Macro exam 2

*Which of the following would cause a rightward shift of the aggregate demand (AD)curve? A. an increase in planned investment B. a drop in the price level C. a rise in the price level D. a decrease in autonomous consumption E. anything that causes an upward shift in the saving function

An increase in planned investment

Suppose the government reduces its budget deficit at the same time that energy prices rise sharply. Which of the following will most likely happen happen? A. The price level will rise, since higher energy prices increase the cost of production. B. The level of aggregate output will fall, since both events will tend to cause an economic contraction C. The price level will fall, because aggregate demand has moved leftward. D. The level of aggregate output will rise; with less government spending, there are more opportunities for the private sector E. Both the price level and the level of aggregate output will fall.

The level of aggregate output will fall, since both events will tend to cause an economic contraction

The MPC plus the MPS equals A. 0.5 B. the multiplier C. the slope of the consumption function D. 1.0 E. the slope of the saving function

The slope of the saving function

In the simple Keynesian model with no government and no foreign sector the economy is in equilibrium when: A. Y = C + I and S < I. B. Y = C + I and S > I. C. Y = C + I and S = I. D. Y = C and S = 0.

Y = C + I and S = I. +

Without government or a foreign sector, which of the following equations is TRUE? A. Y = C + S B. S - I = 1 C. I - S = 1 D. I + S = 1

Y = C + S

In the United States economy which one of the following is not money? A. a Susan B. Anthony $1 coin B. a checking account at a bank C. a 25-cent piece (i.e., a quarter) D. a $20 Federal Reserve note E. a $100 U.S. Government bond

a $100 U.S. government bond

Which of the following would likely increase the money supply? A. One bank buys government securities from another bank. B. The required reserve ratio increases. C. The Fed increases the reserves of commercial banks and the banks hold these as excess reserves. D. The discount rate increases. E. A bank sells government securities to the Fed.

a bank sells government securities to the Fed

The reserve ratio is the ratio of A. Federal Reserve member banks to nonmember banks B. Federal Reserve nonmember banks to member banks C. Federal Reserve member banks to all U.S. banks D. Federal Reserve nonmember banks to all U.S. banks E. a bank's reserves to its total deposits

a bank's reserves to its total deposits

Which of the following would not shift the consumption function?(hint: what are on the axes when you draw it.?) A. a change in household wealth B. a change in the price level C. a change in household disposable income D. a change in the level of unemployment E. a change in the rate of interest

a change in household disposable income +

the great depression was primarily the result of: A. a decrease in aggregate demand B. an increase in aggregate demand C. disequilibrium D. an increase in aggregate supply

a decrease in aggregate demand+

The only way in which government can affect aggregate demand is through changes in its own purchases. TRUE or FALSE

FALSE

The law that established the Federal Reserve System is the A. Federal Reserve Act of 1913 B. National Banking Act of 1863 C. Banking Act of 1933 D. the 1940 law that also established the FDIC E. the 1940 law that also established the Comptroller of the Currency

Federal Reserve Act of 1913

Aggregate supply shifts to the left when: A. input prices rise B. subsidies are higher C. inflation expectations are lower D. there is a decrease in burdensome regulations

Input prices rise

Which of the following is true of the discount rate? A. It is the interest rate commercial banks charge their most creditworthy customers. B. It is the interest rate that thrift institutions charge for home mortgages. C. It is the interest rate at which depository institutions can borrow from the Federal Reserve. D. It is the interest rate set in the market for U.S. Treasury Bills. E. It is the prime interest rate.

It is the interest rate at which depository institutions can borrow from the Federal Reserve.

Which of the following factors will cause the aggregate demand curve to shift to the right? A. reduction in the aggregate price level B. reduction in personal income taxes C. decrease in interest rates D. drop in foreign income

Reduction in personal income taxes

John Maynard Keynes's analysis was based on an economy whose resources were underutilized TRUE OR FALSE

TRUE ++++++

The larger the MPC, the greater the multiplier effect TRUE or FALSE

TRUE +++++++

Consider the following Keynesian Economy: C = 200 + .75(Y - T)I = 400G= 500T= 400Ex = 200IM = 300 1a What is equilibrium GDP? A. 1800 B. 2800 C. 3800 D. 4800 1b What is the level of consumption and saving A. 3300 and 200 B. 4400 and 400 C. 1600 and 200 D. 2000 and 400 1c What is the level of the spending multiplier in this economy? A. 4 B. 5 C. 6 D. 10 1d Is this economy borrowing from foreigners? A. No, it is actually lending to foreigners. B. Yes, it is borrowing 100 from foreigners. C. Yes, it is borrowing 200 from foreigners. D. Yes, it is borrowing 400 from foreigners.

