Macro Last Test Review

Assume that the marginal propensity to consume is .75, net exports decline by $10 billion and government spending increases by $20 billion. Given that there is no crowding out, the equilibrium gross domestic product can increase by a maximum of

$40

If the required reserve ratio is 10%, what is the maximum change in the money supply from John's deposit of $55,000 cash into his checking account

$450,000

If the consumer price index increases from 200 to 240 in a one-year period, then the inflation rate is

20%

An increase in both the inflation rate and the unemployment rate can be illustrated by

A rightward shift of the short-run Phillips curve

Which of the following is a supply-side policy designed to increase real GDP?

A tax credit on capital investment

Suppose you are told that the short-run Phillips curve has shifted downward. Which if the following must have happened?

The SRAS curve has shifted to the right

If the government increases spending without a tax increase and simultaneously no monetary-policy changes are made, which of the following would most likely occur?

The rise in income may be smaller than the multiplier would predict because the higher interest rates will crowd out private investment spending

Which of the following will happen if a country's government reduces business taxes?

The short-run aggregate supply will shift to the right

According to the data above, in which year was real GDP the largest?

2010

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is

5

For Arthur's graduation gift, Arthur's grandmother gives him a choice: he can receive $1000 today or $1050 one year from today. At what annual interest rate would Arthur be indifferent to choosing between the two options?

5%

An economy is in short-run equilibrium as illustrated by the graph above. Which of the following combinations of policy actions would definitely move the economy toward long-run equilibrium?

A decrease in income taxes and an increase in the money supply

An open-market purchase of government bonds accompanied by a decrease in income taxes will result in which of the following in the short run?

A decrease in unemployment

In the long run, government subsidies that promote the development of technology with widespread business applications will have which of the following effects?

A positive supply shock and lower economic growth rate

An increase in the expected inflation rate will cause which of the following?

A rightward shift in the short-run Phillips curve

Country X's economy is in an inflationary gap. Which of the following combinations of fiscal and monetary policy actions would restore full employment in the short run?

An increase in income taxes and an open-market sale of government bonds by the country's central bank

Assume a country's economy is currently in long-run equilibrium. What is the long-run effect of an increase in aggregate demand?

An increase in the price level

Which of the following would cause a movement from point S to R on the short-run Philips curve above?

An unanticipated increase in government spending

Which of the following is true about the relationship between the deficit and the debt? They:

Are positively related

Assume that a country's government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?

Bond Prices: Decrease Price Level: Increase

An Open-Market operation by a country's central bank to reduce the unemployment rate would be to

Buy bonds to decrease the interest rate to increase aggregate demand

Which of the following will move the government budget toward surplus?

Contractionary fiscal policies

Which of the following terms describes the adverse effect that results when private sector investment spending competes with government deficit financing?

Crowding out effect

All of the following may result in increases in real growth domestic product in the long run EXCEPT

Decrease in factor productivity

Which of the following combinations of fiscal and monetary policy will reduce the price level?

Fiscal Policy: Decreasing govt. spending Monetary Policy: Selling govt. bonds

If economic growth through investment in the economy's infrastructure is desirable, which of the following policies will most likely achieve this objective?

Granting tax credits for businesses in the construction sector

Automatic Stabilizers in the economy include which of the following I. A progressive personal income tax II. Unemployment compensation II. Congressional action that increases tax rates

I and II only

Which of the following combinations of changes in income taxes, real interest rate, and investment spending is most likely to promote economic growth?

Income taxes: Decrease Interest rate: Decrease Investment: Increase

As an indicator of an impending recession, inventories will most likely,

Increase as a result of a decrease in consumption

Which of the following will most likely promote long-run economic growth

Increase funding for research and development

A production possibilities curve that is concave to the origin (bowed out) implies that as more of a good is produced, the opportunity cost

Increases

Which of the following policies will most likely promote long-run economic growth?

