Econ 103 LC 8-10

Consumption spending has increased every year since 1980 except between

2008 and 2009. Consumption spending has increased every year since 1980 except 2009.

If the marginal propensity to save is 0.2, what is the multiplier?

5 The multiplier is 5. It is determined by dividing 1 by the marginal propensity to save. The equation is multiplier = 1/MPS = 1/0.2 = 5.

Which of the following is considered discretionary spending within the federal budget?

Defense

Which of these is a contractionary fiscal policy?

decreasing transfer payments Decreasing transfer payments is a contractionary fiscal policy.

What is mandatory spending?

spending authorized by permanent laws Mandatory spending is authorized by permanent laws.

Which of these events would be most likely to cause the shift from AD0 to AD1 in the diagram, which depicts the U.S. economy?

the Great Depression During the Great Depression, investment decreased by 80% and consumption declined nearly 20%, reducing aggregate demand.

The Phillips curve shows a relationship between inflation and

unemployment

At his second press conference, in June 2011, Federal Reserve chairman Ben Bernanke was asked if his views on the recessionary gap had changed. The recessionary gap is the increase in _____ needed to bring a depressed economy back to full employment.

aggregate spending The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment. This is easily confused with the GDP gap, the difference between full employment GDP and real GDP.

According to the Laffer curve, an increase in tax rates will lead to

an increase, a decrease, or no change in tax revenue. According to the Laffer curve, an increase in tax rate can lead to an increase, a decrease, or no change in tax revenue.

Based on the hypothetical data below, what do you believe is occurring?

c)Stagflation Declining output, coupled with rising unemployment and inflation are characteristics of stagflation.

Demand-pull inflation may be caused by _________.

c)a decrease in personal income taxes d)tax credits for investment

Increased taxes and regulation would cause the _____ curve to shift to the _____.

short-run aggregate supply; left Rising taxes or increased regulation would increase the costs of production, thus, shifting the short-run aggregate supply curve to the left.

France is known to have a relatively inflexible labor market. In February 2000, France instituted a new policy. Any hours worked beyond 35 in a week were considered overtime (previously, the policy was that overtime was over 40 hours per week). What was the likely effect on France's short-run aggregate supply curve?

It would cause the short-run aggregate supply curve to shift to the left. Regulations that increase the cost of labor for employers will cause the short-run aggregate supply curve to shift to the left.

Suppose a drought in Australia has seriously impaired agricultural productivity. How would that impairment in productivity affect short-run aggregate supply?

It would cause the short-run aggregate supply curve to shift to the left. Droughts that reduce agricultural productivity will cause the short-run aggregate supply curve to shift to the left.

What would be the likely effect of government actions that would decrease the concentration of industries?

It would cause the short-run aggregate supply curve to shift to the right. Market power causes firms to restrict supply in order to increase profits. By reducing firms' market power, the government can increase short-run aggregate supply.

Which of these would decrease the amount of money a family spends?

a higher debt level A higher debt level will decrease the amount a family spends.

The effect of an increase in government spending on the economy can be shown as

a shift to the right of the entire aggregate demand curve. Government spending is one of the four determinants of aggregate demand. A change in government spending would lead to a shift in the aggregate demand curve. An increase would lead to a shift to the right, and a decrease to a shift to the left.

The U.S. economy recovered from the Great Depression when increased government spending shifted the

aggregate demand curve to the right. The increase in government spending would increase aggregate demand that was necessary to restore the economy.

If the marginal propensity to consume is 0.8 and taxes are increased by a lump sum of $100 billion, what will be the reduction in income?

$400 billion Consumers pay for this tax in part by reducing their savings. This dampens the impact of the tax on equilibrium income because those funds were previously withdrawn from the spending stream. δC = 0.8 × 100 = $80. δY = δC × (1/MPS) = $80 × 1/0.2 = $400.

If the marginal propensity to save is 0.25 and new spending is $200, then total spending will increase by

$800. The spending multiplier is determined by dividing 1 by the marginal propensity to save. Then to calculate the total spending increase, multiply the amount of new spending ($200) by the multiplier (1/MPS): $200 × (1/MPS) = $200 × (1/0.25) = $200 × 4 = $800.

In the long run, improvements in technology will

shift the long-run aggregate supply curve to the right. Improvements in technology would cause an increase in the long-run aggregate supply, leading to economic growth.

