macro exam 2
You have been hired as an economic advisor for a politician running for national office. At a recent campaign event, the politician said that corporations are paying too much in taxes and are funding most of the federal government's operations. When you speak to the politician after the event, what would you say?
"We have a great deal of work to do. On the news tonight, I predict there will be an expert correcting you and questioning why anyone would vote for you. Individuals, through income tax and social insurance taxes, provide the bulk of the federal government's revenue."
If electric car producers adhered to the Solow growth model, which items would they view as important to economic growth?
-assembly line robots -battery charging stations -warehouse space
What are the consequences of automatic stabilizers when real GDP decreases?
Tax revenues decrease and payments to individuals increase. When real GDP decreases, people have less taxable income. In addition, government payments to individuals will increase as more people are eligible for unemployment benefits or income aid to the poor.
no shift in LRAS
The price level increases.
When the east coast of the United States starts rebuilding after the storm, the economy in Canada will be influenced in the following way.
aggregate demand --- will shift to the right
The theory of sticky input prices implies that an increase in the price level in the short run leads to __________ in a firm's profit level.
an increase
During the Great Recession, the U.S. budget deficit worsened as tax collections fell and payments to the poor rose. In other words, the deficit worsened as a result of _____________ in the federal budget.
automatic stabilizers
institutions that hinder growth
corruption, political instability, unexpected inflation
The government announced that last year it spent $616 million in mandatory outlays and $416 million in discretionary outlays. It received $1012 million in revenue. Last year the government had a budget _________ of _________ million
deficit ; 20
When the United States decides to go to war, the Congress and the president have to fund the war. The money that is spent to fight the war represents what type of government spending?
discretionary outlay
institutions that help growth
established property rights, competitive markets, efficient taxes
Technological innovations are often clustered in particular locations because of
institutions
if the US government raised the retirement age from 67 to 70, how would this change effect government entitlement programs like Social Security and Medicare
it would decrease the government's burden of the entitlement programs.
If the price level falls, people will save ___________ , and the interest rate will __________ . Firms, therefore, will __________ investment spending.
more ; fall ; increase
If the government gave tax breaks for education, what type of fiscal policy would that be?
supply side policy
Suppose the economy is in a recession. The economy needs to expand by at least $350 billion, and the marginal propensity to consume is 0.9. What is the least amount the government can spend to overcome the $350 billion gap?
$35 billion explanation: 1 / 1-MPC = 1 / 1 - 0.9 = 1 / .10 = 10 We are told that a $350 billion gap needs to be closed. Given the spending multiplier, the government needs to spend only the dollars that would multiply to $350 billion: 10.00 × (spending) = $350 billion spending = $350 billion ÷ 10.00 = $35.00 billion.
The American Recovery and Reinvestment Act introduced a large amount of government spending into the economy—$789 billion! Suppose the marginal propensity to consume in the United States is 0.85. How much would the program increase total spending in the economy?
$5260 billion explanation: A marginal propensity to consume of 0.85 gives a multiplier of 6.67: 1 / 1-MPC = 1 / 1-0.85 = 1 / 0.15 = 6.67 The multiplier effect should lead to total spending of $789 billion × 6.67 = $5260.00 billion.
As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.6, and the amount of new government spending is $600 billion. What is the multiplier? Compute this to the first place beyond the decimal. How much would the economy be stimulated?
2.5 ------> (equation is m^s = 1 / 1-MPC) $1500 billion -------> because With a marginal propensity to consume of 0.6, the multiplier is 2.5. An increase in government spending of $600 billion multiplied by 2.5 results in a $1500.0 billion increase in real GDP.
Which of the following policies represents an automatic stabilizer with respect to fiscal policy?
As individuals earn more, their tax rates rise.
Which of the following conclusions is supported by modern growth theory?
Competition encourages discovery of new goods and services, which leads to economic growth.
Social Security and Medicare are programs that are requiring an ever-increasing share of the federal budget. There are a number of demographic reasons why this statement is true. Which of the following statements are true?
Life expectancy has been steadily increasing. A record number of individuals are expected to retire over the next two decades.
LRAS shifts right
Microhard develops new computer hardware that doubles data transmission speeds. A large new oil field is discovered off the coast of California.
Suppose that, during a recession, the government borrows money to provide free movies as a distraction from the poor economy. Which of the following statements are correct?
The free movies as a distraction from the poor economy will likely raise interest rates as the government borrows more money to finance the purchase. This policy will likely be accompanied by an impact lag as the policy takes time to make its way to the people. Crowding-out will occur as individuals choose to rely on free movies instead of purchasing their own. Explanation: There will be an impact lag that occurs as this policy becomes a reality. Also, the provision of free movies as a distraction from the poor economy means that fewer people choose to spend their own money, which represents a case of crowding-out. Finally, the government finances the project through borrowed funds. As a result, the demand for loanable funds increases and the interest rate rises.
When the economy is in a recession, the government can use expansionary fiscal policy to stimulate and encourage economic growth. Which of the following scenarios represent expansionary fiscal policies from both a supply perspective and a demand perspective?
The government lowers tax rates and issues a partial refund of taxes that have already been paid. The government lowers tax rates and expands funding for medical research .
LRAS shifts left
The government provides more generous unemployment benefits. The U.S. government deports a large number of illegal aliens. Political instability leads to the overthrow of the government.
Which of the following is the defining feature of a progressive income tax system?
The marginal tax rate is low at low income levels and gets progressively higher as income levels increase.
Suppose that the president of a small island nation has decided to increase government spending by building more libraries. The legislation was enacted without any delay. From here, planning will take 6 months and building will take 2 months. Which of the following is true?
