Macroeconomics Test 3
A country has been in existence for only two years. In the first year, tax revenues were $1 million and expenditures were $1.5 million. In the second year, tax revenues were $1.5 million and expenditures were $2 million. At the end of the second year, the government has issued debt worth...
$1 million
The real interest rate is 4% a year. When the expected inflation rate is zero, the nominal interest rate approximately ... % a year; and when the expected inflation rate is 2% a year, the nominal interest rate is approximately ... % a year
4; 6
A rise in the price level because of an increase in the money wage rate...
might trigger a cost-push inflation
The short-run aggregate supply curve is upward sloping because...
money wages do not immediately change when the price level changes
What would shift the aggregate demand curve leftward year after year?
negative growth in the quantity of money
A popular working definition of a recession is a period with...
negative growth rate in real GDP that lasts at least two quarters
If workers and employers base their wages on an inflation forecast that turns out to be correct...
neither workers nor employers gain or lose from the inflation
Suppose that real GDP rises in all four quarters of 2005; thus 2005 would definitely be a year...
of expansion
A business cycle is the...
pattern of short-run upward and downward movements in production and jobs
What is the proper order for the business cycle?
peak, recession, trough, expansion
Real GDP fluctuates around...
potential GDP
The quantity of real GDP supplied at full employment is called...
potential GDP
Aggregate supply describes the behavior of...
producers
If the economy is at the natural rate of unemployment...
real GDP = potential GDP
In short-run macroeconomics equilibrium...
real GDP and the price level are determined by short-run aggregate supply and aggregate demand
Full-employment equilibrium occurs when...
real GDP equals potential GDP
In long-run macroeconomics equilibrium...
real GDP equals potential GDP
To count as a period of recession...
real GDP growth rates must decrease for at least 2 quarters
In the long-run...
real GDP is equal to potential GDP
When the unemployment rate is below the natural rate of unemployment...
real GDP is greater than potential GDP
If aggregate demand shifts rightward more than expected...
real GDP will be greater than potential GDP
If the aggregate demand curve shift rightward less than expected...
real GDP will be less than potential GDP
What are parts of the business cycle?
recession and expansion
The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a...
recessionary gap
The long-run aggregate supply curve illustrates the...
relationship of prices with the level of GDP when real GDP equals potential GDP
A discretionary fiscal policy is a fiscal policy that...
requires action by the Congress
A demand-pull inflation can be described as ... shifts in the aggregate demand curve and ... shift in the short-run aggregate supply curve
rightward; leftward
The land of Ur increases its capital stock. As a result, the long-run aggregate supply curve shifts... and so does the ... curve
rightward; short-run aggregate supply
The forces that generate economic growth are those that...
shift the long-run aggregate supply curve rightward
To prevent demand-pull inflation...
the Fed must not let the quantity of money persistently rise
What branches of the government play a role in enacting the federal budget?
the President, the House of Representative, and the Senate
During a demand-pull inflation, if the Fed tries to maintain a level of real GDP above potential GDP...
the aggregate demand curve will shift rightward continuously and short-run aggregate supply will shift leftward continuously
In the short-run...
the aggregate supply curve is upward sloping
When the aggregate demand and short-run aggregate supply curves intersect at a level of real GDP which exceeds potential GDP, what will occur?
the aggregate supply curve shifts leftward because the money wage rate rises
The effect of a change in taxes is less than the same sized change in government purchases because...
the amount by which consumption initially changes is the MPC times the tax change
The difference between the government debt and the budget deficit is...
the budget deficit shows the annual discrepancy between government spending and tax revenue and the government debt shows the accumulated balance of past government debts
In a demand-pull inflation, if the Fed stops expanding the quantity of money...
the demand-pull inflation ends
If tax revenue equals $1.5 billion and government expenditure equals $1.6 billion, then...
the government budget has a deficit of $0.1 billion
Moving along which curve does the money wage rate and the price level change in the same proportions?
the long-run aggregate supply curve
The sum of accumulated annual federal budget deficits in excess of budget surpluses refers to...
the national debt
People know that the inflation rate will increase from 3% to 5%. As a result...
the nominal interest rate rises by 2 percentage points
An aggregate supply (AS) curve depicts the relationship between...
the price level and the aggregate quantity supplied
For movements along the long-run aggregate supply curve...
the price level and the money wage rate change in the same proportion
If the aggregate demand curve shifts rightward less than expected...
the price level is lower than expected and output is below potential GDP
At the start of cost-push inflation...
