Macroeconomics Unit 3 Review
What is the formula for per-unit production cost?
total input cost / total units of output.
Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions (2015)?
34 percent
The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when...
AD increases but not when AD decreases.
What are the determinants of aggregate demand?
Consumer spending (consumption), investment spending, government spending, net export spending
Demand-pull inflation can be restrained by increasing government spending and reducing taxes. TRUE/FALSE
False.
What is the formula for equilibrium GDP?
GDP = C + Ig
What is a disequilibrium situation?
When total spending is not sufficient enough or is too sufficient to purchase an output. GPD != C + Ig.
What is the equation for net exports?
Xn = exports - inports
An appropriate fiscal policy for a severe recession is...
a decrease in tax rates.
The real-balances effect indicates that...
a higher price level will decrease the real value of many financial assets and therefore reduce spending.
A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes. Why?
a portion of a tax cut will be saved.
Planned investment plus unintended increases in inventories equals...
actual investment.
An inflationary expenditure gap is the amount by which...
aggregate expenditures exceed the full-employment level of GDP.
The equilibrium level of GDP is determined by the intersection of the ____ and the 45 degree line.
aggregate expenditures schedule.
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward...
an excess of government expenditures over tax receipts.
Which of the following fiscal policy actions is most likely to increase aggregate supply?
an increase in government spending on infrastructure that increases private sector productivity.
The interest-rate effect suggests that...
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
We evaluate the Keynesian model using...
consumption spending and investment spending.
If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by...
decreasing taxes by $25 billion.
Fiscal policy refers to the...
deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.
If the price of crude oil decreased, then this would most likely...
increase aggregate supply in the U.S.
Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should...
increase government expenditures by $50 billion.
Does increase government spending increase or decrease GDP?
increase!
The aggregate expenditures model is built upon the assumption that...
prices are fixed.
With equilibrium GDP, there are unplanned changes in inventory. TRUE/FALSE
FALSE. There are NO unplanned changes in inventories.
An unplanned inventory adjustment occurs when what is purchased and what is produced are equivalent. TRUE/FALSE
FALSE. They occur when those are DIFFERENT.
A recessionary expenditure gap exists if the aggregate expenditures schedule lies...
below the 45-degree line at the full-employment GDP.
According to Congressional Budget Office (CBO) projections...
budget deficits are expected to remain large for the next several years.
Refer to the table for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n)...
contractionary fiscal policy.
Which of the following is considered a legitimate concern of a large public debt?
crowding out of private investment.
If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium output would...
necessarily rise.
We must add international trade, so ____ is included in aggregate expenditures.
net exports spending.
If the dollar appreciates relative to foreign currencies, we would expect a country's...
net exports to fall.
A net export schedule lists the amount of ____ that will occur at each level of ____.
net exports, GDP.
An expansionary fiscal policy is shown as a..
rightward shift in the economy's aggregate demand curve.
Graphically, demand-pull inflation is shown as a...
rightward shift of the AD curve along an upsloping AS curve.
Imports have the same effect on the current size of GDP as ____ . Exports have the same effect on the current size of GDP as ____ .
saving; investment
Other things equal, a decrease in the real interest rate will do what to the aggregate demand curve? Why?
shift the AD curve to the right by expanding investment.
In an aggregate expenditures diagram, equal increases in government spending and in lump-sum taxes will...
shift the aggregate expenditures line upward.
The determinants of aggregate demand explain...
shifts in the aggregate demand curve.
The American Recovery and Reinvestment Act of 2009 was implemented primarily to...
stimulate aggregate demand and employment.
If the government wishes to increase the level of real GDP, it might reduce...
taxes.
What is the slope of the aggregate expenditures model is equal to...
the MPC
When current tax revenues exceed current government expenditures and the economy is achieving full employment...
the cyclically adjusted budget has a surplus.
An unintended increase in business inventories occurring means that GDP is...
too high for equilibrium.
The economy's long-run aggregate supply curve is...
vertical.
If aggregate demand increases and aggregate supply decreases, the price level...
will increase, but real output may increase, decrease, or remain unchanged.
(Last Word) In response to the Great Recession, the federal government engaged in significant deficit-funded spending, but it did not fully achieve the desired result. Which of the following best explains why the fiscal policy actions fell short of their objective?
Consumers did not respond to the fiscal stimulus as well as hoped, as they put more income into saving and repaying debt.
Using the Keynesian aggregate expenditures model, what are assumed to be equal?
GDP = NI = PI = DI
If MPC = .5, a simultaneous increase in both taxes and government spending of $20 will...
Given MPC =0.5 , Multiplier = 1/(1-0.5) = 2Effect of ∆ G: ∆GDP = multiplier*∆G∆GDP = 2*20 = +$40Effect of Tax increase: ∆GDP = multiplier* ∆C∆GDP = multiplier(T*MPC)∆GDP = 2(200.5) = -$20Net effect of G and T = (+40 ) +(-20)= +20
If the MPC is .50 and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap is...
$20 billion.
Suppose an economy is producing at equilibrium GDP. If this GDP is $200 billion below the economy's potential, what is the size of the recessionary expenditure gap if the multiplier is 4?
$50 billion
Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand?
$50 billion
Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The recognition lag of fiscal policy is reflected in events...
