# Econ Ch 12. Quiz

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### Fiscal policy includes:

an increase in government spending

Fiscal policy includes government spending to help stimulate the economy.

### Which of the following is the largest component of aggregate demand for the U.S. economy?

Consumption.

In the aggregate, consumption spending accounts for over 2/3 of total spending in the U.S. economy.

### Net exports for the United States are:

Negative if American exports are less than imports.

### All economists agree that in the short run:

Macro failure is possible.

Macro failure may occur because the price-output relationship at equilibrium may not satisfy our macro goals. Also, even if the designated macro equilibrium is optimal, it may be displaced by macro disturbances.

### According to Keynes, which of the following is possible at the intersection of aggregate supply and aggregate demand?

Inflation, full employment, or high levels of unemployment

It is likely that aggregate demand will turn out to be wrong leading to inflation, full employment, or high levels of unemployment.

### Fiscal stimulus is:

an increase in government spending or a decrease in taxes.

Tax cuts or spending hikes intended to increase (shift) aggregate demand.

### Which of the following is an example of fiscal stimulus?

An increase in government spending on new military jet fighters. (the government is spending money to stimulate the economy).

### If consumers spend 98 cents out of every extra dollar received, the:

MPC is 0.98.

The marginal propensity to consume is .98 of every dollar.

### If consumers save 8 cents out of every dollar receives, the"

MPS is .08 of every additional dollar

### If government spending increases, which causes producers to hire more workers, and as a result households have more income to spend, which causes aggregate demand to increase even more, this is known as the:

Multiplier process.

every dollar of fiscal stimulus has a multiplied impact on aggregate demand.

Multiplier is 5.

1/(1-.80)=5

### Assume an MPC of .75. The change in total spending for the economy as a result of a \$20 billion new government spending injection would be:

\$80 billion

1/(1-.75)x20 = 80

### During an inflationary period it is appropriate for the government to pursue policies that:

Reduce aggregate demand

If excessive aggregate demand, is causing prices to rise, the goal of fiscal policy will be to reduce aggregate demand, not stimulate it.

### A budget deficit is incurred whenever:

Tax revenues fall short of expenditures over the fiscal year.

### According to Keynes:

An unbalanced budget was very appropriate at certain times.

An unbalances budget is perfectly appropriate if macro conditions call for a deficit or surplus.

### Based on Table 12.1, what is saving at a disposable income of \$200 billion per year?

\$45 billion per year

Disposable income of 200 bullion minus total consumption of 155 billion equals 45 billion

### In figure 12.1, assume aggregate demand is represented by AD3. Which of the following could cause a shift to AD2?

An increase in government spending on goods and services.

A shift to the right would be accomplished by an increase in government spending.

True

### If aggregate demand is inadequate, equilibrium real output is less than the full-employment output level.

True

Less aggregate demand will cause unemployment.

### A tax hike will increase the level of aggregate demand since the government will have more money to spend.

False; a tax hike decreases disposable income.

Example: