Advertisement Upgrade to remove ads

These questions may possibly be on the exam for chapter 9-13

The most important determinant of a household's consumption spending is

its disposable income

The difference between consumption spending and disposable income

equals saving

Exhibit 9-1

Disposable Income
$1,000
1,100
1,200
1,300
1,400

Consumption
$800
880
960
1,040
1,120

Given the data in Exhibit 9-1, the level of saving at a disposable income of $1,200 is

$240

If a household's income rises from $20,000 to $22,000 and its consumption spending rises from $19,000 to $20,500, then its

marginal propensity to consume is 0.75

Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion, consumption rises from $5.0 trillion to $5.6 trillion. What is the marginal propensity to save?

0.25

If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion, then consumption spending will rise by

$14 billion

The marginal propensity to consume is defined as the

fraction of a change in income that is spent on consumption

The slope of the saving function is equal to the MPS.

True

The MPC plus the MPS equals

1.0

Which of the following would not shift the consumption function?

A.) a change in household wealth
B.) a change in the price level
C.) a change in household disposable income
D.) a change in expectations about future inflation
E.) a change in the rate of interest

C.) a change in household disposable income

Expectations that the price level will increase in the future will

shift the current consumption function upward

An investment has an expected rate of return on 5.5 percent. Mr. N. Vestor should take this opportunity if:

the prevailing interest rate is 5 percent

Mr. Green is considering four possible investment opportunities, each of which would cost him $5,000. He expects annual returns on these investments of $600, $500, $400, and $300. If the interest rate is 7 percent, how many of these opportunities should Mr. Green undertake?

three

New investment will be undertaken up to the point where the expected rate of return equals

the market interest rate

When economists say investment is autonomous, they mean that

investment is independent of the level of income

If business managers become more pessimistic about future sales and profits, there will be

a downward shift of the autonomous investment function

Fluctuations in investment

account for more of the variability in GDP than consumption does

Which of the following is not a component of aggregate expenditure?

A.) consumption
B.) government spending
C.) saving
D.) purchases of new plant and equipment by firms
E.) intentional increases in business inventories

C.) saving

The relationship between consumption and income is

positive and stable

Which of the following is not an example of a government purchase?

A.) schools and teacher salaries
B.) Chinese toys to be sold in discount department stores
C.) aircraft carriers
D.) interstate highway construction
E.) All the answers are correct

B.) Chinese toys to be sold in discount department stores

The primary determinant of consumption spending is the price level.

False

Historically, consumption spending in the United States has

remained approximately constant as a percentage of income

Out of disposable income, households

consume and save

Which must be true when consumption exceeds income?

A.) the consumption function shifts upward
B.) the consumption function shifts downward
C.) aggregate expenditures equal real GDP
D.) saving must be negative
E.) aggregate expenditures will fall

D.) saving must be negative

The consumption function relates consumption spending to

disposable income

The MPC is a relationship between

a change in consumption and a change in income

If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its

marginal propensity to save is zero

Exhibit 9-2

Income=output (Y)
$1,200
1,400
1,600
1,800
2,000
2,200
2,400

C
$1,240
1,380
1,520
1,660
1,800
1,940
2,080

Planned investment
$200
200
200
200
200
200
200

Aggregate expenditure
$1,440
1,580
1,720
1,860
2,000
2,140
2,280

Unintended inventory adjustment
-$240
-180
-120
-60
0
60
120

Actual investment
-$40
-20
80
140
200
260
320

In Exhibit 9-2, the marginal propensity to save equals

0.30

Exhibit 9-2

Income=output (Y)
$1,200
1,400
1,600
1,800
2,000
2,200
2,400

C
$1,240
1,380
1,520
1,660
1,800
1,940
2,080

Planned investment
$200
200
200
200
200
200
200

Aggregate expenditure
$1,440
1,580
1,720
1,860
2,000
2,140
2,280

Unintended inventory adjustment
-$240
-180
-120
-60
0
60
120

Actual investment
-$40
-20
80
140
200
260
320

We can tell from the data in Exhibit 9-2 that planned investment is autonomous because

it does not vary as income changes

If every time disposable income increases by $5 billion, consumption increases by $4 billion and saving increases by $1 billion, the MPC and MPS are, respectively,

