macro exam 2

The demand for corn has increased in May without any change in supply. Eight months later there still has been no change in corn prices. This is an example of a

sticky price

The government purchases multiplier is

the ratio of the change in the equilibrium level of output to a change in government purchases.

The tax multiplier is

the ratio of the change in the equilibrium level of output to the change in taxes.

Assuming there is no government or foreign sector, if the multiplier is 10, the MPC is A) 0.9. B) 0.8. C) 0.5. D) 0.1.

A) 0.9.

When a government runs a deficit A) its debt increases. B) it must raise taxes C) its debt decreases. D) it must cut spending.

A) its debt increases.

T/F: The amount the government owes to the public is the deficit.

FALSE

T/Fl The economy is in equilibrium when aggregate output equals consumption spending.

FALSE

T/F: A tax cut of $12 billion will have less effect on the economy than an increase in government purchases of $12 billion.

TRUE

T/F: If the government runs a deficit, then the government debt increases.

true

If the MPS is .60, MPC is

.40

If the MPS is .22, the MPC is A) -0.22. B)0.78. C)1.22. D) 0.66.

1.22

If government purchases are decreased by $800 and taxes are decreased by $800, the equilibrium level of income will A) decrease by $800. B) increase by $800. C) not change. D) decrease by $1600.

A) decrease by $800.

During a recession, automatic stabilizers cause the federal deficit to A) decrease. B) increase or decrease. C) remain unchanged. D) increase.

A) decrease.

As the MPS decreases, the multiplier will A) increase. B) decrease. C) remain constant. D) either increase or decrease depending on the size of the change in investment.

A) increase.

The presence of automatic stabilizers means that the federal deficit is ________ than it otherwise would be in a recession and ________ than it otherwise would be in an expansion. A) larger; smaller B) smaller; larger C) smaller; smaller D)larger; larger

A) larger; smaller

When you borrow $2,000 from a bank, you ________ an interest rate and the loan is ________. A) pay; a liability to you B) pay; an asset to you C) receive; a liability to you D) pay; a liability to the bank

A) pay; a liability to you

Disposable income A) increases when net taxes increase. B) increases when income increases. C) decreases when saving increases. D) increases when saving decreases

B) increases when income increases.

When you pay $8 for salad you ordered for lunch, you are using money as a(n) A) store of value. B) investment good. C) medium of exchange. D) unit of account.

B) investment good.

Assuming there is no foreign trade in the economy, equilibrium is achieved when government purchases equal A) saving minus net taxes minus consumption. B) saving plus net taxes minus investment. C) net taxes plus investment minus saving. D)net taxes minus investment minus saving

B) saving plus net taxes minus investment.

What is the largest expenditure source in the government's budget? A) consumption B) transfer payments C) net interest payments D) net subsidies

B) transfer payments

Which of the following is a CORRECT sequence of events during a recession? A) unemployment falls, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises C) unemployment rises, income falls, tax revenue rises, unemployment benefits fall, and the budget deficit falls D) unemployment rises, income rises, tax revenue rises, unemployment benefits rise, and the budget deficit rises

B) unemployment rises, income falls, tax revenue falls, unemployment benefits rise, and the budget deficit rises

If Lily's consumption function is of the form C = 100 + 0.8Y, her saving equals zero at an income level of A) 180. B)500. C) 800. D) cannot be determined from the given information

B)500.

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are A)administered prices. B)sticky prices. C) regulatory prices. D) market prices

B)sticky prices

Narnia National Bank has $750 million in deposits. The required reserve ratio is 30%. Narnia National Bank must keep ________ in reserves. A) $125 million B) $150 million C) $225 million D) $250 million

C) $225 million 750*.30 = 225 million

) Assume that in the Atlantis the actual deficit is $200 billion. If the Atlantis were at full employment, the deficit would be $50 billion. The structural deficit in the Atlantis is A) $100 billion. B) $200 billion. C) $50 billion. D) $150 billion.

C) $50 billion.

If the MPC is .5, the tax multiplier is A) -2.5. B) -2. C) -1.

C) -1.