The recessionary gap is the increase in _____ needed to bring a depressed economy back to full employment.

aggregate spending The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment.

Which of these, when used as inputs for production, most likely contributes to the positive slope of the short-run aggregate supply curve?

rent paid by a bakery The aggregate supply curve is positively sloped in the short run because some input costs, such as rent, are often fixed for a specified term.

In the long run, a large increase in exploitable natural resources will

shift the long-run aggregate supply curve to the right. A large increase in exploitable natural resources would cause an increase in the long-run aggregate supply, leading to economic growth.

An increase in spending on human capital should

shift the long-run aggregate supply curve to the right. An increase in human capital would increase productivity, and therefore shift the long-run aggregate supply curve to the right.

"Cloud" technology means that firms can store their data "in the cloud" instead of on servers that they would have to own and maintain. The effect of this on the economy would be illustrated by a _____ short-run aggregate supply curve.

shift to the right of the entire Cloud technology could mean lower costs or increasing productivity. The impact would be illustrated by a different aggregate supply curve to the right of the original curve.

Which of these events would be most likely to cause the shift from SRAS0 to SRAS1 in the diagram, which depicts the U.S. economy?

the 1973 oil shocks The 1973 oil shocks would cause a decrease in short-run aggregate supply due to increased production costs.

If Amanda has an income of $40,000 and disposable income of $30,000, how much does she pay in taxes?

$10,000 Amanda pays $10,000 in taxes. The amount is determined by subtracting disposable income from total income.

If the inflationary gap is $100 billion and the multiplier is 2, what is the reduction in aggregate spending needed to reach full employment?

$100 billion The inflationary gap is the reduction in aggregate spending that will move the economy back to full employment.

In the simple aggregate expenditures model with no government and no international trade, at the macroeconomic equilibrium, if business investment equals $2 trillion, savings equals

$2 trillion. Savings equals $2 trillion because at macroeconomic equilibrium in the simple aggregate expenditures model, business investment equals savings.

How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.2?

$250 This is determined by multiplying the amount of new spending by the multiplier, which is 1/(1 − MPC), or 1/MPS = 1/(1 − 0.2) = 1.25; 1.25 × $200 = $250.

How much will $200 in new spending change equilibrium income if the marginal propensity to save is 0.75?

$266 This is determined by multiplying the amount of new spending by the multiplier, which is 1/(1 − MPC) = 1/MPS = 1/(0.75) = 1.33; 1.33 × $200 = $266.

According to the full aggregate expenditures model, if government spending is $5 trillion, business investment is $2 trillion, and savings is $4 trillion, how much are taxes in a closed economy?

$3 trillion If government spending and business investment together give $7 trillion, then that must mean the savings and taxes together are also $7 trillion; 4 + 3 = 7.

What is a possible negative effect of a positive wealth effect on the economy?

+35pts Yes! The correct answer is: Increased spending will lead to increased inflation. A positive wealth effect can lead to an increase in consumption, which can lead to an increase in inflation rates.

What is Alice's marginal propensity to consume if she increases her spending by $1,000 after she receives a $5,000 raise in salary?

.2

What is Kyle's marginal propensity to save if his saving increases by $400 after receiving a $1,200 increase in salary?

0.3 Kyle's marginal propensity to save is 0.3. It is determined by dividing the change in saving by the change in income. The equation is: MPS = $400/$1,200 = 0.3.

If Belinda's marginal propensity to save is 0.2, what is her marginal propensity to consume?

0.8 Belinda's marginal propensity to consume is 0.8 because MPC + MPS always equals 1.

_____ is the total output of goods and services purchased at different price levels.

Aggregate demand This refers to the total output of goods and services purchased at different price levels.

_____ refers to the real GDP that firms will produce at various price levels.

Aggregate supply Aggregate supply shows the real GDP that firms will produce at various price levels.

If the spending multiplier is 4, then the marginal propensity to _____ is 0.75.

consume A spending multiplier of 5 means that one person's spending becomes another's income; the other person spends a portion of that income and so on until the sum of increased spending in the economy is 5 times the original amount.

President Reagan implemented a policy of supply-side economics, what did this mainly entail?

decreasing marginal tax rates Presidents Kennedy and Reagan decreased marginal tax rates. President Kennedy reduced the top marginal rate from 70% to 50%, and President Reagan reduced the top marginal rate from 50% to 28%.