The planning and building of the libraries represent an impact lag of this policy.
n a bid to be re-elected president of the United States, you promise both a lower tax rate and greater tax revenue. Would you be able to back up this promise with economic reasoning? Use the Laffer curve, shown here, to support your answer.
Yes, but only if the current tax rate is in region II of the Laffer curve. Explanation: If the tax rate is in region I of the Laffer curve, tax revenues would decrease as the tax rate falls and you wouldn't be able to back up your promise to voters. But if the tax rate is in region II of the Laffer curve, tax revenue would increase as the tax rate falls and you'd keep your promise. Why? Very high taxes are a disincentive for earning income. Lowering those taxes will lead people to work more, earning enough extra taxable income and allowing the government to take in more revenue than it did with the higher tax rate.
Which of the following could have caused a change in real GDP and unemployment like the one experienced in the first two years of the Great Recession?
a decrease in consumer confidence and a decrease in financial market stability
what could have caused change in the in real GDP and unemployment like the one experienced in the first two years of the great recession
a decrease in consumer confidence and a decrease in financial market stability
aggregate demand and aggregate supply refer to:
a demand and supply of GDP, respectively
recent news reports and upward swing in median home prices. the result will be
a rightward shift of the aggregate demand curve
For much of the 1990s, the U.S. economy was experiencing long-run economic growth, low unemployment, and a stable inflation rate. Which of the following would give rise to these outcomes?
an increase in aggregate demand and short-run aggregate supply
The mayor of your hometown has said she will request that the federal government extend a nearby interstate highway so that it passes by the city, stimulating economic growth. However, the federal government is reluctant to do this because it is currently running a budget deficit. If the interstate was extended at a cost of $35 million, what would be the impact of this outlay on the federal government's budget?
an increase in discretionary spending and, if no other changes are made, an increase in the government's deficit an increase in the government's debt
You hear a politician say that she would like to lower the retirement age for receiving Social Security. What would be the impact of such a change over the course of one year?
an increase in mandatory spending and, if no other changes are made, an increase in the government's budget deficit
In the country of Econoville, tax revenue collected by the government this year is $32 million, and government outlays are $25 million. This country currently has a
budget surplus of $7 million
the aggregate demand - aggregate supply model is used to define :
business cycles
during the great recession, the ratio of U.S federal outlays to GDP _________ the long-run average, and the ration of tax revenue to GDP __________ the long-run average
climbed above; dipped below
type of resource that is the primary focus for: laws mandating school attendance for children younger than 18
human capital
type of resource that is the primary focus for: aid from the IMF (International Monetary Fund) for the education of technology workers
human capital
Consider the Economic Stimulus Act passed in 2008. Which of the following could have caused real GDP to remain negative through the first half of 2009?
impact lag ; implementation lag
If the price level in the United States decreases relative to the price level in other countries, net exports will __________ , and the quantity of aggregate demand will ___________
increase ; increase
The establishment of Medicare in the 1960s has caused government outlays to ___________ over time. The Great Recession caused a further __________ in government outlays
increase ; increase
When the price level falls, household real wealth will _________ and consumption spending will __________ Therefore, the quantity of aggregate demand will ____________
increase ; rise ; increase
Technology is:
knowledge that is available for use in other production.
The multiplier effect of fiscal policy predicts that an increase in government spending of $150 billion will increase total income by $600.00 billion if the marginal propensity to consume is 0.75. If we account for crowding-out, then the increase in aggregate demand will be
less than $600.00 billion. Explanation: An increase in government spending has the effect of shifting the aggregate demand curve to the right. Crowding-out has the opposite effect; it reduces private spending and aggregate demand as more people save in response to the higher interest rates. Hence, the full impact of the increase in government spending on aggregate demand will not be realized in presence of crowding-out, and the total increase in aggregate demand will be less than $600.00 billion.
type of resource that is the primary focus for: a piece of legislation banning drilling for oil in Alaska
natural resource
Which of the following resources has likely contributed to the United States being able to nearly quadruple its living standards in 60 years?
natural resources, human capital, physical capital
In the long run, all other things being equal, a crop-killing frost in Georgia and Florida will ____________U.S. output, ___________ the U.S. price level, and ____________ U.S. unemployment.
not change ; not change ; not change
type of resource that is the primary focus for: state tax credits for the construction of new company headquarters within the state
physical capital
The OPEC oil embargo of 1973 (an event marked by a reduction in the production of oil, a reduction in oil exported to the United States, and an increase in oil prices in the United States) may have contributed to the
recession of 1973 and the decrease in real GDP caused by a decrease in aggregate supply
The price level decreases. The aggregate demand curve will
remain unchanged
The price level decreases. The short-run aggregate supply curve will
remain unchanged
The price level increases. This aggregate demand curve will
remain unchanged
the price level increases, the SRAS curve will:
remain unchanged
Investment decreases. This aggregate demand curve will
shift to the left
New policies cause an increase in the cost of meeting government regulations. The short-run aggregate supply will:
shift to the left
Consumption increases. The aggregate demand curve will
shift to the right
Firms and workers expect the price level to fall. The short-run aggregate supply curve will
shift to the right
Government purchases increase. The aggregate demand curve will
shift to the right
Imports decrease and exports increase. The aggregate demand curve will
shift to the right
Input prices decrease. The short-run aggregate supply curve will:
shift to the right
The number of workers in the labor force increases. The short-run aggregate supply curve will:
shift to the right
During the fall of 2007, the United States economy began a descent into deep recession. As a result, the federal government and the Federal Reserve took action to stimulate economic growth. Which of the following would have been an appropriate fiscal policy?
the federal government providing tax refunds to many taxpayers the federal government spending more money to build more infrastructure