Macro Study Set Test 2
In 2016, the city of Canfield collected $550,000 in taxes and spent $470,000. In 2016, the city of Canfield had a
budget surplus of $80,000. ; formula = 550,000-470,000= 80,000 (surplus= tax collected-money spent)
Which of these is a liability for a bank?
deposits made by a firm
What determines the slope of the aggregate supply curve is
how fast the price of factors of production respond to changes in the price level.
Fiscal policy refers to the idea that total economic output and unemployment can be affected by changes:
in government spending and taxes.
Anna deposits $2,000 cash into her checking account. The required reserve ratio is 25%. What is the change in this bank's required reserves? What is the change in this bank's excess reserves? Assume that the bank did not lend any amount.
$500 ; $1500 required reserve= 2,000 x 0.25 = 500 excess reserves= 2,000 - 500 = 1,500
According to the Saving/Investment approach to equilibrium, if government spending (G) is $5 trillion, business investment (I) is $4 trillion, and taxes (T) are $3 trillion, how much is savings (S) in a closed economy?
$6 trillion ; equation = S+T = I+G
If MPS is 0.2 and income increases from $14,000 to $15,000, by how much will consumption and saving increase?
$800; $200
If the MPC is 0.7, the tax multiplier is Question 2 options:
-2.33 ; formula= -MPC/ (1-MPC) ; -0.7 / (1-0.7)
If income rises from $8,000 to $12,000 and investment increases from $9,000 to $10,000, then MPS is ____ and MPC is _______.
0.25; 0.75 ; formula= MPS= 3000/4000 (divide change in savings by change in income) = 0.75; MPC= 1-MPS= 0.25
Because Anna received a raise in pay from $100,000 to 110,000 , her consumption increased from $60,000 to $65,000. What is Anna's marginal propensity to consume?
0.5 ; formula = 5,000/ 10,000 (difference in incomes)
If income rises from $10,000 to $15,000 and consumption increases from $9,000 to $12,000, then MPC is ____ Note: Recall that MPC=∆𝑪/∆𝒀
0.6 ; formula = 3,000/5,000 (difference in increase) = 0.6
If the MPS is 0.22, the MPC is
0.78
Find the equilibrium level of output (Y) for the economy, where the consumption function is given as C=200+0.8Y and the Planned Investment= 50?
1,250
What is the multiplier if the marginal propensity to consume is 0.2?
1.25
If Sandra has an income of $60,000 and disposable income of $45,000, how much does she pay in taxes?
15,000 ; equation= 60,000=45,000-t (or disposable income= total income - net taxes)
Suppose the required reserve ratio is 8%, the banking system has $2,000 in total reserves, and is loaned-up. The deposits in the banking system must be Hint: Recall the formula: Reserve ratio=Reserves/(Customers Deposits)
25,000 formula = 1/ 0.08 = 12.5 2,000 x 12.5 = 25,000
Assume there is no government or foreign sector. If the MPS is 0.20, the multiplier is
5 ; multiplier= 1/MPS or 1/0.20= 5
Find the equilibrium level of aggregate output (income) (Y) for the economy, where the consumption function is given as C=150+0.6Y and the Planned Investment= 60?
525 ; solve for y = 150 + 0.6Y + 60
The relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level is graphed as
Aggregate supply curve (AS)
Which of the following will result in a long-run increase in the U.S. GDP (aggregate output)?
All of the above.
If the marginal propensity to consume (MPC) is 0.9, by how much will $200 of tax cut increase equilibrium aggregate output ? Hint: Calculate tax multiplier, as -MPC/(MPS), then apply it to the change in taxes (T) to estimate corresponding change in aggregate output .
$1800; Explanation: If the marginal propensity to consume is 0.9, the MPS is 0.1 since MPC+MPS=1. The tax multiplier is MPC/1-MPC, therefore -0.9/0.1=9. Then apply the 9 to the change in government spending. 9x200=1800.
How much will $400 in new planned investment change equilibrium income if the marginal propensity to save (MPS) is 0.2?
$2,000
If the marginal propensity to consume (MPC) is 0.9, by how much will $200 of government spending (G) increase aggregate output (Y)? Hint: Calculate spending multiplier, as 1/(1-MPC), then apply it to the change in government spending to estimate the corresponding change in aggregate output.