1a = 2800 1b = 2000 and 400 1c = 4 1d = Yes, it is borrowing 100 from foreigners.

*If the marginal propensity to consume is 0.8, by how much will total income increase after an initial $200 is spent? A. $40 B. $160 C. $200 D. $1,000

$1,000 +

If disposable income is $3,000 and saving is $1,200, how much is consumption? A. -$1,200 B. $1,800 C. $2,100 D. $4,200

$1,800 ++

*In an economy with three sectors (household, business, and government - i.e. no foreign sector), government spending is $5 billion, taxes are $4 billion, and investment is $4 billion. If the economy is in equilibrium, then saving is: A. $1 billion B. $4 billion C. $5 billion D. $9 billion

$5 billion +

If autonomous investment increases by $100 and, as a result, GDP ultimately increases by $200, the multiplier equals A. 1 B. 2 C. 3 D. 4 E. 5

2

If the marginal propensity to save is 0.25, the multiplier is A. 4 B. 1.33 C. 3 D. 3.33

4 ++++

Approximately what share of U.S. GDP is consumption? A. 60% B. 70% C. 80% D. 90%

70% +

f the marginal propensity to save is 1/8, the value of the simple multiplier is A. 8 B. 1/8 C. 2 D. 1/2 E. 4

8

Suppose the reserve requirement ratio is 20 percent. Assuming no bank holds excess reserves and nobody withdraws cash, a $10,000 injection of new excess reserves by the Fed can create A. $2,000 in new checkable deposits B. $10,000 in new checkable deposits C. $50,000 in new checkable deposits D. $500,000 in new checkable deposits E. $50,000 in cash

$50,000 in new checkable deposits

If income rises from $10,000 to $20,000 and consumption increases from $9,000 to$16,000, then the marginal propensity to consume is A 0.10 B. 0.30 C. 0.70 D. 0.80

0.70 +

Which of the following events will shift the aggregate demand curve to the right? A. decreased exports B. increased imports C. a new government program to eliminate poverty D. a rise in the interest rate

A rise in the interest rate +++

A decline in the U.S. price level, other things constant, would A. stimulate U.S. exports, pushing the aggregate demand curve to the right B. stimulate U.S. imports, pushing the aggregate demand curve to the right C. stimulate U.S. exports but discourage imports, causing a rightward movement along a given aggregate demand curve D. discourage U.S. exports but stimulate imports, causing a rightward movement along a given aggregate demand curve E. not affect U.S. net exports, so aggregate quantity demanded would remain constant

discourage U.S. exports but stimulate imports, causing a rightward movement along a given aggregate demand curve

If the MPC = 0.6 and government purchases increase by $2 trillion, then equilibrium real GDP demanded A. increases by $5 trillion B. decreases by the government multiplier C. increases by $2 trillion D. decreases by $5 trillion E. is indeterminate

increases by $5 trillion

In the income-expenditure framework, if planned aggregate expenditures are greater than real GDP, A. the price level will fall B. consumption must fall C. inventories will increase D. inventories will decrease E. consumption will decrease

inventories will decrease

The ultimate impact of the multiplier in determining the change in aggregate real GDP from a change in autonomous planned aggregate expenditure A. is smaller the steeper the slope of the short-run aggregate supply curve B. is larger the steeper the slope of the short-run aggregate supply curve C. is the same regardless of the slope of the short-run aggregate supply curve D. is too negligible to be considered E. depends on what the government policy makers want them to be

is smaller the steeper the slope of the short-run aggregate supply curve

Whatever functions as money must be A. authorized by the government B. accepted for deposit by banks C. backed by precious metals like gold or silver D. completely indestructible E. limited in supply

