce, increase Lower, reduce, decrease Higher, raise, decrease Lower, reduce, increase Higher, reduce, decrease
HIGHER REDUCE DECREASE
__________ unemployment benefits __________ the opportunity cost of not working, so some job seekers may decide to __________ their job searches. Higher, reduce, increase Lower, reduce, decrease Higher, raise, decrease Lower, reduce, increase Higher, reduce, decrease
HIGHER; REDUCE; DECREASE
Which of the following is not a weakness of fiscal policy as a tool of economic stabilization? It is ineffective in dealing with stagflation. Its correct implementation depends on an accurate estimate of potential output. It is subject to lags. Households may not respond to changes they perceive as temporary. Households may not respond to changes they perceive as permanent.
HOUSEHOLDS, PERMANENT
An increase in wealth will increase consumption and saving at each level of income increase saving and decrease consumption at each level of income decrease consumption and saving at each level of income increase consumption and decrease saving at each level of income have no effect on consumption, since consumption is a function of income
INCREASE CONSUMPTION, DECREASE SAVING @ EACH INCOME
In the aggregate demand-aggregate supply model, an increase in the money supply will cause in the short run a(n) increase in both the price level and real GDP decrease in both the price level and real GDP increase in real GDP and a decrease in the price level decrease in real GDP and an increase in the price level increase in the price level only
INCREASE IN BOTH PRICE LEVEL AND REAL GDP
Which of the following, other things constant, will shift the money demand curve to the right? an increase in the interest rate a decrease in the interest rate an increase in real GDP a decrease in real GDP a decrease in the price level
INCREASE IN REAL GDP
Which of the following, other things constant, will shift the money demand curve to the right? an increase in the interest rate a decrease in the interest rate an increase in real GDP a decrease in real GDP a decrease in the price level
INCREASE IN REAL GDP
Increases in the marginal propensity to consume, other things constant, increase the value of the multiplier decrease the value of the multiplier never change the value of the multiplier shift the aggregate expenditure curve downward cause a downward movement along an aggregate expenditure curve
INCREASE THE VALUE OF THE MULTIPLIER
Increases in the marginal propensity to consume, other things constant, increase the value of the multiplier decrease the value of the multiplier never change the value of the multiplier shift the aggregate expenditure curve downward cause a downward movement along an aggregate expenditure curve
INCREASE VALUE OF MULTIPLIER
If the Fed buys bonds, then the money supply A. increases, the interest rate falls, and the quantity of money demanded increases B. falls, the interest rate falls, and the quantity of money demanded increases C. increases, the interest rate increases, and the quantity of money demanded increases D. falls, the interest rate increases, and the quantity of money demanded falls E. falls, the interest rate falls, and the quantity of money demanded falls
INCREASE, THE INTEREST RATE FALLS AND THE QUANTITY OF MONEY DEMANDED INCREASES
If the Fed increases the money supply, GDP increases because the resulting increase in the interest rate leads to a decrease in investment increases because the resulting decrease in the interest rate leads to an increase in investment decreases because the resulting increase in the interest rate leads to a decrease in investment decreases because the resulting increase in the interest rate leads to an increase in investment decreases because the resulting decrease in the interest rate leads to an increase in investment
INCREASES BC THE RESULTING DECREASE IN THE IR LEADS TO AN INCREASE IN INVESTMENT
If the Fed increases the money supply, GDP increases because the resulting increase in the interest rate leads to a decrease in investment increases because the resulting decrease in the interest rate leads to an increase in investment decreases because the resulting increase in the interest rate leads to a decrease in investment decreases because the resulting increase in the interest rate leads to an increase in investment decreases because the resulting decrease in the interest rate leads to an increase in investment
INCREASES BECAUSE THE RESULTING DECREASE IN INTEREST RATE LEADS TO AN INCREASE IN INVESTMENT
