Macro exam 7

If the MPC is 0.9, then the tax multiplier is: a. -9.This is the correct answer. Selected: b. 0.1.This answer is incorrect. c. -10. d. -5. e. 1.11.

a

Increased consumer optimism caused consumption spending to rise by $200 billion in a nation with a marginal propensity to save equal to .1. Gross domestic product should eventually increase by Selected: a. $2,000 billion.This answer is correct. b. $1,000 billion. c. $800 billion. d. $20 billion. e. $200 billion.

a

The long-run aggregate supply curve in Foxystan will shift to the right if Selected: a. there are more available resources in Foxystan.This answer is correct. b. nominal wages are falling. c. consumer wealth is rising. d. the aggregate price level is rising. e. interest rates are rising.

a

The most important determinant of consumer spending is:a. disposab le income.r.b. the government budget deficit or surplus.c. the trade deficit.d. the price of gasoline.e. the interest rate.

a

In the nation of Foxystan, a $1000 increase in consumer spending typically causes GDP to rise by $2500. The marginal propensity to consume in Foxystan is equal to: No answer provideda. 2.5b. .90c. .40d. .50e. .60

e

Suppose that consumer assets and wealth decrease in real value. How will this affect the aggregate demand curve? No answer provideda. The aggregate demand curve will become flatter and nearly horizontal.b. Aggregate demand shifts to the left.This is the correct answer.c. There will be a movement upward along the fixed aggregate demand curve.d. There will be a movement downward along the fixed aggregate demand curve.e. Aggregate demand shifts to the right.

b

The interest rate effect is the tendency for changes in the price level to affect: Selected: a. export demand and thus affect aggregate demand.This answer is incorrect. b. interest rates and thus affect the quantity of investment and consumption demanded.This is the correct answer. c. interest rates and thus affect the productivity of existing capital equipment. d. real incomes and lead to shifts in potential output. e. the quantity of investment demanded and thus affect interest rates.

b

Use the "Shifts of the AD-AS Curves" Figure 19-1. In the short run, an increase in factor prices is illustrated by: Selected: a. Panel (C).This answer is incorrect. b. Panels (A) and (D). c. Panel (D).This is the correct answer. d. Panel (B). e. Panel (A).

c

According to the short-run aggregate supply curve, when the _________ rises, the quantity of _________ rises. Selected: a. interest rate; aggregate output suppliedThis answer is incorrect. b. aggregate price level; aggregate output demanded c. interest rate; investment d. aggregate price level; aggregate output suppliedThis is the correct answer. e. profit per unit; aggregate output demanded

d

An example of an automatic stabilizer is: Selected: a. government purchases rising when GDP rises.This answer is incorrect. b. a discretionary increase in taxes. c. government transfers rising when GDP rises. d. tax receipts rising when GDP rises.This is the correct answer. e. government purchases falling when GDP falls.

d

If the marginal propensity to save is 0.3, the size of the multiplier is: a. 1.3. b. 10. Selected: c. 0.7.This answer is incorrect. d. 2.3. e. 3.3.

e

A nation's potential output: No answer provideda. is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible.This is the correct answer.b. is greater in periods of expansion than in recessions.c. is dependent on the level of consumer confidence.d. varies with the price level.e. is the level of output the economy would produce if there was no unemployment.

a

Expansionary fiscal policy causes the aggregate demand curve to shift to the _______ and is used to close a(n) _______ gap. No answer provideda. right; recessionaryThis is the correct answer.b. left; inflationaryc. right; inflationaryd. left; recessionarye. right; trade

a

Expansionary fiscal policy includes: Selected: a. increasing government expenditures.This answer is correct. b. decreasing the federal funds rate. c. increasing taxes. d. decreasing government expenditures. e. increasing the money supply.

a

If the disposable income increases by $1000 and the consumer spending increases by $800, then the marginal propensity to consume is: No answer provideda. 0.80.This is the correct answer.b. 1.25.c. 0.75.d. 1.00.e. 0.20.

a

Use the "An Increase in Aggregate Demand" Figure 19-10. At the Y2 level of real GDP: a. an inflationary gap exists equal to the difference between Y2 and YP.This is the correct answer. Selected: b. a recessionary gap exists equal to the difference between Y2 and YP.This answer is incorrect. c. the economy will self-correct at output Yp and price level P1. d. the output at Y2 is a long-run equilibrium. e. an inflationary gap exists equal to the sum of Y2 and YP.

