ECO372T_Week3_Practice_&_Apply_Assignment
Generally, changes to social institutions that facilitate production shift aggregate ___ to the right
supply
If the aggregate demand shifts in the short run, aggregate ______________________ will eventually shift in the long run to bring the economy back to full employment.
supply
Suppose that the government increases paperwork and raises fees for starting a business. This will cause aggregate:
supply to decrease, shifting to the left.
A decrease in labor costs will cause aggregate _____. supply to increase demand to increase demand to decrease supply to decrease
supply to increase
What gives the U.S. government the right to collect taxes?
the U.S. Constitution
The largest proportion of the U.S. public debt is held by
the U.S. public (individuals, businesses, financial institutions, and government).
As nominal wages and the cost of other resources rise during an expansion:
the aggregate supply curve shifts to the left, real output falls and the price level rises further.
When the price level decreases, _____. the demand for money falls and the interest rate falls there is a decrease in consumer spending that is sensitive to changes in interest rates holders of financial assets with fixed money values have less purchasing power holders of financial assets with fixed money values decrease their spending
the demand for money falls and the interest rate falls
If pries in the U.S. rise and prices in other countries remain stable, without corresponding adjustments exchange rates, the real value of savings falls, U.S. consumers will buy more foreign goods and services, and imports will rise, foreigners will buy fewer goods and services produced in the U.S., and exports will fall. The quantity of net exports will fall, reducing the quantity of real GDP demanded. This describes:
the foreign purchases effect.
We use demand
to talk about the price and quantity of a single good or service produced in a specific market.
Households and firms receive goods and services for the ________ ____________ they pay.
net taxes
A decrease in aggregate demand may lead to a
recession.
A federal budget deficit exists when federal government
spending exceeds tax revenues in a given year.
An increase in personal income taxes will cause a(n) _____. decrease (or shift left) in aggregate demand decrease in the quantity of real output demanded (or movement up along AD) increase (or shift right) in aggregate demand increase in the quantity of real output demanded (or movement down along AD)
decrease (or shift left) in aggregate demand
If the price level increases form 150 to 250, the real output demanded will: increase by $800 billion increase by $200 billion decrease by $600 billion decrease by $200 billion
decrease by $200 billion
A decrease in government spending will cause a(n) _____. increase in aggregate demand decrease in the quantity of real output demanded decrease in aggregate demand increase in the quantity of real output demanded
decrease in aggregate demand
An increase in aggregate demand is most likely to be caused by a(n) _____. decrease in expected returns on investment decrease in the tax rates on household income increase in real interest rates decrease in government spending
decrease in the tax rates on household income
Many state legislatures cut spending to avoid budge deficits. This causes aggregate demand to _____________, shifting to the _______.
decrease; left
The exchange rate between the US dollar and the euro changes such that one US dollar trades for more euros than before. This causes aggregate demand for euros in the US to ________, shifting to the ________
decrease; left.
If consumers _________________ (increase / decrease) the amount of goods and services they purchase, given constant prices, then aggregate _________________ for real GDP decreases.
decreases; demand
When foreign income rises, aggregate ___ shifts to the right.
demand
Inflation can be caused by an increase in aggregate __________ or by a decrease in aggregate ______________.
demand / supply
Inflation that results in an increase in aggregate demand is called:
demand-pull inflation.
The two main sources of inflation are ________________-pull and _____________-push which both result in a higher price level.
demand; cost
The aggregate supply curve slopes upward in the short run because input prices are_____ and take time to adjust.
fixed
In the long run, when input prices are _______________, the economy will produce the full-employment level of output.
flexible
The relationship between real GDP and the price level when all input prices are _______________.
flexible
The short-run version of aggregate supply assumes that product prices are: fixed while resource prices are flexible both input and product prices are flexible flexible while resource prices are fixed both input and product prices are fixed
flexible while resource prices are fixed
A ____________ is the change to the stock of that something over a period of time.
flow
In order to keep people from giving away their money before they die, the federal government created the
gift tax.
A budget surplus means that
government revenues are greater than expenditures in a given year.
Public finance is the subdiscipline of economics that studies the various ways in which
governments raise and expend money.
