Econ Test (Chapter 12-16)

All of the following are components of aggregate expenditure except:

actual investment spending.

Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP?

$100 million

The largest liability on the balance sheet of most banks is its:

checking account and savings account deposits of its customers.

During most of the years of the Great Depression, the actual federal budget was in ________, and the cyclically adjusted budget was in ________.

deficit; surplus

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant

increase in inflation.

If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

low; lowers

If the Federal Reserve raises or lowers interest rates too late, it could result in a ________ policy that destabilizes the economy.

procyclical

Decreases in the price level will:

raise consumption because real wealth increases.

The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle:

stabilize the economy.

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________.

targets; goals

Net worth is:

the difference between a firm's assets and liabilities.

The long-run aggregate supply curve will shift to the right if:

the economy experiences technological change.

Refer to Figure 12-2. Suppose that the level of GDP associated with point N is potential GDP. If the U.S. economy is currently at point K, then:

the economy is in recession.

Table 14-3 Assets Liabilities Reserves +$7,000 Deposits +$50,000 Loans +$46,000 Net Worth +$3,000 Refer to Table 14-3. Consider the above simplified balance sheet for a bank. If the required reserve ratio is 10 percent, the bank can make a maximum loan of:

$2,000

Currency $1,000 Checking Account Balances $2,000 Savings Account Balances $5,000 Small Denomination Time Deposits $6,000 Non institutional Money Market Fund Shares $7,000 M2 in this simple economy equals:

$21,000

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)

$300 billion decrease in GDP.

If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by:

$5 million.

Scenario 14-2 Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of:

$50,000

If the consumption function is defined as C = 7,250 + 0.8Y, what is the value of the marginal propensity to save?

0.2

If the marginal propensity to consume is 0.75, the marginal propensity to save is:

0.25

The Congressional Budget Office estimates the size of the government purchases multiplier to be:

0.5 to 2.5

Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000, what is the value of the marginal propensity to consume? C = 5,000 + (MPC)Y I = 1,500 G = 2,000 NX = -500

0.75

Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $21,500, what is the value of the marginal propensity to consume? C = 1,500 + (MPC)Y I = 1,000 G = 2,000 NX = -200

0.8

Given the equations for C, I, G, and NX below, what is the value of the marginal propensity to consume? C = 1,000 + 0.8Y I = 1,500 G =1,250 NX = 100

0.8

If disposable income increases by $500 million, and consumption increases by $400 million, then the marginal propensity to consume is:

0.8

Given the equations for C, I, G, and NX below, what is the value of the marginal propensity to consume? C = 2,000 + 0.9Y I = 2,500 G = 3,000 NX = 400

0.9

If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is:

0.9

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be:

11 percent.

If firms find that consumers are purchasing less than expected, which of the following would you expect?

Aggregate expenditure will likely be less than GDP.

An increase in taxes would be depicted as a movement from ________, using the basic AD-AS model in the figure above. -Price level and GDP decrease.

B to A.

Which is the largest component of aggregate expenditure?

Consumption expenditures

Which of the following is an objective of fiscal policy?

High rates of economic growth

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Potential GDP is forecasted to be higher than equilibrium GDP.

Federal Reserve Board Chairmen Paul Volcker, as well as later Fed chairs, focused on which of the following as their main goal of monetary policy?

Price stability

Which of the following is a government expenditure, but is not a government purchase?

The federal government pays out an unemployment insurance claim.

Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?

1.8%

If the required reserve ratio is RR, the simple deposit multiplier is defined as:

1/(RR)

Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier?

10

What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed.

2.78

If government purchases increase by $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph, the difference in real GDP between point A and point B will be: -AD shifts right.

more than $100 billion.

It is ________ difficult to effectively time fiscal policy than monetary policy because ________.

more; fiscal policy takes longer to implement

An increase in the price level will:

move the economy up along a stationary aggregate demand curve.

The consumer price index (CPI), the personal consumption expenditures price index (PCE), and the core PCE have over the last 15 years:

moved roughly together with the core PCE being the most stable.

The increase in consumer spending discussed in the article summary was expected to be sustained due in part to a steady job market, and a slight increase in after-tax income. The increase in consumption resulting from the increase in disposable income will cause a(n) ________ the aggregate expenditure curve.

movement up along

The ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure is called the

multiplier.

Ceteris paribus, a decrease in the price level would be represented by a movement from:

point B to point A.