Fiscal policy refers to the idea that changes in __________.

government spending and taxing policy can affect aggregate demand Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.

In February 2009, Congress approved a $787 billion stimulus package. By March 30, 2011, $633.5 had been spent. This illustrates _____ lag.

implementation Once some new policy has become law, it often requires months of planning, budgeting, and implementation to set up a new program. This process, the implementation lag, rarely consumes less than 18 to 24 months.

Economists at the Bureau of Economic Analysis are busy collecting data for the quarterly growth estimates, which will indicate the health of the economy. The time spent collecting this data and generating reports is the _____ lag.

information The information lag is the time policymakers must wait for economic data to be collected, processed, and reported.

Which of these is a public choice theory issue?

the impact of election incentives on politicians Public choice theory is the economic analysis of public and political decision making. The impact of election incentives on politicians would fit under political decision making.

Stagflation is a situation in which ___________.

unemployment is high, inflation is high and economic growth is stagnant Stagflation is the situation when unemployment is high, inflation is high and economic growth is stagnant—caused by a decrease in SRAS, oil shock.

In the summer of 2011 the economic recovery seemed to be stalled, and the government's budget deficit was rising. Some politicians were calling for higher taxes; others said that was a bad idea because an increase in taxes would result in

An increase in taxes will result in decreased consumption and decreased savings; this is not what you want when you are trying to stimulate an economy.

Data and recognition lags pertain equally to both fiscal and monetary policy.

True

Which of these is a true statement?

When the aggregate price level increases, this causes net exports to fall. A rising aggregate price level lowers the amount of exports because U.S. goods are now more expensive. Foreigners purchase fewer American products, so U.S. exports decline.

Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to save is 0.5?

−$600 This is determined by multiplying the amount of reduced spending by the multiplier, which is 1/(1 − MPC), or 1/MPS. 1/(0.5) = 2; 2 × −$300 = −$600.

Oil prices affect the prices of just about everything in the economy because oil is used in the production and transport of so many goods. How would decreasing oil prices affect aggregate demand?

It would cause a movement down along the aggregate demand curve. When aggregate demand changes as a result of a decreasing price level, there is a movement down along the aggregate demand curve.

Suppose the cost of labor were to increase. How would that affect short-run aggregate supply?

It would cause the short-run aggregate supply curve to shift to the left. An increase in labor cost would increase the costs of production; this would lower short-run aggregate output, which is represented by a leftward shift of the short-run aggregate supply curve. Challenge

Which of the following statements is FALSE regarding the Laffer curve?

None of the above—all are true

What occurs at macroeconomic equilibrium?

The economy neither contracts nor expands. The economy neither contracts nor expands at macroeconomic equilibrium.

Fiscal policy aimed at eliminating a recessionary gap may include reductions in personal and corporate income taxes as well as increased government spending.

True

If leakages fall short of injections at the 'full capacity' level of national income, then we have an inflationary gap.

True

If the recessionary gap is $200 billion and the multiplier is 2, what is the increase in aggregate spending needed to bring the economy to full employment?

$200 billion The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment. This increase in aggregate spending will affect GDP according to the multiplier.

According to the full aggregate expenditures model, if government spending is $4 trillion, savings is $1 trillion, taxes are $2 trillion, and net exports are −$4 trillion, what is investment?

$3 trillion The sum of investment, government spending, and exports must equal the sum of savings, taxes, and imports. Since the sum of taxes, imports, and savings is at least $7 trillion, investment must be $3 trillion.

According to the full aggregate expenditures model, if government spending is $4 trillion, business investment is $3 trillion, and taxes are $3 trillion, how much is savings in a closed economy?

$4 trillion The sum of government spending and business investment must equal the sum of savings and taxes in a closed economy.

Because Susom received a raise in pay from $30,000 to $50,000, his consumption increased from $29,000 to $45,000. What is Susom's marginal propensity to save?

.2 First, calculate Susom's savings. When income was $30,000, his consumption was $29,000, so his savings was $1,000. When his income increased, his consumption increased, and his new level of savings was $50,000 − $45,000, or $5,000. Susom's marginal propensity to save is 0.2, which is determined by dividing the change in savings by the change in income. The equation is MPS = ($5,000 − $1,000)/($50,000 − $30,000) = $4,000/$20,000 = 0.2.