A progressive tax rate is one in which the average tax rate increases as _____________________.
income increases (or vice versa) Federal Income Taxes: Progressive Average Tax Rate = (Tax Amount / Income) x 100
Recessions and expansions can cause inflation, or a general _______________ (increase/decrease) in the level of prices.
increase
Funding for most public universities comes from _________ ________ _____.
state sales tax
A _____________ denotes the total level or amount of something at a particular point in time.
stock
In the diagram, the economy's relevant aggregate demand and long-run aggregate supply curves, respectively, are lines ______________. 2 and 3 4 and 2 4 and 1 2 and 4
4 and 1
What is the biggest category of federal discretionary spending?
Defense
Which one of the following is not an excise tax of the federal government?
General sales tax
Not all states have individual income taxes. In this case, these state governments supplement their income with __________________.
Federal Grants State-run lotteries
A Proportional Tax is __________________________.
One where the average tax rate does not change with either increases or decreases in income.
What are two (2) reasons Medicare costs are rising?
People are living longer, and medical technology is more expensive.
Chad's family lives below the poverty line. Both of his parents work at low-income jobs that do not provide health insurance. Which entitlement program offers healthcare for Chad?
Medicaid
Income Tax
A tax on the amount of taxable income earned by an individual or firm.
What would cause consumption to fall?
-repayments of loans -deteriorating expectations
Circular Flow Model - Government Video What is the key feature of transfer payments?
They are given without any goods or services being produced.
Negative shocks or changes in aggregate demand include:
a decrease in consumer confidence and an increase in taxes.
A budget surplus occurs when ___________________.
a government receives more revenue than it spends in any given fiscal year.
Aggregate demand is a
downward slope.
The aggregate demand curve shows the _____.
inverse relationship between the price level and the quantity of real GDP purchased
The economy's long-run aggregate supply curve _____. is horizontal is vertical slopes downward and to the right slopes upward and to the right
is vertical
An increase in productivity will shift the aggregate supply curve to the _____________.
left
Aggregate demand can be interpreted as the overall demand for real GDP, Y, from four different sources
consumption; gross investment; net exports; government purchases
Social institutions include
property rights courts police protection government
Many states in the U.S. acquire significant amounts of funds from the following, except
property tax
Sales Tax
A tax based on the price paid for good or service.
Who pays unemployment taxes?
Employers
Improved productivity means that we can produce more ___ with fewer ___
outputs; inputs
Aggregate demand is: ( ) Vertical ( ) Upward sloping ( ) Downward sloping ( ) Horizontal
(X) Downward sloping
Most economist believe that property taxes ( ) should be eliminated ( ) are regressive ( ) should become an important source of revenue for the federal government ( ) are progressive
(X) are regressive
When we draw an aggregate demand curve, we're assuming that the only thing that is changing as we move up and down the curve is: ( ) the amount of government purchases. ( ) the overall price level. ( ) taxes. ( ) the money supply.
(X) the overall price level.
Which of the following is the largest expenditure item of local governments? - Welfare - Public Safety - Education - Highways
- Education
Which one of the following is not an excise tax of the federal government? - Gasoline tax - Tobacco tax - General sales tax - Alcohol beverage tax
- General sales tax
Which is the most important source of tax revenue for local governments? - Personal income taxes - Property taxes - Corporate income taxes - Sales and excise taxes
- Property taxes
Which of the following is not a government activity that is involved in public finance? - Running government-owned enterprises such as hospitals, utilities, and lotteries - Regulating the activities of firms in the financial sector of the economy - Providing public goods and services such as national defense and education - Redistributing income through various taxes and income-transfer payments
- Regulating the activities of firms in the financial sector of the economy
Which of the following statements about payroll taxes is false? - Both employers and employees pay these taxes - They are lump-sum taxes not based on wages/salaries - They include Medicare taxes - They provide funds for Social Security
- They are lump-sum taxes not based on wages/salaries
Most economist prefer measuring the deficit relative to GDP because____________________________.
- it allows a comparison across time. - it allows a comparison across countries.