$2,000
If the reserve requirement is 10%, a new deposit of $2,000 leads to a potential increase in the money supply of: Hint: consider using the formula for money multiplier: 1) Money Multiplier=1/Reserve Requirement 2) Apply the money multiplier to the value of new deposit
$20,000 ; 1/ .10 = 10 ; 2,000 x 10 = 20,000
How much will $500 in new government spending (G) change equilibrium aggregate output (Y) if the marginal propensity to save (MPS) is 0.2?
$2500; formula= 500/0.2= 2500
The aggregate consumption function is C = 800 + 0.8Yd. If income is $2,500 and net taxes are $300, consumption equals
$2560 ; formula= 2500-300= 2200 ; 800 + 0.8(2200)= 2560 ( plug in formula but multiply 0.8x 2200, then add the 800.
If planned investment falls by $1,000 and the MPC is 0.75, the total effect on the economy is a decrease of _____ in aggregate income or output.
$4,000 ; formula = (1/(1-MPC))
EQUATION 9.1: C = 300 + 0.8Yd G = 500T = 250I = 200 Refer to Equation 9.1. At the equilibrium level of output in Italy, saving equals
$450.
Jane has a savings account into which she puts money every month so she will eventually have enough money for a down payment on a house. This is an example of which function of money?
store of value
What is the reserve ratio?
the percentage of a bank's total deposits held in reserve, either as cash in the vault or as deposits at the Federal Reserve
Coal is used as a source of energy in many manufacturing processes. Assume a long strike by coal miners reduced the supply of coal and increased the price of coal. This would cause
the short-run aggregate supply curve to shift to the left.
Which of the following will NOT cause an increase in the planned investment?
Increase in interest rate
Which of the following factors does NOT determine the shifts in the aggregate supply curve:
Increased prices on health insurance
Automatic stabilizers include all of the following EXCEPT:
Increased research and development.
__________ government spending, _____ transfer payments, and ____ taxes are all examples of expansionary fiscal policy.
Increasing; increasing; lowering
Difference between planned aggregate expenditures and aggregate output at full capacity (GDP at full employment) is called___________
Inflationary gap
If the money multiplier increased, what probably happened to the reserve requirement? Hint: Recall the formula for money multiplier: Money multiplier=1/Reserve requirement
It decreased.
What happens to the money multiplier when the reserve requirement increases from 20% to 25%?
It decreases from 5 to 4.
Which of the following will NOT cause an increase in the consumption?
James's family debt increases.
_____ is/are the buying and selling of U.S. government securities.
Open market operations
According to the full aggregate expenditures model, which will have the greater stimulus effect on the economy: the same amount increase in government spending or decrease in taxes?
The increase in government spending will have the greater stimulus effect on the economy.
Which of these is a description of an automatic stabilizer of the economy?
When the economy declines, tax receipts decrease.
Which of the following is not included in M1?
a $500 bill in your savings account
The short-run aggregate supply curve is upward sloped to indicate what?
a positive relationship between the aggregate output and aggregate price level.
If the MPC = 0.8 and income rises (ΔY) by $5,000, what is the a) MPS and increase in b) saving, and c) consumption ?
a) 0.2 b) 1,000 c) 4,000
Over which component of investment do firms have the least amount of control?
changes in inventories
If the consumption function is below the 45-degree line
consumption is less than income and saving is positive.
The _____ is the state of an economy at which there are no pressures pushing the economy to a higher or lower level of output.
macroeconomic equilibrium
Suppose the economy portrayed by the figure below experiences a national security related surge in defense expenditures. How does the market equilibrium change? *graph*
AD shifts to the right along AS curve
Serving as a ______ is a function of money that gives us a yardstick by which we can measure and compare the values of a wide variety of goods and services.
unit of account
How will an increase in the aggregate output (Y) impact the Fed's decision to change the interest rate r? Use the Fed rule, where r= aY+bP+jZ
will increase interest rate
Using the Fed rule, answer the following question. How will the Fed react to the increase in price level (P)? Fed rule is described by the formula: r = aY + bP + yZ
will increase interest rate (r)
The 12 Federal Reserve banks and their branches do all of the following except:
accept deposits from U.S. citizens
An open market purchase of government bonds by the Federal Reserve results in _________ in the supply of money and _________ in interest rates.
an increase; a decrease
Related to the Economics in Practice on p. 230: In the simple "Keynesian" view, if planned aggregate expenditure and aggregate demand exceed capacity output, there is
an inflationary gap and price level rises.
