macro test 3

The multiplier effect indicates that:

a change in spending will change aggregate income by a larger amount.

The public debt is the: Amount of U.S. paper currency in circulation Ratio of all past deficits to all past surpluses Accumulation of all past deficits minus all past surpluses Difference between current government expenditures and current tax revenues

Accumulation of all past deficits minus all past surpluses

The foreign purchases, interest rate, and real balances effects explain why the: Aggregate demand curve is downward sloping Aggregate demand curve may shift to the left or right Economy will adjust towards equilibrium Aggregate expenditures schedule may shift up or down

Aggregate demand curve is downwardsloping

If at a particular price level, real domestic output from producers is greater than real domestic output desired by purchasers, there will be a: A. Surplus and the price level will rise B. Surplus and the price level will fall C. Shortage and the price level will rise D. Shortage and the price level will fall

B. Surplus and the price level will fall

If business taxes are reduced and the real interest rate increases: A. consumption and saving will necessarily increase. B. the level of investment spending might either increase or decrease. C. the level of investment spending will necessarily increase. D. the level of investment spending will necessarily decrease.

B. the level of investment spending might either increase or decrease.

A decrease in aggregate demand in the short run will reduce: Both real output and the price level The price level and increase the real domestic output The real domestic output and have no effect on the price level The price level and have no effect on real domestic output

Both real output and the price level

The slope of the immediate-short-run aggregate supply curve is based on the assumption that: A. Both input and output prices are fixed B. Neither input nor output prices are fixed C. Input prices are flexible but output prices are fixed D. Input prices are fixed but output prices are flexible

A. Both input and output prices are fixed

The economy experiences an increase in the price level and a decrease in real domestic output. Which is a likely explanation? A. Productivity has increased B. Input prices have increased C. Excess capacity has decreased D. Government regulations have been reduced

A. Productivity has increased B. Input prices have increased

Generally speaking, the greater the MPS, the: A. Smaller would be the increase in income which results from an increase in consumption spending B. Larger would be the increase in income which results from an increase in consumption spending C. Larger would be the increase in income which results from a decrease in consumption spending D. Smaller would be the increase in income which results from a decrease in consumption spending

A. Smaller would be the increase in income which results from an increase in consumption spending

Due to automatic stabilizers, when the nation's total income rises, government transfer spending: Increases and tax revenues decrease Decreases and tax revenues increase And tax revenues decrease And tax revenues increase

Decreases and tax revenues increase

The following are important problems associated with the public debt, except: Payments of interest on the debt lead to greater income inequality Interest payments on the debt tend to reduce economic incentives to work and invest Government borrowing to finance the debt may lead to too much private investment Payment of interest on the debt held by foreigners would send real resources abroad

Government borrowing to finance the debt may lead to too much private investment.

A budget surplus means that: Government expenditures are greater than revenues in a given year Government revenues are greater than expenditures in a given year A nation's exports are greater than its imports A nation's imports are greater than its exports

Government revenues are greater than expenditures in a given year

The crowding-out effect suggests that: Increases in consumption are always at the expense of saving Increases in government spending will close a recessionary expenditure gap Increases in government spending may reduce private investment High taxes reduce both consumption and saving

Increases in government spending may reduce private investment

Refer to the graph above. Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output? P2 and Q4 P1 and Q1 P2 and Q2 P1 and Q3

P2 and Q2

Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP? Shift aggregate demand by increasing taxes Shift aggregate demand by decreasing transfer payments Shift aggregate demand by decreasing government spending Shift aggregate demand by increasing transfer payments

Shift aggregate demand by increasing transfer payments

Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions. True or False?

TRUE

If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending. True False

TRUE

Assume that MPS is 0.4. If spending increases by $8 billion, then real GDP will increase by: $13.3 billion $15 billion $20 billion

$20 billion

Answer the question based on the following list of factors that are related to the aggregate demand curve. Which of the above factors best explain the downward slope of aggregate demand curve? 2, 4, and 6 7, 9, and 10 1, 3, and 8 4, 6, and 7

1, 3, and 8

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: 150. 200. 250. 300.

200

The amount by which government expenditures exceed revenues during a particular year is the: A. public debt. B. budget deficit. C. full-employment. D. GDP gap.