The Social Security tax is regressive because - the Social Security tax rate applied does not rise with the salary level - each individual must pay a set percentage of his or her income in Social Security taxes - no Social Security tax is collected for incomes in excess of a "cap" income level - as income increases, the Social Security tax rate increases at a decreasing rate
- no Social Security tax is collected for incomes in excess of a "cap" income level
Many states in the U.S. acquire significant amounts of funds from the following, except - state-run lotteries - grants from the Federal government - personal income taxes - property taxes
- property taxes
Which of the following will cause consumption to rise?
-Lower personal taxes -improved consumer expectations -rising wealth
In choosing which type of tax to choose, the government takes into consideration many factors, such as:
1. the ease with which taxes can be collected 2. fairness
Why is the federal income tax a progressive tax?
A higher income pays a higher percentage in taxes.
Aggregate Demand (AD)
A schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and the price level, all else held constant.
Which of the following factors does not explain the inverse relationship between the price level and the total demand for output? A substitution effect A foreign-purchases effect An interest-rate effect A real-balances effect
A substitution effect
Excise Tax
A tax based on the number of units purchased, not on the price paid for a good or service. The government collects an excise tax of about 20 cents on every gallon of gasoline sold. It also collects an even higher excise tax on every pack of cigarettes and every cigar. Consumers pay the flat rate of those excise taxes based on the amount of each of the goods they purchase, not on the value of the purchase transaction.
Regressive Tax
A tax in which the average tax rate decreases as taxable income increases (and increases as taxable income decreases).
Progressive Tax
A tax in which the average tax rate increases as taxable income increases (and decreases as taxable income decreases).
Proportional Tax
A tax in which the average tax rate remains constant with either increases or decreases in taxable income.
Payroll Tax
A tax on the amount of taxable income earned by an individual or firm that is used to pay for Social Security and Medicare programs; also known as FICA tax.
If current output is Q1 and full-employment output is Q3, then in the long run the short aggregate supply schedule is _____. AS2 AD AS1 AS3
AS3
____________ demand describes the overall, or total demand for all final goods and services produced in an economy
Aggregate
____________________ demand relates the price level to real GDP
Aggregate
_____________________ can be interpreted as the overall demand for real GDP from Consumption, Gross Investment, Government Purchases, and Net Exports.
Aggregate demand
Which would most likely increase aggregate supply?
An increase in productivity
Which would most likely increase aggregate supply? A decrease in business subsidies A decrease in personal income taxes An increase in the prices of imported products An increase in productivity
An increase in productivity
Which of the following effects best explains the downward slope of the aggregate demand curve? An expectations effect A substitution effect A multiplier effect An interest-rate effect
An interest-rate effect
Which of the following is a major difference between a state's operating budget and its capital budget?
An operating budget must be balanced; a capital budget does not have to balance.
What is the Average Tax Rate formula?
Average Tax Rate = Tax Amount / Income x 100
What do Social Security taxes pay for?
Benefits for older citizens.
What is a Budget Deficit?
Budget deficits are calculated on an annual basis and are equal to the difference between the government's revenue and its expenditures in any given fiscal year. This number is negative in a deficit indicating that the government spent more than it collected.
How is the public debt calculated? A. By subtracting the government's total liabilities from its total assets B. By cumulating the annual government purchases over time C. By subtracting current government spending from current government tax revenues D. By cumulating the annual difference between tax revenues and government spending over the years
By cumulating the annual difference between tax revenues and government spending over the years
How is the public debt (national debt) calculated?
By summing the annual difference between tax revenues and government spending over the years.
The aggregate demand curve or schedule shows the relationship between the total demand for output and the: A. Income level B. Interest rate C. Price level D. Real GDP
C. Price level
What is an example of discretionary spending?
Education
Which of the following is the largest expenditure item of local governments?
Education
Which of the following is the largest expenditure item of state governments?
Education
Inflation can be caused by: Expansion Decrease in money supply Recession
Expansion Increase in money supply
Most federal spending concentrates in four areas:
Expenditures: Pensions and Income Security Health National Defense Interest on the National Debt (the government spends more than it receives in revenue; forcing them to borrow to finance its deficits)
a. Point B is referred to as a trough Correct. b. The movement from point A to point E is called a business cycle Correct. c. Point D is referred to as a peak Correct. d. The movement from point B to point D is called an expansion Correct.