4/5, 1/5

The slope of the consumption function equals the

MPC

If income increases by $100 and the MPS is 1/4, then the amount saved equals

$25

An increase in wealth will

shift the consumption function upward

A drop in stock prices will __________ net wealth and __________ consumption.

reduce; decrease

An increase in the price level will

result in a downward shift of the consumption function

Purchases of existing commodities, such as gold and precious gems, are considered investment spending by economists.

False

Economists assume that the fundamental motive of investors is

to maximize profit

A grocery store manager has $600 in cash with which to buy a rug cleaner. Rental income from the cleaner would be about $75 per year. The interest rate is 11 percent. Should the manager buy the machine?

Yes, since the rate of return is greater than the rate of interest.

Which of the following best represents the opportunity cost of investing in capital?

A.) the actual revenue stream generated by the investment
B.) the expected revenue stream generated by the investment
C.) the profit that investment is expected to generate
D.) the market interest rate
E.) the purchase price of the plant and equipment

D.) the market interest rate

If the market interest rate equals 8 percent, the opportunity cost of the last new investment project undertaken would be approximately equal to

8 percent

Less of society's resources will be channeled into capital when

interest rates are high

During recession years,

investment declines much faster than GDP declines

Which of the following is the most volatile component of GDP?

A.) investment (I)
B.) consumption (C)
C.) saving (S)
D.) government purchases (G)
E.) net exports (X - M)

A.) investment (I)

Exports minus imports equal net exports.

True

If incomes in the United States increase, other things equal, then U.S.

imports increase and exports remain constant

The aggregate expenditure line shows total planned spending at each

income level, holding the price level constant

In an economy without a government and without international transactions, aggregate expenditure at each level of income is equal to

consumption plus planned investment

Exhibit 10-1

Schedule for Real GDP
With Net Taxes and Government Purchases
(Trillions of Dollars)

Real GDP (Y)
3.0
3.6
4.2
4.8
5.4

Net Taxes (NT)
0.9
0.9
0.9
0.9
0.9

Disposable Income (Y-NT)
2.1
2.7
3.3
3.9
4.5

Consumption (C)
2.0
2.4
2.8
3.2
3.6

Saving (S)
0.1
0.3
0.5
0.7
0.9

Planned Investment (I)
0.5
0.5
0.5
0.5
0.5

Net Exports (NX)
-0.2
-0.2
-0.2
-0.2
-0.2

Government Purchases (G)
0.9
0.9
0.9
0.9
0.9

Planned Aggregate Expenditure (C+I+NX+G)
3.2
3.5
4.0
4.4
4.8

In Exhibit 10-1, the government's budget is

in balance

Exhibit 10-1

Schedule for Real GDP
With Net Taxes and Government Purchases
(Trillions of Dollars)

Real GDP (Y)
3.0
3.6
4.2
4.8
5.4

Net Taxes (NT)
0.9
0.9
0.9
0.9
0.9

Disposable Income (Y-NT)
2.1
2.7
3.3
3.9
4.5

Consumption (C)
2.0
2.4
2.8
3.2
3.6

Saving (S)
0.1
0.3
0.5
0.7
0.9

Planned Investment (I)
0.5
0.5
0.5
0.5
0.5

Net Exports (NX)
-0.2
-0.2
-0.2
-0.2
-0.2

Government Purchases (G)
0.9
0.9
0.9
0.9
0.9

Planned Aggregate Expenditure (C+I+NX+G)
3.2
3.5
4.0
4.4
4.8

In Exhibit 10-1, which of the variables are autonomous?

investment, net exports, net taxes, and government purchases

Exhibit 10-1

Schedule for Real GDP
With Net Taxes and Government Purchases
(Trillions of Dollars)

