Exam Review

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The relationship between consumption and disposable income is such that asdisposable income rises,

consumption rises.

If you produce a graph with consumption spending on the vertical axis and disposable income on the horizontal axis, the relation between consumption and income will

be direct.

The difference between disposable income and consumption spending is

personal saving.

The federal government's principal tool in altering consumer spending is changing

personal income tax rates.

If an economist wants to make a prediction about the effects of a change in disposable income on the change in consumption spending based on historical data, she must assume that

the future will closely resemble the past.

If personal taxes are increased by $10 billion, we can expect that consumers will reduce

spending by less than $10 billion.

The nation's disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion. Therefore, the MPC equals

0.80.

The marginal propensity to consume (MPC) is calculated by which formula?

MPC = change in C divided by change in DI

In 1963, government economists assumed that the MPC for the United States was approximately 0.90. If taxes were cut by $9 billion, then consumer expenditures would be expected to

increase by $81 billion.

If the MPC increases in value, what will happen to the slope of the consumption function?

The slope will increase and the consumption function will become steeper.

For each $1 of a tax cut, economists expect consumption to

increase by less than $1.

A movement from one point to an another point on the same consumption function could be caused due to

changes in disposable income.

Because of recent corporate downsizing, Chuck loses his job. The most likely effect on his After years of hard work in the field of macroeconomics, you win the Nobel Prize in economics (currently $1 million). What is the most likely effect of this prize on your consumption function?

It will shift upward permanently.

Which of the following is an example of wealth?

a mutual fund balance of $1,000

Households can finance their consumer spending from current

income and current wealth.

Which of the following would be most likely to shift the consumption function downward?

a stock market crash

If consumers' expectations about future income is very optimistic, then we should expect

the consumption function to shift upward.

The main reason that the 1975 and 2001 tax cuts did not have a large effect on GDP is that it was a

temporary tax cut rather than a permanent tax cut.

If personal taxes are cut temporarily, the resulting

increase in personal saving would be larger than if they were cut permanently.

Why do permanent tax cuts have a greater impact on consumption than temporary tax cuts?

Permanent tax cuts affect expectations of long-run income more than temporary tax cuts.

The most volatile component of aggregate demand is

investment spending.

Suppose the federal government wants to encourage businesses to increase investment spending. Which policy may be the most effective?

an increase in tax deductions for investment spending

U.S. imports are most likely to increase when

U.S. unemployment rates fall.

The book that is the basis for modern macroeconomic theory is

The General Theory of Employment, Interest, and Money.

An economist who claims that an increase in government spending would result mainly in a higher price level believes the economy is operating where

aggregate supply curve is steep.

One reason the oversimplified multiplier is incorrect is that inflation

decreases the multiplier by decreasing consumer spending.

Assume an economy with an upward-sloping aggregate supply curve and an MPC of .80. An increase in investment spending of $50 billion will increase total income by

more than $50 billion but less than $250 billion.

The reason why inflation reduces the value of the multiplier is that part of the change in demand is

absorbed by price changes.

How is it possible for the economy to have an inflationary gap?

Equilibrium is at a GDP level above full employment.

What is the principal reason that economists give for the existence of a recessionary gap?

Wages are fixed in the short run.

A recessionary gap exists when

potential GDP exceeds real GDP.

A recession can be expected to reduce inflation in the economy if the recession is caused by a(n)

decrease in aggregate demand

Most economists agree that the economy will adjust to a recessionary gap, but the adjustment process

is very slow.

One complication that tends to prolong recessionary gaps is that wages

rarely fall.

The Japanese economy has been consistently weak throughout the 1990s. This has caused a slight deflation, illustrating the

very slow operation of the economy's self-correcting mechanism.

The principal way in which an economy self-corrects from an inflationary gap is through

inflation, which reduces purchasing power.

According to Baumol and Blinder, does the U.S. economy have a self-correcting mechanism?

Yes, and it works very slowly.

The government's fiscal policy is its plan to influence aggregate demand by changing

taxation and spending.

In 2001, President Bush and Congress stimulated aggregate demand by

decreasing taxes and increasing government spending. If wealthy U.S. consumers save most of their tax cut, this means that, compared to government spending changes, tax changes would have a weaker multiplier effect.

Most of the taxes collected by governments tend to

rise and fall with the level of GDP.

Taxes are the difference between

GDP and disposable income.

Personal income taxes and corporate income taxes are examples of ____ taxes.

variable

When you compare the effects of government spending on aggregate demand with the effects of taxes on aggregate demand, the effects of government spending are

larger.

Taxes reduce total spending

directly by substituting investment spending.

The difference between a fixed tax and a variable tax is that

a variable tax changes when GDP changes, but a fixed tax does not change with GDP.

If income tax rates are increased in an attempt to balance the federal budget, what will happen to the expenditures schedule?

The expenditure schedule will shift downward and become less steep.

Which of the following observations is true?

Tax reductions increase equilibrium GDP.

The oversimplified formula for the multiplier yields a number that is too large due to the exclusion of

imports,price-level,income taxes

The oversimplified formula for the multiplier is misleading because it ignores the effects of

price-level changes,the foreign sector,variable taxes.

A change in a fixed tax will cause the consumption schedule to

shift in a parallel manner.

An automatic stabilizer is a feature of the economy that

reduces its sensitivity to shocks.

Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit. Which action will have the larger effect on equilibrium GDP?

the decrease in spending

The president wishes to increase spending for education by $4 billion but also maintain a balanced budget. Therefore, taxes will also be increased by $4 billion. What will happen to GDP?

It will increase.

Government transfer payments act as automatic stabilizers because as labor income decreases, transfer payments

increase.

If the federal government increases the amount of Social Security benefits for retired persons, then the

consumption schedule will shift upward,effect on equilibrium GDP will be the same as a cut in taxes, aggregate demand curve will shift outward.

If Congress votes to increase government purchases and at the same time decrease personal income taxes, they

Have voted for the proper policy to counteract the ressationary gap.

In 2000, many economists believed that the most serious macroeconomic problem confronting the U.S. economy was an inflationary gap. Which policies would be effective in dealing with this problem?

Increase personal income taxes.

In the middle of a severe recession, Congress passes an increase in the level of unemployment benefits. This would be considered by economists as a

negative tax.

After September 11, 2001, President George W. Bush believed in the need for a fiscal stimulus. The proper fiscal policy to reflect this could include a(n)

increase in government purchases.

One of the practical issues in the choice of government spending or taxes to change aggregate demand is how large a

government sector we want.

A fiscal policy that reduces taxes or increases government spending will cause a(n)

increase in real GDP and an increase in the price level.

A conservative who was opposed to an increase in the size of the government sector but believed in the Keynesian approach to aggregate demand management would most likely favor which of the following expansionary policies?

decrease taxes

Which of the following statements would appeal to someone who favors an expanded public sector as the basis of expansionary fiscal policy?

"The American people want national defense; they want laws to be enforced; they want federal support for education and environmental protection, and they want transfer payments for the elderly and unemployed."

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