Chapter 8,9,10

If disposable income is $3,000 and saving is $1,200, how much is consumption?

$1,800

In the nation of Economia, the economy is overheating and there is danger of inflation. The chief economist estimates that current income is $50 billion, while the optimal level is $40 billion. The multiplier is 4. If government wants to close the inflationary gap, it should reduce government spending by:

$2.5 billion

Assume that the marginal propensity to consume is 0.75. John's Clean Clones builds a factory that costs $1 billion. How much does the macroeconomic equilibrium increase?

$4 billion

During the millennium scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?

$4,000

If $1,000 of additional spending occurs (from investment, say) and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.

$5,000

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

$900

If the marginal propensity to consume is 0.65, the spending multiplier is:

2.86

About how large was the unemployment rate during the Great Depression?

25%

Which of the following may be an explanation for the shift in aggregate demand from A to B?

Interest rates fall and boost investment.

The Potbelly Pothole Company is undertaking some investment in its plant. Suppose interest rates fall and new technologies increase the return on its investment. What is likely to happen?

The company's demand for investment will rise.

Which of the following might be a cause of the change in short-run aggregate supply? (line moving to the left)

Unions successfully negotiate higher wages.

If the marginal propensity to save is 0.25 and income increases by $7,540, what is the increase in consumption? a. $5,655 b. $1,885 c. $10,053 d. $30,160

a

______ occurs when aggregate demand expands so much that equilibrium output exceeds full employment output a. demand-pull inflation b. demand-push inflation c. cost-push inflation d. cost-pull inflation

a

a stronger dollar will shift the US aggregate demand curve to the ____ and _____ output demanded a. left; decrease b. left; increase c. right; increase d. right; decrease

a

all of the following are considered expansionary fiscal policies EXCEPT: a. a reduction in unemployment compensation b. a decrease in personal taxes c. an increase in government spending d. an increase in transfer payments

a

demand-pull inflation scenarios took place in the: a. 1960s for the US and from 1985 to 1995 for japan b. 1930s for the US and from 1985 to 1995 for japan c. 1960s for the US and in the 1930s for japan d. 1930s for both the US and japan

a

if government spending drops and taxes rise: a. both will lower equilibrium income, but the effects of government spending will be larger. b. both will lower equilibrium income, but the effects of taxes will be larger. c. both will raise equilibrium income, but the effects of government spending will be larger. both will raise equilibrium income, but the effects of taxes will be larger

a

if the intersection of the short-run aggregate supply and the aggregate demand curves also intersects the long-run aggregate supply curve, then the economy is? a. at full employment b. operating at more than full employment c. in a recession d. operating at less than full employment

a

if the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will: a. rise by $2 billion b. not change c. fall by $2 billion d. rise by $5 billion

a

investment tax credits and more rapid depreciation schedules are intended to _________ productivity, shifting the _________ curve to the ________. a. increase; long-run aggregate supply; right b. increase; long-run aggregate supply; left c. increase; aggregate demand; left d. decrease; long-run aggregate supply; left

a

one argument against using taxation to pay off the public debt is that it will redistribute wealth from: a. poorer people who do not own bonds to richer bondholders b. poorer bondholders to richer people who do not own bonds c. richer bondholders to poorer people who do not own bonds d. richer bondholders to richer people who do not own bonds

a

reducing tax rates can ________ aggregate demand and ________ aggregate supply. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

a

the $787 billion stimulus package passed in the US in 2009 focused more on spending than on taxes partly because: a. increased spending leads to a larger increase in gdp than the same reduction in taxes b. increased spending leads to a smaller increase in gdp than the same reduction in taxes c. the government tax multiplier is more than the government spending multiplier d. the government revenue multiplier is about the same as the government tax multiplier

a

the crowding-out effect: a. replaces some private investment with government spending b. increases the value of the spending multiplier c. is a bigger problem during recessions d. improves the efficacy of discretionary fiscal policy

a

the paradox of thrift suggests that when households intent to save more, they will ______ consumption, which will ultimately lead to _______ actual aggregate saving a. reduce; lower b. reduce; higher c. increase; lower d. increase; higher