a

Use the "Inflationary and Recessionary Gaps" Figure 19-3. In Panel (b), the level of income associated with Y1: No answer provideda. when compared with Yp, would reveal an inflationary gap.This is the correct answer.b. is equal to potential output.c. is caused by flexible wages and prices.d. is a long-run equilibrium.e. when compared with Yp, would reveal an recessionary gap.

a

A general decrease in input prices will result in the: Selected: a. aggregate demand shifting to the right.This answer is incorrect. b. short-run aggregate supply shifting to the right.This is the correct answer. c. short-run aggregate supply shifting to the left. d. aggregate demand shifting to the left. e. long-run aggregate supply shifting to the right.

b

According to the long-run aggregate supply curve, when _________, the quantity of aggregate output supplied _________. No answer provideda. the price of commodities falls; risesb. the aggregate price level rises; does not changeThis is the correct answer.c. the unemployment rate rises; does not changed. nominal wages rise; fallse. the aggregate price level rises; falls

b

An increase in the aggregate price level will increase: Selected: a. aggregate demand.This answer is incorrect. b. the quantity of aggregate output supplied in the short run.This is the correct answer. c. the quantity of aggregate output demanded. d. short-run aggregate supply. e. long-run aggregate supply.

b

Automatic stabilizers act like: a. an additional multiplier effect. b. automatic expansionary fiscal policy when the economy is in a recession.This is the correct answer. c. automatic contractionary policy when the economy is in a recession. d. automatic budget balancing policies when the economy is in a recession. Selected: e. automatic expansionary fiscal policy when the economy is producing above potential output.

b

If the planned aggregate spending rises by $25 billion and the MPC is .8, then GDP changes by: a. $25 billion. b. $125 billion.This is the correct answer. Selected: c. $100 billion.This answer is incorrect. d. - $25 billion. e. $250 billion.

b

If your disposable personal income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $13,000, your MPC is: Selected: a. 0.6.This answer is incorrect. b. 0.8.This is the correct answer. c. 0.5. d. 0.4. e. 0.2.

b

In response to a negative supply shock, the government decreases taxes. The most likely result of the government's tax decrease is: a. an increase in unemployment and a decrease in the aggregate price level. b. a decrease in unemployment and an increase in the aggregate price level.This is the correct answer. Selected: c. an increase in unemployment and an increase in the aggregate price level.This answer is incorrect. d. an increase in real GDP and a decrease in the aggregate price level. e. a decrease in unemployment and a decrease in the aggregate price level.

b

Nominal wages and prices that are slow to adjust is the primary explanation for why No answer provideda. the short-run aggregate supply curve is vertical.b. the short-run aggregate supply curve is upward sloping.This is the correct answer.c. the long-run aggregate supply curve is upward sloping.d. the aggregate demand curve is downward sloping.e. the long-run aggregate supply curve is vertical.

b

The nation of Franklandia is experiencing a short-run equilibrium where the unemployment rate is higher than the natural rate of unemployment. In the long run, how will the nation's nominal wages, real output, and price level change? No answer provideda. decrease; decrease; increaseb. decrease; increase; decreaseThis is the correct answer.c. increase; decrease; increased. increase; increase; decreasee. decrease; decrease; decrease

b

Use the "Policy Alternatives" Figure 19-5. Assume that the economy depicted in Panel (a) is in short-run equilibrium with AD1 and SRAS1. If the economy is left to correct itself: No answer provideda. aggregate demand will shift leftward.b. lower wages will result in a gradual shift from SRAS1 to SRAS2.This is the correct answer.c. real interest rates will fall which will shift SRAS rightward.d. long-run equilibrium will be established at YP and P3.e. aggregate demand will shift rightward to Yp and P1.

b

A decrease in energy prices will: No answer provideda. decrease the quantity of aggregate output supplied in the short run.b. increase aggregate demand.c. increase short-run aggregate supply.This is the correct answer.d. increase the quantity of aggregate output demanded.e. decrease aggregate demand.

c

A nation's potential output is: No answer provideda. the level of real GDP that the economy would produce if there was no inflation.b. the level of real GDP that the economy would produce if all prices, including nominal wages, were sticky.c. the level of real GDP that the economy would produce if all prices, including nominal wages, were fully flexible.This is the correct answer.d. the level of real GDP that exists when the actual rate of unemployment is zero.e. the level of real GDP that exists when the economy is experiencing only cyclical unemployment.

