Econ213 exam 2
in the aggregate expenditure model, MPC + MPS equals ________
1
The formula for the AE multiplier is
1/ (1-MPC)
fiscal sustainability
A measure of the present value of all projected future revenues compared to the present value of projected future spending.
surplus
A situation in which quantity supplied is greater than quantity demanded
export price effect
As prices rise, exports become more expensive, and exports drop.
If Canada is using all its resources to their fullest extent, it can produce either 10 million iPads or 5 million HDTVs. If Mexico is using all its resources to their fullest extent, it can produce either 6 million iPads or 6 million HDTVs. Thus:
Canada has a comparative advantage in producing iPads.
Withdrawals
In the circular flow of income, spending by households which does not flow back to domestic firms. Includes savings, taxes and imports.
Keynesian macroeconomic equilibrium
In the simple model, the economy is at rest; spending injections (investment) are equal to withdrawals (saving), or I = S, and there are no net inducements for the economy to change the level of output or income.
Which of these is a limitation of the infant industry argument?
It is difficult to remove the protection after an industry has matured.
what is the formula for disposable income
Y - T
cost-push inflation is caused by
a decrease in short run aggregate supply to an equilibrium point below full employment
one of the factors that increase aggregate demand is the consumption of more imports (T/F)
false
If the price level in the United States increases relative to other countries, then the United States will export
fewer goods and services
In the Keynesian model, the principal determinant of saving is:
income
Which of these has NOT contributed to global integration?
increased nationalism
The _____ is vertical at full employment.
long run aggregate supply curve
components
processed expense items that become part of a finished product
A country has an absolute advantage in the production of a good if it can:
produce more of a good than another country
The total accumulation of past deficits less surpluses is called the:
public debt
an increase in the cost of energy affects both aggregate supply and aggregate demand (T/F)
true
Shifts vs Movements in Demand
*If non-price determinant changes, then demand curve SHIFTS *If the price decreases, then the quantity demanded increases and there is MOVEMENT along the demand curve
The slope of the saving schedule is:
1 minus the marginal propensity to consume.`
shift factors of supply
1. Price of inputs 2. Technology 3. Expectations 4. Taxes and subsidies
If the marginal propensity to consume is 0.6, then the spending multiplier is:
2.5
Short-run aggregate supply (SRAS) curve
A curve that shows a direct relationship between the price level and real GDP supplied in the short run
laffer curve
A relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged.
The 45-degree line in the Keynesian model represents:
AE = Y
deficit
An excess of federal expenditures over federal revenues.
expansionary fiscal policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
discretionary fiscal policy
Changes in taxes or spending that are the result of deliberate changes in government policy.
aggregate expenditures
Consists of the components of GDP as measured by spending (consumption, investment, government purchases, and net exports at a given price level)
Which of the following illustrates the paradox of thrift?
Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decreases because income is lower.
If England is said to have an absolute advantage over Brazil in the production of computer chips, this means that, given the same resources,
England can produce more computer chips than Brazil
contractionary fiscal policy
Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.
Average Propensity to Consume (APC)
Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income.
Average Propensity to Save (APS)
Fraction (or percentage) of disposable income that households save; saving divided by disposable income.
spending multiplier (K) formula
K= 1 / 1 - MPC
externally held debt
Public debt held by foreigners, which is roughly equal to half of the outstanding U.S. debt held by the public.
internally held debt
Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals.
mandatory spending
Required govt spending by permanent laws
Which best describes the barrier to trade known as dumping?
Selling exports abroad at a lower price than the domestic price.
Which is not an argument against specializing in a single good in the real world?
Specialization in a single good makes dumping easier and more effective.
Although both tariffs and quotas are tools used to restrict or reduce trade, which of the statements best describes their differences?
Tariffs are a tax on imported goods, and quotas are limits on the number of imported goods.
national debt
The amount of money a national government owes to other governments or its people
if the economic arguments against tariffs and quotas are that they are very costly for the macroeconomy, why are they imposed?
The costs to individual consumers are small, whereas individual producers gain much from such trade barriers.
