Macroeconomics Exam 3: Chapters 10-11
Demand-Side Fiscal Policy
In Keynesian theory, this policy can be used to rid the economy of a recessionary gap or an inflationary gap.
a
In November 2013, the accumulated national debt in the U.S.: a) passed the $17 trillion mark. b) was paid off due to budgetary surpluses. c) became all internally held. d) became all externally held.
a
In The General Theory of Employment, Interest, and Money, Keynes disagreed with the Classical notion that: a) a market economy is self-regulating and always automatically moves to macroeconomic equilibrium at the full-employment level of real GDP. b) a market economy is self-regulating and can never achieve macroeconomic equilibrium at the full-employment level of real GDP in the long run. c) a decrease in aggregate demand causes the rate of unemployment to rise. d) an increase in aggregate demand causes the rate of unemployment to fall.
d
In an economy that has automatic (built-in) stabilizers: a) the severity of recessions is intensified. b) budget deficits tend to fall during recessionary periods. c) income tax revenues tend to rise and transfer payments tend to fall during recessionary periods. d) the severity of recessions tends to be reduced.
Tax Base
In terms of income taxes, the total amount of taxable income.
a
In the Keynesian model, the primary determinant of consumer spending is: a) disposable income. b) tax incentives for saving. c) the interest rate. d) a person's age.
d
In the Keynesian model, when aggregate expenditure is less than aggregate output, firms are most likely to react by: a) reducing product prices and remaining output at full employment. b) increasing production and employing more workers. c) raising product prices and maintaining output at full employment. d) reducing production and laying off some workers.
c
In the Keynesian view, a decrease in aggregate demand will most likely cause: a) output and unemployment to rise. b) output and unemplyment to fall. c) output to fall and unemploymen to rise. d) output to rise and unemployment to fall.
c
In the basic Keynesian model, ceteris paribus, an increase in disposable income leads to: a) an increase in consumption spending and a decrease in saving. b) a decrease in consumption spending and an increase in saving. c) an increase in both consumption spending and saving. d) a decrease in both consumption spending and saving.
b
In the short run, macroeconomic equilibrium occurs: a) only if the actual rate of unemployment is equal to the natural rate of unemployment. b) when aggregate ependiture equals total production in the economy. c) when government adheres to a balanced budget. d) only if the rate of inflation is zero.
d
In the simple Keynesian model with an MPC equal to 0.90, a $50 billion increase in investment spending leads to a maximum: a) $50 billion increase in equilibrium income. b) $90 billion increase in equilibrium income. c) $250 billion increase in equilibrium income. d) $500 billion increase in equilibrium income.
a
In the simple Keynesian model with government spending (G) and lump-sum taxes (T), the tax multiplier is equal to _____. a) -MPC/MPS b) -MPS/MPC c) 1/MPC d) 1/MPS
d
In the simple Keynesian model, consumption spending demands on __________ and saving depands on __________. a) the interest rate; disposable income b) the interest rate; the interest rate c) disposable income; the interest rate d) disposable income; disposable income
d
In the simple Keynesian model, when the MPC is 0.8, the autonomous spending multiplier is _____ and the tax multiplier is _____. a) 5;4 b) 5;5 c) 4;-4 d) 5;-4
b
In the simple, two-sector model, if C=$110 billion + 0.75(Y) and I=$35 billion, then break-even disposable income (Yd=Y) is equal to: a) $120 billion. b) $440 billion. c) $480 billion. d) $580 billion.
c
In the simple, two-sector model, if C=$110 billion + 0.75(Y) and I=$35 billion, then equilibrium income (Y) is equal to: a) $145 billion. b) $440 billion. c) $580 billion. d) $600 billion.
Expansionary Fiscal Policy
Increases in government expenditures and/or decreases in taxes to achieve particular economic goals.
d
Increases in government spending and lower taxes represent __________, while decreases in government spending and higher taxes respresnt __________. a) expansionary monetary policy; contractionary monetary policy. b) contractionary fiscal policy; expansionary fiscal policy. c) contractionary monetary policy; expansionary monetary policy. d) expansionary fiscal policy; contractionary fiscal policy.
b
Interest on the national debt: a) is negligable since the national debt is so small. b) creates income for bondholders, but liabilities for taxpayers. c) is paid only to domestic citizens since the debt is all internall held. d) is paid only to foreign citzens since the debt is all externall held.
