Midterm #1 - 101B

Suppose that with the advent of ATMs, a person withdraws money once every two days. Further, suppose this person spends $100 per day. Calculate the amount of money this person holds, on average. Her average money holding is $

$150 Explanation: The average money holding is calculated by summing the person's money holdings over the four days and dividing by 4: {200 + 100 + 200 + 100}/{4} = 150

Suppose that a person's yearly income is $90,000. Also suppose that this person's money demand function is given by Md = $Y(0.35-i) When the interest rate is 15 %, this person's money demand is $

$18,000 Explanation: Again using the formula M^d = Y(0.35 - i) , substitute Y = 90,000 and i = 0.15 : M^d = 90,000 X (0.35 - 0.15) = 90,000 X 0.20 = 18,000

Suppose that with the advent of ATMs, a person withdraws money once every two days. Further, suppose this person spends $100 per day. Calculate the amount of money this person withdraws each time she goes to the bank. She will withdraw $

$200 If the person withdraws money once every two days and spends $100 per day, she will need enough money to cover two days of spending. The amount withdrawn per visit is: 100 \times 2 = 200 So, she will withdraw $200 each time she goes to the bank.

Suppose that a person's yearly income is $90,000. Also suppose that this person's money demand function is given by Md = $Y(0.35-i) When the interest rate is 10 %, this person's money demand is $___

$22,500 Explanation: Using the formula M^d =$Y(0.35 - i) , substitute Y = 90,000 and i = 0.10 : M^d = 90,000 X (0.35 - 0.10) = 90,000 X 0.25 = 22,500

Suppose that before ATMs and credit cards, a person goes to the bank once at the beginning of each four-day period and withdraws from her savings account all the money she needs for four days. Assume that she spends $100 per day. Compute this person's money holdings for days 1 through 4 (in the morning, before she spends any of the money she withdraws). Calculate the amount of money this person holds, on average. Her average money holding is $

$250 The average money holding is calculated as the sum of money holdings over the four days divided by 4: (400+300+200+100)/4 = 250

Suppose that money demand is given by Md= $Y (0.30 - i) where $Y=250 and i denotes the interest rate in decimal form. Also, suppose that the supply of money, M=50. If the Federal Reserve wants to increase the interest rate by 5 percentage points (0.05 in decimal form) over and above the equilibrium interest rate determined above, at what level should it set the money supply? The money supply should be set at $

$37.5 Explanation: If the Federal Reserve wants to increase the interest rate to 10% + 5% = 15% , we use the same money demand equation: M_d = Y(0.30 - i) Substituting Y = 250 and i = 0.15 : M_d = 250(0.30 - 0.15) = 250 \times 0.15 = 37.5 Therefore, to achieve an interest rate of 15%, the Federal Reserve should set the money supply at $37.5.

Suppose that before ATMs and credit cards, a person goes to the bank once at the beginning of each four-day period and withdraws from her savings account all the money she needs for four days. Assume that she spends $100 per day. Calculate the amount of money this person withdraws each time she goes to the bank. She will withdraw ($)

$40 Since the person needs $100 per day and goes to the bank once every four days, the total withdrawal will be 100 \times 4 = 400

Consider a bond that promises to pay $100 in one year. If the interest rate is 15%, the price of the bond today is $

$86.96 Explanation: The price of the bond is calculated using the formula: P = (Face Value)/(1+i) where the face value is $100 and the interest rate i = 0.15 : P = {100}/{1 + 0.15} = {100}/{1.15} = 86.96 Thus, the bond's price today is approximately $86.96.

For any year t, let $Yt denote nominal GDP and Yt denote real GDP. The GDP deflator, denoted by Pt​, can be expressed as

$Yt/Yt

Suppose that before ATMs and credit cards, a person goes to the bank once at the beginning of each four-day period and withdraws from her savings account all the money she needs for four days. Assume that she spends $100 per day. Compute this person's money holdings for days 1 through 4 (in the morning, before she spends any of the money she withdraws). For day 1, money holdings are $

(1) $400 On day 1, the person just withdrew $400, so they start with $400. (2) $300 (3) $200 (4) $100

Imagine a world in which all variables were exogenous. Could policymakers change economic outcomes? In such a world policymakers would have _ (1) control over economic outcomes since their policy tools would _(2) .