If the amount you owe on your house is less than the price of the house, you have:

positive equity in your house.

The tax wedge is the difference between the:

pretax and posttax returns to an economic activity.

With the federal funds rate near zero and the economy still struggling, in response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as:

quantitative easing.

Year Potential Real GDP Real GDP Price Level 2018 $18.0 trillion $18.0 trillion 150 2019 18.5 trillion 18.8 trillion 154 Refer to Table 16-4. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if Congress and the president do not use fiscal policy. If Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2019, which of the following will be lower than if Congress and the president had taken no action?

real GDP and the inflation rate

Potential GDP refers to the level of:

real GDP in the long run.

A decrease in aggregate demand causes a decrease in ________ only in the short run, but causes a decrease in ________ in both the short run and the long run.

real GDP; the price level

In the United States, spending on residential construction:

rose rapidly in the period just before the recession of 2007-2009, declined dramatically during the recession, and recovered only slowly thereafter.

M2 includes M1 plus:

savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non-institutional money market fund shares

To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could:

sell Treasury securities.

Workers expect inflation to rise from 3% to 5% next year. As a result, this should:

shift the short-run aggregate supply curve to the left.

The basic aggregate demand and aggregate supply curve model helps explain:

short-term fluctuations in real GDP and the price level.

In an open economy, the government purchases multiplier will be:

smaller as the marginal propensity to import increases.

If banks do not loan out all their excess reserves, then the real world multiplier is:

smaller than 1/RR.

Actual investment spending does not include:

spending on consumer durable goods

Each of the following is one of the four main categories of spending identified by John Maynard Keynes except:

taxes.

The Federal Reserve does not target both the money supply and an interest rate because:

the Fed cannot achieve a target for both the money supply and an interest rate at the same time.

Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the trough of the recession. Then:

the Fed's expansionary policy may result in too large of an increase in GDP.

A negative supply shock in the short run causes:

the aggregate supply curve to shift to the left.

The velocity of money is defined as:

the average number of times each dollar is used to purchase goods and services.

The growth rate of real GDP equals:

the growth rate of hours worked plus the growth rate of labor productivity.

According to the quantity theory of money, the inflation rate equals:

the growth rate of the money supply minus the growth rate of real output.

The monetary policy target the Federal Reserve focuses primarily on today is:

the interest rate.

When President Obama took office in January 2009, he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession. The next month, Congress passed the American Recovery and Reinvestment Act of 2009, an $840 billion package of spending increases and tax cuts that was:

the largest fiscal policy action in U.S. history..

The use of fiscal policy to stabilize the economy is limited because:

the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.

If the economy receives an influx of new workers from immigration:

the long-run aggregate supply curve will shift to the right.

An increase in the price level causes:

the money demand curve to shift to the right.

Monetarists think that the Fed should use ________ as a target when conducting monetary policy.

the money supply

A monetary growth rule means that

the money supply should grow at a constant rate.

Crowding out will be greater:

the more sensitive investment spending is to changes in the interest rate.

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then:

the multiplier is 8.

Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result:

the short-run aggregate supply curve will shift to the left as wages increase.

While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail:

there is an increased likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to fail.

Actual investment will equal planned investment only when:

there is no unplanned change in inventories.

When housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.

tightened; harder

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.

total spending; real GDP; the price level

The increase in GDP discussed in the article summary was due in part to increases in nonresidential investment. Increases in nonresidential investment will cause a(n) ________ the aggregate expenditure curve.

upward shift of

Commodity money is a good:

used as money that also has value independent of its use as money.

If firms and workers could predict the future price level exactly, the short-run aggregate supply curve would be:

vertical.

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is greater than potential GDP, then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

will be greater than

An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier.

will decrease

Cutting taxes

will raise disposable income and raise spending.

Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

A

Which of the following criteria would make gold a poor medium of exchange?

A supply that would be difficult to control because of the unpredictability of new gold discoveries.

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP falls?

AD did not shift and SRAS shifted to the left.

Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from:

AD1 to AD2.

Ceteris paribus, a decrease in households' expectations of their future income would be represented by a movement from:

AD2 to AD1.

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?

Aggregate expenditure is equal to GDP.

Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $8 million, government purchases are $10 million, and net export spending is $2 million. Based on this information, which of the following is true?

Aggregate expenditure is equal to GDP.