a

the progressive income tax and transfer payments are the two main: a. automatic stabilizers b. monetary policy tools c. long-run aggregate supply management tools d. tools for balancing the budget

a

what type of government spending would be most effective in mitigating the crowding-out effect? a. education subsidies b. subsidies to private airports c. military spending d. increased salaries for the presidential staff

a

when taxes are decreased, disposable income _____ and consumption spending ______ multiplied by the change in disposable income? a. rises; rises by the marginal propensity to consume b. falls; falls by the marginal propensity to consume c. rises; falls by the marginal propensity to consume d. falls; rises by the marginal propensity to consume

a

which of the following partly explains why the aggregate demand curve is negatively sloped? a. when the price of cars manufactured in the US increases, people buy more cars manufactured abroad b. when the price of cars manufactured abroad increases, people buy fewer cars manufactured in US. c. when the interest rate increases, people borrow more money d. when the interest rate decreases, people borrow less money

a

What would cause inflation to rise and employment to increase?

a shift of the AD curve to the right

What would cause the price level to decrease and employment to increase?

a shift to the right of the SRAS curve

If the marginal propensity to consume (MPC) rises, the multiplier:

also rises.

_______ has(have) an impact on both aggregate demand and aggregate supply. a. encouragement of new technologies b. tax rate reductions c. investment in human capital d. increasing transfer payments

b

a rising aggregate price level _______ an economy's interest rates and therefore ________ output demanded. a. increases; increases b. increases; reduces c. reduces; increases d. reduces; reduces

b

according to the simple keynesian model, which of the following statements is not correct? a. MPS+MPS=1 b. APC+MPS=1 c. APC+APS=1 d. Y=C+S

b

federal spending that is authorized by permanent laws and does not go through the annual appropriation process called _______ spending. a. discretionary b. mandatory c. long-term d. infrastructure

b

if both consumers and businesses are pessimistic about the future of the economy? a. there is a movement up along the aggregate demand curve b. the aggregate demand curve shifts to the left c. there is a movement down along the aggregate demand curve d. the aggregate demand curve shifts to the right

b

in recent years, countries such as china have been ______ US debt as a way to keep their currencies from _____ against the US dollar. a. buying; falling b. buying; rising c. selling; falling d. selling; rising

b

suppose consumers spend more than usual. in the short run, prices will _______; in the long run, price will _______ from their starting point. a. increase; remain unchanged b. increase; increase c. remain unchanged; decrease d. remain unchanged; increase

b

suppose policymakers wish to use fiscal policy to fight inflation. which statement is MOST accurate? a. using fiscal policy, the government can have the best of both worlds in the form of low inflation and economic growth b. essentially, the way to lower the inflation rate is to decrease aggregate demand and cause a recession c. they should not use fiscal policy because in the long run the economy will always go back to its equilibrium d. policymakers should use an expansionary policy because jobs are more important than inflation

b

the average propensity to consume is? a. always stable b. equal to consumption divided by income. c. equal to income divided by consumption d. the increase in consumption derived from an increase in income

b

the idea that new spending creates more new spending is known as? a. the crowding-out effect b. the multiplier effect c. the wealth effect d. the interest rate effect

b

the marginal propensity to consume? a. increases when income increases b. is the change in consumption associated with a change in income c. is equal to consumption divided by income d. decreases when income increases

b

the more time a free market economy has to adjust to price changes, the? a. greater the rate of inflation b. closer gdp gets to the natural rate of output c. closer the economy gets to the horizontal portion of the aggregate demand curve d. more volatility is seen in the business cycle

b

the proportion of additional income that consumers spend is known as the? a. marginal propensity to save b. marginal propensity to consume c. average propensity to save d. average propensity to consume

b

the reason business investment is sensitive to interest rates is that? a. interest rates are a lagging indicator, so they signal to firms the state of the economy b. most funds used for investment are borrowed, so firms incur an interest charge c. interest rates indicate how aggressive government policy is about fighting recessions d. firms charge interest on any investment they make

b

the short-run aggregate supply curve? a. is vertical because the economy is at full capacity b. is upward sloping because some costs are slow to rise as output expands c. is horizontal because input prices do not rise as output rises d. cannot be generalized because each economy is unique