d
Keynes argued that: a) Say's Law is true b) prices and wages are perfectly flexible c) a government policy of "hands-off" is the best approach d) prices and wages are not perfectly flexible in the short run
a
Keynes believed that an economy may achieve equilibrium at a level of real GDP below the full-employment level: a) because of insufficient aggregate demand. b) when prices and wages are perfectly flexible. c) only if supply creates its own demand. d) if the long-run aggregate supply curve is vertical.
a
Keynesian economists suggests that the most effective way to eliminate a recessionary gap is for government to: a) increase its spending in order to increase aggregate demand. b) decrease its spending in order to balance the budget. c) increase taxes in order to increase tax revenues. d) decrease taxes and decrease government spending by the same amount.
c
Keynesian theory asserts that a free market economy with no government invervention: a) can never achieve equilibrium at full employment in the short run. b) will always achieve equilibrium at full employment in the short run. c) may experience economic fluctuations in the short run. d) will not ecperience economic fluctuations in the short run.
Change in tax payment / Change in taxable income
Marginal (Income) Tax Rate Formula
Efficiency Wage Models
Models holding that it is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates.
The Transmission Lag
Once enacted, a fiscal policy measure takes time to go into effect.
The Data Lag
Policy makers are not aware of changes in the economy as soon as they happen.
c
Reductions in private spending and/or investment spending that occur as a result of increased government taxing, spending, and borrowing is reffered to as: a) automatic fiscal policy b) discretionary fiscal policy c) crowding out d) crowding in
d
Supply-side economics emphasizes: a) low marginal tax rates. b) increasing incentives to work, save, and invest. c) long-run effects on aggregate supply rather than short-run effects on aggregate demand. d) all of the above.
a
Suppose Congress believes that the economy is entering a recession and approves a budget that includes increased overall government spending (with no corresponding increase in taxes) in order to stimulate aggregate demand. This is an example of: a) discretionary, expansionary fiscal policy. b) discretionary, contrationary fiscal policy. c) automatic, expansionary fiscal policy. d) automatic, contractionary fiscal policy.
d
Suppose the economy is intially at full-employment equilibrium. Which of the following events could cause a recessionary gap, ceteris paribus? a) Congress decreases personal income tax rates. b) Investment increases as a result of optimistic business expectations. c) Households save less at every level of disposable income. d) Consumers spend less due to declining consumer confidence in the economy.
Tax Base x (average) Tax Rate
Tax Revenues = ?
Budget Surplus
Tax revenues are greater than government expenditures.
a
The Laffer curve suggests that: a) increaing marginal tax rates may actually reduce tax revenues. b) there is an inverse relationship between unemployment and inflation. c) increases in tax rates lead to increases in consumption expenditures. d) increases in income, output, and employment are directly related to increases in the tax rate.
Laffer Curve
The curve, that shows the relationship between tax rates and tax revenues. According to this curve, as tax rates rise from zero, tax revenues rise, reach a maximum at some point, and then fall with further increases in tax rates.
Incomplete Crowding In
The decrease in one or more components of private spending that only partially offsets the increase in government spending.
Crowding Out
The decrease in private expenditures that occurs as a consequence of increased government spending or the financing needs of a budget deficit.
d
The essence of the Keynesian theory of unemployment is that: a) the unemployment rate is always equal to the natural rate due to structural and frictional types of unemployment. b) short-run unemployment problems are self-correcting in a market economy. c) government must provide public sector jobs to the unemployed. d) unemployment results from inadequate demand for goods and services throughout the economy.
c
The event that brought Keynesian economics to the forefront was the: a) Civil War b) supply stock resulting from OPEC c) Great Depression d) collapse of communism
a
The increase in personal income tax payments that occurs when an economic expansion causes income to rise is an example of: a) automatic, contractionary fiscal policy. b) discretionary, expansionary fiscal policy. c) discretionary, contractionary fiscal policy. d) automatic, expansionary fiscal policy.
b
The largest source of revenue for the federal government in the U.S. is the: a) sale of military equipment to foreign countries. b) personal income tax. c) payroll tax. d) U.S. Postal Service.
b
The marginal propensity to consume (MPC) is defined as the: a) fraction of disposable income that is spent by households. b) change in consumer spending divided by the change in disposable income. c) difference between disposable income and consumer spending. d) fraction of disposable income that is saved by households.
d
The part of consumption spending that is independent of disposable income is called: a) the marginal propensity to consume. b) the marginal propensity to save. c) disposable consumption. d) autonomous consumption.