Explanation A business cycle is the short-term fluctuations experienced in the economy due to changes in levels of economic activity. It occurs from the economy moving between expansions and recessions. An expansion is a phase of the business cycle characterized by increasing real GDP, income, and employment. A peak is the point in the business cycle where real GDP reaches a maximum. The peak marks the end of an expansion. A recession is a decline in real output for at least two consecutive quarters. A trough is the lowest point of economic activity in the business cycle, where real GDP reaches a minimum; the trough marks the end of a recession. a. At point B, the economy is at its lowest point of economic activity and is therefore at a trough. b. From points A to E, the economy moves through short-term fluctuations as it moves from recession to expansion back to full-employment output. This is an example of the business cycle. c. Point D is the maximum point of economic activity during the business cycle and is referred to as the peak. d. From points B to D, the economy experiences increasing economic activity for a sustained period and shows the economy during an expansion.
_________________ U.S. incomes tend to increase U.S. imports and reduce net exports.
Higher
What is an example of a program for which federal and state governments share the cost?
Highway Construction
Describe the Circular Flow Model:
Illustrates how goods, services, resources and money flow back and forth in an economy. The GREEN arrow represents the flow of monetary payments. The RED arrow shows the flow of goods, services and resources. When you buy a product in a local store, your product becomes consumption for you and a paycheck to someone else. Decision making groups: Households, Firms, and the Government; these interact with the resource and product markets.
The government uses net taxes to make monetary payments or expenditures in the Resource and Product Markets.
In exchange, the resource market provides the government with resources and the product market provides the government with final goods and services. The government then combines them and provides households and firms with goods and services.
For each of the following scenarios, determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign-purchases effect. a. As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars. Foreign-purchases effect Interest-rate effect Real-balances effect b. When the price level decreases, restaurants become busier as more people purchase restaurant meals. Foreign-purchases effect Real-balances effect Interest-rate effect
Interest-rate effect; real-balances effect Explanation a. Interest-rate effect: When the price level rises, the demand for money increases, which causes interest rates to rise, resulting in a decrease in investment and consumption spending, thus reducing the aggregate quantity of real GDP demanded. If the cost of borrowing, or the interest rate, increases as a result of a price level increase and people buy fewer cars, it is an example of the interest-rate effect. b. Real-balances effect: When the price level falls, the real value of money people have rises and people are more willing or able to buy goods and services, thus increasing the aggregate quantity of real GDP demanded. Because people are consuming more restaurant meals as a direct result of the price level decreasing, it is an example of the real-balances effect.
What is the national debt?
It is the accumulation of deficits and surplus over time. Example: Digging a huge hole where the pile of dirt taken it is the deficit and the huge hole is the National Debt. When the government runs a budget surplus, it fills the hole a bit, making the hole smaller. The amount it fills in is the size of the budget surplus.
Local Government expenditures include:
Local Government Expenditures: Education Public Welfare Programs Health
The main sources of income for Local Governments are:
Local Government Revenues: Property Taxes Sales Taxes Excise Taxes Funds collected from these taxes are usually not enough to cover their expenses. Local governments usually get financial support from the federal and state governments.
In most communities, the main source of funding for local public schools probably comes from
Local Property Taxes
___ is defined as the total amount of output produced with a given level of inputs
Productivity
What are the three different kinds of taxes:
Progressive Proportional Regressive
Federal, State, and Local Revenues and Expenditures video: What type of tax is the largest source of revenue for local governments?
Property Taxes
Which of the following is not a significant source of revenue for the U.S. federal government?
Property taxes
Medicare taxes are: Progressive Regressive Proportional
Proportional
Medicare taxes are an example of: Proportional tax Progressive tax Regressive tax
Proportional tax
What is an example of state spending?
Public Safety
The aggregate demand and supply model can be used to describe changes in an economy's price level and ____________ _______ in the short and long run.
Real GDP
Which of the following is not a government activity that is involved in public finance?
Regulating the activities of firms in the financial sector of the economy.
Which of the following descriptions is most representative of the mix of revenues and expenditures of the federal government?
