macroecon test 3

Which of the following may shift the consumption schedule upward?

a decrease in interest rates

An increase in aggregate demand is most likely to be caused by which of the following?

a decrease in the tax rates on household income

Government actions that were taken in order to stimulate the economy during the Great Recession of 2007-09 included the following, except

a sharp increase in the natural rate of unemployment.

Refer to the graph. When output increases from Q1 and the price level decreases from P1, this change will

be caused by a shift in the aggregate supply curve from AS1 to AS3.

The economic burden of World War II for the United States was primarily

borne by the persons who lived during the war period.

Refer to the graph. Automatic stability in this economy could be enhanced by

changing the tax system so that the tax line has a steeper slope.

Dissaving occurs where

consumption exceeds income.

If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

contractionary fiscal policy.

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the

crowding-out effect.

The interest rate effect on aggregate demand indicates that a(n)

decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.

Discretionary fiscal policy will likely cause budget

deficits during recessions and surpluses during periods of demand-pull inflation.

The effect of a decline in taxes on the level of income will differ somewhat from an increase in government expenditures of the same amount because

households may not spend all of an increase in disposable income.

A personal tax cut of $50 billion will affect income differently than an increase in government spending by $50 billion because

households may save part of the additional income from the tax cut.

The crowding-out effect suggests that

increases in government spending may reduce private investment.

The relationship between the real interest rate and investment is shown by the

investment demand schedule.

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy

is not subject to the timing problems of discretionary policy.

If an unintended increase in business inventories occurs at some level of GDP, then GDP

is too high for equilibrium.

Refer to the diagrams. Other things equal, an interest rate decrease will

leave curve A in place but shift curve B upward.

When a consumption schedule is plotted as a straight line, the slope of the consumption line is

less than the slope of the 45° line.

The crowding-out effect from government borrowing to finance the public debt is reduced when

public investment complements private investment.

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

r will fall as more investment is undertaken.

The amount by which an aggregate expenditures schedule must shift upward to achieve the full-employment GDP is a(n)

recessionary expenditure gap.

In an effort to stop the U.S. recession of 2007-2009, the federal government

reduced taxes and increased government spending.

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right.

The aggregate supply curve (short run)

slopes upward and to the right.

The greater is the marginal propensity to consume, the

smaller is the marginal propensity to save.

The table shows a private closed economy. All figures are in billions of dollars. If the real rate of interest is 2 percent, then the equilibrium level of GDP will be

$1,200 billion.

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be

$10 billion.

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion,

GDP will remain at $400 billion unless aggregate expenditures change.

Refer to the graph. 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 Q2

Refer to the figure. If the aggregate demand curve shifts from AD2 to AD1, the multiplier effect on real GDP will be a decrease from

Q2 to Q4.

The total amount of debt owed by the federal government is represented by the total value of the outstanding

U.S. government securities.

Which of the following represents the most expansionary fiscal policy?

a $10 billion increase in government spending

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?

a rise in the real GDP

If for some reason households become increasingly thrifty, we could show this by

an upward shift of the saving schedule.

The given figure suggests that

as income increases, consumption decreases as a percentage of income.

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. If productivity increased such that 3,000 units are now produced with the quantity of inputs still equal to 60, then per-unit production costs would

decrease and aggregate supply would increase.

If disposable income decreases from $1,800 to $1,500 and MPC = 0.75, then saving will

decrease by $75.

In the graph, tax revenues vary

directly with the level of GDP.

The saving schedule shows the relationship of saving of households to the level of

disposable income.

Refer to the accompanying information for a closed economy. The addition of a $100 billion lump-sum tax

has no effect on either the MPC or the multiplier.

Suppose the price level is fixed, the MPC is 0.8, and the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should

increase government expenditures by $40 billion.

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.

The bursting of the dot-com bubble in 2000, along with the terrorist attacks in 2001, made the U.S. government

increase its cyclically adjusted budget deficit from 2000 to 2002.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

An effective expansionary fiscal policy will

increase the cyclically adjusted deficit but reduce the actual deficit.

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by

increasing government spending by $4 billion.

The real-balances effect on aggregate demand suggests that a

lower price level will increase the real value of many financial assets and therefore cause an increase in spending.

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the

start of the recession and the time it takes to recognize that the recession has started.

The consumption schedule is such that

the MPC is constant and the APC declines as income rises.

The consumption schedule shows

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

The cyclically adjusted budget estimates the federal budget deficit or surplus if

the economy were at full employment.

