macro: unit 3 test
Which of the following best describes how taxes work as an automatic stabilizer during a recession?
Tax revenues automatically decrease as GDP falls, which prevents consumption and real GDP from falling further
Which point or points in the graph shown here represent a short-run equilibrium level of output?
E
The LRAS curve for Verminville is shown here. Which points correspond to a point on Verminville's production possibilities curve (PPC)?
Point T only
All else equal, what happens to the price level and unemployment when investment spending by firms increases?
Price level increases, unemployment decreases
The long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC) for the nation of Hamiltonia are shown here: Which point or points have a value of $6 billion?
X and R
An economy is currently producing real GDP that is $500 billion more than it's full employment output. It is also experiencing an undesirable amount of inflation. If the economy's marginal propensity to consume is 0.5 and there is no crowding out, the government should do which of the following fiscal policy actions?
Decrease government spending by $250 billion
Which of the following options best describes what would lead to a higher price level?
An increase in aggregate demand (AD) or a decrease in short-run aggregate supply (SRAS)
Which of the following would cause short-run aggregate supply to decrease?
An increase in the cost of labor
Assume an economy is currently in long-run equilibrium. What would be the long-run impact of an increase in consumer confidence?
An increase in the price level
What happens to the rate of inflation and unemployment as a country moves from point Y to point X in this graph?
The rate of inflation decreases and unemployment increases.
Which of the following best describes a relationship that is illustrated in the short-run aggregate supply (SRAS) curve?
There is a short-run tradeoff between inflation and unemployment
Which of the following best describes the function of automatic stabilizers in an economy?
They decrease tax revenues when gross domestic product decreases.
Which of the following is not a component of aggregate demand (AD)?
Wages
Which of the following best describes what will happen to this economy in the long run?
Wages and prices will increase and output will decrease from Y1 to Yf
Which of the following best describes the purpose of the expenditure multiplier?
quantify the size of the change in aggregate demand (AD) that occurs as a result of a change in a component of AD
Assume Gerbilia's marginal propensity to save (MPS) is 0.3. By how much will household consumption increase as a result of an increase in disposable incomes of $2000?
$1400
The marginal propensity to consume (MPC) in Hamsterville is 0.75.What will be the size of the change in aggregate demand that will occur as a result of a $1 million increase in the government spending component of AD?
$4 million
The figure here shows two points along a country's SRAS curve. Which of the following best describes a tradeoff that a country will experience when it moves from point E to point F?
A decrease in the unemployment rate, but an increase in inflation
Which of the following leads to stagflation?
A negative short-run aggregate supply (SRAS) shock
The country of Verminville produces only two goods: cat food and mouse traps. The production possibilities curve (PPC) here represents five possible levels of output in Verminville. Which of the levels of output in the PPC shown here corresponds to Verminville's maximum sustainable output and its long-run aggregate supply (LRAS) curve?
A only
The PPC for Verminville is shown here. Which points are associated with the long-run aggregate supply (LRAS) curve for Verminville?
A or B
The current state of the economy of Dodgeland is represented by the graph shown here: Which of the following best describes economic conditions in Dodgeland?
A positive output gap
What impact would a decrease in business regulations have in the short run?
A positive short-run aggregate supply (SRAS) shock and lower inflation
Which of the following would be a government spending and tax multiplier for a country?
Government spending multiplier equal 9 and tax multiplier equals -8
Assume that the economy in question is open to international trade. The aggregate demand (AD) curve shows the relationship between the price level and the quantities demanded of goods and services by which of the following?
Households, firms, the government, and the rest of the world
The economy of Hamiltonia is experiencing a severe recession. Which of the following actions will occur automatically to increase employment and output without requiring any action by the government of Hamiltonia?
Income tax collected will decrease.
Suppose that an economy is in the middle of a recession and government policy makers want to increase aggregate demand by $800 billion. If the economy's marginal propensity to consume is 0.9 and there is no crowding out, the government should do which of the following fiscal policy actions?
Increase government spending by $80 billion
Which of the following best explains why the long-run aggregate supply (LRAS) curve is vertical?
Nominal wages eventually adjust to changes in the price level
How will nominal wages respond to a decrease in the price level in the short run?