B. budget deficit.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A. increase the amount of U.S. real output purchased. B. increase U.S. imports and decrease U.S. exports C. increase both U.S. imports and U.S. exports. D. decrease both U.S. imports and U.S. exports.

B. increase U.S. imports and decrease U.S. exports

The fear of unwanted price wars may explain why many firms are reluctant to: A. reduce wages when a decline in aggregate demand occurs. B. reduce prices when a decline in aggregate demand occurs. C. expand production capacity when an increase in aggregate demand occurs. D. provide wage increases when labor productivity rises.

B. reduce prices when a decline in aggregate demand occurs.

Which of the diagrams best portrays the effects of declines in the incomes of U.S. trading partners? A. B. C. D.

C

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is .75. By how much should the government raise taxes to achieve its objective? A. $6 billion B. $9 billion C. $12 billion D. $16 billion

C. $12 billion

If the Congress passes legislation to cut taxes to counter the effects of a severe recession, then this would be an example of a: A. Political business cycle B. Contractionary fiscal policy C. Expansionary fiscal policy D. Nondiscretionary fiscal policy

C. Expansionary fiscal policy

A fall in the price of capital goods used in production will shift the aggregate: A. Demand curve leftward B. Demand curve rightward C. Supply curve rightward D. Supply curve leftward

C. Supply curve rightward

The size of the MPC is assumed to be: A. less than zero. B. greater than one. C. greater than zero, but less than one. D. two or more.

C. greater than zero, but less than one.

An MPC value of less than 1.0 indicates that as income increases: Consumption also increases, and by more than the increase in income Consumption also increases, and at the same rate as the increase in income Consumption will go in the opposite direction and decrease Consumption also increases, though not as much as income

Consumption also increases, though not as much as income

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is: A. 80 percent. B. 8 percent. C. 2 percent. D. 20 percent.

D. 20%

Which set of events would most likely decrease aggregate demand? A. A reduction in the excess capital of the existing capital stock B. A reduction in business and personal tax rates C. An increase in investment spending D. An increase in personal income tax rates

D. An increase in personal income tax rates

An inverse relationship between the rate of interest and the level of: A. Income is suggested by the consumption function B. Prices is suggested by the aggregate supply curve C. Employment is suggested by the aggregate demand curve D. Investment spending is suggested by the investment-demand curve

D. Investment spending is suggested by the investment-demand curve

When changes to taxes and spending occur in the economy without explicit action by the Federal government, such policy is: A. Cyclical B. Variable C. Discretionary D. Nondiscretionary

D. Nondiscretionary

As the economy declines, the collection of personal income tax revenues automatically falls. This relationship best describes how the progressive income tax system: A. Increases crowding out in the economy B. Decreases real interest rates in the economy C. Offsets the timing problem for fiscal policy D. Provides built-in stability for the economy

D. Provides built-in stability for the economy

The amount of consumption in an economy correlates: . Inversely with the level of disposable income Directly with the level of disposable income Directly with the level of saving Directly with the rate of interest

Directly with the level of disposable income

1 + MPS = MPC. True False

FALSE

Demand-pull inflation can be restrained by increasing government spending and reducing taxes. True False

FALSE

Minimum wage laws tend to make the price level more flexible rather than less flexible. True False

FALSE

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID2? A lower interest rate. Lower expected rates of return on investment. A higher interest rate. Higher expected rates of return on investment.

Higher expected rates of return on investment

An increase in expected future income will: Increase aggregate demand and aggregate supply Decrease aggregate demand and aggregate supply Increase aggregate supply Increase aggregate demand

Increase aggregate demand

~ Refer to the graph above. A budget surplus would be associated with GDP level: H J K L

L

In an economy, for every $1600 decrease in income, spending falls by $1200. It can be concluded that the: Slope of the saving schedule is 1.33 Slope of the saving schedule is 0.75 Marginal propensity to consume is 1.33 Marginal propensity to save is .25

Marginal propensity to save is .25

1 MPC= MPS. True False

TRUE

Which of the following will not tend to shift the consumption schedule upward? A currently small stock of durable goods in the possession of consumers. The expectation of a future decline in the consumer price index. A currently low level of household debt. The expectation of future shortages of essential consumer goods.

The expectation of a future decline in the consumer price index.