If the MPS is 0.4, the tax multiplier is A) -2.5. B) -1.67. C) -1.5. D) -2.33.

C) -1.5.

If the MPC is 0.7, the tax multiplier is A) -2.22. B) -1.22. C) -2.33. D) -3.33.

C) -2.33.

If the consumption function is of the form C = 80 + 0.4Y, the MPS equals A) -0.4. B) 0.4. C) 0.6. D)-0.6.

C) 0.6.

If Logan received a $2,500 bonus and his MPS is 0.20, his consumption rises by $________ and his saving rises by $________. A) 500; 100 B) 2,500; 200 C) 2,000; 500 D) 2,500; 20

C) 2,000; 500 (2500*.20) = 2000 in composition & 500 in saving

In which case will the government collect more tax revenue? A) 40% tax rate and $40,000 average income B) 90% tax rate and $10,000 average income C) 20% tax rate and $90,000 average income D) 4% tax rate and $80,000 average income

C) 20% tax rate and $90,000 average income

When the government sector is included in the income-expenditure model, the equation for aggregate income is A) Y = C + S - T. B) Y = C + I. C) Y = C + I + G. D) Y = C + S + I.

C) Y = C + I + G.

Which of the following is NOT a category of fiscal policy? A) government policies regarding the purchase of goods and services B) government policies regarding taxation C) government policies regarding money supply in the economy D) government policies regarding transfer payments and welfare benefits

C) government policies regarding money supply in the economy

If the tax multiplier is -9 and taxes are reduced by $100 billion, output A) falls by $100 billion. B) falls by $900 billion. C) increases by $900 billion. D) increases by $100 billion.

C) increases by $900 billion. -9*-100=900

When you deposit $100 in a bank, the bank A) pays you an interest rate and the deposit is a liability to you. B) charges you an interest rate and the deposit is a liability to you. C) pays you an interest rate and the deposit is a liability to the bank. D) pays you an interest rate and the deposit is an asset to the bank.

C) pays you an interest rate and the deposit is a liability to the bank.

If the economy is in a recession, the full-employment deficit is ________ the actual deficit. A) larger than B) equal to C) smaller than D)equal to or larger than

C) smaller than

Which of the following instruments is NOT used by the Federal Reserve to change the money supply? A) the discount rate B) the required reserve ratio C) the federal tax code D) open market operations

C) the federal tax code

The difference between what a government spends and what it collects in taxes in a year is A) net revenue. B) net taxes. C) the government budget deficit or surplus. D) the government debt.

C) the government budget deficit or surplus.

Fiscal policy refers to A) the techniques used by a business firm to reduce its tax liability. B) the behavior of the nation's central bank, the Federal Reserve, regarding the nation's money supply. C) the spending and taxing policies used by the government to influence the economy. D) the government's ability to regulate a firm's behavior in the financial markets.

C) the spending and taxing policies used by the government to influence the economy.

Uncertainty about the future is likely to A) increase current spending. B) have no impact on current spending. C)decrease current spending. D) either increase or decrease current spending.

C)decrease current spending.

If the economy's full-employment output is $9 trillion, actual output is $9 trillion, and the budget deficit is $20 billion, the deficit in this case is known as a A) natural employment deficit. B) cyclical deficit. C)structural deficit. D) fiscal deficit.

C)structural deficit.

Assume there is no government or foreign sector. If the multiplier is 10, a $10 billion increase in planned investment will cause aggregate output to increase by A) $1 billion. B) $5 billion. C) $10 billion. D) $100 billion.

D) $100 billion.

Assume there is no government or foreign sector. If the MPS is 0.2, a $40 billion decrease in planned investment will cause aggregate output to decrease by A) $20 billion. B) $50 billion. C) $80 billion. D) $200 billion

D) $200 billion

The Intracoastal Bank has $5 million in deposits and $500,000 in reserves. If the required reserve ratio is 5%, excess reserves are equal to A) $125,000. B) $500,000. C) zero. D) $250,000.

D) $250,000. 5,000,000* .05 = 250,000

Assume there is no government or foreign sector. If the multiplier is 4, a $20 billion increase in investment will cause aggregate output to increase by A) $5 billion. B) $20 billion. C) $40 billion. D) $80 billion.