Cyclical Deficit
The part of the budget deficit that is a result of a downturn in economif activity.
Structural Deficit
The part of the budget deficit that would exist even if the economy were operating at full employment.
Public Debt
The total amount that the federal government owes its creditors.
c
The total stock of outstanding government securities (bonds) is the: a) budget surplus b) budget deficit c) national debt d) cyclical debt
Structural deficit + Cyclical deficit
Total budget deficit=?
C+I+G
Total expenditures=?
True
True or False: It is generally accepted that a marginal tax rate reduction increases the attractiveness of work relative to leisure and tax-avoidance activities and thus leads to an increase in aggregate supply.
Price level is assumed to be constant until the economy reaches full-employment. There is no foreign sector. Monetary side is excluded.
What are the 3 assumptions of the simple Keynesian model?
Keynesian cross Income expenditure Total expenditure-Total production
What are the 3 names AD-AS frameworks are called?
Individual income tax Corporate income tax Social Security taxes
What are the three taxes that contribute to a bulk of government tax revenues?
When full-employment is reached
What causes a horiztonal AS curve to become vertical?
Changes in C, I, or G
What causes a shift the AD curve?
May be inflexible downward.
What did Keynes think about wage rates?
More output may be produced than will be demanded.
What did Keynes think in regard to Say's Law?
If expectations are pessimistic, a lower interest rate may not stimulate additional investment.
What did Keynes think in regard to investment?
May be inflexible downward.
What did Keynes think in regard to prices?
Savers may not save more at higher interest rates or save less at lower interest rates.
What did Keynes think in regard to savings?
Firms cut back production to reduce inventories to their optimum levels.
What does TE<TP mean in regards to firms?
Inventories rise above optimum levels.
What does TE<TP mean in regards to inventories?
Individuals are buying less output then firms produce.
What does TE<TP mean in regards to the state of the economy?
Firms neither increase nr decrease production.
What does TE=TP mean in regards to firms?
Inventories are at their optimum levels.
What does TE=TP mean in regards to inventories?
Firms increase production to raise inventories to their optimum levels.
What does TE>TP mean in regards to firms?
Inventories fall below optimum levels.
What does TE>TP mean in regards to inventories?
Individuals are buying more output than firms produce.
What does TE>TP mean in regards to the state of the economy?
Households and businesses
What does the private sector consist of?
S=Yd-[C0-(MPCxYd)]
What is the Savings equation?
Explain changes in Real GDP
What is the purpose of the simple Keynesian model?
Closed
What kind of economy does the simply Keynesian model show: closed or open?
Progressive
What kind of income tax is the federal income tax?
Regressive
What tax is as follows: An income tax system in which a person's tax rate declines as his or her taxable income rises.
Proportional
What tax is as follows: An income tax system in which a person's tax rate is the same regardless of taxable income.
Progressive
What tax is as follows: An income tax system in which one's tax rate rises as taxable income rises (up to some point).
0% and 100%
What two tax revenues will be colleted as zero for the Laffer Curve?
Changes in C, I, or G
What will shift the TE-TP curve?
d
When a $2,000 increase in income causes a $1,600 increase in consumption spending: a) the marginal propensity to consume (MPC) is 0.8. b) the marginal propensity to save (MPS) is 0.20. c) the increase in saving is $400. d) all of the above are true.
Aggregate supply and demand
When fiscal policy measures affect tax rates, they may affect what?
a
When tax receipts are greater than government expenditures during a single year, the result is: a) a budget surplus b) a budget deficit c) the structural debt d) the cyclical debt
b
When tax receipts are less than government expenditures during a single year, the result is: a) a budget surplus b) a budget deficit c) the structural debt d) the cyclical debt
c
When the economy is operating where total production is less than total expenditures, all of the following are true except: a) businesses experience an unplanned decrease in inventories. b) the economy is in a state of disequilibrium. c) the level of output produced is greater than what people want to buy. d) businesses will increase production to increase inventories.
d
When the marginal propensity to consume (MPC) is 0.80, the autonomous spending mulitplier is _____. a) 2 b) 3 c) 4 d) 5
b
Which of the following is an example of automatic, expansionary fiscal policy? a) Lower unemployment compensation designed to reduce the cost of labor to businesses. b) Higher unemployment compensation payments that occur when the economy is in a recession. c) Higher taxes caused by increased incomes during an economic upturn. d) Lower taxes caused by tax reform designed to lower tax rates on low-income families.