Nominal wages will not change, or will change in an amount smaller than the change in the price level
The economy of Hamsterville is in long-run equilibrium. The central bank of Hamsterville decided to engage in expansionary monetary policy and to buy bonds. This action increased aggregate demand (AD). What is the long-run effect of an increase in AD on the price level and the level of output?
Price level increases; output doesn't change.
Households in Maggietopia save 40% of every additional dollar in income that they receive. What will happen to aggregate demand Maggietopia if there is a $2 billion increase in lump-sum taxes?
Real GDP will decrease by $3 billion
The value of production at various levels of real gross domestic product (GDP) are shown in this production possibilities curve (PPC). All values are in millions of dollars. If the GDP deflator in this economy is increasing, which of the following correctly describes the shift that has occurred in the aggregate demand-aggregate supply (AD-AS) model for this economy and the change in points on the PPC associated with that shift?
Short-run aggregate supply (SRAS) decreased, causing a move from $250 to $190.
Hamsterville, where the marginal propensity to save is equal to 0.5, is currently experiencing a negative output gap of $100 million.How much would Hamsterville's government have to change taxes to restore the full employment level of aggregate output?`
Taxes should be reduced by $100 million
Hamsterville, where the marginal propensity to save is equal to 0.25, is currently experiencing a negative output gap of $60 million.How much would Hamsterville's government have to change taxes to restore the full employment level of aggregate output?
Taxes should be reduced by $20 million
What will happen to the size of the expenditure multiplier and the size of the tax multiplier when the marginal propensity to save (MPS) increases?
Both decrease
Which of the scenarios below is a consequence of sticky wages?
The amount of aggregate output supplied increases in response to inflation.
The value of production at various levels of output are shown in this production possibilities curve (PPC). All values are in millions of dollars. If current real gross domestic product (GDP) in this country is $170 million, what is the size of the output gap?
-$20 million
Based on the graph shown here, which of the following best describes this economy?
A point inside its production possibilities curve
Which of the following shifts in aggregate demand and short-run aggregate supply would cause an unambiguous increase in inflation?
An increase in AD and a decrease in SRAS
One of the reasons that aggregate demand (AD) is downward sloping is the interest rate effect. Which of the following best describes the interest rate effect?
An increase in the price level will lead to an increase in interest rates
Which of the following could cause an unanticipated increase in both the inflation rate and the unemployment rate?
An unanticipated increase in energy prices
Which of the following types of events shifts the short-run aggregate supply (SRAS) curve to the left?
Any event that makes it more expensive or more difficult to produce goods and services
The nation of Xela was in long-run equilibrium but experienced the aggregate demand shock shown below. The marginal propensity to consume (MPC) inXela is 0.9. Which of the following is a fiscal policy action that would be the best choice to return the economy to full employment output?
Decrease spending by $2 million
Which of the following is a tool of discretionary fiscal policy?
Government spending on a new infrastructure project
Which of the following best describes an automatic stabilizer that will help Lincolnland recover from a recession?
Government transfer programs, such as unemployment benefits
The economy shown here has experienced a negative aggregate demand shock and is currently in a recession. The marginal propensity to consume is 0.8 Which of the following is a fiscal policy action that would be the best choice to return the economy to full employment output?
Increase government spending by $20$20dollar sign, 20 million
The economy of Maxistan was in long-run equilibrium, but it experienced a shock shown in this graph: The economy of Maxistan before and after a shock Which of the following would be the most appropriate discretionary fiscal policy action to restore Maxistan to full employment output?
Increase taxes
Verminville is currently producing an output of Y1 at a price level of PL1 as shown in the graph here. Based on this graph, which of the following is true about Verminville?
It is in both short-run equilibrium and long-run equilibrium
Which of the following describes why the short-run aggregate supply (SRAS) curve is upward sloping but the long-run aggregate supply (LRAS) curve is vertical?
Some expectations are incorrect in the short run, but all expectations are correct in the long run.
The graph shown here illustrates the current status of the economy in Verminville. Based on this graph, which of the following is true about Verminville?
The actual unemployment rate equals the natural rate of unemployment
The economies of Fredland and Hamsterville are trading partners and Fredland's current account is balanced. Which of the following best describes what happens if national income in Fredland increases?
The current account will move to a deficit.
Which of the following statements best describes this nation's economy?
