Econ exam 2

Which of the following is an example of discretionary expansionary fiscal policy?

Congress approving an increase in government spending in order to stimulate the demand side of the economy

The statement "supply creates its own demand" is commonly referred to as:

Say's Law.

Adam Smith's notion of the invisible hand is best summarized by which statement?

When individuals are allowed to pursue their own self-interest in their economic interactions, resources will naturally flow to their highest-valued use

Assuming nothing else changes, for a given money income, an increase in the domestic price level leads to:

a decrease in real income and a decrease in purchasing power.

The downward-sloping aggregate demand curve indicates that, ceteris paribus:

a decrease in the price level leads to an increase in the quantity demanded of real GDP.

In The General Theory of Employment, Interest, and Money, Keynes disagreed with the classical contention that:

a market economy is self-regulating and automatically moves to equilibrium at the full-employment level of real GDP.

If the economy is initially in equilibrium at natural real GDP (full-employment real GDP), a decrease in investment spending will:

decrease aggregate demand, resulting in a decrease in output, a decrease in the price level, and an increase in the unemployment rate.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, an increase in interest rates:

decreases aggregate demand which leads to a new equilibrium at a lower level of output, a higher unemployment rate, and a lower price level.

Decreases in wages and other input prices lead to:

decreases in costs of production which increases SRAS.

In the simple Keynesian model, the amount of personal consumption spending depends on:

disposable income.

According to the Classical model:

flexible prices, wages, and interest rates will eliminate shortages and surpluses in all markets.

The classical model assumes that:

flexible wages ensure that labor shortages and surpluses (unemployment) will be temporary.

When government is added to the simplified Keynesian model, if government must balance its budget:

government spending is equal to tax revenues.

In modern terms, the wealth of a nation, is measured by:

gross domestic product.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, an increase in aggregate demand leads to a new equilibrium at a:

higher level of output and a higher price level.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, an increase in short-run aggregate supply leads to a new equilibrium at a:

higher level of output and a lower price level.

The SRAS curve slopes upward to the right because:

in the short run, some inputs and costs of production are fixed, which means suppliers earn more profit if prices are rising.

Supply-side economists argue that reductions in marginal tax rates can:

increase incentives for people to work and save and for businesses to invest.

According to the real balance effect, the real value of a given amount of money:

increases as the price level decreases.

Aggregate demand

is comprised of spending on domestic output by consumers, businesses, foreigners, and government. reflects the inverse relationship between the price level and the quantity of real GDP demanded. graphs as a curve that slopes downward to the right due to the real balance effect and the international trade effect.

Autonomous consumption:

is consumption spending at disposable income equal to zero.

In the classical labor market, a surplus of labor:

is eliminated by falling wages.

The vertical long-run aggregate supply implies that:

natural or full-employment real GDP does not depend on the price level in the long run.

international trade effect

occurs when a change in the price level leads to a change in the quantity of net exports demanded

If the unemployment rate is greater than the natural rate of unemployment, a(n):

recessionary gap exists and equilibrium real GDP is less than natural real GDP.

If Congress approves a budget for which spending is greater than projected tax revenue, there is a:

structural deficit.

If Say's Law is true, then:

supply creates own demand.

The Classical model concludes that government should:

take a laissez-faire approach to macroeconomic policy because a market economy is self-regulating.

If the price level is fixed, or constant, over a relatively large range of output:

the SRAS curve is horizontal, and an increase in AD leads to an increase in output with no change in the price level.

When aggregate expenditures are less than aggregate output, businesses experience:

unplanned increases in inventories and respond by decreasing production.

When the wage rate is below the equilibrium wage rate, the classical model argues that:

upward pressure on wages will eliminate the shortage in the labor market.

A possible trade-off between unemployment and inflation may occur if government:

uses expansionary fiscal policy to stimulate the demand side of the economy when SRAS is upward-sloping.

The long-run aggregate supply curve (LRAS) curve is:

vertical at the economy's natural (full employment) level of real GDP.

According to the international trade effect:

when the domestic price level falls, exports become cheaper and imports become more expensive, ceteris paribus. an increase in the domestic price level leads to a decrease in net exports, ceteris paribus. the aggregate demand curve slopes downward to the right, ceteris paribus.

When government is added to the Keynesian model:

AE = C + I + G.