limited in supply

Consumption A. makes up about two-thirds of GDP in a typical year B. exceeds GDP in years when net exports are negative C. is much more volatile than investment, especially during recession years D. is much more volatile than investment, especially during expansion years E. has declined as a fraction of GDP over time

makes up about two-thirds of GDP in a typical year

Which of the following is not a function of the Federal Reserve System? A. holding deposits of member banks B. clearing checks C. making loans to member banks D. serving as a bank to the Federal government E. making loans to the public

making loans to the public

Federal spending that is authorized by permanent laws and does not go through the annual appropriation process is called ________ spending. A. discretionary B. mandatory C. long-term D. infrastructure

mandatory

The proportion of ADDITIONAL income that consumers spend is known as the: A. marginal propensity to save B. marginal propensity to consume C. average propensity to save D. average propensity to consume

marginal propensity to consume

If a household's income falls from $26,000 to $24,000 and its consumption spending falls from $25,000 to $23,500, then its A. marginal propensity to consume is 0.98 B. marginal propensity to consume is 1.33 C. marginal propensity to consume is 0.94 D. marginal propensity to save is 0.02 E. marginal propensity to save is 0.25

marginal propensity to consume is 1.33 ++

Which of the following is not a tool of fiscal policy? A. money supply B. gov' purchases C. taxes D. social security program E. unemployment benefits

money supply

John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that A. balancing the national budget at all times was sound economic policy B. natural economic forces were not necessarily adequate to move the economy toward its potential output level C. the government did not need to stimulate output in order for the economy to achieve its potential output level D. increases in taxes and increases in government purchases are equally effective in closing an expansionary gap E. increases in taxes and increases in government purchases are equally effective in closing a contractionary gap

natural economic forces were not necessarily adequate to move the economy toward its potential output level

Tony deposits $2,000 in cash at the Last National Bank and the bank credits Tony's checking account in the amount of $2,000. Which of the following is true immediately after this transaction? A. The money supply, M1, increases by $2,000. B. Only the composition of M1 changes, not its amount. C. A $2,000 loan from the Last National Bank is an asset to Tony. D. Both the assets and the liabilities of the Last National Bank fall by $2,000. E. The immediate effect of this transaction is that M1 increases by $2,000 times the money multiplier.

only the composition of M1 changes, not its amount

The aggregate expenditure function, along with the 45-degree line, determines equilibrium. This"Keynesian" model is based on the assumption that: A. production is constant B. production is constant and at the full employment level of GDP C. production is determined by aggregate demand at the existing price level D. producers will supply more at higher prices than they will at lower prices E. producers will supply more at lower prices than they will at higher prices

production is determined by aggregate demand at the existing price level

*The aggregate demand curve slopes downward to the right, reflecting a relationship between the price A. real GDP B. interest rates C. the saving rate D. the investment level E. the consumption level

real GDP

The interest rate is important to the investment decision A. only when funds must be borrowed B. only when firms have the money on hand C. regardless of whether funds must be borrowed or firms have the funds on hand D. only when the firm has funds on hand and is ready to lend them E. only when the firm is purchasing new equipment rather than a new building

regardless of whether funds must be borrowed or firms have the funds on hand

*An increase in the price level will A. shift the aggregate expenditure function upward B. shift the aggregate expenditure function downward C. result in a movement upward along the aggregate expenditure function D. result in a movement downward along the aggregate expenditure function E. change the slope of the aggregate expenditure function

shift the aggregate expenditure function downward

Economic growth is shown as a: A. shift to the left in a long-run aggregate supply curve B. movement up along the aggregate supply curve C. shift to the right in a long-run aggregate supply curve D. shift to the left in a short-run aggregate supply curve

shift to the right in a long-run aggregate supply curve ++++++++

When the economy is below full employment, expansionary fiscal policy: A. shifts the aggregate demand curve to the left B. shifts the short-run aggregate supply curve to the right C. Causes a movement down along the aggregate demand curve D. shifts the aggregate demand curve to the right

shifts the aggregate demand curve to the right

Attempting to balance the governments budget during a severe recession will: A. help to reduce the severity of the recession B. tend to make the recession worse C. cause inflation D. stimulate aggregate demand

tend to make the recession worse +

Keynes's insight during the Great Depression was that: A. investment spending was too great to support high employment. B. consumption spending is detrimental to the economy. C. the economy can be in both equilibrium and high unemployment. D. the unemployment rate is not a good indicator of the true state of the economy.