A decrease in the price level in the United States will have what effect on the aggregate expenditure line?

Aggregate expenditure will shift upward.

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

An increase in government purchases

Which of the following will increase aggregate expenditure in the United States?

An increase in government purchases

Which of the following will shift the aggregate demand curve to the right, ceteris paribus?

An increase in net exports

Refer to Figure 16-4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president?

An increase in the marginal income tax rate.

What impact does an increase in the price level in the United States have on net exports and why?

An increase in the price level decreases net exports by increasing the relative cost of American goods.

If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?

An increase in wealth

Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the basic AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from:

C to B.

Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the basic AD-AS model in the figure above, this would be depicted as a movement from:

C to D.

Fiscal policy is determined by:

Congress and the president.

A decrease in aggregate expenditure has what result on equilibrium GDP?

Equilibrium GDP falls.

Suppose you deposit $2,000 into Bank of America and that the required reserve ratio is 10 percent. How does this affect the bank's balance sheet?

Excess reserves rise by $1,800.

Suppose that Congress allocates $1 billion to clean up after hurricanes in 2018. It also raises taxes by $1 billion to keep the deficit from growing. If the marginal propensity to consume is 0.9, what is the effect on equilibrium GDP?

GDP increases by $1 billion.

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium:

GDP will be below potential GDP.

________ is defined as the value of a household's assets minus the value of its liabilities.

Household wealth

Which of the following is a reason why we should consider the federal national debt a problem?

If the debt drives up interest rates, crowding out will occur.

Which of the following statements about inflation targeting is true?

Inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy.

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

Insuring deposits in the banking system.

Refer to Figure 12-1. According to the figure above, at what point is aggregate expenditure less than GDP?

L

Which of the following would not be considered an automatic stabilizer?

Legislation increasing funding for job retraining passed during a recession.

Which of the following assets is most liquid?

Money

Which policy tool allows the Federal Reserve the greatest control over monetary policy?

Open market operations

Which of the following is more likely to be effective in increasing the growth rate of real GDP?

Permanent cuts in business taxes

________ is equal to consumption spending plus planned investment spending plus government purchases plus net exports.

Planned aggregate expenditure

Which of the following is a reason why decreases in the price level result in a rise in aggregate expenditure?

Price level decreases cause firms and consumers to hold less money, which lowers the interest rate. Lower interest rates raise consumption and planned investment expenditures, which raises aggregate expenditure.

Which of the following is not one of the ways that the German government ended the hyperinflation of the 1920s?

Raising the required reserve ratio to reduce bank loans.

Ceteris paribus, an increase in the expected future price level would be represented by a movement from:

SRAS2 to SRAS1.

Which of the following correctly describes what the Fed used as monetary targets in the past?

The Fed increased its reliance on interest rate targets since the mid-1990s.

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?

The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities.

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed responded?

The Fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves.

The hypothetical information in the table shows what the values for real GDP and the price level will be in 2019 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2019?

The Fed should pursue contractionary policy.

Which of the following is (are) responsible for managing the money supply in the United States?

The Federal Open Market Committee

Japanese electronics exports were hurt in 2008 as a result of the recession. How would this decrease in exports have affected Japan's aggregate demand curve?

The aggregate demand curve would have shifted to the left.

Which of the following is true?

The money market model is essentially a model that determines the short-term nominal rate of interest.

Which of the following statements regarding the use of gold as money is false?

The money supply would be easy to control because of the predictability of new gold discoveries.

Which of the following determines the amount of money the banking system as a whole can create?

The quantity of bank reserves

Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during:

World War I and II.

In the long run, most economists agree that a permanent increase in government spending leads to:

a decrease in private spending by the same amount that government spending increased.

Contractionary monetary policy on the part of the Fed results in:

a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

Because of the slope of the aggregate demand curve, we can say that:

a decrease in the price level leads to a higher level of real GDP demanded.

When the Fed sells a security to a financial firm and the Fed agrees to buy back the security the next day, the transaction is known as:

a reverse repurchase agreement.

A financial asset is considered ________ if it can be bought or sold in a financial market.

a security

A financial asset is considered ________ if it can be sold in a secondary market.

a security

On average, in the recessions since 1950, it has taken ________ for real GDP to return to its cyclical peak.

about 18 months

At the beginning of the recession of 2007-2009, real GDP in the United States was ________ potential GDP, and in June 2009, real GDP was ________ potential GDP.

above; below

A central bank can help stop a bank panic by:

acting as a lender of last resort.