The economy has a positive output gap
When the price level increases, the amount of goods and services demanded economy-wide decreases because when the price level increases, everyone's assets can purchase fewer goods and services. What is the term for the relationship described above?
The real wealth effect
Gerbilia decreased lump-sum taxes by $6 billion. What measure can be used to determine the final impact on aggregate demand that occurs as a result of the change in lump-sum taxes?
The tax multiplier
The marginal propensity to consume in the nation of Erd is 0.75 What is the value of the government spending multiplier and what is the value of the tax multiplier?
4, -3
Aggregate demand (AD) has changed in Jabberton, as illustrated in the graph shown here. Which of the following best describes a movement that would result from a decrease in personal income taxes?
A to B
Which of the following best describes what happens when a country is in long-run equilibrium?
AD intersects SRAS and LRAS at the same point.
An economy is currently producing real GDP that is $500 billion less than its full employment output. It is also experiencing an undesirable amount of inflation. Its marginal propensity to consume is 0.8. Assuming that this is a closed economy with no crowding out, which of the following best describes the impact that a $100 billion increase in government spending will have on this economy?
Aggregate demand and real output will eventually increase by $500 billion, and the price level will increase
Which of the following is an example of an automatic stabilizer that helps control inflation?
An increase in income tax revenue collected
Which of the following best describes something that would cause an increase in output along a short-run aggregate supply (SRAS) curve?
An increase in the consumer price index (CPI)
Which of the following unambiguously leads to inflation?
An increase in wages and an increase in consumer spending
Hamsterville has a progressive income tax and a social insurance program that provides unemployed workers with a basic income while they are searching for jobs. What impact will this progressive tax system have on real GDP?
Decrease real GDP during the expansion phase; increase real GDP during the recession phase
Which of the following is an example of an automatic stabilizer that can reduce the effect of a recession on output?
Institutions such as paying unemployment compensation
Which of the following best describes a nation that is producing at its short-run macroeconomic equilibrium?
It has a price level and output associated with the intersection of aggregate demand (AD) and short-run aggregate supply (SRAS)
Assume that an economy is initially in long-run equilibrium. The economy can return to long-run equilibrium output after a negative shock to aggregate demand (AD). Which of the following best describes how this self-correction process will occur?
Lower output and higher unemployment leads to lower wages, causing short-run aggregate supply (SRAS) to increase.
The economy of Maxistan experienced a positive aggregate demand (AD) shock due to unbridled consumer optimism. What will be the effect of this AD shock on Maxistan's level of output and unemployment rate in the long run?
Output will be unaffected; unemployment rate will be unaffected.
What is the price level and real GDP associated with current output in the economy shown in this graph?
PL=105,rGDP=$200b
How will a decrease in short-run aggregate supply (SRAS) caused by increased government regulation affect the equilibrium price level (PL), equilibrium output (Y∗) and the full employment level of output (Yf) in an economy?
PL↓, Y∗↓, no change to Yf
The nation of Johnsrudia has a marginal propensity to consume (MPC) of 0.9. If there is an autonomous increase in new home construction of $10 billion, what will happen to real gross domestic product (GDP)?
Real GDP will increase by more than $, 10 billion
Which of the following statements makes a correct distinction between the short run and the long run?
Short run: wages are fixed; long run: wages are fully flexible
Gross domestic product (GDP) in Marthland is decreasing, plunging Marthaland into a recession. How will the response of automatic stabilizers to decreasing GDP in Marthaland affect the economy of Marthaland?
Tax revenues will decrease without governmental action, which will keep consumption and output from falling further.
Which of the following describes a short-run equilibrium that is not also a long-run equilibrium?
The output and price level associated with the intersection of aggregate demand (AD) and short-run aggregate supply (SRAS)
Which statement correctly describes the difference between short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS)?
There is a tradeoff between inflation and unemployment in the SRAS curve but not with the LRAS curve.
Lincolnland has a progressive income tax and a social insurance program that provides unemployed workers with a basic income while they are searching for jobs. The country experienced a shock and is now producing real GDP equal to Y2, as indicated in the AD-AS model shown here. Which of the following best describes what will happen to transfer payments and income taxes as a result of the decrease in AD?
Transfer payments will increase; taxes will decrease
Which of the following would most likely cause a decrease in this country's aggregate output from Y1 to Y2?