the price level rises and real GDP decreases
The long-run aggregate supply curve is the relationship between the quantity of real GDP supplied and ... when ...
the price level; real GDP equals potential GDP
The supply of real GDP is a function of...
the quantities of labor, capital and the state of technology
A one-time rise in the price level can turn into a demand-pull inflation when...
the quantity of money persistently increase
The term "induced taxes" refers to...
the rise in taxes due to a rise in GDP
A change in the money wage rate shifts...
the short-run aggregate supply curve but not the long-run aggregate supply curve
A reduction in money wages shifts...
the short-run aggregate supply curve rightward but leave the long-run aggregate supply curve unchanged
As the money wage rate increase...
the short-run aggregate supply curve shifts leftward
In the macroeconomics long run...
there is full employment and real GDP is equal to potential GDP
If the money wage and other resource prices do not change when the price level rises by 10%...
there is movement along the short-run aggregate supply curve
If the Fed responds to an initial increase in aggregate demand by increasing the quantity of money...
there is the risk of continued inflation
The largest item of government expenditure is...
transfer payments
At potential GDP...
unemployment is at its natural rate
A peak is the...
upper turning point of a business cycle when an expansion ends
The long-run aggregate supply curve is ... because along it, as prices rise, the money wage rate ...
vertical; rises
Inflation that is higher than expected transfers resources from...
workers to employers and lenders to borrowers
Income taxes and transfer payments...
act like economic shock absorbers and stabilize fluctuations in income
In macroeconomics short-run...
actual real GDP may be less than or more than potential GDP
The text discusses reason why the AD, SAS and LAS curves shift rightward overtime. If there is inflation, which curve shift rightward at a faster pace?
aggregate demand
Demand-pull inflation starts as the...
aggregate demand curve shifts rightward
A demand-pull inflation spiral results when...
aggregate demand increases and the economy corrects the resulting inflationary gap, but aggregate demand continues to increase because the Federal Reserve continues to increase the quantity of money
What will increase long-run aggregate supply?
an advance in technology
What will increase short-run aggregate supply?
an advance in technology
Suppose the country of Dingo experienced an economic trough in January 2004. We can conclude that...
an expansion occurred in 2004
A contractionary fiscal policy is...
an increase in taxes
The country Stanley is at an above full-employment equilibrium. What will return Stanley to full-employment?
an increase in the money wage rate
What starts a demand-pull inflation?
an increase in: -the quantity of money -government expenditures -exports
Recessions...
are an economy-wide decrease in the level of economic activity
The country of Mu has continuous strong economic growth and a persistently steady price level. This situation is most likely the result of aggregate demand growing ... aggregate supply
at much the same pace as long-run
A fall in income that results in a decrease in tax revenues is an example of...
automatic fiscal policy
The effects of a change in government purchases is multiplied throughout an economy...
because these purchases generate changes in consumption expenditure
Starting at full employment, a business cycle can be described by the following sequence: ... equilibrium, ... equilibrium, ... equilibrium
below full-employment; full-employment; above full-employment
An increase in the level of technology shifts...
both the short-run and long-run aggregate supply curves rightward
In 2004, the federal government of Happy Isle has tax returns of $1 million, and spent $500,000 on transfer payments, $250,000 on goods and services and $300,000 on debt interest. In 2004, the government of Happy Isle has a...
budget deficit of $50,000
When tax revenues exceed expenditures, the government has a ..., and when expenditures exceed tax revenues, the government has a ...
budget surplus; budget deficit
An increase in the government ... reduces the government's ...
budget surplus; debt
If the government has a balanced budget, the total amount of government debt is...
constant
A decrease in government purchases of goods and services is an example of...
contractionary fiscal policy
Government transfer payments...
decrease during expansions and increase during recessions
Induced taxes...
decrease during recessions and increase during expansions
An economy currently has an inflationary gap. An increase in the money wage rate will ... the inflationary gap and ... the price level
decrease; increase
The quantity of real GDP supplied... the amount of ...
decreases as; capital and labor input decreases
An increase in the money wage rate...
decreases the short-run aggregate supply
Contractionary fiscal policy ... aggregate demand and in the short run ... real GDP
decreases; decreases
If the government runs a surplus, the total amount of government debt is...
decreasing
If the economy experiences inflation, aggregate...
demand increases faster than aggregate supply
Last year in the country of Union, the price level increased and real GDP increased. Such an outcome might have occurred because short-run aggregate supply ... and aggregate demand ...
did not change; increased
Because of automatic stabilizers, when GDP fluctuates the...