Revenue is predominantly from income taxes and payroll taxes. Expenditures include income security and interest on the national debt. Explanation The federal government's predominant revenue sources are income taxes (taxes paid on income from profits, interest, dividends, etc.) and payroll taxes (mainly taxes from employee income). The revenue is spent for different expenditures, which include income security and interest on the national debt. Both are payments resulting from government debt.
Which of the following descriptions is most representative of the mix of revenues and expenditures of a local government?
Revenue is predominantly from property taxes but may include sales taxes or income taxes. Expenditures include investments in education and public welfare. Explanation A local government's predominant revenue source is from property taxes (e.g., homeowners and businesses pay property taxes for owning real estate). The revenue is spent for different expenditures, which include investments in education (e.g., libraries and other venues) and public welfare (e.g., providing services to the homeless).
Representative of the mix of revenues and expenditures of a local government?
Revenue is predominantly from property taxes but may include sales taxes or income taxes. Expenditures include investments in education and public welfare. Explanation: A local government's predominant revenue source is from property taxes (e.g., homeowners and businesses pay property taxes for owning real estate). The revenue is spent for different expenditures, which include investments in education (e.g., libraries and other venues) and public welfare (e.g., providing services to the homeless).
The main sources of income for the federal government are:
Revenues: Individual Income Taxes Social Insurance & Retirement Receipts (aka payroll taxes) Corporation Income Taxes Excise Taxes
_______________________ institutions are the formal and informal "rules of the game" that society creates to provide structure to political economic, and social interactions.
Social
At the state government level, the expenditures:
State Government Expenditures: Education Public Welfare Programs Health Infrastructure
At the state government level, the main sources of income are:
State Government Revenues: Sales Taxes Excise Taxes State Individual Income Taxes State Corporation Income Taxes
Net taxes flow to the government from households and firms. See attached image. They also receive transfer payments and subsidies from the government.
Taxes and subsidies are payments from the government made to businesses that do not require an exchange of productive activity. So, net taxes, or the difference between transfer payments and subsidies, correctly represent the net flow of monetary payments reaching the government.
Quantity of Real GDP demanded
The aggregate quantity of output (real GDP) demanded at a given price level. Sometimes referred to simply as output. Real GDP Expenditures Real GDP (Y) = Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) Y = C + I + G + NX Net Exports (NX) Net Exports = Exports - Imports NX = X - M
Suppose there is an economy-wide decrease in business taxes. What can we expect to see in the business cycle model?
The business cycle enters an expansion.
Which of the following factors does NOT explain a movement along the AD curve? The interest-rate effect The expenditure multiplier effect The foreign purchases effect The real-balances effect
The expenditure multiplier effect
The government's power to tax is limited. Which of the following is illegal?
The government collects export taxes on U.S.-made items that are sent out of the country.
Mrs. Granger receives her monthly workers' compensation benefit check, which she uses to help pay her bills until she can return to work.
The government is making a payment. Which market is involved: not product or resource .We call this payment: transfer payment
Which of the following transactions best represents the government playing the role of provider of a good or service?
The state government pays for police to patrol the state and federal roadways. Explanation When the government provides police patrols, it provides a service to the public. In contrast, when governments buy goods like office furniture, the private sector provides goods to the government sector. Imposing taxes helps to finance goods and services provided by governments, but it is not considered a service. Social Security payments are a means of redistributing income, but they are not a government service either.
How do most states pay for their capital budget?
Through long-term borrowing or the sale of bonds.
National Defense is a service provided to both households and firms in exchange for their net taxes.
To provide national defense, the government needs resources, such as labor, and final goods such as military products.
A budget deficit occurs when ____________________.
a government receives less revenue than it spends in any given fiscal year.
