Exam 3 - Ch. 8,9,10

If consumption rises from $500 billion to $575 billion and income rises from $600 billion to $700 billion, the marginal propensity to save is

0.25

If the government spending increase by $100 and the MPC is 0.9, how much will GDP increase?

1,000

Which statement best identifies the multiplier effect in the macroeconomy?

A change in aggregate expenditure can affect Real GDP by more than the amount of the change

Contractionary fiscal policy

A decrease in government spending, an increase in taxes, and a decrease in transfer payments are all federal government mechanisms to attempt to contract the economy.

Expansionary fiscal policy

An increase in government spending and a decrease in taxes are both federal government mechanisms to attempt to expand the economy.

Automatic stabilizers

An increase number of layoffs increases govt. spending on unemployment benefits. A reduction in tax revenue that results from a recession reducing personal income and corporate profits. An increase in govt. spending on welfare due to increase in applicants. Economic growth increases personal and corporate income increasing tax payments

If the marginal propensity to consume is 0.8, by how much will GDP increase after government spending increases by $200?

Given the value of MPC we can determine the value of the multiplier = 1 / 1 - MPC = 1 / 1 - 0.8 = 1 / 0.2 = 10/2 = 5. = 200 x 5 = 1,000

_____ government spending, _____ transfer payments, and _____ taxes are all examples of expansionary fiscal policy.

Increasing; increasing; lowering

The aggregate expenditure model is also called the:

Keynesian cross

The MPC

The fraction of an additional dollar consumers spend and 0.75 in this question. The eventual effect of the $75,000 increase is $75000.0×multiplier=$75000.0×1(1−0.75)=$75000.0×4=$300000

Discretionary Spending

The govt. increases tax rate to prevent inflation A bill is passed to increase unemployment benefits. A law is enacted that increases Medicare coverage. The govt. cuts taxes to stimulate consumer spending

Which of the equations represents the macroeconomic equilibrium condition in the aggregate expenditure (AE) model?

Y=C+I+G+NX

The aggregate demand curve shifts in response to:

a change in any of the components of GDP

The aggregate expenditures model explains how

a country spends its money relative to what it earns

Some critics of expansionary fiscal policy believe that:

accumulating more government debt is more harmful than the short-run effects of a recession.

The total output of goods and services that is demanded in the economy at different price levels is captured by the _____ demand curve.

aggregate

Role of automatic stabilizers in the economy

are changes in taxes and government expenditure that occur automatically as the economy fluctuates and simulate discretionary fiscal policy

Increased unemployment insurance claims during times of an economic downturn is an example of a(n):

automatic stabilizer at work.

If an economy is in recession, the intersection of the short-run aggregate supply curve and aggregate demand curve occurs at an output level _____ the long-run output capability of the economy.

below

Some policy makers believe crowding out occurs when excessive government spending:

causes higher interest rates, thereby displacing private sector consumption and investment.

The multiplier effect is in effect when a(n):

change in income is greater than an initial change in spending

Which of these will NOT cause a shift in the short-run aggregate supply curve?

changes in the aggregate price level

Contractionary fiscal policy is typically used to

combat inflation stemming from an overheated economy.

Which segment of the economy has the greatest effect on policies aimed at correcting fluctuations in the economy?

consumption

The largest component of aggregate expenditures is

consumption spending

The components of GDP are

consumption, investment, government spending, and net exports.

If the interest rate increases, investment will

decrease

Contractionary fiscal policy

decreases aggregate demand

When household debt levels rise

families are less able to spend in the current period

The shift in aggregate demand depicted may be due to a(n)

increase in income taxes

To boost economic activity and employment during a U.S. economic downturn, the government will frequently use expansionary fiscal policy. Such a policy might be composed of:

increasing government spending and transfer payments and reducing taxes.

Contractionary fiscal policy is deployed in response to policy makers' concerns about:

inflation

Fiscal policy timing lags

information lag recognition lag decision lag implementation lag

Because it takes time for input prices and wages to adjust, an increase in demand can temporarily increase the level of output in the economy. In this sense, prices and wages are considered:

input prices and government regulations.

Aggregate supply shifts to the left when

input prices rise

The figure depicts a(n)

macroeconomic equilibrium

In the short run, the aggregate supply curve is:

positively sloped

The national debt is the sum of all:

prior federal deficits minus prior surpluses.

Which factor will cause the aggregate demand curve to shift to the right?

reduction in personal income taxes

Fiscal policy

refers to changes in tax policy or government spending in pursuit of economic goals, is expansionary if it leads to higher levels of spending and contractionary when it leads to reduced spending.

If the government raises taxes, what will this do to the AD curve?

shift left

The primary tools of fiscal policy are:

taxation and spending

Effect on real GDP

the government increases transfers by $75,000 can be found by multiplying the transfer increase by the MPC and the multiplier. $75000.0×multiplier×MPC=$75000.0×4×0.75=$225000

A fiscal policy lag is the length of time it takes:

the president and Congress to agree on a possibly controversial tax and spending program and to begin implementation.

A macroeconomic equilibrium occurs when aggregate expenditure equals aggregate income

true

The size of the multiplier effect is determined by the marginal propensity to consume

true

The term "sticky," when applied to short-run aggregate supply and demand, means that prices and wages take time to adjust in response to an increase in aggregate demand in the economy.

true

In the long run, the aggregate supply curve is always:

vertical

If income rises from $3,000 per month to $3,500 per month and consumption increases from $2,800 per month to $3,200 per month, what is the marginal propensity to consume?

MPC = 400/500 = 0.8

Mandatory spending includes government funds directed at programs or activities such as _____ and _____.

Medicare; payments on national debt.

Assume net taxes increase by $200 and the marginal propensity to consume is 0.75. Equilibrium income would be likely to

fall by $600

A macroeconomic equilibrium occurs when aggregate expenditure equals aggregate income

false

The aggregate demand curve for an economy will not shift as a result of a change in consumption or government spending.

false

The short- and long-run aggregate supply curves are identical in shape.

false

The marginal propensity to consume refers to the proportion of the next dollar of

income that is devoted to consumption

In addition to consumption spending, the other components of aggregate expenditures are

investment spending, government spending, and net export spending

The existence of high inflation in an economy means the economy is:

operating above its long-run equilibrium level of output.

If the economy is in a downturn, classical economists believe that, over time, the economy will _____

self‑correct

An increase in consumer confidence in a country will result in a

shift of the aggregate demand curve to the right

An economy cannot increase its output level beyond its long-run maximum full-employment capacity unless:

underlying improvements in production capacity take place.