Real GDP (Y)
3.0
3.6
4.2
4.8
5.4

Net Taxes (NT)
0.9
0.9
0.9
0.9
0.9

Disposable Income (Y-NT)
2.1
2.7
3.3
3.9
4.5

Consumption (C)
2.0
2.4
2.8
3.2
3.6

Saving (S)
0.1
0.3
0.5
0.7
0.9

Planned Investment (I)
0.5
0.5
0.5
0.5
0.5

Net Exports (NX)
-0.2
-0.2
-0.2
-0.2
-0.2

Government Purchases (G)
0.9
0.9
0.9
0.9
0.9

Planned Aggregate Expenditure (C+I+NX+G)
3.2
3.5
4.0
4.4
4.8

In Exhibit 10-1, the marginal propensity to consume equals

2/3

Given that leakages must equal injections in equilibrium, which of the following is true?

A.) S + NT + NX = G + I
B.) S = I
C.) C + S = G + I
D.) S + NT + M = X + G + I
E.)the answer is indeterminate

D.) S + NT + M = X + G + I

If an economy is in equilibrium when net taxes = $50 trillion, saving = $40 trillion, government purchases = $50 trillion, exports = $30 trillion, and imports = $10 trillion, then planned investment spending must equal

$20

Exhibit 10-2

(Trillions of Dollars)

Real GDP (Y)
5.0
5.5
6.0
6.5
7.0

Net Taxes (NT)
1.0
1.0
1.0
1.0
1.0

Disposable Income (Y-NT)
4.0
4.5
5.0
5.5
6.0

Consumption (C)
3.9
4.3
4.7
5.1
5.5

Saving (S)
0.1
0.2
0.3
0.4
0.5

Planned Investment (I)
1.0
1.0
1.0
1.0
1.0

Government Purchases (G)
1.0
1.0
1.0
1.0
1.0

Net Exports (X-M)
-0.7
-0.7
-0.7
-0.7
-0.7

Planned Aggregate Expenditures (C+I+G+(X-M)
5.2
5.6
6.0
6.4
6.8

In Exhibit 10-2, the equilibrium level of GDP is

$6.0 trillion

Exhibit 10-2

(Trillions of Dollars)

Real GDP (Y)
5.0
5.5
6.0
6.5
7.0

Net Taxes (NT)
1.0
1.0
1.0
1.0
1.0

Disposable Income (Y-NT)
4.0
4.5
5.0
5.5
6.0

Consumption (C)
3.9
4.3
4.7
5.1
5.5

Saving (S)
0.1
0.2
0.3
0.4
0.5

Planned Investment (I)
1.0
1.0
1.0
1.0
1.0

Government Purchases (G)
1.0
1.0
1.0
1.0
1.0

Net Exports (X-M)
-0.7
-0.7
-0.7
-0.7
-0.7

Planned Aggregate Expenditures (C+I+G+(X-M)
5.2
5.6
6.0
6.4
6.8

At the equilibrium level of GDP in Exhibit 10-2 there is a trade deficit. If injections equal Ig + G + Xn, then the sum of the injections equals:

$1.3 trillion

Exhibit 10-2

(Trillions of Dollars)

Real GDP (Y)
5.0
5.5
6.0
6.5
7.0

Net Taxes (NT)
1.0
1.0
1.0
1.0
1.0

Disposable Income (Y-NT)
4.0
4.5
5.0
5.5
6.0

Consumption (C)
3.9
4.3
4.7
5.1
5.5

Saving (S)
0.1
0.2
0.3
0.4
0.5

Planned Investment (I)
1.0
1.0
1.0
1.0
1.0

Government Purchases (G)
1.0
1.0
1.0
1.0
1.0

Net Exports (X-M)
-0.7
-0.7
-0.7
-0.7
-0.7

Planned Aggregate Expenditures (C+I+G+(X-M)
5.2
5.6
6.0
6.4
6.8

At the equilibrium level of GDP in Exhibit 10-2 there is a trade deficit; if leakages equal S + NT, then the sum of the leakages is:

$1.3 trillion

Exhibit 10-2

(Trillions of Dollars)

