test 3

The greater the MPC, the greater the multiplier. -True -False

True

A high rate of inflation is likely to cause a: -high nominal interest rate. -low nominal interest rate. -low rate of growth of nominal GDP. -decrease in nominal wages.

high nominal interest rate

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is: -18 percent. -24 percent. -12 percent. -6 percent.

12 percent

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is: -7.5 percent. -10 percent. -15 percent. -20 percent.

15 percent

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is: -80 percent. -8 percent. -2 percent. -20 percent.

20 percent

An $18 billion increase in spending creates $18 billion of new income in the first round of the multiplier process and $13.5 billion in the second round. The multiplier in the economy is: -2 -3 -4 -5

4

If the MPC is 0.75, the multiplier will be: -2 -3 -3.5 -4

4

Which of the following represents the most expansionary fiscal policy? -A $10 billion tax cut. -A $10 billion increase in government spending. -A $10 billion tax increase. -A $10 billion decrease in government spending.

A $10 billion increase in government spending.

Suppose a family's consumption exceeds its disposable income. This means that its: -MPC is greater than 1. -MPS is negative. -APC is greater than 1. -APS is positive.

APC is greater than 1

The fraction, or percentage, of total income which is consumed is called the: -Break-even income -Consumption schedule -Marginal propensity to consume -Average propensity to consume

Average propensity to consume

How is the public debt calculated? -By subtracting the government's total liabilities from its total assets -By cumulating the annual government purchases over time -By subtracting current government spending from current government tax revenues -By cumulating the annual difference between tax revenues and government spending over the years

By cumulating the annual difference between tax revenues and government spending over the years

Due to automatic stabilizers, when the nation's total income rises, government transfer spending: -Increases and tax revenues decrease -Decreases and tax revenues increase -And tax revenues decrease -And tax revenues increase

Decreases and tax revenues increase

Personal saving is equal to: -Disposable income plus consumption -Consumption minus disposable income -Disposable income minus consumption -Consumption divided by disposable income

Disposable income minus consumption

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other. -True -False

False

A decrease in taxes is one way to pursue a contractionary fiscal policy because it will make government revenues contract. -True -False

False

Demand-pull inflation can be restrained by increasing government spending and reducing taxes. -True -False

False

The goal of expansionary fiscal policy is to rein in inflation. -True -False

False

Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that: -Reinforce changes in GDP -Help offset changes in GDP -Produce a cyclically-adjusted budget -Produce a standardized budget

Help offset changes in GDP

Crowding out is a decrease in private investment caused by: -Increased taxation by the government -Increased borrowing by the government -Increased consumer spending by households -Increased exports to buyers in other nations

Increased borrowing by the government

The crowding-out effect suggests that: -Increases in consumption are always at the expense of saving -Increases in government spending will close a recessionary expenditure gap -Increases in government spending may reduce private investment -High taxes reduce both consumption and saving

Increases in government spending may reduce private investment

In an economy, for every $1600 decrease in income, spending falls by $1200. It can be concluded that the: -Slope of the saving schedule is 1.33 -Slope of the saving schedule is 0.75 -Marginal propensity to consume is 1.33 -Marginal propensity to save is .25

Marginal propensity to save is .25

The goal of expansionary fiscal policy is to increase: -The price level -Aggregate supply -Real GDP -Unemployment

Real GDP

The two reasons why bankruptcy is a false concern about the public debt are: -Government spending and taxation -Refinancing and taxation -Investment and refinancing -Saving and investment

Refinancing & taxation

Fiscal policy is enacted through changes in: -Interest rates and the price level -The supply of money and foreign exchange -Unemployment and inflation -Taxation and government spending

Taxation and government spending

If the government wishes to increase the level of real GDP, it might reduce: -Taxes -Transfer payments -The size of the budget deficit -Its purchases of goods and services

Taxes

A major reason that the public debt cannot bankrupt the Federal government is because: -The public debt is mostly held by foreigners -The Federal government has the Social Security Trust Fund -The public debt can be easily refinanced by issuing new bonds -The Federal government can draw on its gold reserves

The public debt can be easily refinanced by issuing new bonds

Assume that MPS is 0.4. If spending increases by $8 billion, then real GDP will increase by: -$8 billion -$13.3 billion -$15 billion -$20 billion

$20 billion

If disposable income increases from $912 to $927 billion and MPC = 0.6, then consumption will increase by: -$6 billion -$9 billion -$54 billion -$56 billion

$9 billion

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by: -$3 billion. -$2/3 billion. -$6 billion. -$2 billion.