D) $80 billion.

Assuming no government or foreign sector, if the MPC is 0.9, the multiplier is A) .1. B) 5. C)9. D) 10.

D) 10.

The required reserve ratio is 5%. The money multiplier is A) 0.5. B) 5. C) 15. D) 20.

D) 20. 1/(.05)

Midwest State University in Nebraska is trying to convince Nebraska taxpayers that the tax dollars spent at Midwest State University are well spent. One of the university's arguments is that for every $1 spent by Midwest State University an additional $5 of expenditures are generated within Nebraska. Midwest State University is arguing that the multiplier for their expenditures is A) 0.2. B) 1. C) 4. D) 5

D) 5

A loan made by a bank is considered ________ of that bank. A) a liability B) capital C) net worth D) an asset

D) an asset

If Wanda's income is reduced to zero after she loses her job, her consumption will be ________ and her saving will be ________. A) less than zero; less than zero B) greater than zero; greater than zero C) less than zero; greater than zero D) greater than zero; less than zero

D) greater than zero; less than zero

When a bank has no excess reserves, and thus can make no more loans, it is said to be A) bankrupt. B) ripe for a takeover. C) in receivership. D) loaned up.

D) loaned up.

What is the largest source of revenue in the government's budget? A)social insurance B) indirect business taxes C) corporate taxes D) personal taxes

D) personal taxes

The required reserve ratio is 50%. The money multiplier is A) 2.5. B) 10. C) 5. D)2.

D)2. 1/.5 = 2

A government's debt is reduced when it A) balances is budget. B) sells more bonds. C) runs a deficit. D)runs a surplus.

D)runs a surplus.

T/F: Defense spending is the largest part of the U.S. government spending.

FALSE

T/F: If autonomous spending increases, the aggregate expenditure function becomes steeper.

FALSE

T/F: If the marginal propensity to consume is .8, the marginal propensity to save is 8.

FALSE

If consumption is $10,000 when income is $10,000, and consumption increases to $11,000 when income increases to $12,000, the MPS is A) 0.10. B) 0.25. C) 0.50. D)0.90.

c) .50

If the government wants to reduce unemployment, government purchases should be ________ and/or taxes should be ________.

increased; decreased

Saving equals A) Y - C. B) Y - planned I. C) Y - actual I. D) Inventory changes

A) Y-C

Assume that in the United States the actual deficit is $300 billion. If the United States were at full employment, the deficit would be $100 billion. The structural deficit in the United States is A) $100 billion. B) $200 billion. C) $300 billion. D) $400 billion.

A) $100 billion.

If the MPS is 0.2, the tax multiplier is A) -4. B) -1.11. C) -9. D) -5.

A) -4 -MPC * (1/MPS) -.8* (1/.2) = -4

Taxes are reduced by $15 billion and income increases by $75 billion. The value of the tax multiplier is A) -4. B) 9. C) -10. D) -5.

A) -4. (15-75)/15 (tax reduction - income increase)/tax reduction

Assuming there is no government or foreign sector, the formula for the multiplier is A) 1/(1 - MPC). B) 1/MPC. C) 1/(1 + MPC). D) 1 - MPC.

A) 1/(1 - MPC).

If the MPS is 0.1, the government spending multiplier is A) 10. B) 1.11. C) 5. D) 2.

A) 10. 1/.1 = 10

The aggregate consumption function is C = 800 + .8Yd. If income is $2,000 and net taxes are $500, consumption equals A) 2,000. B) 1,500. C) 2,150. D)2,050.

A) 2,000. 2,000-500=1500 c=800-.8(1500)=2,000

Using the saving/investment approach to equilibrium, the equilibrium condition can be written as A) C + I = C + S. B) C = S + I. C) C - S = I. D) C + S = I.

A) C + I = C + S.

The central bank of the United States is known as the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Department of the Treasury. D) Federal Savings and Loan Insurance Corporation

A) Federal Reserve System.