government's deficit fluctuates inversely with GDP so that it is larger when GDP decreases
What results in the aggregate demand curve shifting rightward year after year?
growth in the quantity of money
Initially, demand-pull inflation will...
increase both the price level and real GDP
If the government wants to engage in fiscal policy to increase real GDP, it could...
increase government purchases in order to increase aggregate demand
What monetary policy can be used to reduce demand-pull inflation?
increase in the required reserve ratio
Stagflation is characterized by an...
increase in the unemployment rate and an increase in the price level
An economy has real GDP of $300 billion and potential GDP of $240 billion. To move the economy to potential GDP, the government should ... taxes and/or ... government purchases
increase; decrease
During an expansion, tax revenues ... and government transfer payments ...
increase; decrease
During an expansion, tax revenues ..., while during a recession, tax revenues ...
increase; decrease
The government budget deficit tends to decline during the expansion phase of a business cycle because tax revenues ... and government transfer payments ...
increase; decrease
For an economy at full employment, an increase in the quantity of money will lead to what sequence of shifts in aggregate demand and supply curves?
increased aggregate demand, decreased short-run aggregate supply, constant long-run aggregate supply
Using the aggregate demand- aggregate supply model, an increase in government spending...
increases both real GDP and the price level
If the government purchases multiplier is 2.5 and government purchases increase by $10 billion but prices do not change, equilibrium expenditure...
increases by $25 billion
Demand-pull inflation could start with...
increases in government purchases followed by increases in money wage rates
For a cost-push inflation to occur, oil price increases must be accompanied by...
increases in the quantity of money
A decrease in the money wage rate...
increases the short-run aggregate supply
Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that foreign income rises. U.S. aggregate demand ... and eventually the money wage rate ...
increases; rises
An expansion occurs when production of goods and services is...
increasing
If the government runs a deficit, the total amount of government debt is...
increasing
A cost-push inflation spiral results if the Fed's response to stagflation is to keep...
increasing aggregate demand
Demand-pull inflation results from continually increasing the quantity of money, which leads to a continually...
increasing aggregate demand
A demand-pull inflation initially is characterized by...
increasing real output and a labor shortage
A government that currently has a budget deficit can balance its budget by...
increasing tax revenues by more than it increases expenditures
... taxes and transfer payments ... the size of the government purchases multiplier
induced; decrease
The aggregate supply/aggregate demand model is used to help understand...
inflation, business cycle fluctuations, and growth of potential GDP
Between the trough and the peak of a business cycle the economy...
is in an economic expansion
A recessionary gap means that short-run macroeconomics equilibrium GDP...
is less than full-employment GDP
An inflationary gap means that short-run macroeconomics equilibrium GDP...
is more than full-employment GDP
A balanced budget deficit...
is the difference between government expenditures and revenues
An automatic stabilizer...
is triggered by the state of the economy
The government increases it purchases. The steeper the short-run aggregate supply curve, the ... will be the increase in the price level and the ... will be the increase in real GDP
larger; smaller
An increase in the money wage rate shifts the short-run aggregate supply curve...
leftward, as does an increase in the money prices of raw materials
A decrease in government purchases shift the aggregate demand curve ... and a decrease in taxes shifts the aggregate demand curve ...
leftward; rightward
When inflation is less than anticipated, inflation...
lenders gain at the expense of borrowers
As far as redistribution is concerned, if the inflation rate is lower than anticipated...
lenders gain at the expense of borrowers and some workers gain at the expense of employers
An increase in the quantity of capital shifts the ... curve ... and the ... curve ...
long-run aggregate supply; rightward; short-run aggregate supply; rightward
All of the following shift the long-run aggregate supply curve...
-a change in the capital stock -an increase in the stock of human capital -technological progress
The long-run aggregate supply curve...
-is vertical at the level of potential GDP -shows the relationship between the price level and real GDP when wages and other costs are at an equilibrium level -does not shift in response to temporary changes in aggregate demand
When the government's expenditures exceed its revenues...
-it needs to borrow -it incurs a budget deficit -the federal government debt increases
In the macroeconomics long run...
-real GDP = potential GDP -the economy is at full employment -regardless of the price level, the economy is producing at potential GDP
Long-run aggregate supply will decrease for...
-reduction in the level of technology -decreased human capital -decreased capital
The short-run aggregate supply curve shifts because of changes in...