The notion that the wealth of a nation is more likely to increase if individuals are allowed to pursue their own self-interest in a market economy was first put forth by:

Adam Smith in An Inquiry Into the Nature and Causes of the Wealth of Nations.

The beginning of the classical model is most often associated with:

Adam Smith.

What event will lead to a leftward shift of the short-run aggregate supply curve?

An adverse supply shock

Which of the following is an example of nondiscretionary contractionary fiscal policy, or an automatic (built-in) stabilizer?

An increase in the dollar amount of tax revenue that occurs when the economy is expanding and the income tax is progressive

real balances effect

The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level. One reason for the downward slope of the AD curve is the real balance effect (also called the wealth affect), nominal income is adjusted for inflation to get real income; real income reflects the purchasing power of a given money income in one period relative to another period. An increase in the price level, ceteris paribus, decreases real income and decreases purchasing power. A decrease in the price level, ceteris paribus, increases real income (real balances) and increases purchasing power. the decrease in purchasing power that occurs when the price level rises, assuming nothing else changes.

An increase in government spending on infrastructure leads to:

an increase in AD and a rightward shift of the AD curve.

Ceteris paribus, aggregate demand will decrease (shift to the left) when there is:

an increase in interest rates.

Ceteris paribus, an increase in the price level leads to:

an increase in the quantity supplied of real GDP and a movement along the SRAS curve.

The direct (positive) relationship between the quantity of real GDP suppliers are willing and able to make available at alternative price levels is illustrated by:

an upward-sloping short-run aggregate supply curve.

When government spending exceeds net taxes in a fiscal year, the government has a:

budget deficit.

The additional spending by households that occurs as a result of an increase in current disposable income is determined by what Keynes calls:

the marginal propensity to consume.

The total stock of outstanding government securities is:

the national debt.

If the quantity supplied of real GDP increases as the price level increases, then:

the short-run aggregate supply curve is upward sloping.

Fiscal policy is:

the use of the government's budget to influence macroeconomic outcomes.

In the classical credit market (market for loanable funds), if the interest rate is above the equilibrium interest rate:

there is a surplus of loanable funds and the interest rate will fall.

Macroeconomic equilibrium occurs:

at the price level for which the quantity demanded of real GDP is equal to the quantity supplied of real GDP.

The increase in unemployment compensation that occurs when the economy slows down is an example of:

automatic, expansionary fiscal policy.

Keynes believed that an economy may achieve equilibrium at a level of real GDP below the full-employment level:

because of insufficient aggregate demand.

Economists who advocate a macroeconomic policy of laissez-faire:

believe the economy is self-regulating and will move to equilibrium at natural real GDP in the long run.

The Wealth of Nations addresses the economic concepts of:

comparative advantage. division of labor. the market mechanism.

Ceteris paribus, an increase in aggregate demand:

could be caused by a decrease in personal taxes and is illustrated by a rightward shift from AD to AD*.

If increases in government spending and borrowing lead to higher interest rates and lower investment spending, then:

crowding out occurs and expansionary fiscal policy may not be an effective tool for increasing aggregate demand.

An increase in the amount of resources available for production and improved production technology lead to:

economic growth, which is best illustrated by a rightward shift of the LRAS curve.

In The General Theory of Employment, Interest and Money, John Maynard Keynes argued that:

government can use deficit spending to stimulate economic activity during a severe or prolonged economic downturn.

Fiscal policy that leads to increases in aggregate supply:

increases output without increasing inflation.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, a beneficial (positive) supply shock:

increases short-run aggregate supply which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a lower price level.

The Laffer curve suggests that:

increasing marginal tax rates may actually reduce tax revenues.

If the unemployment rate is less than the natural rate of unemployment, a(n):

inflationary gap exists and equilibrium real GDP is greater than natural real GDP.

Contractionary fiscal policy:

involves decreases in government spending and increases in taxes.

Expansionary fiscal policy:

involves increases in government spending and decreases in taxes. tends to expand economic activity. is likely to be implemented when the economy is in a slump.

The Keynesian model:

is a short-run model that focuses on the demand-side of the economy.

According to Keynes:

short-term fluctuations in real GDP are a result of changes in aggregate demand. opportunities for employment are limited by the extent of aggregate demand. consumption spending is a function of current disposable income.