For each of the following scenarios, determine the effect on aggregate supply. a. There is an unexpected decrease in oil prices. This causes: - a movement along the aggregate supply curve to the left, indicating a decrease in the quantity of real GDP supplied. - a movement along the aggregate supply curve to the right, indicating an increase in the quantity of real GDP supplied. - an increase in aggregate supply, shifting the aggregate supply curve to the right. - a decrease in aggregate supply, shifting the aggregate supply curve to the left. b. The government increases the amount that all producers are required to contribute to health insurance coverage. This causes: - an increase in aggregate supply, shifting the aggregate supply curve to the right. - a decrease in aggregate supply, shifting the aggregate supply curve to the left. - a movement along the aggregate supply curve to the left, indicating a decrease in the quantity of real GDP supplied. - a movement along the aggregate supply curve to the right, indicating an increase in the quantity of real GDP supplied.
a. - an increase in aggregate supply, shifting the aggregate supply curve to the right. b. - a decrease in aggregate supply, shifting the aggregate supply curve to the left. Explanation a. As oil prices decline, all producers will experience a decrease in the cost of production, as they will spend less on inputs using oil. When costs across the board decrease, it means producers can produce more goods and services at every price level. This will cause aggregate supply to increase. An increase in aggregate supply is shown as a shift in the aggregate supply curve to the right. b. As producers have to spend more to cover the cost of health insurance, all producers will experience an increase in the cost of production because they will spend more on labor inputs. When costs across the board increase, it means producers are able to produce fewer goods and services at every price level. This will cause aggregate supply to decrease. A decrease in aggregate supply is shown as a shift in the aggregate supply curve to the left.
Determine the effect on aggregate demand for each of the scenarios described below. a. All European countries experience an economic expansion, raising incomes in each of the European countries. This causes: - a movement along the aggregate demand curve to the left, indicating a decrease in the quantity of real GDP demanded. - an increase in aggregate demand, shifting the aggregate demand curve to the right. - a movement along the aggregate demand curve to the right, indicating an increase in the quantity of real GDP demanded. - a decrease in aggregate demand, shifting the aggregate demand curve to the left. b. The government decides to decrease the amount it spends on the military. This causes: - an increase in aggregate demand, shifting the aggregate demand curve to the right. - a movement along the aggregate demand curve to the right, indicating an increase in the quantity of real GDP demanded. - a movement along the aggregate demand curve to the left, indicating a decrease in the quantity of real GDP demanded. - a decrease in aggregate demand, shifting the aggregate demand curve to the left.
a. All European countries experience an economic expansion, raising incomes in each of the European countries. This causes: - an increase in aggregate demand, shifting the aggregate demand curve to the right. b. The government decides to decrease the amount it spends on the military. This causes: - a decrease in aggregate demand, shifting the aggregate demand curve to the left.
a. All European countries experience an economic expansion, raising incomes in each of the European countries. This causes: b. The government decides to decrease the amount it spends on the military. This causes:
a. An increase in aggregate demand, shifting the aggregate demand curve to the right. b. A decrease in aggregate demand, shifting the aggregate demand curve to the left. Explanation a. As foreign countries have higher incomes, those countries will increase spending for all goods and services, including goods and services from other countries. Therefore, they will buy more goods and services from other countries, which are exports for aggregate demand. This increase in spending will increase the amount of goods and services purchased at every price level, causing aggregate demand to increase. An increase in aggregate demand is shown as a shift in the aggregate demand curve to the right. b. When the government reduces total government spending, it reduces spending on goods and services at every price level, causing aggregate demand to decrease. A decrease in aggregate demand is shown as a shift in the aggregate demand curve to the left.
For each of the following scenarios, determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign-purchases effect. a. As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars. b. When the price level decreases, restaurants become busier as more people purchase restaurant meals.
a. As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars. ( ) Real-balances effect ( ) Foreign-purchases effect (X) Interest-rate effect b. When the price level decreases, restaurants become busier as more people purchase restaurant meals. ( ) Real-balances effect ( ) Foreign-purchases effect (X) Interest-rate effect Explanation a. Interest-rate effect: When the price level rises, the demand for money increases, which causes interest rates to rise, resulting in a decrease in investment and consumption spending, thus reducing the aggregate quantity of real GDP demanded. If the cost of borrowing, or the interest rate, increases as a result of a price level increase and people buy fewer cars, it is an example of the interest-rate effect. b. Real-balances effect: When the price level falls, the real value of money people have rises and people are more willing or able to buy goods and services, thus increasing the aggregate quantity of real GDP demanded. Because people are consuming more restaurant meals as a direct result of the price level decreasing, it is an example of the real-balances effect.