6 billion

Which of the following fiscal policy changes would be the most contractionary? -A $40 billion increase in taxes -A $10 billion increase in taxes and a $30 billion cut in government spending -A $20 billion increase in taxes and a $20 billion cut in government spending -A $30 billion increase in taxes and a $10 billion cut in government spending

A $10 billion increase in taxes and a $30 billion cut in government spending

Which of the following fiscal policy changes would be the most expansionary? -A $40 billion increase in government spending -A $20 billion tax cut and $20 billion increase in government spending -A $10 billion tax cut and $30 billion increase in government spending -A $40 billion tax cut

A $40 billion increase in government spending

Built-in stability is exemplified by the fact that with a progressive tax system, net tax revenues decrease when GDP decreases. -True -False

True

A firm invests in a new machine that costs $5,000 a year but which is expected to produce an increase in total revenue of $5,200 a year. The current real rate of interest is 7 percent. The firm should: -Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest -Undertake the investment because the expected rate of return of 8 percent is greater than the real rate of interest -Not undertake the investment because the expected rate of return of 6 percent is less than the real rate of interest -Not undertake the investment because the expected rate of return of 4 percent is less than the real rate of interest

Not undertake the investment because the expected rate of return of 4 percent is less than the real rate of interest

Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions. -True -False

True

An increase in taxes will shift both the consumption schedule and the saving schedule down. -True -False

True

Which of the following will not cause the consumption schedule to shift? -A sharp increase in the amount of wealth held by households. -A change in consumer incomes. -The expectation of a recession. -A growing expectation that consumer durables will be in short supply.

a change in consumers income

Given the expected rate of return on all possible investment opportunities in the economy: -an increase in the real rate of interest will reduce the level of investment. -a decrease in the real rate of interest will reduce the level of investment. -a change in the real interest rate will have no impact on the level of investment. -an increase in the real interest rate will increase the level of investment.

an increase in the real rate of interest will reduce the level of investment

As disposable income goes up, the: -average propensity to consume falls. -average prosensity to save falls. -volume of consumption declines absolutely. -volume of investment diminishes.

average propensity to consume falls

A rightward shift of the investment demand curve might be caused by: -an increase in the price level. -a decline in the real interest rate. -businesses planning to increase their stock of inventories. -an increase in business taxes.

business planning to increase their stock of inventories

The multiplier is defined as: -1 - MPS. -change in GDP × initial change in spending. -change in GDP/initial change in spending. -change in GDP - initial change in spending.

change in GDP/initial change in spending.

The MPC can be defined as that fraction of a: -change in income that is not spent. -change in income that is spent. -given total income that is not consumed. -given total income that is consumed.

change in income that is spent

If Matt's disposable income increases from $4,000 to $4,500 and his level of saving increases from $200 to $325, it may be concluded that his marginal propensity to: -Consume is .80 -Consume is .75 -Consume is .60 -Save is .30

consume .75

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: -save is three-fifths. -consume is one-half. -consume is three-fifths. -consume is two-fifths.

consume is three-fifths

Discretionary fiscal policy refers to: -any change in government spending or taxes that destabilizes the economy. -the authority that the president has to change personal income tax rates. -intentional changes in taxes and government expenditures made by Congress to stabilize the economy. -the changes in taxes and transfers that occur as GDP changes.

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

In contrast to investment, consumption is: -relatively unstable. -relatively stable. -measurable. -unmeasurable.

relatively stable

A major advantage of the built-in or automatic stabilizers is that they: -simultaneously stabilize the economy and reduce the absolute size of the public debt. -automatically produce surpluses during recessions and deficits during inflations. -require no legislative action by Congress to be made effective. -guarantee that the federal budget will be balanced over the course of the business cycle.

require no legislative action by Congress to be made effective

An expansionary fiscal policy is shown as a: -rightward shift in the economy's aggregate demand curve. -movement along an existing aggregate demand curve. -leftward shift in the economy's aggregate supply curve. -leftward shift in the economy's aggregate demand curve.

rightward shift in the economy's aggregate demand curve.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the: -smaller is the economy's MPC. -flatter is the economy's aggregate supply curve. -smaller is the economy's MPS. -less is the economy's built-in stability.

smaller is the economy's MPS.

If Trent's MPC is .80, this means that he will: -spend eight-tenths of any increase in his disposable income. -spend eight-tenths of any level of disposable income. -break even when his disposable income is $8,000. -save two-tenths of any level of disposable income.

spend eight-tenths of any increase in his disposable income

Dissaving means: - the same thing as disinvesting. -that households are spending more than their current incomes. -that saving and investment are equal. -that disposable income is less than zero.

that households are spending more than their current incomes

The greater is the marginal propensity to consume, the: -smaller is the marginal propensity to save. -higher is the interest rate. -smaller is the average propensity to consume. -lower is the price level.

the smaller is the marginal propensity to save

The investment demand curve suggests: -that changes in the real interest rate will not affect the amount invested. -there is an inverse relationship between the real rate of interest and the level of investment spending. -that an increase in business taxes will tend to stimulate investment spending. -there is a direct relationship between the real rate of interest and the level of investment spending.

there is an inverse relationship between the real rate of interest and the level of investment spending.

1 - MPC = MPS. -True -False

true