c

A self-correcting recessionary gap results in: No answer provideda. aggregate demand that gradually increases.b. long-run aggregate supply that gradually increases.c. short-run aggregate supply that gradually increases.This is the correct answer.d. short-run aggregate supply that gradually decreases.e. aggregate demand that gradually decreases.

c

An autonomous increase in aggregate spending: No answer provideda. increases GDP by the same amount.b. reduces GDP by more than that amount.c. increases GDP by more than that amount.This is the correct answer.d. increases GDP by that amount.e. reduces GDP by that amount.

c

Fiscal policy that decreases aggregate demand is: No answer provideda. supplemental.b. expansionary.c. contractionary.This is the correct answer.d. an open market operation.e. balanced.

c

If the Fed increases the quantity of money in circulation: Selected: a. interest rates increase, investment increases, and the aggregate demand curve shifts to the right.This answer is incorrect. b. interest rates decrease, investment increases, and the aggregate demand curve shifts to the left. c. interest rates decrease, investment increases, and the aggregate demand curve shifts to the right.This is the correct answer. d. interest rates increase, investment decreases, and the aggregate demand curve shifts to the left. e. interest rates decrease, investment decreases, and the aggregate demand curve shifts to the right.

c

The General Theory of Employment, Interest, and Money, was written by: Selected: a. Adam Smith.This answer is incorrect. b. David Ricardo. c. Thomas Malthus. d. John Maynard Keynes.This is the correct answer. e. Robert Lucas.

d

When policymakers make deliberate fiscal policy decisions: a. this is an example of an automatic stabilizer.b. no lag effects will result.c. the value of the multiplier will be reduced.d. the budget remains balanced.e. this is discretionary fiscal policy.

e

If the MPC equals 0.75, then based on the simple model presented in this chapter, one would expect a $100 decrease in investment spending to lead to: Selected: a. an increase in spending which will total $100 by the end of all the rounds.This answer is incorrect. b. an increase in spending which will total $400 by the end of all the rounds. c. a decrease in spending which will total $400 by the end of all the rounds.This is the correct answer. d. a decrease in spending which will total $500 by the end of all the rounds. e. a decrease in spending which will total $100 by the end of all the rounds.

c

If the marginal propensity to consume is .75, and the federal government increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by: Selected: a. $100 billion.This answer is incorrect. b. $300 billion. c. $400 billion.This is the correct answer. d. $750 billion. e. $150 billion.

c

Producing a short-run level of aggregate output that exceeds the economy's potential output results in: Selected: a. a downward adjustment in production costs.This answer is incorrect. b. a downward adjustment in the price level. c. an upward adjustment in nominal wages.This is the correct answer. d. a downward adjustment in nominal wages. e. an upward adjustment in profits per unit of output.

c

Suppose that the economy is in long-run macroeconomic equilibrium and aggregate demand increases. As the economy moves to short-run macroeconomic equilibrium, there is: a. an inflationary gap with zero unemployment. Selected: b. a recessionary gap with high inflation.This answer is incorrect. c. an inflationary gap with low unemployment.This is the correct answer. d. an inflationary gap with high unemployment. e. a recessionary gap with low inflation.

c

Suppose the economy is currently producing $80 billion in real output. If potential output is equal to $100 billion, the output gap is equal to No answer provideda. - 80%b. + 180%c. - 20%This is the correct answer.d. - 25%e. 0%

c

The _____ curve shows the negative relationship between the aggregate price level and the quantity of aggregate output demanded in the economy. Selected: a. investment demandThis answer is incorrect. b. Phillips curve c. aggregate demandThis is the correct answer. d. short-run aggregate supply e. long-run aggregate supply

c

The economy of Foxystan currently produces $1000 of GDP. If the marginal propensity to consume is equal to .90, and net exports to Franklandia increase by $20, economists in Foxystan predict that aggregate demand will Selected: a. shift to the left by $20.This answer is incorrect. b. shift to the right by $180 c. shift to the right by $200This is the correct answer. d. shift to the left by $2. e. shift to the right by $20.

c

The economy of Foxystan is experiencing an inflationary gap of $200 billion. Foxystan's MPC is 0.80 and the government decides to decrease spending on goods and services by $100 billion and decrease lump sum taxes by $50 billion. All else equal, the outcome of this policy will Selected: a. leave the economy in an inflationary gap of $50 billion.This answer is incorrect. b. return the economy to full employment. c. leave the economy in a recessionary gap of $100 billion.This is the correct answer. d. leave the economy in a recessionary gap of $550 billion. e. leave the economy in an inflationary gap of $100 billion.