1 and 2
Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The administrative lag of fiscal policy is reflected in events...
3 and 4
Describe the investment schedule, including what it shows, and briefly explain its relationship to the investment demand curve.
The investment schedule, Ig, relates the amount of investment determined in the investment schedule to the various levels of GDP.
An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of what?
The multiplier effect.
The public debt is held as...
Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
With the Keynesian aggregate expenditures model, we assume what kind of economy? What is ignored, what does the economy consist of, and what activity does not exist?
We assume a private, closed economy with no international trade. Government is ignored, so the economy consists of the households and businesses (private sector).
An increase in productivity shifts the aggregate supply curve...
down and to the right.
With equilibrium GDP, saving and planned investment are...
equal. S = Ig
If aggregate expenditures exceed GDP in a private closed economy, planned investment will...
exceed saving.
Positive net exports have a(n) ____ effect. Negative net exports have a(n) ____ effect.
expansionary, contractionary.
In the immediate short-run, the aggregate supply curve is ____ at the economy's current price level.
horizontal.
The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will...
increase U.S. exports and decrease U.S. imports.
An increase in expected future income will
increase aggregate demand.
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90 billion, and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP gap here?
increase government spending and decrease taxes
If Congress passed new laws significantly increasing the regulation of business, this action would tend to...
increase per-unit production costs and shift the aggregate supply curve to the left.
Positive net exports ____ equilibrium GDP and negative net exports ____ equilibrium GDP.
increase, decrease.
The crowding-out effect of expansionary fiscal policy suggests that...
increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
Discretionary fiscal policy is so named because it...
involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
Contractionary fiscal policy is so named because it...
is aimed at reducing aggregate demand and thus achieving price stability.
Expansionary fiscal policy is so named because it...
is designed to expand real GDP.
The accompanying table is the before-tax consumption schedule for a closed economy. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system... GDP: $0 - $100 - $200 - $300 - $400, C: $40 - $120 - $200 - $280 - $360.
is regressive.
A tax reduction of a specific amount will be more expansionary the...
larger is the economy's MPC.
Cost-push inflation is depicted by a ____ shift of the aggregate ____ curve.
leftward, supply.
Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's budget shows a surplus, then...
planned investment must exceed savings.
Net exports affect aggregate expenditures in a(n) ____ economy. The formula for aggregate expenditures in this economy is...
private, open; C + Ig + Xn
Equilibrium price level occurs when what two things are equivalent?
real output demanded equals real output supplied.
In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should...
reduce tax rates and/or increase government spending.
When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may...
reduce worker morale and work effort and thus lower productivity.
In an effort to stop the U.S. recession of 2007-2009, the federal government...
reduced taxes and increased government spending.
A major advantage of the built-in or automatic stabilizers is that they...
require no legislative action by Congress to be made effective.
An increase in net exports will shift the AD curve to the...
right by a multiple of the change in net exports.
Other things equal, the multiplier effect associated with a change in government spending is equal to that associated with a change in investment or consumption. TRUE/FALSE
TRUE. Multiplier effect works in the same way.
What model is used to help explain how modern economies adjust to economic shocks?
The Keynesian aggregate expenditures model.
Is the aggregate demand curve sloped? If so, in what direction? Why or why not?
The aggregate demand curve is downsloping because of the interest-rate, real-balances, and foreign purchases effects.
How does the investment schedule affect the aggregate expenditures model?
If the investment schedule shifts upward, so will the aggregate expenditures model, and vice versa. If expected rate of return rises OR real interest rate falls, the investment schedule will shift upward because investment increases; and vice versa.
What is the ratchet effect?
In terms of our analogy, increases in aggregate demand ratchet the U.S. price level upward . Once in place the higher price level remains until it is ratcheted up again. The higher price level tends to remain even with declines in aggregate demand.
What are the determinants of aggregate supply?
Input prices, productivity, and the legal/institutional environment.
The aggregate supply curve (short run) is steepest where?
It is steeper above the full-employment output than below it.
What is equilibrium GDP?
It is the level of output whose production will create total spending just sufficient to purchase that output.
The larger the ____ , the greater the effect of increased taxes on the equilibrium GDP.
MPC.
What are the equations for multiplier?
Multiplier = 1/MPS OR 1/(1-MPC). Multiplier = change in real GDP/initial change in spending.
How do positive and negative net exports affect the aggregate expenditures in an open economy relative to what it would be if the economy were closed?
Positive net exports increase aggregate expenditures beyond what they would be in a closed economy, while negative net exports decreases aggregate expenditures.
What is the equation for savings?
S = DI - Consumption
How does positive and negative net exports affect the aggregate expenditures schedule?
Positive net exports shift the aggregate expenditures upward, while negative net exports shift it downward.
In a mixed open economy, the equilibrium GDP is determined at that point where...
Sa + M + T = Ig + X + G.
How do unplanned inventory adjustments affect firms?
A positive unplanned inventory adjustment would lead firms to produce less output in the future. A negative unplanned inventory adjustment would lead firms to produce more. Unplanned inventory adjustments are gaps between spending & investment, and DI and/or GDP.
How does the movement of the aggregate expenditures model affect equilibrium real GDP?
An upward shift will increase the equilibrium real GDP, while a downward shift will decrease the equilibrium real GDP.
