Econ 102 Quiz #3

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The economy will expand if

a. leakages exceed injections
b. injections exceed leakages
c. leakages equal injections
d. expenditures are less than output
e. saving exceeds investment

b. injections exceed leakages

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

a. the aggregate expenditure line shifts upward by $15 billion
b. planned investment increases by $15 billion
c. the aggregate expenditure line shifts downward by $15 billion
d. planned investment decreases by $15 billion
e. the equilibrium level of real GDP demanded decreases by $15 billion

c. the aggregate expenditure line shifts downward by $15 billion

Which of the following best describes the multiplier?

a. It shows the magnified change in planned aggregate spending that arises from a change in
output.
b. It shows the magnified change in equilibrium output demanded that arises from a change
in income.
c. It shows the magnified change in planned aggregate spending that arises from a change in
equilibrium output.
d. It shows the magnified change in equilibrium output demanded that arises from a change
in planned aggregate spending.
e. It shows the change in planned aggregate spending that arises from a change in real output.
put.

d. It shows the magnified change in equilibrium output demanded that arises from a change
in planned aggregate spending.

The smaller the marginal propensity to save, other things constant,

a. the smaller the marginal propensity to consume
b. the larger the multiplier
c. the smaller the multiplier the flatter the consumption function
d. the steeper the saving function

b. the larger the multiplier

The smaller the marginal propensity to save, other things constant,

a. the smaller the marginal propensity to consume
b. the larger the multiplier
c. the smaller the multiplier
d. the flatter the consumption function
e. the steeper the saving function

b. the larger the multiplier

If the marginal propensity to save is 1/8, the value of the simple multiplier is

a. 8
b. 1/8
c. 2
d. 1/2
e. 4

a. 8

What is the effect of an increase in the price level?

a. The real value of dollar-denominated assets will rise.
b. The aggregate expenditure line will shift upward.
c. The equilibrium level of output demanded will fall.
d. There will be downward movement along a particular aggregate demand curve.
e. The aggregate demand curve will shift rightward.

c. The equilibrium level of output demanded will fall.

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

a. the aggregate expenditure line shifts upward; the economy moves upward along the aggregate demand curve
b. the aggregate expenditure line shifts downward; the economy moves upward along the aggregate demand curve
c. the aggregate expenditure line shifts upward; the aggregate demand curve shifts to the
right
d. the aggregate expenditure line shifts downward; the aggregate demand curve shifts to the
left
e. the aggregate expenditure curve shifts upward; the aggregate demand curve shifts to the left.

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

Which of the following is true about real and nominal wages?

a. The nominal wage will be constant only if the inflation rate is constant.
b. The real wage will be constant only if the inflation rate is constant.
c. Changes in the nominal wage will be the same as changes in the real wage only if the price
level is constant.
d. The real wage will be constant only if the price level is constant.
e. The real wage will be constant only if the nominal wage is constant.

c. Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant.

The expected price level is significant because

a. it is the equilibrium price level in the short run
b. it determines the actual price level in the short run
c. it determines the actual price level in the long run
d. firms and resource owners make long-term agreements based on the expected price level
e. the difference between the expected and actual price levels is equal to the actual inflation
rate

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

The potential output of an economy is the level of output produced when the

a. real wage equals the nominal wage
b. price level is constant
c. expected real wage equals the inflation rate
d. expected price level equals the unemployment rate
e. expected price level equals the actual price level

e. expected price level equals the actual price level

If the actual price level exceeds the expected price level reflected in long-term contracts,

a. firms will find production more profitable than they had expected and will increase the
quantity of output supplied
b. firms will find production less profitable than they had expected and will decrease the
quantity of output supplied
c. firms will find production more profitable than they had expected and will decrease the
quantity of output supplied
d. resource owners, because they are making a lower profit than they had expected, will de-
crease the quantity of output supplied
e. unemployment will increase

a. firms will find production more profitable than they had expected and will increase the
quantity of output supplied

The steepness of the short-run aggregate supply curve depends primarily on

a. the length of time for which resource prices are fixed
b. the length of time for which output prices are fixed
c. the difference between the expected and the actual price levels
d. how quickly employment increases as output expands
e. how quickly production costs increase as output expands

e. how quickly production costs increase as output expands

Wage agreements may cause costs to be __________ flexible than prices so that __________ in the price level cause __________ in aggregate quantity supplied.