A major reason that the public debt cannot bankrupt the Federal government is because: The public debt is mostly held by foreigners The Federal government has the Social Security Trust Fund The public debt can be easily refinanced by issuing new bonds The Federal government can draw on its gold reserves

The public debt can be easily refinanced by issuing new bonds

An increase in net exports will shift the: aggregate expenditures curve upward and the aggregate demand curve rightward. aggregate expenditures curve upward and the aggregate demand curve leftward. aggregate expenditures curve downward and the aggregate demand curve rightward. aggregate expenditures curve downward and the aggregate demand curve leftward.

aggregate expenditures curve upward and the aggregate demand curve rightward.

As disposable income goes up, the: average propensity to consume falls. average prosensity to save falls. volume of consumption declines absolutely. volume of investment diminishes.

average propensity to consume falls.

In contrast to investment, consumption is: relatively unstable. relatively stable. measurable. un-measurable.

relatively stable.

The multiplier is useful in determining the: fullemployment unemployment rate. level of business inventories. change in the rate of inflation from a change in the interest rate. change in GDP resulting from a change in spending

change in GDP resulting from a change in spending

A high rate of inflation is likely to cause a: high nominal interest rate. low nominal interest rate. low rate of growth of nominal GDP. decrease in nominal wages.

high nominal interest rate.

In the diagram, a shift from AS2 to AS3 might be caused by a(n): decrease in interest rates. increase in business taxes and costly government regulation. decrease in the prices of domestic resources. decrease in the price level.

increase in business taxes and costly government regulation.

Refer to the diagram. Other things equal, a shift of the aggregate supply curve from AS0 to AS1 might be caused by a(n): increase in government regulation. increase in aggregate demand. increase in productivity. decline in nominal wages.

increase in government regulation.

A contractionary fiscal policy is shown as a: rightward shift in the economy's aggregate demand curve. rightward shift in the economy's aggregate supply curve. movement along an existing aggregate demand curve. leftward shift in the economy's aggregate demand curve.

leftward shift in the economy's aggregate demand curve.

Graphically, costpush inflation is shown as a: leftward shift of the AD curve. rightward shift of the AS curve. leftward shift of the AS curve. rightward shift of the AD curve

leftward shift of the AS curve.

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should: not purchase the machine because the expected rate of return exceeds the interest rate. not purchase the machine because the interest rate exceeds the expected rate of return. purchase the machine because the expected rate of return exceeds the interest rate. purchase the machine because the interest rate exceeds the expected rate of return.

purchase the machine because the expected rate of return exceeds the interest rate.

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when: r falls. i is greater than r. r is greater than i. i rises.

r is greater than i.

The fear of unwanted price wars may explain why many firms are reluctant to: reduce wages when a decline in aggregate demand occurs. reduce prices when a decline in aggregate demand occurs. expand production capacity when an increase in aggregate demand occurs. provide wage increases when labor productivity rises.

reduce prices when a decline in aggregate demand occurs.

Refer to the diagram, in which Qf is the full employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to: increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2. reduce taxes on businesses to shift the aggregate supply curve leftward. reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2. do nothing since the economy appears to be achieving fullemployment real GDP.

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

An expansionary fiscal policy is shown as a: rightward shift in the economy's aggregate demand curve. movement along an existing aggregate demand curve. leftward shift in the economy's aggregate supply curve. leftward shift in the economy's aggregate demand curve.

rightward shift in the economy's aggregate demand curve.

Dissaving means: the same thing as disinvesting. that households are spending more than their current incomes. that saving and investment are equal. that disposable income is less than zero.

that households are spending more than their current incomes.

The consumption schedule is such that: .

the MPC is constant and the APC declines as income rises

The consumption schedule shows: that the MPC increases in proportion to GDP. that households consume more when interest rates are low. that consumption depends primarily on the level of business investment. the amounts households intend to consume at various possible levels of aggregate income.

the amounts households intend to consume at various possible levels of aggregate income.

Refer to the diagram. If equilibrium real output is Q2, then: aggregate demand is AD1. the equilibrium price level is P1. producers will supply output level Q1. the equilibrium price level is P2.

the equilibrium price level is P2.

Refer to the given data. If disposable income was $325, we would expect consumption to be: $315. $305. $20. $290.

$305

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: $200 billion. $20 billion. $40 billion. $60 billion.

$40 billion.

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is: 7.5 percent. 10 percent. 15 percent. 20 percent.