Federal govenment
Who owns the debt?
Crowding Out Lags
Why Demand-Side Fiscal Policy may be ineffective?
decreases; left
(Demand-Side Fiscal Policy) A decrease in G __________ aggregate demand and shifts the AD curve to the _____.
expansionary
(Demand-Side Fiscal Policy) A recessionary gap calls for __________ fiscal policy.
increases; right
(Demand-Side Fiscal Policy) An increase in G __________ aggregate demand and shifts the AD curve to the _____.
contractionary
(Demand-Side Fiscal Policy) An inflationary gap calls for __________ fiscal policy.
a
A __________ tax is one for which the average tax rate increases as income increases. a) progressive b) regressive c) proportional d) flat
b
A balanced budget amendment to the U.S. Constitution would require that: a) all state government balance their budgets. b) federal government spending be financed by tax revenue. c) tax rates must balance with interest rates in a given year. d) Congress use only fiscal policy to close an inflationary gap.
increases; increase; right
A decrease in income taxes __________ disposable (after-tax) income, permitting individuals to __________ their consumption. As consumption rises, the AD curve shifts to the _____.
Complete Crowding Out
A decrease in one or more components of private spending that completely offsets the increase in government spending.
Increase
A decrease in tax rates could cause tax revenues to __________.
raise; right
A rise in autonomous consumption(C0) will _____ consumption(C) and therefore shift the AD curve to the _____.
decrease
According to Keynes, a decrease in consumption and subsequent increase in saving may not be matched by an equal increase in investment. Thus, a __________ in total expenditures may occur.
b
According to Keynes, equilibrium income and output are determined by: a) available resouces and technology in the short run. b) aggregate demand in the short run. c) the position of the long-run aggregate supply curve. d) the natural rate of unemployment,
The Effectiveness Lag
After being actually implemented, a policy measure takes times to affect the economy. If government spending is increased on Monday, that aggregate demand curve does not shift rightward on Tuesday.
The Wait-and-See Lag
After policy makers are aware of a downturn in economic activity, they rarely enact counteractive measures immediately.
The Legislative Lag
After policy makers decide that some type of fiscal policy measure is required, Congress or the president has to propose the measure, build political support for it, and get it passed. This can take months.
c
All of the following equations are correct except: a) MPC + MPS = 1. b) 1 - MPC = MPS. c) MPC = C/Yd d) MPS = Change in S/ Change in Yd
d
An $8 billion decrease in investment spending when the MPC is 0.75 may potentially lead to: a) an increase in equilibrium income of up to $40 billion. b) a decrease in equilibrium income of up to $40 billion. c) an increase in equilibrium income of up to $32 billion. d) a decrease in equilibrium income of up to $32 billion.
Increase
An increase in tax rates could cause tax revenues to __________.
decreases; lowers; left
An increase in taxes __________ disposable income, __________ consumption, and shifts the AD curve to the _____.
a
Assume the government cuts taxes by $125 billion. If the MPC = 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model> a) Real GDP increases by $500 billion. b) Real GDP increases by $625 billion. c) Real GDP decreases by $500 billion. d) Real GDP decreases by $625 billion.
a
Ceteris paribus, a $100 increase in investment spending will generally: a) increase equilibrium income by more than $100. b) increase equilbrium income by less than $100. c) increase equilibrium income by exactly $100. d) have no effect on equilibrium income.
Multiplier x Change in Co
Change in total spending=?
Automatic Fiscal Policy
Changes in government expenditures and/or taxes that occur automatically without (additional) congressional action.
Fiscal Policy
Changes in government expenditures and/or taxes to achieve economic goals, such as low unemployment, stable prices, and economic growth.
b
Changes in government spending and taxing that counteract the business cycle and occur as a result of changing economic conditions are: a) discretionary stabilizers. b) automatic (built-in) stabilizers. c) discretionary budget balancers. d) automatic (built-in) budget balancers.
Contractionary Fiscal Policy
Decreases in government expenditures and/or increases in taxes to achieve economic goals.
Discretionary Fiscal Policy
Deliberate changes of government expenditures and/or taxes to achieve economic goals.