-the capital stock -money wage rates -technological progress
When the inflation rate is expected to be zero, Steve plans to lend money if the interest rate is at least 4% a year and Cindy plans to borrow money if the interest is no more than 4% a year. Steve and Cindy make a loan agreement for one year at an interest rate of 4% a year when the inflation rate is zero. But if Steve and Cindy expect an inflation rate of 1% a year, they would be willing to make a loan agreement at ... % a year
5%
The bottom or low point of a recession just before an expansion begins is called...
a trough
An example of a discretionary fiscal policy is when...
Congress passes a law that raises personal marginal tax rates
When the inflation rate is expected to be zero, Steve wants to lend money if the interest rate is at least 4% per year, and Cindy wants to borrow money if the interest rate is no more than 4% per year. Steve and Cindy make a loan agreement for one year anticipating the inflation rate to be 2%. During the year, the inflation rate is actually 1%. As a result...
Steve gains
A one-time increase in the price level of oil followed by a one-time increase in aggregate demand produce...
a one-time increase in the price level
Cost-push inflation might start with...
a rise in the price of raw materials, but it requires increases in the quantity of money to persist
An expansionary fiscal policy is...
a cut in taxes
What policy shifts the aggregate demand curve the farthest leftward?
a decrease in government purchases of $10 billion
What reduces the size of the government purchases multiplier?
a decrease in the marginal propensity to consume
Suppose the only revenue taken in by the government is in the form of income tax, and the tax rate is 10%. If aggregate income is $800 billion, and government expenditures are $100 billion then the government budget has...
a deficit of $20 billion
An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a long-run equilibrium with...
a higher price level but the same real GDP
An increase in the income tax rates is an example of...
discretionary fiscal policy
The tax cuts passed by Congress in 2003 to help move the economy more rapidly toward potential GDP are an example of...
discretionary fiscal policy
When the price level rises, the long-run aggregate supply curve...
does not shift
Economic growth will occur and the price level will be constant when the increase in aggregate demand...
exactly equals the increase in long-run aggregate supply
If aggregate demand grows only slightly faster than potential GDP, then the economy will...
experience economic growth with low inflation
Suppose that wage contracts between workers and employers are based on an expected inflation rate of 3% and a 5% increase in money wages is agreed upon. If inflation actually equals 7%, real wages...
fall
Suppose the economy is experiencing a recessionary gap. In the long run, the money wage rate ..., unemployment ..., and the price level...
falls; falls; falls
The long-run aggregate supply curve shows the...
full-employment level of real GDP
Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive...
government debt will increase
Because of automatic stabilizers, when real GDP increases...
government expenditures decrease and tax revenues increase
Because of automatic stabilizers, when real GDP decreases...
government expenditures increase and tax revenues decrease
The amount by which a change in government purchases of goods and services is multiplied to determine the change in aggregate demand that it generates is the ...
government purchases multiplier
A change in the full-employment quantity of labor... the short-run aggregate supply curve and... the long-run aggregate supply curve
shifts; shifts
A technological advance... the long-run aggregate supply curve and... the short-run aggregate supply curve
shifts; shifts
An increase in the amount of human capital labor... the short-run aggregate supply curve and ... the long-run aggregate supply curve
shifts; shifts
By itself, an increase in the price of oil shifts the...
short-run aggregate supply curve leftward and does not shift the aggregate demand curve
Higher resource prices shift the...
short-run aggregate supply curve leftward, rising the price level and decreasing real GDP so it is less than potential GDP
In a short-run macroeconomics equilibrium, real GDP exceeds potential GDP, so the...
short-run aggregate supply curve will shift leftward as the money wage rises
In a short-run macroeconomics equilibrium, potential GDP exceeds real GDP, so the...
short-run aggregate supply curve will shift rightward as the money wage rate falls
In a persisting demand-pull inflation...
short-run aggregate supply decreases and aggregate demand increases
A business cycle is actually a continuous series of different...
short-run macroeconomic equilibrium
The short-run aggregate supply curve...
shows the impact changes in the price level have on the quantity of real GDP when resource prices are constant
The ..., the smaller is the government purchases multiplier
smaller the marginal propensity to consume
An increase in the world price of oil will result in...
stagflation
The government debt is equal to the ... plus ...
sum of past deficits; the current deficit
If the government's expenditures are $1.5 trillion and its tax revenues are $2.2 trillion, the government is running a budget...
surplus of $0.7 trillion
An example of an automatic fiscal policy stabilizer is when...
tax revenues decrease as real GDP decreases
An automatic stabilizer is at work if as real GDP increases...
tax revenues increase and transfer payments decrease