Real GDP (Y)
5.0
5.5
6.0
6.5
7.0

Net Taxes (NT)
1.0
1.0
1.0
1.0
1.0

Disposable Income (Y-NT)
4.0
4.5
5.0
5.5
6.0

Consumption (C)
3.9
4.3
4.7
5.1
5.5

Saving (S)
0.1
0.2
0.3
0.4
0.5

Planned Investment (I)
1.0
1.0
1.0
1.0
1.0

Government Purchases (G)
1.0
1.0
1.0
1.0
1.0

Net Exports (X-M)
-0.7
-0.7
-0.7
-0.7
-0.7

Planned Aggregate Expenditures (C+I+G+(X-M)
5.2
5.6
6.0
6.4
6.8

The marginal propensity to consume (MPC) in Exhibit 10-2 equals

0.80 or 4/5

Exhibit 10-2

(Trillions of Dollars)

Real GDP (Y)
5.0
5.5
6.0
6.5
7.0

Net Taxes (NT)
1.0
1.0
1.0
1.0
1.0

Disposable Income (Y-NT)
4.0
4.5
5.0
5.5
6.0

Consumption (C)
3.9
4.3
4.7
5.1
5.5

Saving (S)
0.1
0.2
0.3
0.4
0.5

Planned Investment (I)
1.0
1.0
1.0
1.0
1.0

Government Purchases (G)
1.0
1.0
1.0
1.0
1.0

Net Exports (X-M)
-0.7
-0.7
-0.7
-0.7
-0.7

Planned Aggregate Expenditures (C+I+G+(X-M)
5.2
5.6
6.0
6.4
6.8

The marginal propensity to save (MPS) in Exhibit 10-2 equals

0.20 or 1/5

Suppose that at a particular level of real GDP, the unintended change in inventories is zero. Which of the following is true?

A.) That level of real GDP is less than the equilibrium level of real GDP demanded.
B.) That level of real GDP is greater than the equilibrium level of real GDP demanded.
C.) That level of real GDP is the equilibrium level of real GDP demanded.
D.) At that level of real GDP, there is no inflation.
E.) At that level of real GDP, there is no saving.

C.) That level of real GDP is the equilibrium level of real GDP demanded

Which of the following is illustrated by the distance between the aggregate expenditure line and the 45-degree line at each level of real GDP?

A.) saving
B.) unplanned inventory change
C.) planned investment
D.) marginal propensity to save
E.) marginal propensity to consume

B.) unplanned inventory change

If planned spending exceeds planned output, the result is

unintended inventory reductions

The economy will expand if

injections exceed leakages

Exhibit 10-3

Real GDP
$ 0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300

Consumption
$140
220
300
380
460
540
620
700
780
860
940
1,020
1,100
1,180

Planned Investment
$100
100
100
100
100
100
100
100
100
100
100
100
100
100

The MPS in the economy represented in Exhibit 10-3 is

0.2

On the aggregate expenditure graph, if autonomous investment decreases by $10 billion,

the aggregate expenditure line shifts downward by $10 billion

On the aggregate expenditure graph, if autonomous investment increases by $20 billion,

the aggregate expenditure line shifts upward by $20 billion

On the aggregate expenditure graph, if autonomous saving increases by $15 billion,

the aggregate expenditure line shifts downward by $15 billion

The simple multiplier

is defined as 1.0 divided by the marginal propensity to save

If the mps is 0.25, the simple multiplier is

4

If the simple multiplier is 10, the marginal propensity to save is

1/10

Suppose that planned autonomous investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will increase by

$1,000 billion

If the multiplier is 3, a $20 billion increase in autonomous consumption will cause a

$60 billion increase in equilibrium real GDP demanded

If there are no unintended changes in inventories, the economy is at its equilibrium level of real GDP demanded.

True

Consumption plus saving equals disposable income at every level of real GDP demanded.

True

Aggregate expenditure means total or combined spending.

True

Movement along the aggregate expenditure curve is caused by a change in the level of income.

