Econ Exam 2

The above table has data from the nation of Atlantica. Based on these data, autonomous consumption is $1.8 trillion. $2.6 trillion. $3.2 trillion. $4.0 trillion.

$1.8 trillion.

What does the "paradox of thrift" say? People who consume too much will go broke. Businesses that are greedy will make the most profit. An economy that saves too much can end up with lower total savings. People who save too little are harming the economy.

An economy that saves too much can end up with lower total savings.

How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected? + government spending has a greater spending multiplier than an equivalent tax decrease. + government spending has a smaller spending multiplier than an equivalent tax decrease. + government spending has the same spending multiplier as an equivalent tax decrease. Neither an + in government spending nor a - in taxes generates any multiplier at all.

An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

In the simple Keynesian model with no government and foreign sectors, assume that full employment occurs at an output level of $20,000. With a marginal propensity to save of 0.20 and equilibrium output at $15,000, by how much will investment spending have to increase to move the economy to full employment? $1,000 $5,000 $2,500 $2,000

$1000 Ye - Y^x = 20000 - 15000

If the national debt is $6 million and this year's deficit is $5 million, what would the new national debt be? $11 million $50 million $60 million $275 million

$11 million

If disposable income increases from $5,000 to $5,400 and consumption increases from $4,000 to $4,200, what is the average propensity to consume when disposable income is $5,400? 0.78 0.22 0.65 0.35

0.78

Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by $: 75 billion. 4 billion. 5 billion. 20 billion.

20 billion

If the marginal propensity to save is 0.20, the spending multiplier is: 10.00. 0.20. 5. 5.55.

5 Multiplier = 1 / (1 - Marginal Propensity to Consume)

If the cost of production increase, there is an increase in aggregate supply and the SRAS curve shifts rightward. a decrease in aggregate supply and the SRAS curve shifts leftward. an increase in the quantity of real GDP supplied and a movement up along the SRAScurve. a decrease in the quantity of real GDP supplied and a movement down along the SRAScurve.

A decrease in aggregate supply and the SRAS curve shifts leftward

What is stagflation in economics? A period of high economic growth accompanied by low inflation. A period of economic recession with falling prices. A period of economic recession with rising prices. A state of economic equilibrium with no price or output changes.

A period of economic recession with rising prices.

Imagine that in the current year, the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Which curve shifts and in which direction? Aggregate demand shifts left. Aggregate demand shifts right. Aggregate supply shifts left. Aggregate supply shifts right.

Aggregate demand shifts left.

_____ occurs when aggregate demand expands so much that equilibrium output exceeds full employment output. Demand-pull inflation Demand-push inflation Cost-push inflation Cost-pull inflation

Demand-pull inflation

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80? Income will not change. Income will increase by $8,000. Income will increase by $10,000. Income will increase by $50,000.

Income will increase by $10,000.

Which of the following is an example of an expansionary fiscal policy tool? Decreasing government spending and increasing taxes. Increasing government spending and decreasing taxes. Increasing government regulations on businesses. Selling government bonds in the open market.

Increasing government spending and decreasing taxes.

Other things the same, if technology increases, then in the long run both output and prices are higher. output is higher and prices are lower. output is lower and prices are higher. both output and prices are lower.

Output is higher and prices are lower.

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 government do to achieve full employment? increase spending by $25 billion increase spending by $10 billion reduce spending by $25 billion reduce spending by $100 billion

Reduce spending by $25 billion k = 1/(1-MPC) GS = GDP/k

Which of the following best describes the effect on the aggregate supply curve if political negotiations result in a substantial decrease in the price of oil? The SRAS curve shifts rightward. There is no change to the SRAS curve. The SRAS curve does not shift but there is an upward movement along it. The SRAS curve does not shift but there is a downward movement along it.

The SRAS curve shifts rightward.

Refer to the Figure. Assuming the country begins on the long-run equilibrium, what will happen in the short-run if the price of oil rises significantly? The economy will move from point C to E. The economy will move from point B to E. The economy will move from point C to A. The economy will move from point B to C.

The economy will move from point C to A.

