Econ module 3 test
In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line
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Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward
an excess of government expenditures over tax receipts
Which of the following represents the most contractionary fiscal policy?
a $30 billion decrease in government spending
A decline in disposable income
decreases consumption by moving downward along a specific consumption schedule.
With the expenditures programs and the tax system shown in the diagram,
deficits will occur at income levels below K, and surpluses above K.
If the United States wants to increase its net exports, it might take steps to
depreciate the dollar compared to foreign currencies.
Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n)
expansionary fiscal policy.
Net exports are
exports minus imports.
The crowding-out effect of expansionary fiscal policy suggests that
government spending increases at the expense of private investment.
If households expect the current economic boom will continue far into the future and real interest rates are staying very low, then we can expect
household consumption to increase, shifting the consumption schedule up and the saving schedule down.
A private closed economy includes
households and businesses, but not government or international trade.
Contractionary fiscal policy
if successful, will reduce demand-pull inflation.
Other things equal, an increase in an economy's exports will
increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.
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, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to
increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.
If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by
increasing taxes by $20 billion
Exports have the same effect on the current size of GDP as
investment
If an unintended increase in business inventories occurs at some level of GDP, then GDP
is too high for equilibrium.
A tax reduction of a specific amount will be more expansionary the
larger is the economy's MPC
If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when
r is greater than i.
A major advantage of the built-in or automatic stabilizers is that they
require no legislative action by Congress to be made effective.
The cyclically-adjusted budget deficit for the United States
rose to −7.5 percent of potential GDP in 2009.
The federal budget deficit is found by
subtracting government tax revenues from government spending in a particular year.
If consumers expect their future real income to rise, they will
tend to spend more of their current incomes now.
When the economy is at full employment,
the actual and the cyclically-adjusted budgets will be equal.
The consumption schedule shows
the amounts households intend to consume at various possible levels of aggregate income.
The public debt is the amount of money that
the federal government owes to holders of U.S. securities.
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.
If the marginal propensity to consume is 0.7, then the marginal propensity to save must be
0.3.
If the marginal propensity to consume is 0.65 then the marginal propensity to save must be
0.35.
An economy is employing 4 units of capital, 7 units of raw materials, and 10 units of labor to produce its total output of 670 units. Each unit of capital costs $12; each unit of raw materials, $6; and each unit of labor, $3. If the per-unit price of raw materials rises from $6 to $10 and all else remains constant, the per-unit cost of production will rise by about
10 percent.
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 per-unit cost of production will rise by about
30 percent.
The marginal propensity to consume equation is
MPC = change in consumption / change in disposable income
If the saving schedule is a straight line, the
MPS must be constant.
The aggregate-expenditures model is built upon which of the following assumptions?
Prices are fixed.
An upward shift of the aggregate-expenditures schedule might be caused by
a decrease in imports, with no change in exports.
In the diagram, a shift from AS1 to AS2 might be caused by
a decrease in the prices of domestic resources.
The relationship between consumption and disposable income is such that
a direct and relatively stable relationship exists between consumption and income.
The consumption schedule shows
a direct relationship between aggregate consumption and aggregate income.
The real-balances effect indicates that
a higher price level will decrease the real value of many financial assets and therefore reduce spending.
The short-run aggregate supply curve has
a slope that is not constant.
As it relates to the aggregate-expenditures model, a leakage is
a withdrawal of potential spending from the income-expenditures stream via saving, tax payments, or imports.
At equilibrium real GDP in a private closed economy,
aggregate-expenditures and real GDP are equal.
The 45-degree line on a graph relating consumption and income shows
all the points at which consumption and income are equal.
The reason a major tax change affects both the consumption schedule and saving schedule is
an increase in taxes reduces both household consumption and household saving. any decrease in taxes will be partly consumed and partly saved by households. taxes are paid partly at the expense of consumption and partly at the expense of saving.
Actual investment equals saving
at all levels of GDP.
The U.S. public debt
consists of the historical accumulation of all past federal deficits and surpluses.
If the multiplier in an economy is 5, a $20 billion increase in net exports will
increase GDP by $100 billion.
If the multiplier in an economy is 5, a $10 billion increase in net exports will
increase GDP by $50 billion.
The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will
increase U.S. exports and decrease U.S. imports.
The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will
increase U.S. imports and decrease U.S. exports.
In an effort to avoid a recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to
increase aggregate demand.
If the MPC in an economy is 0.80, government could shift the aggregate demand curve leftward by $32 billion by
increasing taxes by $8 billion.
Refer to the diagrams. Curve A
is an investment demand curve, and curve B is an investment schedule.
When a household borrows money today,
it can increase current consumption beyond its disposable income and it shifts the current consumption schedule upward
An input whose price is often fixed in both the immediate-short-run and short-run is
labor, due to labor contracts.
If investment decreases by $21 billion and the economy's MPC is 0.5, the aggregate demand curve will shift
leftward by $42 billion at each price level.
The foreign purchases effect
moves the economy along a fixed aggregate demand curve.
The equilibrium level of GDP is associated with
no unintended changes in inventories.
The aggregate supply curve (short-run) is upsloping because
per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
In a private closed economy, when aggregate expenditures equal GDP
planned investment equals saving
An investment-demand curve is a curve that shows the amounts of investment demanded by an economy at a series of
real interest rates.