the economy can be in both equilibrium and high unemployment. +

Less of society's resources will be channeled into capital when A. interest rates are high B. households decide to save more of their income C. business people have optimistic expectations about the future D. aggregate income increases E. the nation is running a trade deficit

the nation is running a trade deficit ++

Which of the following is assumed constant in the Keynesian model? A. the price level B. consumption C. unintended inventory adjustment D. actual investment E. real GDP

the price level +

In the Keynesian aggregate expenditure model, which variable is assumed to be fixed? A. GDP B. Consumption C. unemployment D. the price level

the price level +++++

Which of the following is not investment spending? A. an increase in business inventories B. the extensive renovation of an old factory building C. the purchase of stock in Potomac Electric Company D. the construction of a new apartment building E. the purchase of a new silo for a farm

the purchase of stock in Potomac Electric Company

If the economy is already producing at its potential, A. the spending multiplier equals 1/(1 - MPC) in the long run B. the spending multiplier is less than 1/(1 - MPC) in the long run C. the spending multiplier is more than 1/(1 - MPC) in the long run D. the spending multiplier equals zero in the long run E. the aggregate demand curve is horizontal

the spending multiplier equals zero in the long run

In which of the following ways does government affect the consumption component of planned aggregate expenditures? A. through net taxes, which change disposable income B. by purchasing goods and services, which increase consumption C. by using subsidies to encourage firms to invest D. by using net taxes to encourage firms to invest E. by producing public goods

through net taxes, which change disposable income

Mandatory spending comprises nearly ________ of the federal budget. A. one-fourth B. one-third C. one-half D. two-thirds

two-thirds

At the equilibrium level of real GDP, unplanned inventory changes equal A. planned investment B. saving C. zero D. actual investment E. consumption

zero

Which of the following is NOT an explicit short-run goal of discretionary fiscal policy? A. Full employment B. economic growth C. control of inflation D. zero unemployment

zero unemployment

In the early 1930s, many U.S. banks failed, wiping out the savings of millions of U.S. households. The result of these mass bank failures might be graphed as A. a downward shift of the aggregate expenditure line and a movement upward along the aggregate demand curve B. a downward shift of the aggregate expenditure line and a movement downward along the aggregate demand curve C. a downward shift of the aggregate expenditure line and a shift to the left in the aggregate demand curve D. an upward shift of the aggregate expenditure line and a rightward shift of the aggregate demand curve E. an upward shift of the aggregate expenditure line and a leftward shift of the aggregate demand curve

a downward shift of the aggregate expenditure line and a shift to the left in the aggregate demand curve

*Short-run macroeconomic equilibrium occurs at the intersection of: A. aggregate demand and short-run aggregate supply B. aggregate demand and long-run aggregate supply. C. aggregate demand, short-run aggregate supply, and long-run aggregate supply. D. short-run aggregate supply and long-run aggregate supply.

aggregate demand and short-run aggregate supply

John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income A. aggregate spending B. investment C. the interest rate D. property rights

aggregate spending ++

Open-market operations involve A. clearing checks B. lending money to member banks C. accepting deposits from member banks D. the Fed's purchase and sale of government securities E. any monetary policy actions

any monetary policy actions

The distinction between discretionary fiscal policy and the use of automatic stabilizers is that A. only discretionary fiscal policy can stimulate the economy B. only automatic stabilizers can stimulate the economy C. discretionary fiscal policy, once adopted, is built into the structure of the economy D. automatic stabilizers, once adopted, are built into the structure of the economy E. only discretionary fiscal policy can be used by the federal government

automatic stabilizers, once adopted, are built into the structure of the economy +