The short-run aggregate supply curve shows the relationship between potential GDP and the price level. potential GDP and real GDP. the quantity of real GDP supplied and the price level. the quantity of real GDP supplied and the interest rate

The quantity of real GDP supplied and the price level

Which is the proper sequence of events if income was originally at $100? (One with graph AE + C + I + G +NX)

Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

Refer to the figure. The potential level of output occurs at Y1. Y2. Y3. both Y1 and Y3.

Y2

What would cause inflation and employment to increase? a leftward shift of the AS curve a leftward shift of the AD curve a rightward shift of the AS curve a rightward shift of the AD curve

a rightward shift of the AD curve

A recessionary gap is a situation where the actual level of output is below the potential level of output. a situation where aggregate demand exceeds aggregate supply. a situation where the economy is operating at its full potential output. a situation where the government increases its spending to stimulate economic growth.

a situation where the actual level of output is below the potential level of output.

If the ultimate goal of fiscal policy aimed at aggregate supply is achieved, what happens to the aggregate price level and aggregate output? aggregate price level decreases; aggregate output decreases aggregate price level increases; aggregate output increases aggregate price level decreases; aggregate output increases aggregate price level increases; aggregate output decreases

aggregate price level decreases; aggregate output increases

If the economy is at full employment, increases in government spending: have a multiplier effect on equilibrium output. have no effect on the aggregate price level. are primarily absorbed by price increases. reduce aggregate output.

are primarily absorbed by price increases.

According to the crowding-out effect, if the government sells bonds to finance spending, _____ can eventually fall. consumption and government expenditures government expenditures and investment consumption and investment exports and investment

consumption and investment

There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations? shrinking area of law-maker discretion law-making time lag estimating potential GDP fiscal multiplier

fiscal multiplier

What occurs when spending is above the full employment level? inflationary gap depressionary gap recessionary gap contractionary gap

inflationary gap

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ gap exists and will require a(n) _____ in spending to bring the economy back to full employment. recessionary; increase recessionary; decrease inflationary; increase inflationary; decrease

inflationary; decrease

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals is called _____ debt. internally held personal proper national

internally held

Potential GDP increases as the price level increases because firms supply more goods and services. decreases as the price level increases because people demand fewer goods and services. might either increase or decrease as the price level increases, depending on whether aggregate demand increases or decreases. is independent of the price level.

is independent of the price level.

Assume the economy depicted in the figure above is in long-run equilibrium, where the aggregate demand curve is AD0 and the short-run aggregate supply curve is SRAS0. If there is a supply shock, such as a drastic increase in the price of oil, this will cause a _____ and a movement to a short-run equilibrium at point _____. leftward shift to AD1; a rightward shift to AD1; c rightward shift to SRAS2; c leftward shift to SRAS2; a

leftward shift to SRAS2; a

All of these programs are considered mandatory spending EXCEPT: Social Security. Medicare. national defense. interest on national debt.

national defense.

If interest rates rise, the burden of a nation's public debt will _____ and it will be _____ difficult to service its debt. fall; less fall; more rise; less rise; more

rise; more

Cost-push inflation occurs when: total spending expands so much that equilibrium output exceeds full-employment output. a supply shock shifts the short-run aggregate supply curve to the right. rising resource costs reduce short-run aggregate supply. subsidies to businesses rise.

rising resource costs reduce short-run aggregate supply.

If an economy is in a recession, what would expansionary fiscal policy do? shift AD to the right shift AD to the left shift SRAS to the right shift SRAS to the left

shift AD to the right

The "sticky-wage" hypothesis explains the slope of the aggregate demand curve slope of the short-run aggregate supply curve slope of the long-run aggregate supply curve position of the aggregate demand curve

slope of the short-run aggregate supply curve

When consumer confidence falls in an economy, _____ will decrease which is going to be _____ by the spending multiplier. spending; unaffected spending; magnified taxes; unaffected taxes; magnified

spending; magnified

Which of these is an example of an automatic stabilizer? consumers spending more when the economy is strong business laying off workers during a recession unemployed workers claiming unemployment benefits during a recession the government raising interest rates to reduce inflation

unemployed workers claiming unemployment benefits during a recession

If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve will not change until income actually rises. will shift leftward because people will spend less now. will shift rightward because people will increase spending now. and the AS curve will both shift leftward because people will increase their saving.

will shift rightward because people will increase spending now.