(1) little to no (2) not have a direct influence over any economic variable

The figure shows the demand for money for a given level of nominal income, $Y. According to the figure, a decrease in the nominal interest rate produces an increase in the amount of ____ (1) that people wish to hold. Suppose that an increase occurs in the level of nominal income, $Y. People now want to hold more money at any given __ (2).

(1) money (2) nominal interest rate

Which of the following represents real GDP?

- GDP in constant dollars GDP in base year dollars - GDP in terms of goods (all the above)

This problem examines the implications of allowing investment to depend on output. Suppose the economy is characterized by the following behavioral equations: C= c0+c1Yd Yd = Y-T I = b0+b1Y Government spending and taxes are constant. Note that investment increases with output. c0 is autonomous consumption, c1 is the propensity to consume, and b0 is business confidence. How does the relation between investment and output affect the value of the multiplier?

- Increases in autonomous spending create a multiplier effect through consumption. - An increase in autonomous spending creates a multiplier effect through investment. - Including the b1Y term in the investment equation increases the multiplier. - All of the above.

Why are the government spending multiplier and tax multiplier different?

- Taxes affect demand indirectly through consumption -Government spending directly affects demand without an initial propensity-to-consume impact. -Taxes have to go through the propensity-to-consume impacts prior to affecting demand. -All of the above.

Factors that one might explore to understand the pace at which a country's capital stock and its level of technology are advancing include the (Check all that apply.)

- quality of its education system - role of the government - saving rate

One if the reasons macroeconomists have concerns about inflation is that inflation causes:

- wages to rise as fast as prices. - real GDP to exceed nominal GDP - nominal GDP to fall. - real GDP to rise. (none of the above)

Suppose that the economy starts with a balanced budget: G=T. If the increase in G is equal to the increase in T , then the budget remains in balance. Let us now utilize the balanced budget multiplier. Suppose that G and T increase by one unit each. Using the government spending multiplier and the tax multiplier (which forms the balanced budget multiplier), what is the change in equilibrium GDP?

1 In a balanced budget scenario where an increase in government spending (G) is exactly matched by an increase in taxes (T), the balanced budget multiplier is always 1. This means that for each unit increase in G and T, the output Y increases by 1 unit.

Today, the United States and many other nations calculate real GDP using a chained methodology. This is, in part, to remedy a major disadvantage of the old method, which involved using a base year for prices that was changed every five years or so. What was a major disadvantage of using the old method (chose all that apply)

1. When the base year changed, all of the old measures of real GDP had to be recalculated. 2. The old methodology tended to underweight the real growth of industries growing above average and overweight those growing below average

If in year t nominal GDP is $7,200 and real GDP is $6,200, the GDP deflator is ____. (Round your response to two decimal places. Do not multiply by 100)

1.16 {GDP Deflator} = {Nominal GDP}/{Real GDP} Given that: Nominal GDP = $7,200 and Real GDP = $6,200 The GDP deflator calculation is: {7,200}/{6,200} = 1.16129 Rounding to two decimal places: Thus, the GDP deflator is 1.16.

Suppose that money demand is given by Md= $Y (0.30 - i) where $Y=250 and i denotes the interest rate in decimal form. Also, suppose that the supply of money, M=50. Calculate the equilibrium interest rate as a percent. The equilibrium interest rate is __ %.

10% Explanation: We are given the money demand function: M_d = Y(0.30 - i) where Y = 250 and M_s = 50 (since M_d = M_s in equilibrium). To find the equilibrium interest rate i , set the money demand equal to the money supply and solve for i : 50 = 250(0.30 - i) Dividing both sides by 250: 0.20 = 0.30 - i Solving for i : i = 0.30 - 0.20 = 0.10 Converting this to a percentage: i = 10%

Consider a bond that promises to pay $100 in one year. If the bond's price today is $85, the interest rate is __(%)

17.65% Explanation: Using the same formula as the previous question, the calculation is: i = (100-85)/85= 17.65%

Forecasts show that the earth's temperature will increase by another ____ degrees celsius by the end of the century if we elect to do nothing to stop global warming.