c

The wealth effect explains why: No answer provideda. the short-run aggregate supply curve slopes upward since an increase in wealth leads to more consumption.b. the aggregate demand curve slopes upward since wealth allows consumers to purchase more regardless of the price level.c. the aggregate demand curve slopes downward since changes in aggregate price levels change the purchasing power of peoples' assets.This is the correct answer.d. the long-run aggregate supply curve is vertical as there is no relationship between aggregate price level and aggregate output in the long run.e. the short-run aggregate supply curve shifts since changes in wealth affect production.

c

Use the "Fiscal Policy Choices" Figure 20-7. In Panel (b), if real GDP is equal to Y1, there is: Selected: a. a trade gap.This answer is incorrect. b. equilibrium at full employment. c. an inflationary gap.This is the correct answer. d. a recessionary gap. e. A foreign exchange gap.

c

Use the "Fiscal Policy II" Figure 20-6. Suppose that this economy is in equilibrium at E1. If there is an increase in taxes, then: Selected: a. AD2 will shift to the right, causing an increase in the price level and an increase in real GDP.This answer is incorrect. b. AD1 will shift to the left, causing a decrease in the price level and an increase in the real GDP. c. AD1 will shift to the left, causing a decrease in the price level and a decrease in the real GDP.This is the correct answer. d. AD2 will shift to the right, causing a decrease in the price level and an increase in real GDP. e. AD1 will shift to the left, causing an increase in the price level and a decrease in real GDP.

c

Use the "North Placid Government" Figure 20-3. Suppose the economy of North Placid was originally producing at potential output. What fiscal policy might have caused the economy to move to its current short-run equilibrium? No answer provideda. Lower interest rates.b. More restrictive trade practices.c. Tax cuts on household income.This is the correct answer.d. Lower levels of government spending.e. Cuts to benefits received by retirees.

c

Use the "Shift of the Aggregate Demand Curve" Figure 17-2. A movement from AD1 to AD2 may have been the result of: No answer provideda. a decrease in government spending.b. a decrease in value of consumer wealth.c. decreases in personal income taxes.This is the correct answer.d. a decrease in investment spending.e. falling net exports.

c

If the marginal propensity to consume is 0.9, then the tax multiplier will be: a. 5. b. 0.9. c. 10. Selected: d. 9.This answer is correct. e. 0.1.

d

If there is a recessionary gap, discretionary fiscal policy would likely involve action to: Selected: a. shift aggregate demand to the left and short-run aggregate supply to the right.This answer is incorrect. b. leave aggregate demand alone, and shift short-run aggregate supply to the left. c. shift aggregate demand to the right and shift short-run aggregate supply to the left. d. shift aggregate demand to the right.This is the correct answer. e. shift aggregate demand to the left

d

In the nation of Foxystan, a $500 decrease in consumer spending typically causes GDP to fall by $5000. The spending multiplier in Foxystan is equal to: No answer provideda. .10b. .90c. 5d. 10This is the correct answer.e. 100

d

Use the "AD-AS" Figure 19-8. Suppose that initially the economy is at the intersection of SRAS1 and AD2. If the economy self-corrects, in the long-run equilibrium, we would see No answer provideda. output of Y2 and a higher price level.b. output of Y2 and a lower price level.c. output of Yp and a lower price level.d. output of Yp and a higher price level.This is the correct answer.e. output of Y1 and a lower price level.

d

Use the "Aggregate Supply" Figure 18-2. If the economy is at point E, which of the following describes the likely adjustment process? a. Nominal wages increase, and the short-run aggregate supply curve shifts right until potential output is greater than actual output.b. Nominal wages decrease, and the short-run aggregate supply curve shifts right until actual and potential output are equal.c. Nominal wages decrease, and the short-run aggregate supply curve shifts right until potential output is less than actual output.d. Nominal wages increase, and the short-run aggregate supply curve shifts left until actual and potential output are equal.This is the correct answer.e. Nominal wages decrease, and the short-run aggregate supply curve shifts left until potential output is equal to actual output.

d

Use the "Shift of the Aggregate Demand Curve" Figure 17-2. A movement from point B on AD1 to point E on AD2could have been the result of: No answer provideda. an increase in personal income taxes.b. a decrease in consumer wealth.c. an increase in interest rates.d. an increase in consumer optimism.This is the correct answer.e. the central bank reducing the quantity of money.