The President of Vulcan hires you as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the MPC in Vulcan is 0.6. Which of the following would be the best advice to give to the Vulcan president? A) reduce government purchases by $4 billion B) increase taxes by $10 billion C) reduce government purchases by $10 billion D) increase taxes by $2.5 billion

A) reduce government purchases by $4 billion

The MPC is A) the change in consumption divided by the change in income. B) consumption divided by income. C) the change in consumption divided by the change in saving. D) the change in saving divided by the change in income.

A) the change in consumption divided by the change in income.

The MPS is A) the change in saving divided by the change in income. B) 1 + MPC C) income divided by saving. D) total saving divided by total income

A) the change in saving divided by the change in income.

A decrease in the required reserve ratio A) will increase the money supply. B) will decrease the money supply. C) will not change the money supply. D) will decrease the discount rate.

A) will increase the money supply.

What determines tax revenues? A)the income tax rate B)the rate of interest C) the money supply in the economy D) the rate of inflation

A)the income tax rate

Veronica's income is $4,000 a month. She deposits $800 in a saving account, buys $300 worth of government securities, and leaves the rest for daily transactions. Veronica's transaction money demand is A) $5,100. B) $2,900. C) $3,200.

B) $2,900. 4000-800-300

If the government spending multiplier is 2 and government purchases increase by $200 billion, output will increase by A) $100 billion. B) $400 billion. C) $1,600 billion. D) $500 billion.

B) $400 billion.

Bill's income is $1,000 and his net taxes are $350. His disposable income is A) $1,350. B) $650. C) -$350. D) $750.

B) $650.

If taxes depend on income and the MPC is 0.6 and t is 0.3, the tax multiplier is A) -1.72. B) -1.03. C) -2.0. D) -2.24.

B) -1.03. MPC/[(1-MPC) *(1-T)] = -0.6 -.6/[1-.6*(1-.3)] = -.06/[1-(.06*.07) = -.6/(1-0.42) =-.6/.58 =-1.03

Assuming no government or foreign sector, the formula for the multiplier is A) 1/MPC. B) 1/MPS. C) 1/(1 + MPC). D) 1 - MPC.

B) 1/MPS.

The formula for the government spending multiplier is A) 1/(1 + MPC). B) 1/MPS. C) 1/MPC. D) 1/(1 + MPS).

B) 1/MPS.

Assume there is no government or foreign sector. If the MPS is .05, the multiplier is A) 0.95. B) 20. C) 10. D) 50.

B) 20

If the MPC is .75, the government spending multiplier is A) 2.5. B) 4. C) 3. D) 1.75.

B) 4. 1/(1-.74)=1/.25=4

The aggregate consumption function is C = 100 + .6Yd. If income is $1,000 and net taxes are $300, consumption equals A) 800. B) 520. C) 580. D) 700.

B) 520. 1000-300=700 cc=100+.6(700)=520

Which of the following is NOT considered investment? A) The acquisition of capital goods B) The purchase of government bonds C) The increase in planned inventories D) The construction of a new factory

B) The purchase of government bonds

If output is less than planned aggregate expenditure, there will be A) an unplanned increase in inventories. B) an unplanned decrease in inventories. C) no change in inventories. D) a planned increase in inventories.

B) an unplanned decrease in inventories.

Money is A) the same as income. B) anything that is generally accepted as a medium of exchange. C) the value of all coins and currency in circulation at any time. D) backed by gold in Fort Knox.

B) anything that is generally accepted as a medium of exchange.

The total amount owed by the federal government to the public is the A) federal budget deficit. B) federal debt. C) net tax revenue. D) fiscal drag.

B) federal debt

During recessions, government spending usually A) decreases because unemployment payments decrease. B) increases because unemployment payments increase. C) decrease because unemployment payments increase. D) increases because unemployment payments decrease

B) increases because unemployment payments increase.

T/F: For the economy to be in equilibrium, the following condition must be satisfied: G + I = S + T.

TRUE

T/F: If tax receipts are less than government expenditures the government is running a deficit.

TRUE

T/F: If the government increases taxes by $4 billion and increases spending by $4 billion, equilibrium output increases by $4 billion.

TRUE

T/F: The marginal propensity to consume is the change in consumption per change in income.

TRUE