b

what happens if business expectations improve? a. aggregate supply shifts left b. aggregate supply shifts right c. aggregate demand shifts left d. aggregate demand shifts right

b

when the economy is in a recession, welfare and unemployment compensation payments __________ and tax revenues __________. a. rise; rise b. rise; decline c. decline; rise d. decline; decline

b

which of the following event cases a decrease in aggregate demand? a. consumer confidence improves b. taxes increase c. interest rates fall d. government spending increases

b

which three US presidents implemented well-known tax cuts designed to stimulate aggregate demand? a. bill clinton, ronald reagan, and george g. w. bush b. john f. kennedy, roald reagan, and george w. bush c. john f. kennedy, ronald reagan, and bill clinton d. bill clinton, ronald reagan, and george w. bush

b

According to Keynes, as income grows:

both consumption spending and saving grow.

If government spending drops and taxes rise:

both will lower equilibrium income, but the effects of government spending will be larger.

Investment is defined as spending by:

business that adds to the productive capacity of the economy.

In the simple keynesian model the economy is in equilibrium when: a. Y=C+I and S<I b. Y=C+I and S>I c. Y=C+I and S=I d. Y=C and S=0

c

The spending reduction necessary to bring an overheated economy back to full employment is called the: a. recessionary gap b. gdp gap c. inflationary gap d. gap analysis

c

_______ occurs when a negative supply shock hits the economy, shifting the short-run aggregate supply curve leftward a. demand-pull inflation b. demand-push inflation c. cost-push inflation d. cost-pull inflation

c

according to john maynard keynes, what determines employment and income? a. aggregate supply b. government spending alone c. aggregate expenditures d. wages, prices, and interest rates

c

assume that the MPC is 0.75. full employment is considered to be at a gdp level of $500 billion. the gdp is $600 billion. what should the governemtn do to achieve full employment? a. increase spending by $25 billion b. increase spending by $10 billion c. reduce spending by $25 billion d. reduce spending by $100 billion

c

fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is: a. aggregate shifts policy b. contractionary policy c. supply-side fiscal policy d. consumption policy

c

if oil prices decrease, the short-run aggregate supply curve shifts _______ and output supplied will be ____. a. left; increases b. left; reduced c. right; increased d. right; reduced

c

if the marginal propensity to consume is 0.9, by how much will $100 of government spending increase gdp? a. $90 b. $100 c. $1,000 d. $900

c

in an economy with three sectors (household, business, and government), government spending is $5 billion, taxes are $4 billion, and investment is $4 billion. if the economy is in equilibrium, then saving is? a. $1 billion b. $4 billion c. $5 billion d. $9 billion

c

in the history of the US, public debt as a percentage of gdp: a. is fixed by law b. tends to decrease during times of war c. varies widely over time d. tends to be zero percent

c

in the simple keynesian model with no government and foreign sectors, assume that full employment occurs at an output of $10,000. with a marginal propensity to consume of 0.5 and equilibrium output at $9,600, by how much will investment spending have to increase to move the economy to full employment? a. $100 b. $400 c. $200 d. $50

c

investment levels depend mainly on? a. high levels of consumption in the economy b. strong government demand c. the rate of return on capital d. tax incentives

c

other things equal, when the US aggregate price level falls, US exports ____ and US imports ____? a. fall;rise b. fall;fall c. rise;fall d. rise;rise

c

public debt held by foreigners is known as ________ debt. a. out-of-country b. internally held c. externally held d. improper

c

suppose full employment real gdp is $12 trillion, current gdp is $11 trillion, and the marginal propensity to consume is 0.8. the recessionary gap is? a. $1 trillion b. $0.8 trillion c. $0.2 trillion d. $0.5 trillion

c

the collapse of home values that began in 2008 led to ______ in americans saving rates, shifting aggregate demand to the _____ a. a decrease; left b. a decrease; right c. an increase; left d. an increase; right

c

too much spending will cause? a. cost-push inflation b. aggregate supply to increase c. demand-pull inflation d. aggregate supply to decrease

