Exam 3
A tax multiplier equal to -4.30 would imply that a $100 tax increase would lead to a
$430 decline in real GDP
According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be
0
Mathematically, the value of the tax multiplier in terms of the marginal propensity to consume (MPC) is given by the formula
1-[1/(1-MPC)]
In Exhibit 15-13, supply siders claimed that the shift from AS1 to AS2 would occur if the government
Decreased tax rates and decreased the amount of government regulation
As the aggregate demand curve shifts from AD1 to AD2 in Exhibit 14-16, the economy experiences
Demand-pull inflation
Beginning at equilibrium E1 in Exhibit 15-11, when the government increases spending or cuts taxes the economy will experience
Demand-pull inflation
The interest-rate effect is the impact on real GDP caused by the ____________ relationship between the price level and the interest rate.
Direct
The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption and more saving is known as the
Real balances effect
According to supply-side fiscal policy, reducing tax rates on wages and profits will
Reduce both unemployment and inflation
Unemployment compensation payments
Rise during a recession and thus reduce the severity of the recession
Which of the following is NOT a component of the aggregate demand curve
Saving
An expansionary fiscal policy
All of the answers above are correct
Supply-side economics calls for
All of the answers above are correct
The shift from AS1 to AS2 in Exhibit 14-15 could be caused by a(an)
All of the answers above are incorrect
Which of the following would shift the aggregate demand curve to left?
A decrease in government spending
Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then
Both real GDP and the price level will fall
When the economy enters a recession, automatic stabilizers create
Budget deficits
Automatic stabilizers "lean against the prevailing wind" of the business cycle because
Federal expenditures and tax revenues change as the level of real GDP changes
The real balances effect occurs because a higher price level will reduce the real value of peoples
Financial assets
In Exhibit 14-17, choosing to operate the economy at GDP = $1,200 billion and P = 110 would be opting for an economy of
Full employment with inflation
Stagflation is a period of time when the economy is experiencing
High inflation and high unemployment at the same time
Which of the following is an example of expansionary fiscal policy?
Increase government spending
Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is .75, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should
Increase spending by $250 billion
In the __________ range of the aggregate supply curve, expansionary fiscal policy causes aggregate _______ to increase, which results in a higher price level and a higher equilibrium level of real GDP
Intermediate, demand
The net exports effect is the ________ relationship between net exports and the price level of an economy
Inverse
The real balances effect is the impact on real GDP caused by the ___________ relationship between the price level and the real value of financial assets
Inverse
Assume the marginal propensity to consume (MPC) is .75 and the government increases taxes by $250 billion. The aggregate demand curve will shift to the
Left by $750 billion
When the government levies a $100 million tax on peoples income and puts the $100 million back into the economy in the form of a spending program, such as new interstate highway constructions, the
Level of real GDP expands by $100 million
Which of the following are beliefs of classical theory?
Long-run full employment
In Exhibit 14-17, if aggregate demand increases from AD1 to AD2,
Prices alone will increase
An increase in oil prices will shift the aggregate
Supply curve leftward
The aggregate demand curve shows how real GDP purchased varies with changes in
The price level
In Exhibit 14-14, as production increases, firms resort to offering higher wage rates to attract the dwindling supply of unemployed resources in
The segment labeled bc.
In Exhibit 14-14, resources are fully employed, and competition among producers for resources will lead to a higher price level in
The segment labeled cd
As the economy moves to the right in Exhibit 14-16 along the upward-sloping aggregate supply curve the
Unemployment rate falls
In Exhibit 14-17, the aggregate demand and supply curves reflect an economy in which
excess aggregate demand forces prices up to P = 120
