econ test

Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by:

$40 billion.

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = .6, how much will the change in investment increase aggregate demand?

$50 billion.

If the marginal propensity to consume is .9, then the marginal propensity to save must be:

.1

Answer the question on the basis of the following data for a hypothetical economy. Refer to the given data. At the $100 level of income, the average propensity to save is: 27

.10

Refer to the given diagram. The marginal propensity to consume is: 28

.8

With a marginal propensity to save of .4, the marginal propensity to consume will be:

1.0 minus .4.

The multiplier is:

1/MPS.

If the MPC is .6, the multiplier will be:

2.5

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines: chp 12 19

4 and 3.

Which of the following represents the most expansionary fiscal policy?

A $10 billion increase in government spending.

Which of the following represents the most contractionary fiscal policy?

A $30 billion decrease in government spending.

Suppose a family's consumption exceeds its disposable income. This means that its:

APC is greater than 1.

In which of the following sets of circumstances can we confidently expect inflation?

Aggregate supply decreases and aggregate demand increases.

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

An appreciation of the U.S. dollar.

Refer to the given diagram. The marginal propensity to consume is equal to: 24

CB/AB.

Refer to the given diagram. At income level F, the volume of saving is: 25

CD

The group of three economists appointed by the president to provide fiscal policy recommendations is the:

Council of Economic Advisers.

Refer to the given diagram. Suppose the economy's saving schedule shifts from S1 to S2 as shown in the given diagram. We can say that its: ch.10 22

MPS has increased.

Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government purchases by $18 billion. On the basis of this information, we can say that the:

MPS in this economy is .4.

The aggregate expenditures model is built upon which of the following assumptions?

Prices are fixed.

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.

Planned investment plus unintended increases in inventories equals:

actual investment.

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.:

aggregate demand curve would shift to the right.

Refer to the diagram for a private closed economy. At the $300 level of GDP: chp 11....15

aggregate expenditures and GDP are equal.

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.

If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause:

an $8 billion downshift in the consumption schedule.

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.

Refer to the given diagram. Consumption will be equal to income at: 26

an income of E.

The multiplier effect means that:

an increase in investment can cause GDP to change by a larger amount.

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.

If for some reason households become increasingly thrifty, we could show this by:

an upward shift of the saving schedule.

As disposable income increases, consumption:

and saving both increase.

As disposable income goes up, the:

average propensity to consume falls.

The immediate-short-run aggregate supply curve represents circumstances where:

both input and output prices are fixed.

In a private closed economy, when aggregate expenditures exceed GDP:

business inventories will fall.

The MPC can be defined as that fraction of a:

change in income that is spent.

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:

consume is three-fifths.

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase:

consumption by $80 billion.

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.

A decline in disposable income:

decreases consumption by moving downward along a specific consumption schedule.

Discretionary fiscal policy will stabilize the economy most when:

deficits are incurred during recessions and surpluses during inflations.

Fiscal policy refers to the:

deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:

determinants of aggregate demand.

Refer to the given data. At the $200 level of disposable income: 23

dissaving is $5.

In the aggregate expenditures model, it is assumed that investment:

does not change when real GDP changes.

The aggregate demand curve is:

downsloping because of the interest-rate, real-balances, and foreign purchases effects.

Other things equal, the multiplier effect associated with a change in government spending is:

equal to that associated with a change in investment or consumption.

Other things equal, a decrease in the real interest rate will:

expand investment and shift the AD curve to the right.

The immediate determinants of investment spending are the:

expected rate of return on capital goods and the real interest rate.

The level of aggregate expenditures in the private closed economy is determined by the:

expenditures of consumers and businesses.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to:

increase aggregate demand.

Other things equal, a reduction in personal and business taxes can be expected to:

increase both aggregate demand and aggregate supply.

In the diagram, a shift from AS1 to AS3 might be caused by a(n):

increase in the prices of imported resources.

Other things equal, an increase in an economy's exports will:

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

In the aggregate expenditures model, an increase in government spending may:

increase output and employment.

In the aggregate expenditures model, a reduction in taxes may:

increase saving.

An economist who favored expanded government would recommend:

increases in government spending during recession and tax increases during inflation.

Discretionary fiscal policy refers to:

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

investment will take place until i and r are equal.

The multiplier applies to:

investment, net exports, and government spending.

Contractionary fiscal policy is so named because it:

is aimed at reducing aggregate demand and thus achieving price stability.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP.

The economy's long-run aggregate supply curve:

is vertical.

A decline in investment will shift the AD curve to the:

left by a multiple of the change in investment.

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

leftward by $40 billion at each price level.

The most important determinant of consumption and saving is the:

level of income.

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 investment spending caused by the interest-rate effect of a price-level increase is depicted by the:

move from point a to point b in panel (B).

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the:

multiplier effect.

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:

panel (B) only.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by: chp12 45

panel (C) only.

In a private closed economy, when aggregate expenditures equal GDP:

planned investment equals saving.

If aggregate expenditures exceed GDP in a private closed economy:

planned investment will exceed saving.

In the diagram, a shift from AS3 to AS2 might be caused by an increase in: chp 12 25

productivity.

Productivity measures:

real output per unit of input.

The fear of unwanted price wars may explain why many firms are reluctant to:

reduce prices when a decline in aggregate demand occurs.

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:

reduce worker morale and work effort, and thus lower productivity.

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. Answer the following question on the basis of this information. Refer to the information. All else being equal, if the price of each input increased from $4 to $6, productivity would:

remain unchanged.

An increase in net exports will shift the AD curve to the:

right by a multiple of the change in investment.

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:

rightward by $50 billion at each price level.

Other things equal, an improvement in productivity will:

shift the aggregate supply curve to the right.

The aggregate demand curve:

shows the amount of real output that will be purchased at each possible price level.

The aggregate supply curve:

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

The aggregate supply curve (short run):

slopes upward and to the right.

The greater is the marginal propensity to consume, the:

smaller is the marginal propensity to save.

An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because:

some of the tax increase will be paid out of income that would otherwise have been saved.

If Trent's MPC is .80, this means that he will:

spend eight-tenths of any increase in his disposable income.

An economist who favors smaller government would recommend:

tax cuts during recession and reductions in government spending during inflation.

Dissaving means:

that households are spending more than their current incomes.

The equilibrium price level and level of real output occur where:

the aggregate demand and supply curves intersect.

Refer to the diagram. Suppose that aggregate demand increased from AD1 to AD2. For the price level to stay constant:

the aggregate supply curve would have to shift rightward.

In the figure, AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by: chp 12 51

the increase in productivity.

The most important determinant of consumer spending is:

the level of income.

If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, it is most likely that:

the price level is inflexible downward and a recession has occurred.

(Consider This) The ratchet effect is the tendency of:

the price level to increase but not to decrease.

In the aggregate expenditures model, technological progress will shift the investment schedule:

upward and increase aggregate expenditures.

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of:

wage contracts.

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.

Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when: chp 11... 13

GDP is $60 billion.

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Great Depression.