_____ is the change in consumption associated with a change in income.
The marginal propensity to consume
decision lag
The time it takes Congress and the administration to decide on a policy once a problem is recognized.
recognition lag
The time it takes for policy makers to recognize the existence of a boom or a slump
information lag
The time policymakers must wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter (three months) after the fact.
Suppose policymakers wish to use fiscal policy to fight inflation. Which statement, then, is MOST accurate?
The way to lower the inflation rate is to decrease aggregate demand, causing a rise in unemployment
The solution to simultaneous deflation and unemployment is to shift the:
aggregate demand curve to the right.
Which statement best describes an infant industry?
an emerging or underdeveloped industry that needs protection to survive and become competitive
demand-pull inflation is caused by
an increase in aggregate demand to an equilibrium point beyond full employment
paradox of thrift
an increase in saving can lead to a decrease in expenditures, decreasing output and causing a recession
Which of the following will shift the aggregate supply curve to the right?
an increase in the investment of human capital
one explanation for the negative slope of the aggregate demand curve is the "wealth effect", What is this effect?
as inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines
wealth effect
as prices rise, purchasing power of wealth falls, reducing consumption
The interest rate effect:
change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level
automatic stabilizers
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
In general, which of the statements is most likely to occur as a result of the proposed tax on imported solar panels?
consumers will face higher prices for solar panels
According to the crowding-out effect, if the government sells bonds to finance spending, _____ can eventually fall.
consumption and investment
according to the wealth effect, what happens as the price level falls?
consumption spending increases
Computer game cartridges produced in EconomyLand sell for $50 each. The same cartridges made in MarketLand have a price of $100. If free trade were allowed, we would expect the prices in both countries to:
converge to somewhere between $50 and $100.
_____ inflation occurs when a supply shock reduces aggregate supply.
cost-push
A(n) _____ in government spending, a _____ domestic currency, and _____ interest rates will shift a country's aggregate demand to the left.
decrease; stronger; higher
According to public choice economists, the federal government has expanded because:
deficit spending has reduced the perceived cost of current government operations.
Average Propensity to Consume equals
disposable income MINUS savings= ? then DIVIDED BY the disposable income
The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.
disposable income; consumption
The advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers:
do not require overt action by policymakers.
If the domestic price of a good is below the prices in other countries and free trade is opened up, then in terms of pricing:
domestic consumers lose and domestic producers gain.
During cost-push inflation, aggregate output _____ and the aggregate price level _____.
falls; rises
public debt
government debt held by individuals and institutions outside the government
the ______________, the larger the resulting change in output for a given change in expenditure
greater the MPC
the effects of a quota are similar to that of a tariff in that consumers pay _____ prices and imports _____ as a result of the quota.
higher; fall
saving
income not used for consumption
An increase in the incomes of the countries that purchase U.S.-made products will cause a(n) _____ in the _____ U.S.-made products.
increase; aggregate demand for
demand-pull inflation
increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
Which of the following do supply-side economists believe is the best for increasing the standard of living?
increasing investment in capital that boosts worker productivity
Suppose a tariff is imposed on avocados. This has the effect of _____ the domestic price of avocados, as well as having the effect of _____ the imported price of avocados.
increasing; increasing
The largest source of federal government revenues is:
individual income taxes
Alexander Hamilton argued in the late 1700's for strong controls on imports to protect American industries from competition from more established English industries. This is an example of the _____ argument for trade restriction.
infant industry
An expansionary fiscal policy can result in:
inflation and higher GDP
investment is determined by:
interest rates, the expected rate of return on investment, and business expectations
supply-side fiscal policy
involves the use of government spending and taxes to affect the production (supply) side of the economy
If the amount of regulation in an economy increases, the aggregate supply curve shifts _____ and output supplied will _____.
left; decrease
The focus of supply-side fiscal policies is on:
long-run economic growth
Textile workers in the United States would offer which argument to restrain international trade in textiles?
low foreign wages
if the price level in the United States increases relative to other countries, then the United States will import
more goods and services
High taxes and/or heavy regulation:
raise costs of production so that the aggregate supply curve shifts to the left.