Under a fractional reserve banking system A. only a fraction of the banks in the system are allowed to create money B. only a fraction of the banks in the system have reserves C. the claims outstanding against the bank are only a fraction of the bank's total reserves D. each bank must deposit a fraction of its reserves with the Federal Reserve Bank E. bank reserves represent only a fraction of bank deposits

bank reserves represent only a fraction of bank deposits

In the federal funds market, A. banks make loans to the Fed B. banks make short-term loans to other banks C. banks make long-term loans to other banks D. the Fed makes short-term loans to commercial banks E. the Fed makes long-term loans to commercial banks

banks make short-term loans to other banks

If policy makers think the natural rate of unemployment is lower than it really is, then their policies designed to move the economy to the (high) estimated natural rate, if continued over the long run, will A. cause continuing inflation B. shift the long-run aggregate supply curve to the right C. shift the supply curve of labor to the right D. reduce unemployment more than they had intended E. keep the economy below its potential GDP level

cause continuing inflation

Which group of economists believed that economic downturns were self-correcting, that is the forces of supply and demand would naturally bring the economy back to equilibrium? A. Keynesians B. classical economists C. interventionists D. Marxists

classical economists ++

The more time a free market economy has to adjust to price changes, the: A. greater the rate of inflation B. closer GDP gets to the natural rate of output C. closer the economy gets to the horizontal portion of the aggregate demand curve D. more volatility is seen in the business cycle

closer GDP gets to the natural rate of output

M1 is defined as A. one dollar bills B. currency and coins held by the nonbank public, checkable deposits and traveler's checks C. M3 minus M2 D. all currency and checkable deposits E. coins and currency held by the nonbank public

currency and coins held by the nonbank public, checkable deposits and traveler's checks +++++++

In the Keynesian framework, the way to fight a recession is to: A. cut taxes and/or increase government spending. B. reduce interest rates. C. increase the population with more immigration. D. do nothing and wait for the economy to return to full employment on its own.

cut taxes and/or increase government spending ++

Which of the following is specifically designed to increase the long-run aggregate supply curve? A. raising marginal taxes on income B. developing new technologies C. increasing the government spending on welfare D. increasing taxes on entrepreneurs

developing new technologies +++++

Assume that the MULTIPLIER is 10. Full employment is considered to be at a GDP level of$500 billion. The current GDP is $400 billion. According to Keynesian macroeconomics, what should the government do to achieve full employment? A. increase spending by $25 billion B. increase spending by $10 billion C. reduce spending by $25 billion D. reduce spending by $100 billion

increase spending by $10 billion +

A shift of the aggregate _______ curve to the ________ would cause inflation to rise and employment to increase A. supply ; left B. demand ; left C. supply ; right D. demand ; right

demand; right ++

The simple money multiplier A. equals the reciprocal of the required reserve ratio B. assumes banks hold excess reserves C. is larger as the required reserve ratio increases D. equals required reserves plus excess reserves E. equals total reserves minus required reserves

equals the reciprocal of the required reserve ratio

In order to increase the money supply, the banking system must have A. required reserves B. the authority to buy corporate stocks C. the authority to print U.S. currency D. excess reserves E. the authority to engage in interstate banking

excess reserves +++++

Which of the following will not necessarily increase when net taxes decrease? A. saving B. disposable income C. consumption D. government expenditure E. GDP

government expenditure

Because the private and foreign sectors of the economy were in a deep slump during the Great Depression of the 1930s, Keynes suggested an increase in: A. investment spending. B. government spending. C. consumption spending. D. import spending.

government spending +

An increase in incomes in other countries, other things equal, would cause U.S. A. exports to decrease and imports to increase B. exports to increase and imports to increase C. imports to decrease and exports to decrease D. imports to increase and exports would remain unchanged E. imports to remain unchanged and exports to increase

imports to remain unchanged and exports to increase

Which of the following might be considered the most expansionary set of fiscal policies? A. increase in government purchases, increase in taxes, and decrease in transfer payments B. decrease in government purchases, increase in taxes, and decrease in transfer payments C. increase in government purchases, decrease in taxes, and increase in transfer payments D. increase in government purchases, increase in taxes, and increase in transfer payments E. decrease in government purchases, decrease in taxes, and decrease in transfer payments

increase in government purchases, decrease in taxes, and increase in transfer payments