ECON 201 Test 4 Ch. 29 - 34

In an economy, it costs $1,500 to produce 2,000 units of output. If the costs increase to $2,500, then the per unit cost of production will have increased from

$0.75 to $1.25.

Domestic Output or Income (GDP=DI) Consumption $240 $244 250 250 260 256 270 262 280 268 290 274 300 280 310 286 320 292 Refer to the table. All figures are in billions of dollars. When there is no investment in this private closed economy, the equilibrium level of GDP will be

$250 billion.

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by

$3 billion.

Refer to the diagram for a private closed economy. At the $200 level of GDP,

consumption is $200 and planned investment is $50, so aggregate expenditures are $250.

If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the

consumption schedule will shift downward by $20 billion.

The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)

recognition lag.

The real-balances, interest-rate, and foreign purchases effects all help explain

why the aggregate demand curve is downsloping.

Built-in stability means that

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus.

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about

1.6 percent.

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

reducing the current level of investment.

If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should

rise proportionately more than the change in GDP.

If net exports decline from zero to some negative amount, the aggregate expenditures schedule would

shift downward.

The aggregate supply curve

shows the various amounts of real output that businesses will produce at each price level.

When the economy is at full employment,

the actual and the cyclically adjusted budgets will be equal.

When current tax revenues exceed current government expenditures and the economy is achieving full employment,

the cyclically adjusted budget has a surplus.

At the economy's natural rate of unemployment,

the economy achieves its potential output.

The higher the rate of unemployment,

the larger is the GDP gap.

An increase in taxes will have a greater effect on the equilibrium GDP

the larger the MPC.

The intersection of the aggregate demand and aggregate supply curves determines the

equilibrium level of real domestic output and prices.

Okun's law indicates that for

every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, a 2 percent GDP gap is generated.

Injections into the income-expenditure stream include

government purchases and exports.

The crowding-out effect of expansionary fiscal policy suggests that

government spending increases at the expense of private investment.

A decrease in aggregate demand will cause a greater decline in real output the

less flexible is the economy's price level.

The version of aggregate supply that allows for changes in both product prices and resource prices is the

long run.

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

1

In the diagram, the economy's long-run aggregate supply curve is shown by line

1.

The total adult population of an economy is 175 million, the number of employed is 122 million, and the number of unemployed is 17 million. The percentage of adults who are not in the labor force is

20.6 percent.

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines

4 and 3.

If the inflation premium is 3 percent and the real interest on a loan is 4 percent, then the nominal interest rate is

7 percent.

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of potential GDP is

8 percent.

The level of aggregate expenditures in a mixed open economy consists of

Ca + Ig + Xn + G.

The public debt is held as

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

Which of the following fiscal policy changes would be the most expansionary?

a $40 billion increase in government spending

If the dollar appreciates relative to foreign currencies, we would expect

a country's net exports to fall.

Cost-push inflation may be caused by

a negative supply shock.

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

aggregate demand increases because net exports increase.

If net exports are positive,

aggregate expenditures are greater at each level of GDP than when net exports are zero or negative.

Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit

at any level of GDP below $400.

Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of

built-in stability.

The recurrent ups and downs in the level of economic activity extending over several years are referred to as

business cycles.

A decrease in government spending will cause a(n)

decrease in aggregate demand.

Cost-push inflation is characterized by a(n)

decrease in aggregate supply and no change in aggregate demand.

Refer to the graph, which shows an aggregate demand curve. If the price level decreases from 200 to 100, the real output demanded will

increase by $200 billion.

In the diagram, a shift from AS2 to AS3 might be caused by a(n)

increase in business taxes and costly government regulation.

A person's real income will increase by 3 percent if her nominal income

increases by 5 percent while the price index rises by 2 percent.

Refer to the diagrams. Curve A

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

The short-run version of aggregate supply assumes that

product prices are flexible, while resource prices are fixed.

In the diagram, a shift from AS3 to AS2 might be caused by an increase in

productivity.

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

start of the recession and the time it takes to recognize that the recession has started.

The federal budget deficit is found by

subtracting government tax revenues from government spending in a particular year.

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

supply curve will shift rightward.

If at a particular price level, real output from producers is greater than real output desired by purchasers, then there will be a general

surplus and the price level will fall.

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

time the need for the fiscal action is recognized and the time that the action is taken.

Full-time homemakers and retirees are classified in the BLS data as

not in the labor force.

Assume the MPC is 0.8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by

$40 billion.