a. less; decreases; decreases
b. less; increases; increases
c. less; decreases; increases
d. more; decreases; increases
e. more; increases; increases

b. less; increases; increases

Which of the following is true of an expansionary gap?

a. It develops when the expected price level exceeds the actual price level.
b. In the long run, this gap will close when resource suppliers negotiate lower resource payments.
c. It measures the amount by which actual output falls short of the economy's potential.
d. In the long run, this gap will close when the short-run aggregate supply curve shifts rightward.
e. In the long run, this gap will close when resource suppliers negotiate higher resource payments.

e. In the long run, this gap will close when resource suppliers negotiate higher resource payments.

In the long run, the economy will produce at potential output if

a. workers mistakenly believe that nominal wages equal real wages
b. expectations are the same in the long and short run
c. wages and prices are sufficiently flexible
d. the price level is high
e. the price level is low

c. wages and prices are sufficiently flexible

Which of the following is true in the long run?

a. The aggregate supply curve is the key determinant of the level of potential output.
b. The long-run aggregate supply curve is horizontal.
c. The actual price level is less than the expected price level.
d. Cyclical unemployment is between 5 percent and 6 percent.
e. The price level is determined entirely by the long-run aggregate supply curve.

a. The aggregate supply curve is the key determinant of the level of potential output.

Which of the following would shift the LRAS curve to the left?

a. an increase in the size of the labor force
b. a reduction in the quality of the labor force
c. a reduction in the cost of using computers
d. a decrease in the price level
e. an increase in the price level

b. a reduction in the quality of the labor force

Fiscal policy is concerned with

a. government spending and taxation only
b. government spending and money only
c. money and taxation only
d. government spending, taxation, and
money
e. money only

a. government spending and taxation only

A decrease in net taxes

a. raises aggregate expenditure by raising disposable income, thereby increasing consumption
b. raises aggregate expenditure by raising disposable income, thereby decreasing consumption
c. lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption
d. lowers aggregate expenditure by lowering disposable income, thereby increasing consumption
e. has no effect on aggregate expenditure

a. raises aggregate expenditure by raising disposable income, thereby increasing consumption

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

a. equals -4
b. equals -3
c. always equals 1
d. is the same as the original multiplier
e. is invariably equal to 5

b. equals -3

Under which of the following conditions will a change in government purchases have the greatest effect on the economy's output in the short run?

a. The aggregate demand curve is relatively flat.
b. The aggregate demand curve is relatively steep.
c. The short-run aggregate supply curve is relatively flat.
d. The aggregate demand curve is vertical.
e. The short-run aggregate supply curve is vertical.

c. The short-run aggregate supply curve is relatively flat.

The difference between the classical approach and the Keynesian approach to fiscal policy is

a. Keynesians believe that natural forces in the economy would tend toward full employment
b. Keynesians believe that natural forces in the economy would not tend toward full employ-
ment, but they were distrustful of government's ability to stimulate the economy
c. classical economists believe that the economy would not achieve its potential GDP but
that any action of the government would make matters worse
d. Keynesians believe that it may be necessary that government increase aggregate demand
so as to stimulate output and employment, if the economy is to achieve its potential output
e. both the classical economists and Keynesians were equally distrustful of government in-
tervention in the economy

d. Keynesians believe that it may be necessary that government increase aggregate demand

During economic contractions, transfer payments such as welfare benefits

a. automatically increase, reducing incomes further
b. automatically increase, reducing the impact of the contraction on disposable income
c. automatically decrease, because tax revenues fall and welfare benefits are no longer af-
fordable
d. are decreased, as a discretionary move on the part of Congress to stimulate expansion
e. are increased, as a discretionary move on the part of Congress to cushion recipients
against the negative effects of economic contraction

b. automatically increase, reducing the impact of the contraction on disposable income

