Econ Exam 3

Discretionary fiscal policy may fail to stabilize the economy and even destabilize it because of:

lags in decisions regarding the implementation of policy changes.

If the economy is in a recessionary gap, actual output will be _____ potential output.

less than

The interest rate effect states that as the aggregate price level decreases, all else equal, people demand _____ money, which drives the interest rate _____ and investment _____.

less; down; up

Fiscal policy is conducted by________and involves________

the federal government, government spending and taxes

The economy is self-correcting in ____.

the long run only

If Medicaid is expanded to cover a greater percentage of the population:

implicit liabilities will increase

If aggregate output is less than potential output, the economy is:

in a recessionary gap.

The short-run aggregate supply curve would NOT shift to the left as a result of a(n):

increase in interest rates.

(Figure: Shift of the Aggregate Demand Curve) Use Figure: Shift of the Aggregate Demand Curve. A movement from point A on AD1 to point C on AD2 may result from a(n):

increase in the total quantity of consumer goods and services demanded.

(Figure: Policy Alternatives) Use Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a), and the government decides to intervene, it will MOST likely:

increase its spending.

(Figure: Aggregate Demand) Use Figure: Aggregate Demand. The quantity of output demanded at a price level of 120 is:

$10 trillion.

(Figure: Aggregate Demand) Use Figure: Aggregate Demand. The quantity of output demanded if the price level is 100 is:

$12 trillion.

(Figure: Shifts of the AD-AS Curves) Use Figure: Shifts of the AD-AS Curves. A short run increase in net exports is illustrated by panel:

(a).

For each of the scenarios, please decide whether there will be an increase, decrease, or no change in aggregate demand: 1. The United States government decides to increase the federal tax rate by 4% for all earners. 2. The newest release of the Consumer Confidence Index shows a steady increase in consumer confidence about the economy. 3. A manufacturing boom during the late 1990s has created an oversupply of tractors, a necessary implement in agricultural production. 4. The Federal Reserve, the agency charged with regulating banking and monetary policy in the United States, decides to increase the amount of money available in the economy.

1. Aggregate demand decreases 2. Aggregate demand increases 3. Aggregate demand decreases 4. Aggregate demand increases

For each of the scenarios, please decide whether there will be an increase or decrease in short-run aggregate supply or if there will be no change. 1. Changes in the healthcare market cause employers to pay significantly more for health insurance they provide employees. 2. The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world's lumber is grown. 3. The production of a new type of blade for their combine harvesters, a tractor used to harvest crops, has allowed wheat farmers, like Herbert, to increase productivity by 40%.

1. short run aggregate supply decreases 2. short run aggregate supply decreases 3. short run aggregate supply increases

The tables show the spending and revenue for Littleland in 2010. Use the tables and other information to answer the questions. How much money (in millions) did Littleland need to borrow in 2010 to finance its government spending? At the end of 2010, what was Littleland's debt to GDP ratio? Give your answer to the nearest whole percentage point

300 million 52%

(Figure: Fiscal Policy II) Use Figure: Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD1; left; decrease; decrease

(Figure: AD-AS Model II) Use Figure: AD-AS Model II. When consumers and firms become more optimistic, in the short run, the _____ curve will shift to the _____.

AD; right

Which of the statements best describes why the aggregate demand curve is downward sloping?

An increase in the aggregate price level causes consumer and investment spending to fall, because consumer purchasing power decreases and money demand increases.

Classify each scenario based on whether it increases or decreases aggregate demand (AD).

Increases Aggregate demand: - a billion dollars falls from the sky - interest rates decreases - the government buys airplanes - income taxes fall - interest rates fall for business only Decreases Aggregate demand: - consumers expect income taxes to rise in the future - businesses believe that consumer demand will fall in the future - the relative price of foreign goods decreases

Adjust the graph to show the effect of a decrease in the aggregate price level. Which of the following, if true, offers the best explanation for the change demonstrated in the graph?

Move point A to the right Prices of goods and services have decreased on average.

The accompanying graph illustrates an economy in long-run equilibrium which is denoted by point ELR. Suppose a new technology is discovered which increases productivity. In the graph, demonstrate how the economy moves to its new long-run equilibrium by shifting the appropriate curves and placing point ELR at the new long-run equilibrium. In the long run, the aggregate price level, and real GDP (aggregate output)

SRAS curve shifts to the right. Point E shifts to the right decreases, increases

Move the short-run aggregate supply (SRAS) curve and/or the aggregate demand (AD) curve in the accompanying graph to demonstrate a negative supply shock. Which of the following is most associated with a negative supply shock?