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6 percent. But if the rate of inflation was anticipated to be 4 percent, the bank would most likely charge the firm an annual interest rate of

10 percent.

Unemployed: 7 Total Population: 145 Employed: 95 Discouraged Workers: 3 The table contains information about the hypothetical economy of Scoob. All figures are in millions. The labor force in Scoob is

102 million.

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is

2.

Possible Levels of Domestic Output and Income (GDP = DI), Consumption $320, $320 330, 327 340, 334 350, 341 360, 348 370, 355 380, 362 The table gives data for a private closed economy. At the $370 billion level of DI, the APS is approximately

4 percent.

1.Government Spending 2.Consumer Expectations 3.Degree of Excess Capacity 4.Personal Income Tax Rates 5.Productivity 6.National Income Abroad 7.Business Taxes 8.Domestic Resource 9.Availability 10.Prices of Imported 11.Products 12.Profit Expectations on 13.Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which combination of factors best explain why the aggregate supply curve would shift?

7 and 8

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in productivity is depicted by

B.

A Federal budget deficit exists when

Federal government spending exceeds tax revenues in a given year.

Refer to the diagram. If the aggregate supply curve shifted from AS0 to AS1 and the aggregate demand curve remains at AD0, we could say that

aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.

In which industry or sector of the economy is output least likely to be affected by the business cycle?

agricultural commodities

The aggregate cost of unemployment can be measured by the

amount by which potential GDP exceeds actual GDP.

The investment schedule shows the

amounts business firms collectively intend to invest at each possible level of GDP.

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the

crowding-out effect.

The intent of contractionary fiscal policy is to

decrease aggregate demand.

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to

decrease by $50 billion.

If the United States wants to increase its net exports in the short term, it might take steps to

depreciate the dollar compared to foreign currencies.

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is

discretionary fiscal policy.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

Refer to the diagram for a private closed economy. Gross investment

is independent of the level of GDP.

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

productivity.

Which of the following formulas is correct? Percentage change in

real income approximates percentage change in nominal income minus percentage change in price level.

Real Domestic Output Demanded, Price Level (Index Value), Real Domestic Output Supplied (in Billions) $3,000, 350, $9,000 4,000, 300, 8,000 5,000, 250, 7,000 6,000, 200, 6,000 7,000, 150, 5,000 8,000, 100, 4,000 The accompanying table shows the aggregate demand and aggregate supply schedules for a hypothetical economy. At the price level of 150, there will be a general

shortage in the economy, and output demanded will decrease as the price level rises.

If the government wishes to increase the level of real GDP, it might reduce

taxes.

GDP C S Ig $100 $100 $0 $80 200 160 40 80 300 220 80 80 400 280 120 80 500 340 160 80 600 400 200 80 700 460 240 80 Refer to the accompanying information for a closed economy. If both government spending and taxes are zero, the equilibrium level of GDP is

$300.

GDP Consump Invest $0 $60 $30 100 120 40 200 180 50 300 240 60 400 300 70 500 360 80 (Advanced analysis) The tables gives data for a private closed economy. The letters Y, C, S, and I are used to represent real GDP, consumption, saving, and investment, respectively. Equilibrium Y (= GDP) is

$300.

GDP Ci Exp Imp $500$525$15 $10 550 560 15 10 600 595 15 10 650 630 15 10 700 665 15 10 750 700 15 10 All figures in the table are in billions. The equilibrium level of GDP in this private open economy is

$600 billion.

Real GDP, C+Ig, Net Exports $400, $420, $20 450, 460, 20 500, 500, 20 550, 540, 20 600, 580, 20 650, 620, 20 700, 660, 20 The table shows a private open economy. All figures are in billions of dollars. If net exports increased by $10 billion at each level of GDP, the equilibrium real GDP would be

$650.

The economy experiences an increase in the price level and an increase in real domestic output. Which is a likely explanation?

Net exports have increased.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP gap here?

decrease government spending and increase taxes

The multiplier effect demonstrates that

equal increases in government spending and taxes increase the equilibrium GDP.

GDP C S Ig $100 $100 $0 $80 200 160 40 80 300 220 80 80 400 280 120 80 500 340 160 80 600 400 200 80 700 460 240 80 Refer to the accompanying information for a closed economy. The addition of a $100 billion lump-sum tax

has no effect on either the MPC or the multiplier.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to

reduce government expenditures or increase taxes.

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate

supply curve would shift to the left.

If the Consumer Price Index was 125 in one year and 120 in the following year, then the rate of inflation was approximately

−4.0 percent.