c

when the consumption schedule lies below the 45-degree reference line, savings: a. must be negative b. is zero c. is postive d. is negatively sloped

c

which of the following events will shift the aggregate demand curve to the right? a. a catastrophic hurricane hitting the northeastern us b. an increase in household debt c. decreased taxes d. decrease in military spending

c

which of the following fiscal policies will increase aggregate supply? a. increasing tax rates on consumers b. increasing tax rates on businesses c. reducing the depreciation period for business equipment from five years to three years d. instituting more regulations on businesses

c

which of the following measures is an example of an expansionary fiscal policy? a. decreasing government spending b. reducing welfare payments c. increasing unemployment compensation d. raising taxes

c

which of the following will not cause an increase in the consumption schedule? a. james's family wealth increases b. the price of gas is expected to increase in two days c. james's family debt increases d. james's personal taxes decrease

c

which of the following will shift the aggregate supply curve to the right? a. the development of a cartel in the production of soybeans b. an increase in corporate taxes c. increased investment in human capital d. an increase in the price of garbage collection

c

The more time a free market economy has to adjust to price changes, the:

closer GDP gets to the natural rate of output.

In the Keynesian framework, the way to fight a recession is to:

cut taxes and/or increase government spending.

_______ in wealth and _______ in government spending, along with a(n) _______ of the dollar, will shift the US aggregate demand curve to the left. a. decreases; increases; appreciation b. increases; decreases; appreciation c. decreases; decreases; depreciation d. decreases; decreases; appreciation

d

_______ is known for showing that reducing tax rates could increase tax revenues. a. robert lucas b. irving fisher c. john galbraith d. arthur laffer

d

a shift of the aggregate ______ curve to the ______ would cause inflation to rise and employment to increase. a. supply; left b. demand; left c. supply; right d. demand; right

d

according to keynes, as income grows? a. consumption spending alone grows b. saving alone grows c. saving falls d. both consumption spending and saving grow

d

as a result of the crowding-out effect, interest rates ______ and private sector borrowing _______. a. increase; increases b. decrease; increases c. decrease; decreases d. increase; decreases

d

assume that the economy is at equilibrium at $10 trillion, with a marginal propensity to consume of 0.75. if exports rise by $0.5 trillion and imports increase by $0.7 trillion, equilibrium income will? a. not change b. fall by $0.2 trillion c. rise by $2 trillion d. fall by $0.8 trillion

d

if income grows from $3,000 per month to $3,500 per month and savings rise from $200 per month to $400 per month, what is the marginal propensity to save? a. 1.25 b. 0.8 c.2.5 d. 0.4

d

if the marginal propensity to consume is 0.8, by how much will total income increase after an initial $200 is spent? a. $40 b. $160 c. $200 d. $1,000

d

in the keynesian aggregate expenditure model, which variable is assumed to be fixed? a. gdp b. consumption c. unemployment d. the price level

d

suppose the treasury sells $10 billion worth of securities to the social security administration and $15 billion to the general public. this sale added ______ billion to gross public debt and ______ billion to the debt held by the public. a. $15, $15 b. $10, $15 c. $15, $25 d. $25, $15

d

the 45-degree line in the keynesian model represents? a. AE=C b. AE=G c. AE=I d. AE=Y

d

when the economy is below full employment, expansionary fiscal policy: a. shifts the aggregate demand curve to the left b. shifts the short-run aggregate supply curve to the right c. causes a movement down along the aggregate demand curve d. shifts the aggregate demand curve to the right

d

which two important leakages helped reduce the real life spending multiplier during the stimulus that was implemented during 2009? a. exports and saving b. imports and saving c. exports and taxes d. imports and taxes

d

If the interest rate increases, investment will:

decrease

A luxury car manufacturer is contemplating investing in its assembly plants. It learns that the probability of a recession in the next few years has increased dramatically because of adverse international events. Its investment demand will:

decrease because lower investment returns are expected.

If the stock market collapses, consumption will:

decrease because people feel less wealthy.