Assume that the marginal propensity to consume in an economy is 0.75. If the economy's full-employment real GDP is $900 billion and its equilibrium real GDP is $800 billion, there is a recessionary expenditure gap of

$25 billion.

Refer to the given data. If disposable income was $325, we would expect consumption to be

$305.

If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by

$400 billion.

Ig = 80 S = −80 + 0.4Y (Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). The equilibrium GDP will be

$400.

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 (Advanced analysis) The accompanying equations are for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. The equilibrium level of GDP for this economy is

$530.

The table gives data for a private (no government) closed economy. All figures are in billions of dollars. If planned investment is $25 billion, then aggregate expenditures at the income level of $560 billion will be

$580 billion.

A $1 billion increase in investment will cause a

(1/MPS) billion increase in GDP.

Refer to the given data. The marginal propensity to consume is

0.80.

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is

25 percent.

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. The investment demand curve for this economy is shown in which table?

25%. $0 20. 5 15. 10 10. 15 5. 20 0. 25

(Advanced analysis) Assume the saving schedule for a private closed economy is S = −20 + 0.2Y, where S is saving and Y is gross domestic product. The multiplier for this economy is

5.

(Last Word) In 1960 the ratio of workers to Social Security and Medicare beneficiaries was ______; by 2040 it is projected to be _________.

5:1; 2:1

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by

A and B.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in

A and C.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by

A.

In which of the following sets of circumstances can we confidently expect inflation?

Aggregate supply decreases and aggregate demand increases.

Which of the diagrams for the U.S. economy best portrays the effects of an increase in foreign spending on U.S. products?

C

In a mixed open economy, changes in which of the following all affect the equilibrium GDP in the same direction?

Sa, T, and M

Which of the following is not a reason why the stimulus package that the government implemented during the Great Recession of 2007-09 did not have as strong an impact on GDP and unemployment as expected?

The stimulus package caused prices to fall in many sectors.

Planned investment plus unintended increases in inventories equals

actual investment.

If the dollar appreciates in value relative to foreign currencies,

aggregate demand decreases because net exports decrease.

For a private closed economy, an unintended decline in inventories suggests that

aggregate expenditures exceed production.

An inflationary expenditure gap is the amount by which

aggregate expenditures exceed the full-employment level of GDP.

Refer to the diagram. If the aggregate supply curve shifted from AS0 to AS1 and the aggregate demand curve remains at AD0, we could say that

aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.

Refer to the diagram. The change in aggregate expenditures as shown from (C + Ig + Xn2) to (C + Ig + Xn1) might be caused by

an appreciation of this nation's currency relative to the currencies of its trading partners.

Which of the following would not shift the aggregate supply curve?

an increase in the price level

Other things being equal, the effect of a downward shift of the economy's net export schedule on equilibrium GDP will be similar to a(n)

downward shift in the consumption schedule.

The investment demand slopes downward and to the right because lower real interest rates

enable more investment projects to be undertaken profitably.

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)

expansionary fiscal policy.

In the accompanying graph, which of the following would shift the investment demand curve from ID2 to ID3?

falling stock of capital resources while output is high

A federal budget deficit is financed by the

government issuance or sale of Treasury securities.

A change in which one of the following factors would shift the aggregate supply curve?

government regulation

The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because

in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.

The cyclically adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be

in deficit.

Dissaving occurs when

income is less than consumption.

An increase in expected future income will

increase aggregate demand.

In the aggregate-expenditures model, the average price level is

not shown on the AE graphs.

The real-balance effect pertains to the effect of

price changes on aggregate demand, while the wealth effect refers to the impact of changes in wealth on aggregate demand.

One of the most important views expressed by classical macroeconomists was that

supply creates its own demand.

Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate

supply curve will shift rightward.

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate

supply curve would shift to the left.

Deflation refers to a situation where

the price level falls; it could be caused by a shift of AD to the left.

The immediate primary cause of the swing from federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was

the recession of 2001.

Saving is $40 billion and planned investment is $28 billion at the $175 billion level of output in a private closed economy. At this level,

unplanned investment will be positive $12 billion.

The cyclically adjusted budget tells us

what the size of the federal budget deficit or surplus would be if the economy was at full employment.

Refer to the accompanying information for a closed economy. If government now spends $80 billion at each level of GDP and taxes remain at zero, the equilibrium GDP

will rise to $500.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. At an income level of $400 billion, the average propensity to save in economy (2) is

0.0875.

Refer to the accompanying consumption schedule. If disposable income were $34,000, then the average propensity to save would be about

0.12.