Increasing funding for research and development

Which of the following policy actions will promote long-run economic growth

Increasing investment in human capital

The long-run Philips curve indicates that there are no trade-offs between

Inflation and unemployment

When unemployment rate is 10% and the CPI is rising at 2%, the federal government cut taxes and increases government spending. If the federal reserve buys bonds on the open market, interest rates, investment, real gross domestic product and the price level are most likely to change in which of the following ways

Interest rates: decrease Investment: increase Real GDP: increase Price level: Increase

A nation's unemployment rate is the ratio of the number of unemployed seeking employment to the nation's

Labor Force

Which of the following would most likely benefit from unexpected deflation?

Lenders

Olivia volunteers full time at an animal shelter and will not accept any offers for a paid job for the next six months. Olivia is

Not in the labor force

Which of the following will most likely occur if a country's government is continuously borrowing to finance its spending without changing taxes?

Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run.

Suppose a country's government increases the allowable deduction for individual retirement accounts per person. Holding all other influences constant, how would this policy action affect the country's loanable funds market, its production possibilities curve, and its long-run aggregate supply (LRAS) curve?

Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRAS curve would shift to the right.

How do the effects of an increase in SRAS compare to the effects of an increase in AD? An increase in SRAS will increase:

Real GDP but not the price level, while the increase in AD will increase both real GDP and the price level

With an expansionary fiscal policy, what will most likely happen to real gross domestic product and nominal interest rate in the short run?

Real GDP: Increase Nominal Interest rate: Increase

Suppose that an economy with flexible wages and prices is in long-run equilibrium when the central bank contracts the money supply. What is the long-run effect on real output in the economy?

Real output is unchanged

In the coffee market, which of the following changes will increase the price and decrease the quantity of coffee?

Supply: Decrease Demand: No change

Which of the following describes a surplus in the government budget?

Tax revenues exceed government purchases plus transfer payments.

How will a nation's production possibilities curve (PPC) and long-run aggregate supply (LRAS) curve change as a result of an increase in both the labor force and productivity?

The LRAS curve will shift to the right, and the PPCwill shift outward.

Suppose the government increases spending more than is necessary to close a recessionary gap. Which of the following is likely to be the end result?

The economy will experience inflation

Steady advances in technological development will result in which of the following?

The long-run aggregate supply curve will shift to the right, resulting in economic growth and a lower natural unemployment rate.

If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen?

The national debt will increase

If policy makes use fiscal policy to reduce inflation, which of the following will most likely happen in the short run?

The unemployment rate will increase

Assume policy makers increased spending and cut taxes to stimulate the economy. If the government's budget was initially in balance, which of the following will occur?

There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out.

Assume the economy is in long-run equilibrium. A decrease in net exports will result in which of the following in the short run?

There will be a movement from point B to point C

Based on the table above, which of the following combinations of unemployment and inflation could lie on the same long-run Philips curve?

Unemployment rate: 5%

Assume that the United States central bank sells government bonds on the open market. How will sale affect the value of the United States dollar on the foreign exchange market and United States exports?

Value of Dollar: Increase Exports: Decrease

To reduce the size of a country's national debt, a government could potentially take all of the following actions EXCEPT

finance spending by borrowing

Recession can be caused by

A decrease in aggregate demand

An economy is at full-employment equilibrium. If consumers and firms become more optimistic about future income and profits, which of the following will occur in the short run?

Aggregate demand will shift rightward, increasing real output and the price level

Which of the following changes is most likely to cause economic growth?

An increase in human capital

A contractionary monetary policy will cause the nominal interest rate, aggregate demand, output and the price level to change in which of the following ways

Nominal Interest rate: Increase Aggregate Demand: Decrease Output: Decrease Price level: Decrease

Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged time period. If the velocity of money is constant, which of the following is true according to the quantity theory of money?

Price level will increase at the same rate as the money supply.

Suppose the nominal GDP is $25 million, the price level is 1.25, and the central bank has set the money supply at $10 million. What is the real GDP and the velocity of money according to the quantity theory of money?

Real GDP is $20 million, and the velocity of money is 2.5

Crowding out occurs when investment spending by the private sector decreases as a result of

increasing interest rates caused by an increase in government borrowing