For each of the examples below, determine the effect on aggregate demand. a. In order to reduce the deficit, the government decides to increase the level of taxes in the economy. This causes: - a movement along the aggregate demand curve to the right, indicating an increase in the quantity of real GDP demanded. - a decrease in aggregate demand, shifting the aggregate demand curve to the left. - an increase in aggregate demand, shifting the aggregate demand curve to the right. - a movement along the aggregate demand curve to the left, indicating a decrease in the quantity of real GDP demanded. b. The economy experiences a sustained expansion in stock prices for the majority of companies in the country. This causes: - a movement along the aggregate demand curve to the left, indicating a decrease in the quantity of real GDP demanded. - a decrease in aggregate demand, shifting the aggregate demand curve to the left. - an increase in aggregate demand, shifting the aggregate demand curve to the right. - a movement along the aggregate demand curve to the right, indicating an increase in the quantity of real GDP demanded.
a. In order to reduce the deficit, the government decides to increase the level of taxes in the economy. This causes: - a decrease in aggregate demand, shifting the aggregate demand curve to the left. b. The economy experiences a sustained expansion in stock prices for the majority of companies in the country. This causes: - an increase in aggregate demand, shifting the aggregate demand curve to the right.
The equilibrium level of real GDP is found at the intersection of the
aggregate expenditures schedule and the equilibrium line
The relationship between the price level and the amount of real GDP supplied in the economy is called
aggregate supply; short run aggregate supply
The long-run aggregate supply curve is vertical because
all input prices are flexible in the long run. Explanation The long-run aggregate supply curve is vertical because all input prices are flexible in the long run. An increase in the price level will cause the cost of inputs to rise, and as the input prices adjust firms will not increase output as the price level increases. Therefore, output remains the same, but at a higher price.
The long-run aggregate supply curve is vertical because:
all input prices are flexible in the long run. Explanation The long-run aggregate supply curve is vertical because all input prices are flexible in the long run. An increase in the price level will cause the cost of inputs to rise, and as the input prices adjust firms will not increase output as the price level increases. Therefore, output remains the same, but at a higher price.
Positive shocks or change to aggregate supply include:
an unexpected increase in productivity and an abrupt crease in oil prices.
A __________________ in consumer confidence cause aggregate demand to fall.
decrease
When price level falls, in the short run, output will contract because profit margins ___________.
decrease
An increase in personal income taxes will cause a(n) _____.
decrease (or shift left) in aggregate demand
Aggregate demand is ____________________ sloping (one word).
downward
The economy's long-run AS curve assumes that wages and other resource prices _____. are flexible upward but inflexible downward eventually rise and fall to match upward or downward changes in the price level rise and fall more rapidly than the price level are relatively inflexible both upward and downward
eventually rise and fall to match upward or downward changes in the price level
The economy's long-run AS curve assumes that wages and other resource prices ________.
eventually rise and fall to match upward or downward changes in the price level
An expected increase in the prices of consumer goods in the near future will _____. increase (or shift right) in aggregate demand now decrease in the quantity of real output demanded (or movement up along AD) decrease (or shift left) in aggregate demand now increase in the quantity of real output demanded (or movement down along AD)
increase (or shift right) in aggregate demand now
An increase in expected future income will _____. increase aggregate demand decrease aggregate demand and aggregate supply increase aggregate demand and aggregate supply increase aggregate supply
increase aggregate demand
Higher U.S. incomes tend to ________________ (increase/decrease) U.S. imports and ______________ (increase/decrease) net exports.
increase; decrease
In the short run, when price levels increases, the quantity of real GDP supplied will ________________ and the aggregate supply curve will ______________________________. In the short run, some input prices are said to be sticky. This means that:
increase; not shift; some input prices will remain constant even as the prices levels changes. Explanation a. In the short run, input prices tend to be sticky. When the price level increases, it causes total revenue to rise while some input costs do not increase. This makes firms more profitable, so they produce more output in the economy. As the price level increases and the quantity of real GDP supplied increases, there is a movement up and to the right on the AS curve. However, there is no change in aggregate supply—only a movement along the curve. Therefore, the aggregate supply curve will remain the same and will not shift. b. When input prices are sticky, it means that some input prices will remain constant even as the price level changes. This could be due to a variety of reasons including labor contracts or material price contracts.