True

The aggregate expenditure line shows

real GDP on the horizontal axis and aggregate expenditure on the vertical axis

The economy will contract (shrink) if

leakages exceed injections

If households save $40 billion less at each level of income and the MPC = 0.8, the aggregate expenditure line will

shift upward by $40 billion

If investment increases by $100 and, as a result, GDP ultimately increases by $200, the multiplier equals

2

If an increase in planned investment of $70 billion causes equilibrium output demanded to rise by $280 billion, the value of the marginal propensity to consume is

3/4

If the multiplier is 4, a $10 billion increase in autonomous investment will cause a

$40 billion increase in equilibrium real GDP demanded

In the simple aggregate expenditures model, planned investment is

autonomous

The aggregate demand curve illustrates a relationship between

the price level and real GDP

Exhibit 10-5

This is a graph and can be found here:
http://bit.ly/1es0IMD

(PASSWORD PROTECTED; Ask me for password)

According to the graph in Exhibit 10-5, if the price level increases, the new equilibrium level of real GDP must be

less than $100

An increase in the price level will

shift the aggregate expenditure line downward

If the price level rises,

the aggregate expenditures line shifts downward; the economy moves upward along the aggregate demand curve

An increase in the U.S. price level, other things constant, would

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

As the U.S. price level rises relative to price levels in other countries, what would happen in the U.S.?

consumption and net exports would decline

A decrease in the price level will

increase the level of aggregate quantity demanded

A decline in the U.S. price level, other things constant, would

stimulate U.S. exports but discourage imports, causing a rightward movement along a given aggregate demand curve

If consumer spending increases, other things constant, the aggregate demand curve shifts inward.

False

Which of the following would cause a rightward shift of the aggregate demand curve?

A.) an increase in planned investment
B.) a drop in the price level
C.) a rise in the price level
D.) a decrease in autonomous consumption
E.) anything that causes an upward shift in the saving function

A.) an increase in planned investment

If the level of autonomous spending increases at a given price level,

the aggregate expenditure line shifts upward; the aggregate demand curve shifts to the right

A decrease in planned investment would shift the

aggregate demand curve inward

The slope of the aggregate expenditure line equals the marginal propensity to consume.

True

Exhibit 10-6
This is a graph and can be found here:
http://bit.ly/1apOUGI

(PASSWORD PROTECTED; Ask me for password)

Assume Japan's aggregate expenditure line started at AE(1). When the stock and real estate markets crashed, its aggregate expenditure would have changed to

AE(3)

Aggregate supply reflects billions of production decisions made by

resource suppliers and firms

Which of the following is true of the short-run aggregate supply curve?

A.) It shows the relation between the inflation rate and the quantity of aggregate output firms supply, other things constant.
B.) It shows the relation between the price of labor and the aggregate quantity of labor workers supply, other things constant.
C.) It shows the relation between the interest rate and the quantity of capital goods firms supply, other things constant.
D.) It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.
E.) It displays an inverse relationship between the price level and real GDP.

D.) It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.

The expected price level is significant because

firms and resource owners make long-term agreements based on the expected price level

The real wage represents the

quantity of goods and services a worker can purchase in exchange for work time

The nominal wage represents

the dollar value of the goods and services a worker can purchase in exchange for work time

Potential output is the amount produced when

firms' and workers' expectations about the price level are realized

Which of the following types of unemployment can exist in an economy that is at its potential output level?

frictional, seasonal, and structural unemployment only

In the long run, but not in the short run,

output is fixed

Potential output depends on all of the following except one. Which is the exception?
A.) the supply of labor
B.) labor productivity
C.) household choices regarding labor and leisure
D.) the technology in current use
E.) the number of consumers in the market

E.) the number of consumers in the market

Fixed resource prices help explain why firms

increase output in the short run when the price level increases

In constructing the short-run aggregate supply curve, we define the short run as the period in which

the costs of some resources are fixed

If the price level turns out to be lower than expected,

businesses cut back production

Exhibit 11-1

Quantity of Aggregate Output Demanded
$7.0
6.5
6.0
5.5
5.0

Price Level
110
120
130
140
150

Quantity of Aggregate Output Supplied
----------- #1 -----------
$5.0
5.5
6.0
6.5
7.0