If the Fed buys bonds, then the money supply increases, the interest rate falls, and the quantity of money demanded increases falls, the interest rate falls, and the quantity of money demanded increases increases, the interest rate increases, and the quantity of money demanded increases falls, the interest rate increases, and the quantity of money demanded falls falls, the interest rate falls, and the quantity of money demanded falls
INCREASES, IR FALLS, QUANTITY OF MONEY DEMANDED INCREASES
If the quantity of money supplied exceeds the quantity of money demanded, A. this is evidence of a failed fiscal policy B. this indicates that the supply of money curve is horizontal C. the interest rate will fall D. the quantity of money demanded will increase E. the transactions money demand curve will shift to the right
INTEREST RATE WILL FALL
All of the following are tools of fiscal policy except one. Which is the exception? taxes transfer payments interest rates government purchases of goods government purchases of services
IR
All of the following are variables that can be manipulated to affect fiscal policy except one. Which is the exception? personal income taxes government expenditures on goods and services government expenditures on unemployment benefits the interest rate corporate income taxes
IR
The opportunity cost of holding money is measured by the interest rate liquidity lost by holding money money supply curve inflation rate cost of cashing in financial assets
IR
If the Fed increases the money supply, then the interest rate declines and the quantity of money demanded increases the interest rate declines and the quantity of money demanded declines the interest rate increases and the quantity of money demanded increases the interest rate increases and the quantity of money demanded declines nothing happens to the quantity of money demanded
IR DECLINES & QUANTITY OF MONEY DEMANDED INCREASES
Which of the following is not an automatic stabilizer? a progressive income-tax system unemployment compensation new legislation to increase tax rates unemployment insurance welfare programs
NEW LEGISLATION
Planned investment expenditures will eventually increase after the money supply decreases the demand for money increases the interest rate falls the Fed sells government securities business managers are pessimistic about future market conditions for their product
IR FALLS
Planned investment expenditures will eventually increase after the money supply decreases the demand for money increases the interest rate falls the Fed sells government securities business managers are pessimistic about future market conditions for their product
IR FALLS
If there is a decrease in the supply of money, which one of the following is most likely to happen? the demand for money will increase planned investment spending will increase interest rates will rise aggregate expenditure will increase the demand for money will decrease
IR RISE
If the quantity of money supplied exceeds the quantity of money demanded, this is evidence of a failed fiscal policy this indicates that the supply of money curve is horizontal the interest rate will fall the quantity of money demanded will increase the transactions money demand curve will shift to the right
IR WILL FALL
Discretionary fiscal policy is policy that is developed in secret applies to some states but not others applies to some industries but not others works automatically without public announcement or plan is an intentional change in taxation or government spending
IS AN INTENTIONAL CHANGE IN TAXATION OR GOV. SPENDING
The opportunity cost of holding money includes bank service charges is the interest foregone on potential interest-earning assets varies inversely with the rate of interest affects relatively few individuals is determined exclusively by the Fed
IS INTEREST FORGONE ON POTENTIAL INTEREST-EARNING ASSETS
Induced saving is that part of saving that is inversely related to the interest rate plus autonomous saving equals disposable income is that portion of saving that is directly related to income is less than disposable income at every level of income equals autonomous saving at every income level
IS THAT PORTION OF SAVING THAT IS DIRECTLY RELATED TO INCOME
The marginal propensity to consume is the proportion of disposable income consumed is the reciprocal of the ratio of disposable income to saving is the change in consumption relative to a change in disposable income minus the marginal propensity to save must equal 1 is greater than 1 at all levels of income