3

Use the information provided below to answer the following questions. Suppose a country using the United States' system of calculating official unemployment statistics has 100 million people, of whom 50 million are working age. Of these 50 million, 20 million have jobs. Of the remainder: 10 million are actively searching for jobs; 10 million would like jobs but are not searching; and 10 million do not want jobs at all. The official unemployment rate in percentage points is:

33% 10/(10+20) = 33%

Consider a bond that promises to pay $100 in one year. If the bond's price today is $75, the interest rate is __(%)

33.33% Explanation: The interest rate can be calculated using the formula: i = (Face Value - Price)/Price *100 Substituting the values: i = (100-75)/75 = 33.33%

Suppose that the economy is characterized by the following behavioral equations: C=170+0.90Yd ​ I = 200 G = 170 T=150 Consumption Spending C=

3680 : Now, use the consumption equation: C = 170 + 0.90Yd Substitute Yd = 3,900 : C = 170 + 0.90(3,900) C = 170 + 3,510 C = 3,680 So, consumption spending C is 3,680.

Suppose that the economy is characterized by the following behavioral equations: C=170+0.90Yd ​ I = 200 G = 170 T=150 Disposable Income, Yd=

3900 Now that we have Y = 4,050 , we can calculate disposable income: Yd = Y - T Yd = 4,050 - 150 Yd = 3,900 So, disposable income Yd is 3,900.

In 2021 the top 10% of U.S. wage earners received ____ of total pretax income.

45%

If the GDP deflator in the prior year 1.10, the inflation rate for year t is ____ %. (Round your response to one decimal place.)

5.5 {Inflation Rate} = [{GDP Deflator in Year t} - {GDP Deflator in Prior Year}] / [{GDP Deflator in Prior Year}] X 100 Given: GDP Deflator in Year t = 1.16 GDP Deflator in Prior Year = 1.10 Now, calculate the inflation rate: {Inflation Rate} = [{1.16 - 1.10}/{1.10}] X 100 = {0.06}/{1.10} X100 = 5.5% So, the inflation rate for year t is 5.5%.

From 1960 to 2019 China's growth rate has averaged ____ per year.

5.6%

Labor income's share in an advanced country is likely to be about

70%

Suppose you are provided with the following data for your country for a particular month: 200 million people are working, 20 million are not working but are looking for work, and 40 million are not working and have given up looking for work. Your country uses the same standards for calculating unemployment as the US. The official unemployment rate for that month is ____

9.1% This is the correct calculation of the unemployment rate. 20/(200+20) = 9.1%

In which year, a year where output growth is 2% or a year where output growth is −2%, will the unemployment rate rise more?

A year with output growth of -2% will see a higher rise in the unemployment rate because negative growth in output means firms will need fewer workers, which will cause unemployment to rise.

Changes in GDP in the long run are determined primarily by:

A. Fiscal Policy (Incorrect - While fiscal policy can have short-term effects, it's not the primary determinant of long-run GDP changes) B. Demand (Incorrect - Long-run GDP changes are primarily driven by supply-side factors, not demand) C. Monetary Policy (Incorrect - Monetary policy affects short-term fluctuations but not long-run growth) D. All of the above (Incorrect - These factors are not all primary determinants of long-run GDP changes) E. None of the above (Correct - Long-run GDP changes are primarily determined by factors not listed here, such as technological progress and productivity growth)

Okun's law stated that when output growth is higher than usual, the unemployment rate tends to fall. Explain why usual output growth is positive.

A. Output is dependent on the overall size of all factors of production (inputs), and an economy's inputs generally increase over time. B. Overall output is a function of population (labor) and capital in an economy.Choice 3 of C. Output growth is positively related to population as population grows, overall output can increase. (all the above)

Economists care about unemployment because it (Check all that apply.)