TE>TP TE<TP
Disequilibrium examples involving TE-TP
TE=TP
Equilibrium example involving TE-TP
Automatic Stabilizer
Features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to dampen fluctuations in real GDP.
c
Fiscal policy is best defined as: a) uncontrolled government spending. b) altering the mix of government spending and taxing in order to balance the budget every fiscal year. c) changes in government spending and taxing for the purpose of achieving certain macroeconomic goals. d) minimizing government expenditures over the fiscal year.
a
From a Keynesian perspective, the appropriate fiscal policy to deal with a recessionary gap: a) recessionary gap is to increase government spending and/or reduce taxes. b) recessionary gap is to decrease government spending and/or raise taxes.
b
Given a marginal propensity to save equal to 0.25, the simple Keynesian model leads to the conclusion that the autonomous spending multiplier is equal to _____, meaning that a $100 increase in autonomous investment spending could potentially lead to a(n) _____, increase in equilibrium income. a) 4; $100 b) 4; $400 c) 5; $500 d) 8; $800
Balanced Budget
Government expenditures are equal to tax revenues.
Budget Deficit
Government expenditures are greater than tax revenues.
A change in C, I, G, or net exports can change aggregate demand and therefore shift the AD curve.
How do changes in G and T affect aggregate demand?
d
If a constitutional amendment was passed requiring a balanced budget for the federl government, then: a) automatic fiscal policy would be much more powerful than it is now. b) discretionary fiscal policy would be much more powerful than it is now. c) there would be no effect on the economy's performance according to the Keynesian model. d) if the government starts with a balanced budget, any increase in government spending would have to be financed by an equal increase in taxes.
b
If disposable income is $1,000 billion and consumption spending is $1,200, then personal saving __________. a) is $200 billion b) is -$200 billion c) is $1,800 d) cannot be determined from the information given.
d
If equilibrium income falls by $1,000 when investment spending falls by $250, the autonomous spending multiplier is equal to: a) 1/4 b) 1/2 c) 2 d) 4
c
If equilibrium income is $8,000 billion, full-employment income (natual real GDP) is $8,500 billion, and the MPS = 0.10, the simple Keynesian model predicts that a(n): a) $500 billion increase in government spending will close the recessionary gap. b) $10 billion increase in government spending will close the recessionary gap. c) $50 billion increase in government spending will close the recessionary gap. d) change in government spending cannot help close the recessionary gap.
d
If equilibrium real GDP falls short of full-employment (natural) real GDP by $60 million when the MPC = 0.75, which of the following would eliminate the recessionary gap that exists according to the Keynesian model? a) Increase G by $15 million. b) Decrease T by $20 million. c) Increase both G and T by $60 million. d) Any of the above.
a
If government spending financed by borrowing causes crowding out, then: a) the economy will likely grow at a slower rate due to less accumulation. b) the economy will likely grow at a faster rate due to more capital accumulation. c) fiscal policy is a more powerful tool for managing the economy than it would be in the absence of crowding out. d) there is no burden from the national debt that is shifted to future generations.
c
If households have a tendency to save $3 of every $100 increase in income, then: a) the household saving rate is negative. b) household spending must increase by $103 when income increases by $100. c) the MPS is 0.03 and the MPC is 0.97. d) the saving multiplier is 3.
d
If income increases by $10,000 and the tax bill for the $10,000 increase is $3,000, then: a) the marginal tax rate must be equal to the average tax rate. b) the marginal tax rate must be greater than the average tax rate. c) the average tax rate is 30%. d) the marginal tax rate is 30%.
d
If the MPC = 0.8, the MPS = _____, and the autonomous spending multiplier = _____. a) 0.1; 10 b) 0.1; 5 c) 0.2; 10 d) 0.2; 5
b
If the marginal propensity to consume is 0.925, then a $100 increase in disposable income leads to a: a) $7.50 decrease in consumption. b) $92.50 increase in consumption. c) $7.50 decrease in saving. d) $92.50 increase in saving.
c
If the marginal propensity to save is 0.05, then the marginal propensity to consume is: a) 0.97 b) 1.05 c) 0.95 d) 0.50
Increase
If the percentage increase in the tax base is greater than the percentage reduction in the tax rate, then the tax revenues will __________.
Decrease
If the percentage increase in the tax base is less than the percentage reduction in the tax rate, then the tax revenues will __________.
c
If the short-run aggregate supply curve (SRAS) is horizontal, then an increase in aggregate demand leads to: a) an increase in real ouput, an increase in the price level, and a decrease in unemployment. b) an increase in real output, a decrease in the price level, and a decrease in unemployment. c) an increase in real output, no change in the price level, and a decrease in unemployment. d) a decrease in real output, no change in the price level, and an increase in unemployment.