IS THE CHANGE IN CONSUMPTION RELATIVE TO A CHANGE IN DI
The marginal propensity to consume A. is the proportion of disposable income consumed B. is the reciprocal of the ratio of disposable income to saving C. is the change in consumption relative to a change in disposable income D. minus the marginal propensity to save must equal 1 E. is greater than 1 at all levels of income
IS THE CHANGE IN CONSUMPTION RELATIVE TO A CHANGE IN DISPOSABLE INCOME
The opportunity cost of holding money includes bank service charges is the interest foregone on potential interest- earning assets varies inversely with the rate of interest affects relatively few individuals is determined exclusively by the Fed
IS THE INTEREST FOREGONE ON POTENTIAL INTEREST-EARNING ASSETS
The most important determinant of a household's consumption spending is A. its disposable income B. its total wealth C. the number of persons in the household D. its net wealth E. the ratio of wage to nonwage income the household earns
ITS DISPOSABLE INCOME
Induced consumption spending A. represents consumption that is independent of income B. plus saving equals total consumption spending C. is positively related to disposable income D. is equal to autonomous consumption spending in equilibrium E. is the difference between autonomous consumption spending and disposable income
Is positively related to disposable income
An increase in the money supply will A. increase the demand for money at each interest rate B. decrease the demand for money at each interest rate C. lead people to try to exchange money for interest-bearing assets D. lead people to try to exchange interest-bearing assets for money E. increase the interest rate
LEAD PEOPLE TO TRY TO EXCHANGE MONEY FOR INTEREST-BEARING ASSETS
If the Fed wanted to stimulate the economy, it might buy bonds to lower the money supply sell bonds to lower the money supply raise the discount rate to increase the money supply lower the discount rate to increase the money supply increase the required reserve ratio to lower the money supply
LOWER DISCOUNT RATE
The demand for money is based primarily on money's role as a(n) store of wealth medium of exchange standard of value interest-bearing asset non-interest-bearing asset
MEDIUM OF EXCHANGE
Planned investment expenditures will eventually decrease after the money supply decreases the demand for money decreases the interest rate falls the Fed buys government securities business managers become more optimistic about future market conditions for their products
MONEY SUPPLY DECREASES
People will hold __________ money as the interest rate __________ because they will __________ other financial assets. more; decreases; buy more; increases; sell more; decreases; sell less; increases; sell less; decreases; buy
MORE DECREASE SELL
If a household's income rises from $46,000 to $46,700 and its consumption spending rises from $35,800 to $36,400, then its marginal propensity to consume is 0.86 marginal propensity to consume is 0.99 marginal propensity to consume is 0.98 marginal propensity to save is 0.01 marginal propensity to save is 0.86
MPC IS .86
If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its marginal propensity to consume is -0.67 marginal propensity to consume is 0.88 marginal propensity to consume is 0.20 marginal propensity to save is zero marginal propensity to save is 0.12
MPS=0
Which of the following is not a tool of fiscal policy? money supply government purchases taxes Social Security program unemployment benefits
MS
Which of the following is not a tool of fiscal policy? money supply government purchases taxes Social Security program unemployment benefits
MS
Which of the following is not an automatic stabilizer? a progressive income-tax system unemployment compensation new legislation to increase tax rates unemployment insurance welfare programs
NEW LEGISLATION TO INCREASE TAX RATES
Autonomous consumption expenditures are identical to induced consumption determined primarily by transfer payments not influenced by disposable income increasing at a decreasing rate increasing at an increasing rate
NOT INFLUENCED BY DI
According to classical economists, government intervention is necessary to maintain a stable price level in the long run necessary to maintain a stable price level in the short run necessary to maintain full employment in the long run necessary to maintain full employment in the short run not necessary to maintain full employment
NOT NEC. TO MAIN. FULL EMPLOY.