----------- #2 -----------
6.0
6.5
7.0
7.5
8.0

----------- #3 -----------
4.0
4.5
5.0
5.5
6.0

Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1, the equilibrium price level is

130

Exhibit 11-1

Quantity of Aggregate Output Demanded
$7.0
6.5
6.0
5.5
5.0

Price Level
110
120
130
140
150

Quantity of Aggregate Output Supplied
----------- #1 -----------
$5.0
5.5
6.0
6.5
7.0

----------- #2 -----------
6.0
6.5
7.0
7.5
8.0

----------- #3 -----------
4.0
4.5
5.0
5.5
6.0

Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1, the equilibrium level of output is

$6.0

An expansionary gap is equal to

actual short-run output minus potential output

The situation in which actual output exceeds potential output

creates pressure for inflation

Exhibit 11-2
This is a graph and can be found here:
http://bit.ly/1es3fGQ

(PASSWORD PROTECTED; Ask me for password)

If the actual price level in Exhibit 11-2 exceeds the expected price level, then

equilibrium output might be Y3 in the short run

Exhibit 11-2
This is a graph and can be found here:
http://bit.ly/1es3fGQ

(PASSWORD PROTECTED; Ask me for password)

If the actual price level in Exhibit 11-2 exceeds the expected price level, then

the actual unemployment rate is below the natural rate

Exhibit 11-2
This is a graph and can be found here:
http://bit.ly/1es3fGQ

(PASSWORD PROTECTED; Ask me for password)

In Exhibit 11-2, an expansionary gap would be represented by the distance

Y3 - Y1

Exhibit 11-3
This is a graph and can be found here:
http://bit.ly/1bXfDB3

(PASSWORD PROTECTED; Ask me for password)

Consider Exhibit 11-3. In this situation, long-run equilibrium would be established by a(n)

decrease of short-run aggregate supply to close the expansionary gap

Which of the following would be strong evidence that an expansionary gap exists?

A.) Rapid inflation during a period when plant capacity utilization is below average.
B.) A steady price level and a 5 percent unemployment rate.
C.) Help wanted advertising is higher than usual, and the consumer price index is up more than expected.
D.) Inflation has slowed markedly and the Dow Jones average is at record levels.
E.) The number of new unemployment claims has skyrocketed and the price level is falling.

C.) Help wanted advertising is higher than usual, and the consumer price index is up more than expected.

Exhibit 11-4
This is a graph and can be found here:
http://bit.ly/H1ZfBN

(PASSWORD PROTECTED; Ask me for password)

The graph in Exhibit 11-4 shows a(n)

increase in short-run aggregate supply

Exhibit 11-4
This is a graph and can be found here:
http://bit.ly/H1ZfBN

(PASSWORD PROTECTED; Ask me for password)

Exhibit 11-4 shows that the

economy will experience deflation

Exhibit 11-5
This is a graph and can be found here:
http://bit.ly/GRw0Rg

(PASSWORD PROTECTED; Ask me for password)

If the economy is at point M in Exhibit 11-5,

the actual price level is higher than expected with a $200 billion expansionary gap

Exhibit 11-6
This is a graph and can be found here:
http://bit.ly/1bzttFz

(PASSWORD PROTECTED; Ask me for password)

In Exhibit 11-6, the distance between Y1 and Y2 is called

a contractionary gap

Exhibit 11-6
This is a graph and can be found here:
http://bit.ly/1bzttFz

(PASSWORD PROTECTED; Ask me for password)