As a result of productivity increases in the US, Income in the US rises significantly. This causes aggregate demand to ____, shifting to the ____.
increase; right
In an effort to stimulate the economy, the federal government creates a jobs program increasing funding to several agencies. This causes aggregate demand to ____ shifting to the_____.
increase; right
Which of the following will cause government purchase to rise?
increased spending on airports; increased spending highways
When the government needs to borrow money, it (increases / decreases) the demand for loanable funds in the economy.
increases
When the price level (increases / decreases), in the short run, output will expand because profit margins increase.
increases
If the national incomes of our trading partners increase, then our aggregate demand _____. decreases because net exports decrease decreases because consumption decreases increases because consumption increases increases because net exports increase
increases because net exports increase
If the national incomes of our trading partners increase, then our aggregate demand _____.
increases because net exports increase.
To track the public debt over time and understand its significance to the economy, it is best
measured relative to the gross domestic product.
The Social Security tax is regressive because
no Social Security tax is collected for incomes in excess of a "cap" income level.
Improved productivity means that we can produce more _________________ with fewer _____________________.
output; resources
Social Security contributions are part of
payroll taxes
Social Security contributions are part of
payroll taxes.
The two largest sources of tax revenue for the U.S. federal government are
personal income taxes and payroll taxes
An economy is in both short- and long-run equilibrium at _____. point B only point A point B to C point C only
point C only
Aggregate demand relates the ___ level real GDP
price
An aggregate supply curve represents the relationship between the _____. price level that producers are willing to accept and the price level buyers are willing to pay real domestic output bought and the real domestic output sold price level and the production of real domestic output price level and the buying of real domestic output
price level and the production of real domestic output
The circular flow model with the government included would show that government
provides goods and services to businesses and households and pays for them with net taxes.
You have a habit of saving $100 per month for emergencies. The price level falls, so you can decide that your emergencies can be funded with only $80 per month, leaving you $20 more to spend each month.
real balances effect.
Resource prices tend to adjust slowly in response to changes in the market. Another way to state this is to say that
resource prices are sticky.
Which would most likely shift the aggregate supply curve? A change in the prices of _____. financial assets foreign products resources domestic products
resources
In the short run, a shift of the aggregate supply curve to the _______________ (right / left) indicates increasing production at every price level.
right
When Incomes _____________ (rise / fall) in foreign countries, foreigners may be more willing and able to purchase goods and services produced in the United States.
rise
According to the interest rate effect, when the price level ___ people need more money to make the same number of purchases so the demand for money ___ . As a result, interest rates increase which lowers consumption and investment causing the quality of real ___ demand to ___
rises, rises, GDP, decrease
In the circular flow model, households ______ resources to _____________ and ________ products from __________ ______________.
sell; firms and buy; the resource markets
Changes in consumption and gross investment can _________________________________________.
shift the aggregate demand curve
The aggregate supply curve (short run) _____. graphs as a horizontal line graphs as a vertical line slopes upward and to the right slopes downward and to the right
slopes upward and to the right
Why does the federal government collect income taxes throughout the year?
so the government can pay for regular expenses such as rent
A tax is regressive if it
takes a smaller percentage of income as income increases.
A balanced budget occurs when ________________.
the government receives exactly the same amount of revenue that it spends in a given year.
When we draw an aggregate curve, we're assuming that the only thing that is changing as we move up and down the curve is _________.
the overall price level
A public debt that is owed to foreigners can be burdensome because
the payment of interest reduces the volume of goods and services available for domestic use.
One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has
the power to print money to finance the debt.
According to the real-balances effect, when the price level rises, ______________________
the purchasing power of your savings falls.
We use aggregate demand
to describe the overall, or total, demand for all final goods and services produce in an economy.
The long-run aggregate supply curve is
vertical.
At full employment, the long run aggregate supply curve is:
verticle
The upward slope of the short-run aggregate supply curve is based on the assumption that _____. wages and other resource prices do respond to price level changes wages and other resource prices do not respond to price level changes prices of output do not respond to price level changes prices of inputs are flexible while prices of outputs are fixed
wages and other resource prices do not respond to price level changes