The exchange rate is the A. total yearly amount of money changed from one country's currency to another country's currency B. total monetary value of exports minus imports C. amount of a country's currency that can be exchanged for one ounce of gold D. sum of net unilateral transfers E. price of one country's currency in terms of another country's currency
PRICE OF ONE COUNTRY'S CURRENCY IN TERMS OF ANOTHER COUNTRY'S CURRENCY
The exchange rate is the A. ratio of exports to imports B. interest rate the U.S. government charges on international transactions C. pricing policy of goods scheduled for export D. price of one nation's currency in terms of another nation's currency E. price that central banks charge each other for currency exchanges
PRICE OF ONE NATION'S CURRENCY IN TERMS OF ANOTHER NATION'S CURRENCY
A drop in stock prices will __________ net wealth and __________ consumption. reduce; increase reduce; decrease reduce; not change increase; increase increase; decrease
REDUCE DECREASE
A drop in stock prices will __________ net wealth and __________ consumption. reduce; increase reduce; decrease reduce; not change increase; increase increase; decrease
REDUCE DECREASE
If the Fed sells bonds in the open market, then: Reserves in the banking system are increasing Reserves in the banking system are decreasing There is no change in the reserves in the banking system Demand for excess reserves in the federal funds market increases Supply of excess reserves in the federal funds market decreases
RESERVES ARE DECREASING
If the Fed sells bonds in the open market, then: Reserves in the banking system are increasing Reserves in the banking system are decreasing There is no change in the reserves in the banking system Demand for excess reserves in the federal funds market increases Supply of excess reserves in the federal funds market decreases
RESERVES ARE DECRESASING
If the Fed buys bonds in the open market, then: Reserves in the banking system are increasing Reserves in the banking system are decreasing There is no change in the reserves in the banking system Demand for excess reserves in the federal funds market increases Supply of excess reserves in the federal funds market decreases
RESERVES ARE INCREASING
If the money supply decreases, the opportunity cost of holding money __________ and people will want to hold __________ quantity of money. rises; a greater rises; a smaller does not change; the same falls; a greater falls; a smaller
RISES; A SMALLER
A decrease in wealth will shift the consumption function downward make the consumption function steeper cause a movement upward along the consumption function cause a movement downward along the consumption function make the consumption function flatter
SHIFT CONS. FUNCT. DOWNWARD
Expectations that the price level will decrease in the future will make the current consumption function flatter shift the current consumption function downward result in a movement upward along the current consumption function result in a movement downward along the current consumption function make the current consumption function steeper
SHIFT CURRENT CONSUMPTION FUNCTION DOWNWARD
Expectations that the price level will decrease in the future will make the current consumption function flatter shift the current consumption function downward result in a movement upward along the current consumption function result in a movement downward along the current consumption function make the current consumption function steeper
SHIFT THE CURRENT CONSUMPTION FUNCTION DOWNWARD
The smaller the marginal propensity to save, other things constant, the smaller the marginal propensity to consume the smaller the multiplier the flatter the consumption function the steeper the consumption function the steeper the saving function
STEEPER CONSUMPTION FUNCTION
If the Fed sells bonds in the open market, then: A. The federal funds rate is increasing B. The federal funds rate is decreasing C. The required reserve ratio is increasing D. The required reserve ratio is declining E. The discount rate is increasing
THE FEDERAL FUNDS RATE IS INCREASING
All of the following are variables that can be manipulated to affect fiscal policy except one. Which is the exception? A.personal income taxes B. government expenditures on goods and services C. government expenditures on unemployment benefits D. the interest rate E. corporate income taxes
THE INTEREST RATE
The opportunity cost of holding money increases when A. the interest rate rises B. the interest rate falls C. the price level falls D. nominal GDP rises E. nominal GDP falls
THE INTEREST RATE FALLS
The opportunity cost of holding money increases when the interest rate rises the interest rate falls the price level falls nominal GDP rises nominal GDP falls
THE IR RISES
The smaller the marginal propensity to save, other things constant, A. the smaller the marginal propensity to consume B. the smaller the multiplier C. the flatter the consumption function D. the steeper the consumption function E. the steeper the saving function
THE STEEPER THE CONSUMPTION FUNCTION
Which one of the following statements is correct? The lower the interest rate, the higher the opportunity cost of holding assets in the form of money. A vertical money supply curve means that the quantity of money supplied is independent of the interest rate. The larger the supply of money, the higher the interest rate, all things equal. Travelers checks and government bonds are equally liquid assets. The transactions demand for money increases whenever the price level decreases.
VERTICAL MONEY SUPPLY CURVE MEANS THE QUANTITY OF MONEY SUPPLIED IS INDEPENDENT OF THE INTEREST RATE
Lags in the approval and implementation of fiscal policy A. weaken fiscal policy as a tool of economic stabilization B. increase the effectiveness of fiscal policy as a tool of economic stabilization C. help legislators to better assess what policies are most appropriate to adopt D. make fiscal policy more responsive to the current economic environment E. cause fiscal policy to be more effective in changing the level of real GDP than changing the price level
WEAKEN FISCAL POLICY AS A TOOL OF ECONOMIC STABILIZATION
