Macro Chap 12 & 13

Refer to the graph above. Which of the following factors will shift AS1 to AS2?

A decrease in business taxes

Refer to the graph above. Which of the following factors will shift AD1 to AD3?

A decrease in consumer wealth

With cost-push inflation in the short run, there will be:

A decrease real GDP

Use the following diagrams for the U.S. economy to answer the following question. Which of the diagrams best portrays the effects of a dramatic increase in energy prices?

B

Refer to the graph above. When output increases from Q1 and the price level decreases from P1, this change will:

Be caused by a shift in the aggregate supply curve from AS1 to AS3

The slope of the immediate-short-run aggregate supply curve is based on the assumption that:

Both input and output prices are fixed

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when:

AD increases but not when AD decreases

When the U.S. economy reached full employment in 2007, the cyclically-adjusted deficit that year was -1.3% of GDP. From this information, we know that the:

Actual budget deficit must have been very close to 0% of GDP

If the dollar appreciates in value relative to foreign currencies:

Aggregate demand decreases because net exports decrease

In which of the following sets of circumstances can we confidently expect inflation?

Aggregate supply decreases and aggregate demand increases.

Refer to the diagram, where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the actual budget deficit is:

$40 billion.

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. Refer to the information. The recognition lag of fiscal policy is reflected in events:

1 and 2.

Answer the question on the basis of the following aggregate demand and supply schedules for a hypothetical economy: Refer to the data. The equilibrium price level will be:

200

In 2012, foreign ownership of the total public debt of the U.S. was about:

33%

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. Refer to the information. The operational lag of fiscal policy is reflected in event(s):

5

Answer the question based on the following list of items that are related to aggregate demand and/or aggregate supply. Refer to the list above. Changes in which combination of factors best explain why the aggregate supply curve would shift?

7 and 8

What percentage of the average U.S. firm's costs are accounted for by wages and salaries?

75

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely:

Complement private investment

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

Contractionary fiscal policy

The cyclically-adjusted surplus in the U.S. went from +1.2% of GDP in 2000 to +0.6% of GDP in 2002. This suggests that the government during that period:

Cut taxes and increased spending

Actions by the Federal government that decrease the progressivity of the tax system:

Decrease the effect of automatic stabilizers

From 1995 to 2001, the U.S. public debt relative to GDP:

Decreased, and increased since then

Financing wartime expenditures by increasing internally held public debt permits a nation to defer a part of the economic cost of war.

False

Fiscal policy is mainly undertaken by the Federal Reserve.

False

The greater the upward slope of the AS curve, the larger is the realized multiplier effect of a change in investment spending.

False

The portion of the public debt owed to foreigners does not represent any real economic burden to Americans because we received money from foreigners when we incurred the debt.

False

The so-called "recognition lag" associated with fiscal policy is a result of how slowly the U.S. Congress moves.

False

The price level in the United States is more flexible downward than upward.

False.

Aggregate demand decreases and real output falls but the price level remains the same. Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?

Fear of price wars

Refer to the figure above. A shift from AD2 shifts to AD1 would be consistent with what economic event in U.S. history?

Great Recession of 2007-2009

The more progressive the tax system, the:

Greater is the built-in stability for the economy

Refer to the graph above. The ratchet effect would suggest that:

If AD1 shifts to AD2, the economy would move to point b

Refer to the graph above, which shows an aggregate demand curve. If the price level decreases from 200 to 100, the real output demanded will:

Increase by $200 billion

In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could:

Increase taxes by $16 billion

The crowding-out effect tends to be stronger when the economy:

Is at, or close to, full employment

Which of the following is an important real consequence of the public debt of the United States?

Its consequent higher interest rates lead to fewer incentives to bear risk and innovate

If the price level decreases, then the aggregate expenditures schedule will shift and this translates into a:

Movement down along the aggregate demand curve

There is general agreement among economists that a proposed fiscal policy should be evaluated for its:

Potential positive and negative effects on long-run productivity growth

An aggregate supply curve represents the relationship between the:

Price level and the production of real domestic output

The crowding-out effect from government borrowing to finance the public debt is reduced when:

Public investment complements private investment

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2, and that the full-employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level?

Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs.

The labels for the axes of the aggregate demand graph should be:

Real domestic output on the horizontal axis and the price level on the vertical axis

The two reasons why bankruptcy is a false concern about the public debt are:

Refinancing and taxation

The foreign purchases effect on aggregate demand suggests that a:

Rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand

Refer to the figure above. The massive increase in government spending during World War II moved the economy in the span of a few short years from mass unemployment and price stability to "overfull" employment. This situation can be best illustrated in the figure above as a:

Shift from AD1 to AD2, an increase in aggregate demand.

Refer to the graph above. It depicts an economy in the:

Short run

If at a particular price level, real output from producers is greater than real output desired by purchasers, then there will be a general:

Surplus and the price level will fall

Fiscal policy is enacted through changes in:

Taxation and government spending

When the price level decreases:

The demand for money falls and the interest rate falls

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

The opportunity cost of wartime expenditures was borne by the generation that lived during the war

When government spending is increased, the amount of the increase in aggregate demand primarily depends on:

The size of the multiplier

A budget deficit causes the government to issue or sell Treasury bonds.

True

A negative GDP gap can be caused by either a decrease in aggregate demand or a decrease in aggregate supply.

True.

In the diagram, a shift from AS1 to AS2 might be caused by:

a decrease in the prices of domestic resources.

Refer to the diagrams. A decline in aggregate expenditures from AE2 to AE1 resulting from the real-balances, interest-rate, and foreign purchases effects would be depicted as:

a movement from C to A along aggregate demand curve AD1.

The effect of a government surplus on the equilibrium level of GDP is substantially the same as:

an increase in saving.

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:

at any level of GDP below $400.

According to Congressional Budget Office (CBO) projections:

budget deficits are expected to remain large for the next several years.

Refer to the diagram. The degree of built-in stability in the economy could be increased by:

changing the tax system so that the tax line has a greater slope.

Refer to the diagram. Assume that G and T1 are the relevant curves and that the economy is currently at B, which is its full-employment GDP. This economy has a:

cyclically adjusted budget surplus and an actual budget surplus.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2:

government should undertake neither an expansionary nor a contractionary fiscal policy.

The immediate-short-run aggregate supply curve is:

horitzontal.

Refer to the diagram. Initially assume that the investment demand curve is ID1. The crowding-out effect of a large public debt would be shown as a(n):

increase in the interest rate from 4 percent to 6 percent and a decline in investment spending of $5 billion.

In the diagram, a shift from AS1 to AS3 might be caused by a(n):

increase in the prices of imported resources.

A rightward shift of the AD curve in the very steep upper part of the short-run AS curve will:

increase the price level by more than real output.

Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the economy would:

increase the public debt from $460 billion to $480 billion.

Discretionary fiscal policy is so named because it:

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

The aggregate supply curve (short run):

is steeper above the full-employment output than below it.

The portion of the public debt held outside federal agencies and the Federal Reserve is:

larger than the portion held by federal agencies and the Federal Reserve.

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

leftward by $40 billion at each price level.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in investment spending caused by the interest-rate effect of a price-level increase is depicted by the:

move from point a to point b in panel (B).

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by the foreign purchases effect of a price-level increase is depicted by the:

move from point a to point b in panel (B).

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in:

panels (A) and (C).

Refer to the diagram. If the full-employment GDP is Y5, government should:

reduce taxes and increase government spending.

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:

reduce worker morale and work effort, and thus lower productivity.

The federal budget deficit is found by:

subtracting government tax revenues from government spending in a particular year.

If the economy has a cyclically adjusted budget surplus, this means that:

tax revenues would exceed government expenditures if full employment were achieved.

Since actual budget deficits surpassed 10 percent of GDP in 2009:

the deficits as a percentage of GDP have fallen, but fiscal policy has remained expansionary.

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes:

the foreign purchases effect.

If aggregate demand increases and aggregate supply decreases, the price level:

will increase, but real output may increase, decrease, or remain unchanged.