One of the main purposes of a tariff is to:
raise the price of an import above the world price.
The _____ lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession.
recognition lag
The effects of a tariff are:
reduced quantity supplied overall, increased quantity supplied by domestic producers, and a higher price.
Which of the following is an example of contractionary fiscal policy?
reducing military spending
_____ government spending, _____ transfer payments, and _____ taxes are all examples of contractionary fiscal policy.
reducing; reducing; raising
Decreased interest rates will shift the aggregate demand curve to the _____ and _____ output demanded.
right; increase
Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.
right; increase
aggregate demand curve
shows the amount of real GDP that will be demanded at each possible price level
The largest category of federal government spending in 2015 was:
social security
what best describes how the effects of import tariffs and import quotas are different?
some foreign producers receive some of the benefits generated by an import quota
consumption
spending by households on goods and services/ makes up around 2/3 of all U.S. GDP, so it is the key component in the AE model
discretionary spending
spending category about which government planners can make choices
investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:
supply-side fiscal policy
Canada is considering imposing a tax on imports of Chinese solar panels. This action would be best described as a
tariff
Which of the following is NOT involved with implementing fiscal policy in the United States?
the Supreme Court
Which of these is a policy designed to ease the impact of expanded trade and globalization?
the Trade Adjustment Assistance program
If the United States can produce more of both bread and milk than Germany can, then:
the United States can still benefit from trade with Germany because of comparative advantage.
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
Marginal Propensity to Save (MPS)
the amount by which saving changes when disposable income changes
The long-run aggregate supply curve is vertical because:
the economy will gravitate to the position of full employment when all variables are flexible.
Which of the following did classical economists believe would happen if the economy experienced a downturn?
the economy would self-correct
If a government always balances its budget:
the effect of an increase in government spending on aggregate expenditures is weakened.
as prices rise in the US, foreigners purchase fewer US goods
the export effect
Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1
Firms decide how much to invest by comparing the rate of return on their projects with:
the interest rate
Which of the statements about free trade's effects on the environment is not commonly given as an argument against trade liberalization?
the international trade of agricultural products harms local agriculture in all countries
balanced budget multiplier
the multiplier for a change in government purchases that is matched by an equal change in taxes
crowding-out effect
the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
macroeconomic equilibrium
the point where the quantity of aggregate demand equals the quantity of aggregate supply
multiplier
the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change
marginal propensity to save (MPS)
the share of each additional dollar of income earned that is devoted to saving rather than consumption
implementation lag
the time needed to execute a change in policy
aggregate demand
the total demand for final goods and services in an economy at a given time
When nations specialize according to their comparative advantage:
total consumption and production in the world increase
if the value of people's stock portfolios increases or if peoples houses appreciate in value, then this very easily could lead to an increase in aggregated demand (T/F)
true
A(n) _____ on imports is a fixed amount per unit of the product assessed by a government at its border.
unit tax
One reason the amount of real output demanded declines when the aggregate price level rises is the resulting reduction in household wealth, called the:
wealth effect
consumer spending is affected by what four major factors besides income?
wealth, consumer confidence, debt, and taxes
inflationary gap
when aggregate output is above potential output
recessionary gap
when aggregate output is below potential output
why does the multiplier exist
when people spend money, the money ends up in the pockets or bank accounts of other people or organizations who then use that money in some way
cost-push inflation
When prices rise due to an increase in the cost of production.
aggregate supply
`the sum of all the supply in the economy
Which of the following events will shift the aggregate demand curve to the right?
a new government program to eliminate poverty
What would cause inflation and employment to increase?
a rightward shift of the AD curve
Autarky
a situation where one country does not engage in trade with other countries
Long Run Aggregate Supply (LRAS) curve
a vertical line at the economy's potential output; aggregate supply when there are no surprises about the price level and all resource contracts can be renegotiated
After the acceptance of Keynesian analysis, the government:
actions toward macroeconomic policy grew significantly.
injections
additions to an economy's circular flow which include investments, government spending, and exports