A. signifies the inefficient use of human resources C. Inflicts suffering on those who are unable to find work

What was the initial response of most central banks to the Covid-19 pandemic and subsequent lockdowns of most nation's economies?

Central banks reduced interest rates to near zero.

In chapter 3 we have assumed that the fiscal policy variables G and T are independent of the level of income. In the real world, however, this is not the case. Taxes typically depend on the level of income and so tend to be higher when income is higher. In this problem, we examine how this automatic response of taxes can help reduce the impact of changes in autonomous spending on output. Consider the following behavioral equations: C=c0​+c1​Yd​ T=t0+t1Y Yd=Y−T G and I are both constant. Assume that t1 is between 0 and 1. Note that c0​ is autonomous consumption, c1 is the propensity to consume, and t0​ is the part of taxes not dependent on income. What is the spending multiplier?

Correct Answer: 1/(1-c1+c1t1) The spending multiplier measures how much output (Y) changes for a given change in government spending (G). To derive the multiplier, we take the formula for equilibrium output: Since the multiplier measures the impact of a change in G on Y, we focus on the denominator: This shows that the larger the tax rate t_1 , the smaller the multiplier effect of government spending on output because taxes reduce the direct impact of spending on aggregate demand.

In chapter 3 we have assumed that the fiscal policy variables G and T are independent of the level of income. In the real world, however, this is not the case. Taxes typically depend on the level of income and so tend to be higher when income is higher. In this problem, we examine how this automatic response of taxes can help reduce the impact of changes in autonomous spending on output. Consider the following behavioral equations: C=c0​+c1​Yd​ T=t0+t1Y Yd=Y−T G and I are both constant. Assume that t1 is between 0 and 1. Note that c0​ is autonomous consumption, c1 is the propensity to consume, and t0​ is the part of taxes not dependent on income. Solve for equilibrium output.

Correct answer: [1/(1-c1+c1t1)]*(c0-c1t0+I+G) Step 1: Substitute the consumption function Substitute C = c_0 + c_1(Y - T) into the equilibrium condition: Y = (c_0 + c_1(Y - T)) + I + G Step 2: Substitute the tax function Substitute T = t_0 + t_1Y into the equation: Y = c_0 + c_1(Y - t_0 - t_1Y) + I + G Y = c_0 + c_1Y - c_1t_0 - c_1t_1Y + I + G Step 3: Combine like terms Group all terms involving Y on the left side: Y - c_1Y + c_1t_1Y = c_0 - c_1t_0 + I + G Factor out Y on the left side: Y(1 - c_1 + c_1t_1) = c_0 - c_1t_0 + I + G Step 4: Solve for equilibrium output Y Now, isolate Y : Y = {c_0 - c_1t_0 + I + G}/{1 - c_1 + c_1t_1}

Suppose that with the advent of ATMs, a person withdraws money once every two days. Further, suppose this person spends $100 per day. Compute this person's money holdings for days 1 through 4 (in the morning, before she spends any of the money she withdraws). For day 1, money holdings are $ For day 2, money holdings are $ For day 3, money holdings are $ For day 4, money holdings are $

Day 1: Correct: $200 -Explanation: On day 1, the person has just withdrawn $200, so they start with this full amount. Day 2: Correct: $100 Explanation: After spending $100 on day 1, the person has $100 left on the morning of day 2. Day 3: Correct: $200 Explanation: The person goes to the bank again on day 3 and withdraws another $200, so they begin day 3 with $200. Day 4: Correct: $100 Explanation: After spending $100 on day 3, the person starts day 4 with $100 remaining.

Which option best explains the difference between endogenous and exogenous variables?

Endogenous variables are explained within the model while exogenous variables are not; they are simply taken as given.

