econ test 2
Tax Multiplier
-MPC/MPS The ratio of change in the equilibrium level of output to a change in taxes.
Spending Multiplier
1/MPS
Assume an economy's MPC is 0.25 and there is a recessionary gap of 150 billion. By how much must a government cut taxes to eliminate this gap?
441 billion 1/MPS then 1- (answer) then you times this by the tax or spending multiplier
all else equal, a decrease in aggregate demand, assuming constant aggregate supply, will result in ______ in the price level
A decline
Assume real GDP falls short of employment output by 500 billion dollars, and MPS is .8 a) calculate minimum increase in gov spending to bring full employment b)now assume we reduce taxes, will reduction of taxes be larger or smaller than the government spending change you originally calculated
A) For part A we would take 1/MPS or in this case 1/ 1 - 0.8 = 1/0.2 this would equal 5. After this we now know the equation Gtriangle is equal to AG / Spending multiplier so therefore we would get 500 billion divided by 5. This meaning that an increase in government spending would be equal to 500 billion / 5 which equals 100 billion for part A. As for part B, we would use the tax multiplier equation being -MPC/MPS which in this case would equal -0.8/0.2 which would therefore equal -4. To find this we take triangleAD and make it equal to AD/ -T. For this equation this would be 500 billion / -4. This equals -125.
which of the following would shift aggregate demand to the right? a.the value of dollar increases b.stock market increases by 20% c.college graduates can't find jobs d.decline in consumer confidence
B
In a private open economy, the formula for aggregate expenditures is
C+Ig+Xn
Expansionary vs contractionary
Expansionary means gov spending increases while taxes decrease (used in times of recession) Contractionary means government spending goes down while taxes increase(used in inflationary period)
Marginal propensity to consume is the slope of the savings function. True or False
False
The manipulation of taxes and federal spending in order to stimulate the economy or reduce inflation is known as expansionary or contractionary _______________ policy.
Fiscal
In the immediate short run for aggregate supply, both input and output prices are
Fixed
In reaction to the recession of 2007 - 2009, the government issued $100 billion in tax rebate checks. How did the government expect that this policy would impact aggregate expenditures?
Increase consumption thereby increasing aggregate expenditures
The two components of aggregate expenditures in a private closed economy are consumption and gross private ___
Investment
Businesses became more pessimistic during the Great Recession of 2007-2009. As a result:
Investment demand fell
In economic terms "extra" or "change in" equals
Marginal
In economic terms, _____________ means "extra" or "a change in."
Marginal
Market versus Aggregate demand
Market: Physical units, one good Aggregate: Measures final goods services, and lots of goods
Marginal Prosperity to Consume (MPC) plus marginal prosperity to save (MPS) must always equal:
ONE
In a private closed economy, C + Ig+ GDP, but two other characteristics of GDP at equilibrium are that saving and ________ investment are equal and there are no _____ changes in inventories
Planned; unplanned
ON AD-AS graph, what variable is on the verticle axis?
Price Level
Input prices are _________ in the short run and _________ in the immediate run
Sticky;sticky
The equilibrium price level and equilibrium output is determined by the intersection of aggregate demand curve and aggregate " " curve
Supply
What causes the aggregate demand curve's shape?
The Aggregate Demand Curve has a downward slope which indicates an inverse (negative) relationship between the price level and the amount of real output purchased. It has the downward curve because of the real balances effect, interest rate effect, and foreign purchases effect.
recessionary expenditure gap
The amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, noninflationary level.
What is the difference between the national debt and the budget deficit? Define both terms in your explanation.
The budget deficit is when government spending exceeds the tax revenue in any given year. The national debt is the concept explaining the accumulation of the yearly budget outcomes. When we have a national debt, it means we have had an accumulation of budget deficits.
What causes the market demand curve's shape?
The market demand curve is downward sloping due to the Law of Demand (the inverse relationship between price and quantity demanded). It is downward sloping because of diminishing marginal utility, substitution effect, income effect, and common sense (we will buy more of something the cheaper it becomes).
An inflationary gap is the amount by which aggregate expenditures at the full-employment GDP exceed those required to achieve full-employment. True or False
True
Dissaving is consuming in excess of after-tax income. True or False
True
Marginal propensity to consume (MPC) plus marginal propensity to save (MPS) must always equal one. True or False
True
Tax reductions and increases in government spending are both tools of fiscal policy to positively stimulate the economy. True or False
True
In the long run for aggregate supply, both input and output prices are
Variable
All else equal, a decrease in aggregate demand, assuming constant aggregate supply, will result in _______ in the price level.
a decline
Economists use what term to mean "total" or "combined"?
aggregate
Define Inflationary expenditure gap
amount by which an economy's aggregate expenditures at the full employment GDP exceed those just necessary to achieve the full employment level of GDP.
Assume an economy's MPC is 0.25 and there is an inflationary gap of $200 billion. Which of the following will close the gap? (Round your final answer to the nearest whole number)
decrease government spending by $150 billion
When the level of GDP is above the equilibrium level, businesses will respond to the unintended accumulation of unsold goods by:
decreasing the rate of production
When the level of GDP is above the equilibrium level, businesses will respond to the unintended accumulation of unsold goods by:
decreasing the rate of production
An increase in aggregate demand beyond the full employment level of output that causes inflation is called
demand pull inflation
An increase in aggregate demand beyond the full-employment level of output that causes inflation is called:
demand-pull inflation
crowding-out effect may result from _____ fiscal policy
discretionary expansionary
A decrease in the price level that leads to a change in the interest rate, and therefore to a change in the quantity of aggregate demand will cause
downward movement along aggregate demand curve
The real balance effect causes the aggregate demand to be
downward sloping
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
An economy's potential output is also known as:
full employment output
U.s fed budget surplus occurs when
government revenue exceeds outlays
two components of aggregate expenditures in a private closed economy are consumption and..
gross private investment
Three time horizons of aggregate supply
immediate short run short run long run
The government may decrease government spending or increase taxes in order to eliminate a(n)
inflationary GDP gap
When real ______, households tend to barrow more consume more, and save less
interest rates fall
consumer price index
main measure of inflation in the US
A decrease in aggregate demand with constant aggregate supply can result in
recession
decrease in aggregate demand with constant aggregate supply can result in:
recession
Marginal propensity to save is equal to a change in ___________ divided by a change in income.
savings
Marginal prosperity to save is equal to change in ________ divided by change in income
savings
The equilibrium price level and equilibrium output is determined by the intersection of the aggregate demand curve and the aggregate _____________ curve.
supply
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
An increase in investment spending will shift the aggregate expenditure schedule schedule _____ the equilibrium level of real GDP
upward and increase