A decrease business confidence
An economy is currently producing real GDP that is $500 billion more than its full employment output. It is also experiencing an undesirable amount of inflation. Its marginal propensity to consume is 0.75. Assuming that this is a closed economy with no crowding out, which of the following best describes the impact that a $100 billion increase in government spending will have on this economy?
Aggregate demand and real output will eventually increase by only $400 billion, and the price level will increase
How do automatic stabilizers affect an economy during inflationary periods?
As national income increases, tax revenues increase, which slows consumption spending
Xela's economy was in long-run equilibrium but experienced a shock as shown in this graph: If the government of Xela wants to use a discretionary fiscal policy tool to return the economy to full employment output, which of the following would be the most appropriate choice?
Decrease taxes
Before experiencing the supply shock shown in this graph, Maxistan was in long-run equilibrium. The marginal propensity to consume (MPC) Maxistan is 0.75. Which of the following is a fiscal policy action that would be the best choice to return the economy to full employment output?
Decrease taxes by $25 million
Which of the following best describes why long-run aggregate supply is vertical at full employment output, as opposed to some other output?
Full employment output is the output associated with the natural rate of unemployment
What happens to inflation and unemployment as you move to the left along the short-run aggregate supply (SRAS) curve?
Inflation decreases and unemployment increases.
What happens to inflation and the unemployment rate as you move to the right along the short-run aggregate supply (SRAS) curve?
Inflation increases and the unemployment rate decreases.
Assume that the typical household in Jabberville will spend 80% of any additional increase in income. How much will aggregate demand (AD) change as a result of a $4 billion increase in net export spending in Jabberville?
Real GDP increases by $20 billion
Households in Iron Island save 10% of every additional dollar in income that they receive. What will happen to aggregate demand Iron Island if there is a $4 billion increase in lump-sum taxes?
Real GDP will decrease by $36 billion
How does a decrease in the price level affect real wealth and aggregate demand?
Real wealth increases; the quantity of aggregate demand increases
The current state of the economy of Fredland is illustrated in this graph: Which of the following best describes how the economy will adjust in the long run?
Short-run aggregate supply will decrease and the price level will increase.
If the marginal propensity to consume (MPC) decreases from 0.8 to 0.6, how will the marginal propensity to save (MPS) and the spending multiplier change?
The MPS increases; spending multiplier decreases
When the price level increases, goods in other countries are relatively cheaper. As a result, a country's imports increase, displacing the demand for domestic production. What is the term for the relationship described above?
The exchange rate effect
Which of the following could cause the change in short run aggregate supply (SRAS) shown in the graph here?
The expectation of lower inflation in the future
Which of the changes described below would be the most likely reason for a $ 40 billion increase in Bloominonionland's real GDP?
The government spent $15 billion to upgrade Bloominonionland's highway network
Which of the following best describes the relationship illustrated by the aggregate demand (AD) curve?
The inverse relationship between the price level and the quantity of aggregate output demanded by households, firms, the government, and the rest of the world
How are an increased potential output and an unchanged current output represented in the aggregate demand-aggregate supply (AD-AS) model?
The long-run aggregate supply (LRAS) curve shifts to the right.
Which of the following scenarios illustrates an increase in the full-employment level of output?
The long-run aggregate supply (LRAS) curve shifts to the right.
Which of the following best describes the relationship illustrated by the short-run aggregate supply (SRAS) curve?
The positive relationship between the price level and the quantity of output produced
The current state of the economy of Fredland is illustrated in this graph: The government is considering whether to allow the economy to self-adjust or take fiscal policy actions to correct this graph. In the long run, how does the change in unemployment and the price level compare if the government takes an appropriate fiscal policy action rather than allowing the economy to self-adjust?
Unemployment increases in both approaches, but the price level will be lower if the government takes action rather than allowing the economy to self adjust.
Assume the country of Libertyville is currently producing at its full employment output. What will be the long-run impact of a negative aggregate demand shock on nominal wages and the level of unemployment in Libertyville?
Wages decrease; no change in unemployment
Which of the following best describes how wages respond to changes in the price level in the long run?
Wages fall when the price level falls and rise when the price level rises
The graph shown here illustrates the impact of a positive aggregate demand shock on the economy of Johnsrudia. If no policy actions are taken by the government of Johnrudia, what will happen to wages and output in the long run?
Wages will increase; output will decrease