Because Mayara received a raise in pay from $90,000 to $100,000, her consumption increased from $50,000 to $55,000. What is Mayara's marginal propensity to consume?

0.5 Mayara's marginal propensity to consume is determined by dividing the change in consumption by the change in income. The equation is MPC = δ C/ δY = ($55,000 − $50,000)/($100,000 − $90,000) = $5,000/$10,000 = 0.5.

What is the average propensity to consume if income is $50,000 and savings is $10,000?

0.8 The average propensity to consume is 0.8. It is determined by first calculating consumption spending, which is equal to income less savings, or $50,000 − $10,000 = $40,000. Then divide consumption spending by income. That equation is APC = C/Y = $40,000/$50,000 = 0.8.

If consumption increases $850 billion following a $1 trillion reduction in personal income taxes, the value of the MPC would be __________.

0.85 or 85% •MPC = ∆C/∆Yd• = $850M / $1,000M = 0.85 or 85%

The Revenue Act of 1932, signed by President Herbert Hoover, increased taxes across the board on individuals and corporations. The top income tax rate on high earners increased a staggering amount, from 25% to 63%. How would this affect aggregate demand?

It would cause the aggregate demand curve to shift to the left. Factors that decrease aggregate demand at any given price level will cause the aggregate demand curve to shift to the left.

In the mid- to late 1990s, huge productivity gains were realized from the adoption of information technology by firms. How would that affect short-run aggregate supply?

It would cause the short-run aggregate supply curve to shift to the right. Adoption of information technology would increase productivity. The IT-led productivity boom in the late-1990s caused the short-run aggregate supply curve to shift to the right. It also caused the long-run aggregate supply curve to shift to the right.

In 2011, analysts were predicting increases in the aggregate price level in India. How would this affect exports from India?

Its exports would decrease. An increase in the aggregate price level will lead to a decrease in exports because the higher prices in India would make the goods less competitive (more expensive) in global markets.

According to Keynes's model of the macroeconomy, _____ is a key component of short-term equilibrium employment, output, and income.

consumer spending Keynes's focus is on aggregate expenditures. His operating assumption was that if consumers demanded a given level of output, business would provide it. Thus, consumer spending is a key component of short-term equilibrium employment, output, and income.

Which of the following statements is/are FALSE regarding a country's federal (or national) deficit, surplus and debt?

The last occurrence of a surplus in the U.S. was under the Obama Administration.

_____ is the factor used to determine the amount by which equilibrium income changes due to a change in spending.

The multiplier This is the definition of the multiplier.

Which of these is true of the paradox of thrift?

The paradox of thrift occurs when households intend to save more. When investment is positively related to income and households intend to save more, they reduce consumption, income, and output, reducing investment so that the result is that consumers actually end up saving less.

_____ is demonstrated when the price of a product falls, causing consumers to purchase more of the product because they substitute it for other higher-priced goods.

The substitution effect The substitution effect states that when the price of a product falls, consumers purchase more of the product because they substitute it for other higher-priced goods.

What is one of the weaknesses of supply-side fiscal policies in the economy?

They can take a long time to work. Fiscal policy directed at the supply side tends to take a long time to work.

The diagram shows the economy

at long-run macroeconomic equilibrium at full employment. The diagram shows the economy at long-run macroeconomic equilibrium at full employment.

Which of these will cause the aggregate demand curve to shift to the left?

a decrease in consumer confidence A decrease in consumer confidence will cause people to purchase fewer goods at any given price level, shifting the aggregate demand curve to the left.

Which of these will cause the aggregate demand curve to shift to the left?

a decrease in exports due to decreasing consumer confidence in Europe A decrease in consumer confidence in Europe will cause Europeans to purchase fewer American goods at any given price level, shifting the aggregate demand curve in the United States to the left.

An appreciation of the U.S. dollar will result in __________.

a)an increase in imported goods into the U.S. b)a decrease in goods exported by the U.S. If a country's currency appreciates: the price of its exports would become more expensive, resulting in a decrease of exports; and, the price of imported goods would fall, resulting in an increase in imports. Both of the above would mean net exports would decrease, meaning a decrease in aggregate demand.

If the economy is operating below the natural rate of unemployment, then the economy is typically operating __________ potential GDP.

above When the the economy is operating below the natural rate of unemployment, typically around 5%, it means it a time of expansion with low unemployment. This means that output is being created and GDP is high.