The amount of real output that could be purchased at current prices if all of our assets were liquidated (turned to cash) and the money used to purchase goods and services is the
real-balances effect.
A lump-sum tax will
reduce disposable income by the amount of the tax.
An increase in input productivity will
reduce the equilibrium price level, assuming downward flexible prices.
If the MPS in an economy is 0.40, government could shift the aggregate demand curve leftward by $60 billion by
reducing government expenditures by $24 billion.
In contrast to investment, consumption is
relatively stable.
If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift
rightward by $50 billion at each price level.
If the consumption schedule is linear, then the
saving schedule will also be linear.
Other things equal, an increase in nominal wages will
shift the aggregate supply curve to the left.
Other things equal, an improvement in productivity will
shift the aggregate supply curve to the right.
Other things equal, a 10 percent decrease in corporate income taxes will
shift the investment-demand curve to the right.
The aggregate-demand curve
shows the amount of real output that will be purchased at each possible price level.
The APC can be defined as the fraction of a
specific level of total income that is consumed.
The crowding-out effect is
strongest when the economy is at full employment.
An aggregate-expenditures schedule is a
table of numbers showing the total amount spent on final goods and final services at different levels of real gross domestic product (real GDP).
If a $25 billion increase in government expenditures increases equilibrium GDP by $100 billion, then
the MPS is 0.25 for this economy
When current tax revenues exceed current government expenditures and the economy is achieving full employment,
the cyclically-adjusted budget has a surplus.
The cyclically-adjusted budget refers to
the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.
If today, prospective car buyers expect a surge in the supply of cars on the market next week that will cause the price of cars to substantially decline, they will
wait for the price of cars to go down before buying, shifting aggregate demand to the left.
In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the
wealth effect.
The reason the long-run aggregate supply curve is vertical is
when both input prices and output prices are flexible, profit levels always adjust to give firms exactly the right profit incentive to produce the full-employment output level.
If the equilibrium level of GDP in a private open economy is $1,400 billion and consumption is $950 billion at that level of GDP, then
Ig + Xn must equal $450 billion
Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?
Reductions in federal tax rates on personal and corporate income.
What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?
a rise in the real GDP
Saving is always equal to
actual investment.
The short-run begins
after the immediate short run ends.
The long-run begins
after the short-run ends.
An appropriate fiscal policy for a severe recession is
an increase in government spending.
Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of
an increase in personal taxes.
The interest-rate effect suggests that
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
Which one of the following would increase per-unit production cost and therefore shift the aggregate supply curve to the left?
an increase in the price of imported resources
As disposable income increases, consumption
and saving both increase.
If government increases the size of its cyclically-adjusted surplus, we can
assume that government is having a contractionary effect on the economy.
In a private closed economy, when aggregate expenditures exceed GDP,
business inventories will fall.
In the aggregate-expenditures model, it is assumed that investment
does not change when real GDP changes.
If at some level of GDP the economy is experiencing an unintended decrease in inventories,
domestic output will increase.
The immediate determinants of investment spending are the
expected rate of return on capital goods and the real interest rate.
The aggregate supply curve
shows the various amounts of real output that businesses will produce at each price level.
A specific reduction in government spending will dampen demand-pull inflation by a greater amount the
smaller is the economy's MPS.
The MPC for an economy is
the slope of the consumption schedule or line.
The investment-demand curve suggests that
there is an inverse relationship between the real rate of interest and the level of investment spending.
What was unusual about the policy response to the COVID pandemic lockdowns in 2020?
there was zero administrative lag
A private closed economy will expand when
unplanned decreases in inventories occur.
Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus,
unplanned decreases in inventories of $10 billion will occur.
Refer to the figure. The consumption schedule indicates that
up to a point, consumption exceeds income but then falls below income.
If disposable income increases by $50 billion and there is an MPS of 0.20, the increase in saving will be
$10 billion.
C = 40 + 0.8Y Ig = 40 X = 20 M = 30 (Advanced analysis) The equations give information for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in billions of dollars. The equilibrium GDP (=Y) in the economy is
$350
If the marginal propensity to consume is 0.9, then the marginal propensity to save must be
0.1.
Refer to the diagram, in which Qf is the full-employment output. Contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at
AD3.
In a mixed open economy, the equilibrium GDP is determined at that point where
Sa + M + T = Ig + X + G.
Which of the following statements about the real balances effect is not correct?
A higher price level means more consumption spending while a lower price level means less consumer spending.
The immediate-short-run aggregate supply curve represents circumstances where
both input and output prices are fixed.
The amount by which federal tax revenues exceed federal government expenditures during a particular year is the
budget surplus.
Higher interest rates may cause
consumers to decide not to purchase a new house or new automobile. businesses to postpone a potential purchase of capital.
If the MPC is 0.8 and disposable income is $200, then
consumption and saving cannot be determined from the information given.
Dissaving occurs when
consumption exceeds income.
The APC is calculated as
consumption ÷ income.
If the full-employment GDP for the economy is at L, then we can say with certainty that the
cyclically-adjusted budget will have a surplus.
The definition of a lump-sum tax is
A tax that collects a constant amount (the tax revenue of government is the same) at all levels of GDP.