If fiscal policy makers increase aggregate demand in an attempt to decrease the unemployment rate below the natural rate of unemployment, then


a. the potential GDP level will decrease b. the potential GDP level will increase
c. the only lasting impact of the policy is a higher price level
d. the only lasting impact of the policy is greater real GDP
e. the only lasting impact of the policy is lower real GDP

c. the only lasting impact of the policy is a higher price level

Lags in the approval and implementation of fiscal policy

a. weaken fiscal policy as a tool of economic stabilization
b. increase the effectiveness of fiscal policy as a tool of economic stabilization
c. help legislators to better assess what policies are most appropriate to adopt d. make fiscal policy more responsive to the current economic environment
e. cause fiscal policy to be more effective in changing the level of real GDP than changing
the price level

a. weaken fiscal policy as a tool of economic stabilization

If people base their spending decision more on permanent income than current income, then

a. consumption spending will be more responsive to a temporary change in income than a change in
permanent income
b. shifts in aggregate supply will be less predictable than if spending was based on current income
c. consumption spending will fluctuate more widely than if such spending was determined by current
income
d. shifts in short-run aggregate supply will be more predictable than if spending was based on current
income
e. attempts to fine-tune the economy with temporary tax rate adjustments will be less effective

e. attempts to fine-tune the economy with temporary tax rate adjustments will be less effective

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

a. the higher taxes lead workers to seek out a second job
b. the higher taxes cause workers to work less
c. the government purchases goods with the additional revenue
d. the government uses the additional revenue to retire some of the federal debt
e. the higher taxes cause people to save less

b. the higher taxes cause workers to work less

Problems with the federal government budget process include

a. Congressional adoption of a budget outline that allows the President too much discretion
in spending decisions
b. a streamlined Congressional committee structure that speeds the process and reduces uncertainty about funding
c. continuing resolutions that allow agencies to continue operating despite being abolished
by Congress
d. most of the expenditures are for entitlement programs
e. a brief budget process that does not allow Congress to study whether the budget is an ap-propriate tool for activist fiscal policy

d. most of the expenditures are for entitlement programs

Because of automatic stabilizers, government budget deficits are

a. positive during both expansions and contractions
b. negative during both expansions and contractions
c. zero if averaged out over the entire business cycle
d. larger during expansions and smaller during contractions
e. smaller during expansions and larger
during contractions

e. smaller during expansions and larger
during contractions

Which of the following has been advanced as a legitimate reason for federal budget deficits?

a. Both c and d are legitimate reasons for government budget deficits.
b. All of the following.
c. Deficits help reduce the size and duration of recessions through the automatic stabilizers.
d. Deficits have been used to finance capital projects.
e. If the government had to fund all of its programs with tax revenues, the programs wouldn't get funded.

a. Both c and d are legitimate reasons for government budget deficits.

An annually balanced budget

a. is the surest path to economic stability
b. is required by the U.S. Constitution
c. dampens cyclical swings by decreasing government spending during expansions and increasing it during recessions
d. accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions
e. is a goal that has only been achieved twice in the past 5 years

d. accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions.

Discretionary expansionary fiscal policy may lead to

a. all of the following except d
b. decreased unemployment
c. inflation
d. lower interest rates
e. crowding out

a. all of the following except d

The key link between the so-called twin deficits involves

a. higher interest rates and a stronger dollar
b. lower interest rates and a stronger dollar
c. higher interest rates and a weaker dollar
d. lower interest rates and therefore larger trade deficits
e. higher interest rates leading to more exports

a. higher interest rates and a stronger dollar

The difference between the federal budget deficit and the national debt is that the

a. deficit is a stock and the debt is a flow
b. deficit is a flow and the debt is a stock
c. debt includes interest payments and the deficit does not
d. deficit can be positive but the debt cannot
e. debt can be negative but the deficit cannot

b. deficit is a flow and the debt is a stock

Increases in the fraction of national debt held by foreigners __________ the burden of debt service on future generations __________.

a. decrease; because it is easier for the borrowing nation to default on the debt
b. decrease; but may make the country more vulnerable to foreign intervention
c. decrease; because debt servicing accomplished by increases in the money supply is not as inflationary as it would be if all debt were held domestically
d. increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside
e. increase; because foreign bondholding pushes up interest rates at date of issue, increasing crowding out

d. increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside

The opportunity cost of deficit spending is likely to be low

a. only when it creates new physical capital
b. only when it creates new human capital
c. only when it improves existing physical capital
d. only when it improves existing human capital
e. when it creates or improves physical or human capital

e. when it creates or improves physical or human capital

Large budget __________ have come from a combination of tax __________ and spending __________.

a. surpluses, cuts, increases
b. surpluses, increases, increases
c. deficits, increases, increases
d. deficits, cuts, cuts
e. deficits, cuts, increases

e. deficits, cuts, increases

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