Macroeconomics Test 2

Similar to point of equilibrium of supply and demand...

There is no overproduction and no excess of total spending. Businesses will not alter their rate of production

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule except when there is

an increase in personal taxes; then they both shift downward.

For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include

an increase in taxes

A positive GDP gap is associated with

an inflationary expenditure gap

progressive

as you make more money rate of taxes go up- income tax

An upsloping aggregate supply curve weakens the realized multiplier effect because any increase in aggregate

demand will have both a price and an output effect.

APS=

disposable income that households save divided by disposable income

APC=

disposable income that households spend on consumer goods divided by disposable income

productivity

measure of the relationship between a nation's level of real output and the amount of resources used to produce that output. measure of average real output, or of real output per unit of input

The expenditure components of real GDP purposely excluded in a private closed economy are

net exports and the government sector

Paying off an internally held debt would

no burden an economy as a whole

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

5.0

In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC out of his $500 raise?

0.80

APC and APS

always equals 1

MPC=

consumption divided by income

debt for one year

deficit

True or False. Real GDP is more volatile (variable) than gross investment.

false

Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in the private closed economy? a. A decline in the real interest rate will cause GDP to increase correct. b. An overall decrease in the expected rate of return on investment will cause GDP to decrease correct. c. A sizeable, sustained increase in stock prices will cause GDP to increase correct.

increase decrease increase

expansionary

increase in government purchases of goods

when do you expand fiscal policy

recession

According to Keynes in a contractionary fiscal policy

taxes should be high

The investment demand schedule shows

the level of investment spending for a given level of GDP

regressive

the more you make the less percentage you pay throughput the year-social security tax system

According to the "real-balances effect," if prices decline

the purchasing power of assets will rise, so spending at each income level should rise

The short-run aggregate supply curve is relatively flat to the left of the full employment output because

there are large amounts of unused capacity and idle human resources.

Equilibrium GDP formula

C+Ig=GDP

Assuming the economy is operating below its potential output, an increase in net exports will

increase aggregate expenditures and real GDP

if an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _________ taxes or __________ government expenditures.

increasing; decreasing

The multiplier effect

intensifies the effect of a spending change, whether it is an increase or decrease.

Saving is called a leakage because it

is a removal from the flow of aggregate consumption.

Planned investment is called an injection because it

is an addition to the flow of aggregate spending

total inputs

land, labor, and capital

The multiplier is

larger, the larger the MPC is and the smaller the MPS is.

Paying off an externally held debt

lower dollar exchange rate

It is difficult, if not impossible, for a country to boost its net exports by increasing its tariffs during a global recession.This is because other countries will respond in-kind by

lowering U.S. exports and net exports.

Fiscal Policy is...

made by congress which is budget which is taxation and spending

MPC definition

marginal propensity to consume

In 2002, the annual oil price was $24.36. As of late July 2006, the annual oil price was $62.07. The percentage increase in real GDP from 2001 to 2005 (the latest year for which data were available) was about 12.6 percent. This indicates that

oil prices increased faster than real GDP, but real GDP still grew at a healthy pace

Measure of resources are used in

order to create a certain amount of output

A political business cycle is the concept that

politicians are more interested in reelection than in stabilizing the economy

federal income tax system is

progressive

A depression abroad will tend to ____________ our exports, which in turn will ____________ net exports, which in turn will ____________

reduce x3

The government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both

The crowding-out effect is the

reduction in investment spending caused by the increase in interest rates, arising from an increase in government spending.

types of tax systems

regressive and progressive

MPS=

savings divided by income

total public debt

since beginning

Saving must equal planned investment at equilibrium GDP in the private closed economy because when this is so,

spending and production will be the same, and there will be no unplanned inventory, or GDP, changes.

productivity in the U.S has increased the past several years due to

technology

The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level

says law

the government should always stay out of the way

The magnitude of the drop in real GDP that will occur when aggregate expenditures fall depends on

the size of the marginal propensity to consume

*productivity formula

total output divided by total inputs

True or False. Larger MPCs imply larger multipliers.

true

With imports, money is leaving and we are not producing it in our own country which means we aren't providing jobs or income to anyone in the U.S. (t/f)

true

consumers are in control, not producers (t/f)

true

during the great recession, our U.S government adopted Keynes philosophy (t/f)

true

our social security is going to go bankrupt (t/f)

true

Keynes

Government intervention to help during recession and intervene when things are growing too much

Take two individuals. One earns $25,000 and the other one earns $100,000 and give them $5,000. Who has the higher MPC?

The one who earns $25,000 because they will be more then likely to use the $5,000 for expenses then say to invest it.

Multipiler Effect

a change in a component of total spending leads to a larger change in GDP

What are the two ways to measure the public debt?

Its absolute dollar size and as a percentage of GDP

But changes in consumption (unrelated to changes in income), net exports, and government purchases also lead to the

Multiplier Effect

Being thrifty is good for individual but bad for the economy

Paradox of Thrift

product(ion) vs. productivity

Productivity is the rate at which goods are produced. Production is defined as the act of manufacturing goods for their use or sale.

For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include

a cut in government spending

Contractionary fiscal policy is

a policy in and inflationary economy

A negative GDP gap is associated with

a recessionary expenditure gap.

Suppose that an initial $40 billion increase in investment spending expands GDP by $40 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $24 billion in the second round of the process. a. What is the MPC in this economy? b. What is the size of the multiplier? c. If, instead, GDP and consumption both rose by $32 billion in the second round, what would have been the size of the multiplier?

a. 0.6 b. 2.5 c. 5

The sum of MPC and the MPS must equal 1 because

all additional income must be spent or saved

APC definition

average propensity to consume

APS

average propensity to save

An internally held debt is one in which the

bondholders live in the nation having the debt

The difference between the MPC and the APC is that the MPC is the

change in consumption divided by change in income, whereas the APC is total consumption divided by total income.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again.

The Council of Economic Advisers (CEA) advises the President on

economic matters, and provides recommendations for discretionary fiscal policy action.

If total spending is just sufficient to purchase an economy's output, then the economy is:

equilibrium

proportional- flat tax

everyone pays the same (sales tax)

If inventories unexpectedly rise, then production __________ sales and firms will respond by __________ output.

exceeds; reducing

If the MPS rises, then the MPC will:

fall

According to Keynes in an expansionary fiscal policy

high government policy should be adopted

MPS defintion

marginal propensity to save

A reduction in aggregate demand likely causes a decline in real output rather than the price level because

prices are inflexible downward

Refinancing the public debt means

selling new bonds to retire maturing bonds

According to the "wealth effect," a change in consumer wealth causes a

shift in consumer spending and the aggregate expenditures curve.

The shape of the short-run aggregate supply curve is

upsloping because wages adjust more slowly than the price level, increasing profits and output.