Suppose that the economy is characterized by the following behavioral equations: C=170+0.90Yd ​ I = 200 G = 170 T=150

Equilibrium GDP, Y= 4050 *Based on the equation for GDP in a closed economy (C+I +G) in the context of these values, equilibrium GDP calculates to 4,050.In a closed economy, the equilibrium GDP ( Y ) is determined by the equation: Y = C + I + G However, since C depends on disposable income Y_d , we first need to calculate Y_d . Step 1: Calculate Disposable Income (Y_d): Disposable income Y_d is: Y_d = Y - T So, disposable income is the GDP minus taxes. Step 2: Express C in Terms of Y : We substitute Y_d = Y - T into the consumption function: C = 170 + 0.90(Y - T) Given that T = 150 , this becomes: C = 170 + 0.90(Y - 150) C = 170 + 0.90Y - 135 C = 35 + 0.90Y Now, we substitute the expression for C back into the GDP equation: Y = (35 + 0.90Y) + 200 + 170 Y = 35 + 0.90Y + 200 + 170 Y = 405 + 0.90Y Step 3: Solve for Y : Now, isolate Y : Y - 0.90Y = 405 0.10Y = 405 Y = 4,050

An increase of one unit in government spending leads to an increase of one unit in equilibrium output.

False

If the Japanese CPI index is currently 108 and the U.S. CPI index is 104, the Japanese rate of inflation is higher than the U.S. rate of inflation.

False

The Phillips curve is a relation between the level of prices and the level of unemployment.

False

When the economy is functioning normally, the unemployment rate is zero.

False

When the unemployment rate is high, the participation rate is high.

False

Government spending, including transfers, was equal to 17.4 % of GDP in 2022.

False. Assuming the we are talking about US Federal Government Expenditures & Investment, GG, in the nomenclature of the textbook, the correct share is 23.45%

Suppose that the economy starts with a balanced budget: G=T. If the increase in G is equal to the increase in T , then the budget remains in balance. Let us now utilize the balanced budget multiplier. Suppose that G and T increase by one unit each. T/F : Balanced budget changes in G and T are macroeconomically neutral.

False: Balanced budget changes in government spending and taxes are not macroeconomically neutral. An increase in both G and T by the same amount increases output due to the balanced budget multiplier being 1, thus affecting overall economic activity.

The equilibrium condition for the goods market states that consumption equals output.

False: because the equilibrium condition is that aggregate demand (including consumption, investment, and government spending) equals output

The propensity to consume has to be positive, but otherwise it can take on any positive value.

False: because while the propensity to consume must be positive, it is limited to values between 0 and 1.

The Phillips curve is a relation between the inflation rate and the level of the unemployment rate. Using the Phillips curve, what will happen to the unemployment rate when the rate of inflation is 2%?

It will be about 5.5%. Explanation: Empirical data suggests that moderate inflation like 2% corresponds to an unemployment rate of around 5.5%.

The Phillips curve is often portrayed as a line with a negative slope. In the text, the slope is about −0.17. Is this a "better" economy than one that has a Phillips curve with a large slope, say −0.5 or a smaller slope, say -0.1?

No, the slope does not indicate whether one economy is better than another; it simply shows how much inflation rises or falls given a change in the unemployment rate.

Which of the following data types do economists generally use to compare GDP across countries?

Purchasing power parity (PPP) numbers

In the United States, which of these persons would be classified as unemployed?

Someone who does not have a job, has recently looked for work, and is collecting unemployment insurance.

This problem examines the implications of allowing investment to depend on output. Suppose the economy is characterized by the following behavioral equations: C= c0+c1Yd Yd = Y-T I = b0+b1Y Government spending and taxes are constant. Note that investment increases with output. c0 is autonomous consumption, c1 is the propensity to consume, and b0 is business confidence. Solve for Equilibrium Output

Step 1: Aggregate demand (AD) equation The aggregate demand equation becomes: Y = C + I + G Substitute C = c_0 + c_1(Y - T) and I = b_0 + b_1Y : Y = (c_0 + c_1(Y - T)) + (b_0 + b_1Y) + G Step 2: Simplify Now simplify this expression: Y = c_0 + c_1Y - c_1T + b_0 + b_1Y + G Group terms involving Y : Y(1 - c_1 - b_1) = c_0 - c_1T + b_0 + G Step 3: Solve for Y Finally, solve for Y (equilibrium output): Y = {c_0 - c_1T + b_0 + G}/{1 - c_1 - b_1} This is the equation for equilibrium output when investment depends on output.