SRAS line shifts to the left Stagflation

The government is concerned about an inflationary gap. Shift the AD curve to provide a graphical representation of an inflationary gap and move the point, ESR, to the short-run equilibrium associated with the inflationary gap. Which of the following policies will help to eliminate the inflationary gap?

Shift AD line to the right an increase in taxes

The difference between a budget deficit and government debt is that:

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

_____ will shift the aggregate demand curve.

a demand shock

The wealth effect suggests:

a negative relationship between the price level and consumer spending.

(Figure: Policy Alternatives) Use Figure: Policy Alternatives. In panel (a), if the economy is at an aggregate output of Y1 and a price level of P2, the economy is in:

a recessionary gap.

Suppose that the economy of Monaco is represented by the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves in the accompanying graph. a. Based on the graph, Monaco is b. Which of the following policies eliminate this phenomenon? c Suppose that the government implements the policy proposed in part b. Shift the aggregate demand curve on the graph accordingly.

a. experiencing an inflationary gap. b. An increase in taxes C. Shift AD line to the left

Suppose the government increases taxes. What will happen to disposable income and consumer spending? a. Disposable income b. Consumer spending will

a. falls b. decrease

Social Security and Medicare:

are implicit liabilities.

A government might want to decrease aggregate demand to:

close an inflationary gap.

Changes in short-run aggregate supply can be caused by changes in:

commodity prices.

(Figure: Fiscal Policy Options) Use Figure: Fiscal Policy Options. If the aggregate demand curve is ADʺ, the most appropriate discretionary fiscal policy is to _____ government transfer payments and _____ income tax rates.

decrease; increase

Contractionary fiscal policy includes:

decreasing government spending.

As a recessionary gap self-corrects, the equilibrium price level _____, and the equilibrium aggregate output _____.

falls; increases

The interest rate effect leads to a downward-sloping aggregate demand curve because a lower price level causes consumer spending to _____ and investment to _____.

increase; increase

The federal government's LARGEST source of revenue is:

personal income and corporate profit taxes.

Which tax is the largest source of tax revenue in the United States?

personal income taxes

The long-run level of output is known as _____ output.

potential

(Figure: Fiscal Policy Choices) Use Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy in the economy depicted in panel (b) when real GDP is Y1, government spending is likely to be _____, and taxes are likely to be _____.

reduced; increased

The short-run aggregate supply curve will shift to the:

right if nominal wages decrease.

If there is a recessionary gap, discretionary fiscal policy would likely include action to:

shift the aggregate demand curve to the right.

If government increases income tax rates, the aggregate demand curve is likely to:

shift to the left.

An increase in aggregate demand is seen as a(n) _____ the aggregate demand curve.

shift to the right of

The accompanying graphs illustrate an initial equilibrium for the economy. Suppose that a snowstorm destroys a large number of corn crops. Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in both the short-run and the long-run, as well as the short-run (ESR) and long-run (ELR) equilibria resulting from this change. Then answer what happens to the price level and GDP. 1. In the short run, the price level_____and real gdp _____ 2. In the long run, the price level _____and real gdp _____

Economy in the short run - SRAS line shifts to the left - Point E shifts to the left Economy in the long run - Point E intersects LRAS, SRAS, and AD line 1. increases, decreases 2. stay the same, stay the same

In the accompanying graph, illustrate the impact of an increase in the contracted nominal wage. How do nominal wage changes affect the economy's output at the long-run equilibrium?

Shift SRAS line to the left Nominal wages have no impact on output in the long run.

How, if at all, did these events affect the long‑run aggregate supply (LRAS) curve? Each phrase should be placed under the appropriate heading.

Shifted the LRAS curve to the left a tsunami destroying much of the existing stock of capital in Japan the 1970s oil crisis significant and sustained increases in income tax rates Shifted the LRAS curve to the right the Internet revolution of the 1990s James Watt's invention of the steam engine in 1775 Did not shift LRAS a central bank increasing the amount of money in circulation

(Figure: Aggregate Supply Movements) Use Figure: Aggregate Supply Movements. Which statement is correct?

Short-run aggregate supply has increased.

(Figure: Aggregate Supply Movements) Use Figure: Aggregate Supply Movements. Which statement is correct?

Short-run aggregate supply increases because of increased productivity.

Which equation represents the government budget balance MOST accurately?

T - G - TR

The government's budget balance is:

T - G - TR.