d

Which of the following would cause the aggregate demand in Franklandia to decrease? Selected: a. Personal income tax rates are falling in Franklandia.This answer is incorrect. b. Interest rates in Franklandia are falling. c. Firms in Franklandia are more optimistic about future profits. d. Net exports to Foxystan are decreasing.This is the correct answer. e. Government spending in Franklandia is rising.

d

A decrease in aggregate demand will generate _______ in real GDP and _______ in the price level in the short run. a. an increase; no change b. a decrease; no change c. no change; an increase Selected: d. a decrease; an increaseThis answer is incorrect. e. a decrease; a decrease

e

According to the aggregate demand curve, when the aggregate price level _________, the quantity of _________. Selected: a. falls; aggregate output demanded fallsThis answer is incorrect. b. rises; aggregate output supplied falls c. falls; aggregate output supplied falls d. rises; aggregate output demanded does not change e. rises; aggregate output demanded falls

e

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output? Selected: a. Increase government spending by $50 billion.This answer is incorrect. b. Decrease government spending by $50 billion. c. Decrease government transfers by $50 billion. d. Decrease taxes by $12.5 billion. e. Decrease government spending by $10 billion.

e

Discretionary fiscal policy may fail to stabilize the economy or even make the economy less stable due to: a. its ineffectiveness.b. the absence of the multiplier.c. government waste.d. the business cycle.e. lags in deciding and implementing a policy change.

e

Government spending increases to help low-income student afford college. Which of the following is likely to result? a. Automatic stabilizers will have no impact on the increase in government spending and aggregate demand. b. Automatic stabilizers will decrease the contractionary impact of the increase in aggregate demand. c. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. Selected: d. Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand.This answer is incorrect. e. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.

e

If MPC=.75, then the MPS is: No answer provideda. 1.25.b. 1.75.c. 4.d. -0.25.e. 0.25

e

If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume is equal to: a. 20. Selected: b. 0.2.This answer is incorrect. c. 9. d. 1.25. e. 0.8.

e

If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium? a. Nominal wages decrease, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium. b. Nominal wages decrease, and the aggregate demand curve shifts left until the economy reaches long-run equilibrium. Selected: c. Nominal wages increase, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium.This answer is incorrect. d. Nominal wages increase, and the aggregate demand curve shifts right until the economy reaches long-run equilibrium. e. Nominal wages increase, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium.

e

The _____ shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied in the economy. Selected: a. long-run aggregate supply curveThis answer is incorrect. b. Phillips curve c. aggregate demand curve d. aggregate spending curve e. short-run aggregate supply curve

e

The multiplier effect of changes in government purchases of goods and services is equal to: Selected: a. MPS/(1 - MPC).This answer is incorrect. b. MPS/MPC. c. 1/(1 - MPS). d. MPC/(1 - MPS). e. 1/(1 - MPC).

e

The multiplier effect of government purchases of goods and services: a. runs into fewer time lag issues than tax changes. b. is useful for inflations but not for recessions. c. is a type of automatic stabilizer. d. is useful for recessions but not for inflations. Selected: e. has a more direct and greater impact than an equal amount of tax changes.

e

Use the "Inflationary and Recessionary Gaps" Figure 20-4. At E3, the economy: No answer provideda. is in equilibrium.b. has a recessionary gap.c. would benefit from expansionary fiscal policy.d. is stagnating.e. has an inflationary gap.

e

Use the "Shift of the Aggregate Demand Curve" Figure 17-2. A movement from point C on AD2 to point A on AD1may have been the result of : No answer provideda. a higher aggregate price level.b. an increase in investment demand due to optimistic GDP forecasts.c. lower interest rates.d. decreases in the taxes paid by businesses.e. a decrease in investment due to higher interest rates.

e

Which of the following is considered to be the two types of macroeconomic policies? Selected: a. monetary policy and health care policyThis answer is incorrect. b. fiscal policy and price controls c. monetary and regulation policy d. fiscal and regulation policy e. monetary and fiscal policy

e

Which of the following would cause the aggregate demand in Franklandia to increase? No answer provideda. Consumers in Franklandia are less optimistic about earnings.b. Government spending in Franklandia is falling.c. Personal income tax rates are rising in Franklandia.d. Imports from Foxystan are rising.e. Interest rates in Franklandia are falling.

e