Balanced budget versus automatic stabilizers It is often argued that a balanced budget amendment would actually be destabilizing. Consider the following behavioral equations: C = c0 + c1Yd T = t0 + t1Y Yd = Y-T G and I are both constant. Assume that t1 is between 0 and 1. c0 is autonomous consumption, c1​ is the propensity to consume, and t0​ is the part of taxes not dependent on income. Solve for equilibrium output

Step 1: Substitute the tax function and solve for output Starting again with: Y = C + I + G Substitute C = c_0 + c_1(Y - T) and T = t_0 + t_1Y : Y = c_0 + c_1(Y - t_0 - t_1Y) + I + G Simplifying: Y = c_0 + c_1Y - c_1t_0 - c_1t_1Y + I + G Rearrange the terms: Y(1 - c_1 + c_1t_1) = c_0 - c_1t_0 + I + G Step 2: Solve for equilibrium output Y c_0 - c_1t_0 + I + G/ (1 - c_1 + c_1t_1)

Consider a bond that promises to pay $100 in one year. If the bond's price today is $95, the interest rate is __(%)

The interest rate can be calculated using the formula: i = (Face Value - Price)/Price *100 Substituting the values: i = (100-95)/95 = 5.26%

Suppose that the economy starts with a balanced budget: G=T. If the increase in G is equal to the increase in T , then the budget remains in balance. Let us now utilize the balanced budget multiplier. Suppose that G and T increase by one unit each How does the specific value of the propensity to consume affect the size of the balanced budget multiplier?

The size of the propensity to consume has no impact on the balanced budget multiplier. The balanced budget multiplier remains constant at 1, regardless of the value of the marginal propensity to consume (MPC) c_1 . While c_1 affects the individual tax and spending multipliers, it does not change the balanced budget multiplier.

This problem examines the implications of allowing investment to depend on output. Suppose the economy is characterized by the following behavioral equations: C= c0+c1Yd Yd = Y-T I = b0+b1Y Government spending and taxes are constant. Note that investment increases with output. c0 is autonomous consumption, c1 is the propensity to consume, and b0 is business confidence. Value of Spending Multiplier?

The spending multiplier is derived from the formula for equilibrium output. It tells us how much output changes for a given change in government spending G . The formula for the spending multiplier is: \text{Multiplier} = {1}/{1 - c_1 - b_1} This multiplier is smaller than the standard multiplier because both consumption and investment depend on output. The larger c_1 and b_1 , the smaller the multiplier.

Which of these statements is the most accurate with respect to global warming?

There is overwhelming evidence that shows that global warming does exist

Balanced budget versus automatic stabilizers It is often argued that a balanced budget amendment would actually be destabilizing. Consider the following behavioral equations: C = c0 + c1Yd T = t0 + t1Y Yd = Y-T G and I are both constant. Assume that t1 is between 0 and 1. c0 is autonomous consumption, c1​ is the propensity to consume, and t0​ is the part of taxes not dependent on income. What is the equilibrium equation for taxes?

To find the equilibrium taxes, we use the formula for taxes: T = t_0 + t_1Y Substitute Y from the previous equation: T = t_0 + t_1 X [{c_0 - c_1t_0 + I + G}/{1 - c_1 + c_1t_1} This gives the equilibrium level of taxes, which depends on the marginal tax rate t_1 , consumption, investment, and government spending.

Fiscal policy describes the choice of government spending and taxes and is treated as exogenous in our goods market model.

True

In 2022 the value of US imports exceeded the value of US exports.

True

Okun's law shows that when output growth is lower than normal, the unemployment rate tends to rise.

True

Periods of negative GDP growth are called recessions.

True

The largest component of GDP is consumption.

True

The rate of unemployment tends to fall during expansions and rise during recessions.