The full employment level of real GDP is $6 billion for the recently formed island nation of Turtleopolis. Use the line segment to show long‑run aggregate supply on the graph.

Vertical line from 6,8

(Figure: AD-AS) Use Figure: AD-AS. Suppose the economy is in an inflationary gap, so that SRAS1 intersects AD2. The size of the inflationary gap is equal to:

Y1 - YP.

(Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. Which equation measures a recessionary gap?

Y2 - Y1

a. A leftward shift in the AD curve b. A leftward shift in the SRAS curve c. A rightward shift in the SRAS curve d. A positive shift that leads to a higher aggregate price level. e. A rightward shift in the AD curve f. A negative shift that leads to a lower aggregate price level g. Stagflation h. A negative shift that leads to a higher aggregate price level i. A positive shift that leads to a lower aggregate price level

a. Negative demand shock b. negative supply shock c. positive supply shock d. positive demand shock e. positive demand shock f. negative demand shock g. negative supply shock h. negative supply shock i. positive supply shock

Identify how each of the scenarios affects short‑run aggregate supply. a. The U.S. government increases the minimum wage. b. Widespread adoption of the Internet by businesses increases productivity and efficiency. c. The government decreases the payroll tax paid by employers. d. The U.S. government decreases the personal income tax rate paid by households.

a. decrease b. increase c. increase d. no change

(Figure: Aggregate Supply) Use Figure: Aggregate Supply. If the economy is at point E:

actual output is greater than potential output.

Increasing funding for space exploration will shift the _____ curve to the _____.

aggregate demand; right

The aggregate supply curve shows the relationship between the _____ and the quantity of aggregate output supplied.

aggregate price level

Why are persistent budget deficits worrisome?

all of the above

Which fiscal policy would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services

Lilliput is a country that has closed borders and does not import or export any goods or services; hence, they do not worry about trade with other countries. Total spending for the federal government of Lilliput for the last fiscal year was $4.71$4.71 billion. The country collected $4.83$4.83 billion in taxes during this same fiscal year. Assume government transfers were zero. Based on this information, what is Lilliput's budget balance? Enter your answer to two decimal places. In the last fiscal year, Lilliput was running

budget balance is .12 billion a budget surplus

(Figure: Short-Run Equilibrium) Use Figure: Short-Run Equilibrium. If the economy is in equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

contractionary; left

If the government is required to balance the budget and the economy falls into a recession, which of the actions is a feasible policy response? What is a likely consequence of this policy?

cut spending equal to the reduction in tax revenue The negative consequences of the recession are magnified.

Consumer spending will likely rise if:

government transfers rise.

(Figure: Policy Alternatives) Use Figure: Policy Alternatives. In panel (b), the economy is initially in short-run equilibrium at a real GDP of Y1 and price level of P2. If the government decides to intervene, it will MOST likely:

increase its spending.

Suppose an economy's aggregate output is below potential output. If the government wishes to use fiscal policy to bring the economy back to potential output, it will:

increase its spending.

A cut in taxes _____, shifting the aggregate demand curve to the _____.

increases disposable income and consumption; right

When the aggregate price level _____, firms in perfectly competitive markets usually experience a(n) _____ in profit per unit and _____ output.

increases; increase; increased

If overall spending declines, causing the economy to contract, the government could counter this by:

increasing government spending.

(Figure: Short- and Long-Run Equilibrium II) Use Figure: Short- and Long-Run Equilibrium II. If the economy is in short-run macroeconomic equilibrium at E1, it is in a(n):

inflationary gap.

The interest rate effect

is the change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level.

The long-run supply curve shows that aggregate output supplied _____ the aggregate price level in the long run.

is unrelated to

Time lags make:

the effective use of both fiscal and monetary policy challenging.

In a macroeconomic context, what are implicit liabilities? Which of the choices is a significant implicit liability in the United States?

money that the government has promised to pay in the future social secutiry

(Figure: AD-AS Model I) Use Figure: AD-AS Model I. If the economy is at point X, there is a(n) _____ gap with _____ unemployment.

recessionary; high

(Figure: An Increase in Aggregate Demand) Use Figure: An Increase in Aggregate Demand. At the Y2 level of real GDP:

there is an inflationary gap equal to the difference between Y2 and YP.

Answer the questions about Keynes and his history. John Maynard Keynes famously said: "In the long run, Keynes was an economist during the Great Depression. During the Great Depression there was

we are all dead." high unemployment and high deflation.

(Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. The level of income associated with Y1 in panel (b):

would indicate an inflationary gap.