Decreases in government spending ____ equilibrium income, and increases in taxes ____ equilibrium income.

decrease; decrease

A(n) __________ in government spending, a __________ domestic currency, and ________ interest rates will shift a country's aggregate demand to the left.

decrease; stronger; higher

The situation when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises is known as ________ inflation.

demand-pull

A shift of the aggregate _______ curve to the ________ would cause inflation to rise and employment to increase.

demand; right

If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will:

fall by $125 billion.

A product demand curve and the aggregate demand curve are negatively sloped for the same reasons.

false

A tax decrease has more of an impact on income, employment, and output than does an equivalent increase in government spending.

false

AE is equal to C + I + G - (X + M).

false

An increase in interest rates will lead to an increase in aggregate demand.

false

Classical economists expected government to promote full employment, stabilize prices, and stimulate economic growth.

false

Classical economists thought that prices, wage rates, and interest rates were slow to change.

false

Consumption expenditures play a minor role in the U.S. economy.

false

Expectations of large increases in income lead to lower levels of consumption.

false

From year to year, consumption fluctuates more than gross private domestic investment.

false

The oil shock of 1973 led to demand-pull inflation.

false

Which of the following factors is NOT a determinant of aggregate supply?

income

Disposable income equals:

income minus taxes.

An increase in net export spending will result in a(n):

increase in aggregate demand.

Assume that the multiplier is 10. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. According to Keynesian macroeconomics, what should the government do to achieve full employment?

increase spending by $10 billion

Assume that the MPC is 0.8. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. The government is committed to a balanced budget. To achieve full employment, the government should _______ taxes by ____________ and increase government spending by ________.

increase; $100 billion; $100 billion

An increase in the incomes of the countries that purchase U.S.-made products will cause a(n) _________ in the ____________ U.S.-made products.

increase; aggregate demand for

A(n) _______ in oil prices and a(n) _______ in taxes will shift short-run aggregate supply to the left.

increase; increase

A falling aggregate price level ____ demand for a country's exports and therefore _____ output demanded.

increases; increases

Exports are ______ of spending into (from) the economy, and imports are ______ of spending into (from) the economy.

injections; withdrawals

A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded.

left; decrease

All of the following are determinants of aggregate supply EXCEPT:

net exports

A shift to the ________ of the __________ curve would cause the price level to decrease and employment to decrease.

right; short-run aggregate supply

If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will:

rise by $2 billion

If a pill is discovered that allows people to work twice as fast as they would ordinarily work, then the aggregate supply curve will:

shift to the right

Economic growth is shown as a:

shift to the right in the long-run aggregate supply curve.

A decrease in regulation would cause aggregate:

supply to shift to the right.

The long-run aggregate supply curve is vertical because:

the economy will gravitate to the position of full employment when all variables are flexible.

Classical economists claim that ______ is the primary determinant of saving, and Keynes claimed that ______ is the primary determinant of saving.

the interest rate; income

A change in _____ will cause a change in the quantity demanded of real GDP.

the price level

Aggregate supply increases when:

there is a decrease in firms' market power.

A criticism of Keynesian policies is that they are the cause for significant growth in the size of the government.

true

A decrease in foreign income will cause aggregate demand to shift to the left.

true

A horizontal investment schedule assumes that investment spending is not related to current income.

true

A rise in real GDP is associated with increased employment.

true

A vertical aggregate supply curve represents full employment in the long run.

true

Added spending causing income to grow by a larger amount is called the multiplier effect.

true

Aggregate expenditures are equal to consumption plus business investment in the simple private sector model.

true

An increase in government spending will increase aggregate demand.

true

An increase in interest rates will cause the aggregate demand curve to shift to the left.

true

Changes in technology are a determinant of investment.

true

If income is $22,150 and taxes are $11,000, then disposable income is $11,150.

true

If you believe that your income will soon rise, you will be more inclined to purchase something you want and go into debt.

true

The short-run aggregate supply curve is positively sloped, since many input costs are slow to change in the short run.

true

When the monopoly power of firms increases, short-run aggregate supply shifts to the left.

true

According to Keynesian analysis, if households intend to save more, they will:

ultimately cause job losses.

Approximately what share of U.S. GDP is consumption?

70%