True

Using official data, U.S. GDP was 47 times higher in 2022 than it was in 1960

True

Which of the following statements correctly describes the relationship between the interest rate and money demand?

When the interest rate increases, money demand decreases because interest-paying bonds become more attractive than holding money

The rate of inflation computed using the CPI is a better index of inflation than the rate of inflation computed using the GDP deflator.

Whether CPI or GDP deflator is better depends on the context and purpose of the measure.

Based on the notation presented in Chapter 2, which of the following expressions represents real GDP?

Yt

During the mid 1980s, we observed a significant reduction in oil prices. In the United States, we would expect that this reduction in oil prices would cause:

a larger reduction in the CPI compared to the GDP deflator

Which of the following tends to occur when the unemployment rate increases?

a reduction in the labor force participation rate

If the price of the bond increases, the rate of interest ____.

always decreases

This problem examines the implications of allowing investment to depend on output. Suppose the economy is characterized by the following behavioral equations: C= c0+c1Yd Yd = Y-T I = b0+b1Y Government spending and taxes are constant. Note that investment increases with output. c0 is autonomous consumption, c1 is the propensity to consume, and b0 is business confidence. For the multiplier to be positive, what condition must (c1​+b1​) satisfy?

c1 + b1 < 1

For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macroeconomically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Using the following formula: Y= ​(c0​+I+G−c1​T)​ / (1 - c1) where c0=autonomous consumption and c1= the propensity to consume. By how much does Y change when G increases by one?

change in Y = 1 - c1: because increasing G by one unit leads to an increase in output by a factor of 1 - c1, accounting for the consumption multiplier effect.

For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macroeconomically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Using the following formula: Y= ​(c0​+I+G−c1​T)​ / (1 - c1) where c0=autonomous consumption and c1= the propensity to consume. By how much does Y change when T increases by one?

change in Y = c1 / (1-c1) : because the change in output due to an increase in taxes is determined by the marginal propensity to consume and the multiplier.

Overall, inequality across countries has ____ over the past 40 years.

decreased

Politicians are very shortsighted and prefer to run deficits rather than increase taxes. This is known as

deficit bias

Changes in GDP in the short run are caused primarily by:

demand factors

Suppose nominal GDP increased in a given year. Based on this information, we know with certainty that:

either real output or the price level (GDP deflator) have increased

Prices for which of the following are included in the GDP deflator, but not included in the Consumer Price Index?

firms' purchases of new equipment

income is a ___ variable, and financial wealth is a ___ variable.

flow; stock

The prices for which of the following goods are included in both the GDP deflator and the consumer price index?

goods bought by households.

Since 1960 inequality in the United States has ____.

increased

The Phillips curve describes the relationship between

inflation and unemployment

Which of the following statements about capital income is NOT correct?

it refers to a firm's revenue

A firm's value added in any period equals:

its revenue minus its cost of intermediate goods in that period.

When using the income approach to measure GDP, the largest share of GDP generally consists of:

labor income

An exploration of the factors underlying an economy's capital stock and its level of technology indicates that the relevant time frame is the _ (1) run.

long run The capital stock and technology factors are generally considered in the long run.

The economy responds _____ to changes in autonomous spending when t1 is 0 than when t1​ is positive.

more

Okun's law shows the relationship between

output growth and unemployment.

The term investment , as used by economists, refers to the ___.

purchase of new plants and equipment by firms and the purchase of new houses by households.

Changes in GDP in the medium run are determined primarily by:

supply factors

Which of the following prices will be used when calculating the rate of growth of real US GDP between the year's 2022 and 2023 using the chain method?

the average of prices in 2022 and 2023

During the late 1990s, Japan experienced reductions in the GDP deflator. Given this information, we know with certainty that:

the overall price level in Japan decreased during these periods

Hedonic pricing is

the process of adjusting the price of a good for changes in its quality

The GDP deflator provides a measure of which of the following?

the ratio of nominal GDP to real GDP.

The labor force in the United States is defined as:

the sum of individuals who are employed and those who are officially unemployed.