15 percent.

Refer to the data. If the amount of real output demanded at each price level falls by $200, the equilibrium price level and equilibrium level of real domestic output will fall to: 250 and $200, respectively. 200 and $300, respectively. 150 and $300, respectively. 150 and $200, respectively.

200 and $300, respectively.

The fraction, or percentage, of total income which is consumed is called the: Break-even income Consumption schedule Marginal propensity to consume Average propensity to consume

Average propensity to consume

If the cyclically-adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion, it can be concluded that there is: A. Built-in stability B. A cyclical deficit C. An expansionary fiscal policy D. A contractionary fiscal policy

B. A cyclical deficit

Efficiency wages are associated with: A. A price level that is inflexible upward B. A price level that is inflexible downward C. A domestic output that cannot be increased D. A domestic output that cannot be decreased

B. A price level that is inflexible downward

Which would decrease investment demand? A. A decrease in business taxes B. An increase in the cost of acquiring capital goods C. An increase in the rate of technological change D. A decrease in the stock of capital goods on hand

B. An increase in the cost of acquiring capital goods

A contractionary fiscal policy shifts the aggregate demand curve leftward. True False

TRUE

Which of the following will not cause the consumption schedule to shift? A sharp increase in the amount of wealth held by households. A change in consumer incomes. The expectation of a recession. A growing expectation that consumer durables will be in short supply.

A change in consumer incomes.

Fiscal policy refers to the: A. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level. B. manipulation of government spending and taxes to achieve greater equality in the distribution of income. C. altering of the interest rate to change aggregate demand. D. fact that equal increases in government spending and taxation will be contractionary.

A. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

The fraction, or percentage, of total income which is saved is called the: Average propensity to save Marginal propensity to save Disposable income schedule Saving schedule

Average propensity to save

5. As disposable income decreases, consumption: A. And saving both increase B. And saving both decrease C. Increases and saving decreases D. Decreases and saving increases

B. And saving both decrease

A decline in the quantity of real output demanded along the aggregate demand curve is a result of a(n): A. Decrease in the level of income B. Increase in the price level C. Increase in the level of income D. Decrease in the price level

B. Increase in the price level

The multiplier effect means that: A. consumption is typically several times as large as saving. B. a change in consumption can cause a larger increase in investment. C. an increase in investment can cause GDP to change by a larger amount. D. a decline in the MPC can cause GDP to rise by several times that amount.

C. an increase in investment can cause GDP to change by a larger amount

If Congress passed new laws significantly increasing the regulation of business, this action would tend to: Increase per-unit production costs and shift the aggregate supply curve to the left Increase per-unit production costs and shift the aggregate supply curve to the right Increase per-unit production costs and shift the aggregate demand curve to the left Decrease per-unit production costs and shift the aggregate supply curve to the left

Increase per-unit production costs and shift the aggregate supply curve to the left

Crowding out is a decrease in private investment caused by: Increased taxation by the government Increased borrowing by the government Increased consumer spending by households Increased exports to buyers in other nations

Increased borrowing by the government

Refer to the diagram. Other things equal, a shift of the aggregate supply curve from AS0 to AS1 might be caused by a(n): increase in productivity. increase in the prices of imported resources. decrease in the prices of domestic resources. decrease in business taxes.

increase in the prices of imported resources.

Refer to the diagram, in which Qf is the fullemployment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to: do nothing since the economy appears to be achieving fullemployment real output. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level. increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1.

increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.

A decline in the real interest rate will: increase the amount of investment spending. shift the investment schedule downward. shift the investment demand curve to the right. shift the investment demand curve to the left.

increase the amount of investment spending.

Discretionary fiscal policy refers to: any change in government spending or taxes that destabilizes the economy. the authority that the president has to change personal income tax rates. intentional changes in taxes and government expenditures made by Congress to stabilize the economy. the changes in taxes and transfers that occur as GDP changes.

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Answer the question on the basis of the following consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. Refer to the given data. The marginal propensity to save: is highest in economy (1). is highest in economy (2). is highest in economy (3). cannot be determined from the data given.

is highest in economy (1).

In the figure, AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by: a reduction in the price level. the increase in productivity. an increase in business taxes. the real-balances, interest rate, and foreign purchases effects.

the increase in productivity.