Suppose the government wishes to reduce or eliminate existing demand-pull inflation. It could use its tax and spending policy powers to shift the

aggregate demand curve to the left. The government can use its tax and spending policy powers to reduce aggregate demand, shifting it to the left. Specifically, the government could raise taxes and/or decrease its spending.

After the elections of 2010, the U.S. Senate remained controlled by the Democrats, but the majority of the House of Representatives became Republican. You might expect that this would increase the _____ lag associated with fiscal policy.

decision Decision lag is the time required for both houses of Congress and the administration to decide on a policy. Having different parts of the Congress controlled by different political parties (or having Congress controlled by one party while the president is of another party) usually results in decisions taking more time.

The aggregate demand curve is downward-sloping due to the

effect of prices on exports. The aggregate demand curve is negatively sloped because of three factors. When the aggregate price level rises, household purchasing power is lowered; that's the wealth effect. A rising aggregate price level also lowers the amount of exports because our goods are now more expensive. Furthermore, a rising aggregate price level increases the demand for money and so drives up interest rates, which reduces business investment and reduces the quantity demanded of real GDP. In each case, as the aggregate price level rises, the quantity demanded of real GDP falls.

The aggregate demand curve is downward-sloping due to the

effect of prices on interest rates. The aggregate demand curve is negatively sloped because of three factors. When the aggregate price level rises, household purchasing power is lowered; that's the wealth effect. A rising aggregate price level also lowers the amount of exports because our goods are now more expensive. Furthermore, a rising aggregate price level increases the demand for money and so drives up interest rates, which reduces business investment and reduces the quantity demanded of real GDP. In each case, as the aggregate price level rises, the quantity demanded of real GDP falls.

The aggregate demand curve is downward-sloping due to the

effect of prices on the demand for money. The aggregate demand curve is negatively sloped because of three factors. When the aggregate price level rises, this lowers household purchasing power; that's the wealth effect. A rising aggregate price level also lowers the amount of exports because our goods are now more expensive. Furthermore, a rising aggregate price level increases the demand for money and so drives up interest rates, which reduces business investment and reduces the quantity demanded of real GDP. In each case, as the aggregate price level rises, the quantity demanded of real GDP falls.

Reducing tax rates may result in

entrepreneurial profits being taxed at lower rates, encouraging more people to take risks and start businesses. This is a result of reducing taxes.

Based on the Keynesian model, if output falls short of current aggregate expenditures, business firms will __________.

expand production to build up inventories

Aggregate demand is the total output of _____ at different price levels.

goods and services purchased This is aggregate demand, which pertains to the output of goods and services purchased.

Which of the following would lead to a decrease in AD?

none of the above—all would increase AD A reduction in personal income taxes would increase consumption and ADA reduction in interest rates would increase consumption, investment and ADA depreciation of the U.S. dollar will lead to less imports, more exports and an increase in net exports and ADAn increase in government spending would increase AD

In a full aggregate expenditures model, the tax multiplier

is smaller than the spending multiplier. Economists typically describe the tax multiplier as being smaller than the spending multiplier. Consider the case of a tax increase: Consumers pay for a higher tax in part by reducing their savings as well as consumption. The reduction in savings dampens the impact of the tax on equilibrium income because those funds were previously withdrawn from the spending stream. The result is that a tax increase (or decrease, for that matter) will have less of a direct impact on income, employment, and output than will an equivalent change in government spending.

Which of these inputs most likely contributes to the positive slope of the short-run aggregate supply curve?

labor costs paid by an airline The aggregate supply curve is positively sloped in the short run because some input costs, such as wages paid to labor, are slow to change.

Which of these is NOT mandatory spending?

national defense The national defense program is discretionary spending. It is in the part of the budget that works its way through the appropriations process in Congress each year.

It can often take more than a year for researchers and policymakers to determine that an economy is moving out of a recession. That year is known as _____ lag.

recognition Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession.

In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.

recognition Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession. Policymakers depend on information sources such as the NBER.

If the spending multiplier is 4, then the marginal propensity to _____ is 0.25.

save A spending multiplier of 4 means that one person's spending becomes another's income; the other person spends a portion of that income and so on until the sum of increased spending in the economy is 4 times the original amount.