If the saving function is of the form [S = -15 + 0.4Y], consumption at an income level of 200 is
answer = 135 ; formula= S= -15+80= 65; C= Y-S (200-65)= 135
If the (actual) reserve ratio is less than the reserve requirement, excess reserves _______________
are negative.
An increase in aggregate demand when the economy is operating ________ is likely to result in an increase in the overall price level and ________ in output.
at full capacity; no increase
Money is _______ when it has no intrinsic value, but it is nonetheless accepted as money because the government has decreed it to be money.
fiat money
Assume initially that market interest rates are 6% and the bondholder is receiving a $60 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 10%, the bond price_______
falls to $600 ; formula = 60 / 0.10 = 600
Georgia health intends to conduct additional business investments. Which of the following conditions may POSTPONE their investment?
higher interest rates
To decrease the price level the government could adopt policies that
increase aggregate supply and decrease aggregate demand.
Assume that the MPS is 0.25. Full employment is considered to be at aggregate output level of $800 billion. Currently, the aggregate output is $700 billion. What should the government do to achieve full employment, while also maintaining the federal budget balanced (not increasing the deficit)?
increase government spending and taxes by $100 billion.
Assume that the MPS is 0.25. Full employment is considered to be at aggregate output level of $900 billion. Currently, the aggregate output is $800 billion. What should the government do to achieve full employment?
increase government spending by $25 billion
As a government analyst you are asked to evaluate two fiscal policies and estimate which of them would more favorably impact aggregate output (Y). In the first case the government spending (G) will increase by $100. In the second case the taxes (T) will decline by $100. MPC is 0.75. Which policy would you choose and why? Hint: 1) Use spending multiplier (1/(1-MPC) to calculate GDP increase when government spending is increased. 2) Use tax multiplier (MPC/(1-MPC)) to calculate GDP increase when taxes are reduced. 3) Compare both outcomes.
increase in government spending; yields higher aggregate output by $100.
Assume that the MPC is 0.75. Full employment is considered to be at the aggregate output level of $200 billion. Currently, the aggregate output is $320 billion. Which fiscal policy the government should choose to achieve full employment? Hint: 1) Estimate the change in the aggregate output. 2) Calculate government spending multiplier 3) Calculate tax multiplier 4) Compare the effect of two.
increase taxes by 40 billion
Refer to Figure 11.5. As a result of an increase in government spending, the equilibrium interest rate ________ and the equilibrium output level ________.
increases; increases
The long-run aggregate supply curve _____
is vertical because all prices (both input and output prices) change at the same rate in the long run.
If the money multiplier decreases from 15 to 12, what probably happened to the required reserve ratio?
it increased from 6.67% to 8.33%
M2 is ____ in dollar value than M1; it also contains ____ assets.
larger; less liquid
The level of aggregate output demanded falls when the price level rises, because the resulting increase in the interest rate will lead to
lower investment spending and lower consumption spending.
Refer to Table 9.1. At an output level of $2,000 billion, there is an unplanned inventory change of
positive $100 billion
Household income is ________ related to consumption and ________ related to household saving.
positively; positively
The aggregate supply curve is ________ sloped in the short run, but _______ in the long run.
positively; vertical
Under a cyclically balanced budget, a government should _____ when the economy is growing and _____ when GDP is declining.
raise taxes; raise spending
Assume that the MPC is 0.75. Full employment is considered to be at aggregate output level of $300 billion. Currently, the aggregate output is $380 billion. What should the government do to retain the full employment and overcome the inflationary gap?
reduce spending by $20 billion
Which of the following would cause the short-run aggregate supply curve to shift to the right?
retired workers reentering the labor force
Assume initially that market interest rates are 9% and the bondholder is receiving a $90 coupon payment per year on a bond with a face value of $1,000. If market interest rates decline to 6%, the bond price_______
rises to $1,500 ; 90/0.06 = 1500
Inventory might be lower than planned if ____________
sales are stronger than expected