In Exhibit 11-6, at income level Y1

the actual unemployment rate is greater than the natural rate of unemployment

As a contractionary gap is closed in the long run,

output increases and the price level decreases

In long-run equilibrium,

actual output must equal potential output

Given the long-run aggregate supply curve, the aggregate demand curve determines

the price level but not the output level

If nominal wages are sticky in the downward direction,

unemployment may persist for long periods of time

Which of the following would cause the long-run aggregate supply curve to shift rightward?
A.) a rise in energy prices
B.) a drop in the actual price level
C.) workers opting for more leisure time and less time on the job
D.) a level of investment spending that is less than depreciation of the capital stock
E.) a technological breakthrough with widespread practical applications that occurs in the microcomputer industry

E.) a technological breakthrough with widespread practical applications that occurs in the microcomputer industry

Which of the following is true of a beneficial supply shock?
A.) It could lead to a lower price level.
B.) If the economy were initially in equilibrium, such a shock would create a contractionary gap.
C.) It will permanently decrease the economy's price level.
D.) It will cause the aggregate demand curve to shift rightward.
E.) It will cause the aggregate demand curve to shift leftward.

A.) It could lead to a lower price level.

Beneficial supply shocks include all of the following except one. Which is the exception?
A.) an abundant harvest that increases food supplies
B.) discoveries of natural resources
C.) changes in legislation favorable to production
D.) technological advances
E.) establishment of the Occupational Safety and Health Administration (OSHA)

E.) establishment of the Occupational Safety and Health Administration (OSHA)

The only way in which government can affect aggregate demand is through changes in its own purchases.

False

Discretionary fiscal policy works by shifting the aggregate demand curve.

True

All of the following are tools of fiscal policy except one. Which is the exception?

A.) taxes
B.) transfer payments
C.) interest rates
D.) government purchases of goods
E.) government purchases of services

C.) interest rates

The distinction between discretionary fiscal policy and the use of automatic stabilizers is that

automatic stabilizers, once adopted, are built into the structure of the economy

Fiscal policy

uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP

A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in taxes.

False

If government purchases increase by $10 billion when the MPC is 0.8, then real GDP will increase by $50 billion.

True

Exhibit 12-1

Real GDP
$1,800
1,900
2,000
2,100
2,200
2,300

Consumption
$1,540
1,620
1,700
1,780
1,860
1,940

Planned investment
$100
100
100
100
100
100

Government purchases
$200
200
200
200
200
200

Given the information in Exhibit 12-1, if government purchases increased to $300, equilibrium real GDP demanded would increase by

$500

In which of the following ways does government affect the consumption component of planned aggregate expenditures?

through net taxes, which change disposable income

If autonomous net taxes decrease, which of the following correctly describes the effects?

Disposable income increases, consumption increases, and saving increases.

A tax is considered to be autonomous if it is independent of

real GDP

If the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier

equals -3

If autonomous net taxes decline by $40 billion and the MPC = 0.75, then equilibrium real GDP demanded

increases by $120 billion

By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?

$100

If the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8, it should decrease autonomous net taxes by

$25

To close a contractionary gap using fiscal policy, the government can
A.) increase government spending by the size of the gap
B.) decrease government spending by the size of the gap
C.) increase government spending by more than the size of the gap
D.) increase government spending by less than the size of the gap
E.) decrease government spending by more than the size of the gap

D.) increase government spending by less than the size of the gap

To close a contractionary gap using fiscal policy, the government can
A.) increase taxes by the size of the gap
B.) decrease taxes by the size of the gap
C.) increase taxes by more than the size of the gap
D.) decrease taxes by less than the size of the gap
E.) decrease taxes by more than the size of the gap

D.) decrease taxes by less than the size of the gap

Exhibit 12-2
This is a graph and can be found here:
http://bit.ly/1bXhDcs

(PASSWORD PROTECTED; Ask me for password)

If the government wants the economy illustrated in Exhibit 12-2 to be at full employment, it should

do none of the above

A federal budget deficit occurs when

federal government purchases exceed net taxes

When the government closes an expansionary gap with a change in government spending, the __________ in government spending leads to __________.

decrease; a decrease in both real GDP and the price level

To close an expansionary gap, the government can

decrease government spending, which will decrease aggregate demand

See More

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

NEW! Voice Recording

Create Set