A central bank like the Federal Reserve in the United States can help banks survive a bank run by:

acting as a lender of last resort.

If inventories decline by more than analysts predict they will decline, this implies that:

actual investment spending was less than planned investment spending.

An unplanned decrease in inventories results in :

actual investment that is less than planned investment.

The ________ model focuses on the relationship between total spending and real GDP in the short run, assuming the price level is constant.

aggregate expenditure

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that:

aggregate expenditure that year was less than GDP that year.

The international trade effect states that:

an increase in the price level will lower net exports.

Most economists believe that the best monetary policy target is:

an interest rate.

In economics, money is defined as:

any asset people generally accept in exchange for goods and services.

Suppose a recession occurs as a result of a negative supply shock, and instead of the economy naturally working its way back to equilibrium, the government uses policy to shift the aggregate demand curve to fight the recession. Using policy this way would:

bring real GDP back to potential GDP more quickly but would result in a permanently higher price level.

Year Potential Real GDP Real GDP Price Level 2018 $18.0 trillion $18.0 trillion 150 2019 18.5 trillion 18.2 trillion 152 Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2019, it should:

buy Treasury securities.

To increase the money supply, the Federal Reserve could:

conduct an open market purchase of Treasury securities.

A decrease in ________ can put your job at risk if aggregate expenditures fall.

consumer confidence

The five most important variables that determine the level of ________ are disposable income, wealth, expected future income, price level, and interest rate.

consumption

The M1 measure of the money supply equals:

currency + checking account balances + travelers' checks.

If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will:

decrease consumption by $9 million.

From an initial long-run equilibrium, if aggregate demand grows faster than long-run and short-run aggregate supply, then Congress and the president would most likely:

decrease government spending.

To combat inflation, Congress and the president should:

decrease government spending.

In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely:

decrease interest rates.

An increase in interest rates:

decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.

A bank is legally required to hold a fraction of its ________ as ________.

deposits; required reserves

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

discretionary fiscal policy; automatic stabilizers

The difference between GDP and net taxes is:

disposable income

An increase in aggregate demand results in a(n) ________ in the ________.

expansion; short run

When the price of a financial asset ________ its interest rate will ________.

falls; rise

The Taylor rule helps explain the relationship between the Fed's ________ and ________.

federal funds target; economic conditions

In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B:

firms are operating below capacity.

In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B:

firms are producing above capacity.

If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

government purchases.

The federal budget deficit acts as an automatic stabilizer because:

government tax revenues decrease during a recession.

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously.

high employment; economic growth

Falling interest rates can:

increase a firm's stock price, which causes firms to issue more stock shares, and thus increases funds for investment.

If the marginal propensity to save is 0.4, then a $2 million increase in disposable income will:

increase consumption by $1.2 million.

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should:

increase.

The international trade effect states that a(n) ________ in the price level will ________ net exports.

increase; decrease

A reduction in the tax rate on pass-through business income to a maximum of 25 percent would ________ the return to entrepreneurship, and this would ________ aggregate supply.

increase; increase

The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus.

increases; decreases

The multiplier effect refers to the series of:

induced increases in consumption spending that result from an initial increase in autonomous expenditures.

The three categories of federal government expenditures, in addition to government purchases, are:

interest on the national debt, grants to state and local governments, and transfer payments.

Social Security

is a system whereby current retirees are paid from taxes collected from current workers.

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by:

less than $500 billion.

When the Social Security program was in its infancy in 1940, the ratio of workers to retirees was more than 150 to 1. Currently, the ratio of workers to retirees is:

less than 3 to 1.

Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should:

lower government purchases by an amount less than $200 billion.

The money demand curve has a negative slope because:

lower interest rates cause households and firms to switch from financial assets to money

When the economy enters a recession, your employer is unlikely to reduce your wages because ________ during a recession.

lower wages increase your incentive to find employment elsewhere

A study by Edward Prescott found that the ________ marginal tax rates in the United States relative to Europe resulted in a ________ quantity of labor supplied in the United States.

lower; larger

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

lower; lower

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

lowers; recession; raises; expansion

Money's most narrow definition is based on its function as a:

medium of exchange.

When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have:

more money than they want to hold.

As the tax wedge associated with a given economic activity gets smaller, we would expect:

more of that economic activity to occur.