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A decrease in AD will generate_________in real GDP and _________ in the price level in the short run.
a decrease; a decrease
Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is rising. Which of the following most likely caused these changes?
An increase in AD
Suppose that the U.S government doubles its spending on health care. Which of the following is most likely to occur?
The AD curve shifts right
A negative demand shock can cause:
a recessionary gap
A positive demand shock leads to:
higher prices; higher employment
Suppose the equilibrium price level is rising and the equilibrium level of real GDP is falling. Which of the following most likely cased these changes?
A decrease in short run aggregate supply
Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect
short-run increase in real GDP and price level, and a long-run decrease in real GDP and an increase in price level.
When the economy is producing output below potential, it has a(n)
Inflationary and recessionary gaps are closed by self-correcting adjustments that shift
the SRAS curve
As an inflationary gap is eliminated through correcting adjustment, the equilibrium price level___________and the equilibrium real output_______________
Recessionary gap is when:
aggregate output is below potential output.
If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium.
Nominal wages increase, and the short run aggregate supply curve shifts left until the economy reaches long-run equilibrium.
A correcting inflationary gap results in:
Short run aggregate supply that gradually decreases.
If actual GDP is less than potential output, then the economy is
In a recessionary gap
Using monetary policy to address a recessionary gap created by a supply shock involves_______to______.
Increasing the amount of money in circulation; lower the unemployment rate
If an economy is in short-run equilibrium such that the level of output is greater than the potential output, then this means that:
in the long run, nominal wages rise
If government decides to increase spending, in the short run, this will:
increase aggregate output and aggregate price levels
If an economy is currently operating at an output level below its potential real GDP, if government wishes use fiscal policy to bring the economy back to its potential real GDP, it will
increase government spending.
Fiscal policy attempts to affect the overall level of spending in the economy through:
changes in tax policy or government spending.
Which of the following is a government transfer?
Social security payments to retired postal workers.
Suppose the economy is experiencing a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:
Fiscal Policy that decreases aggregate demand is:
If there is a recessionary gap, discretionary fiscal policy would likely involve action to:
shift aggregate demand to the right
When government decreases government spending the:
SRAS curve will shift to the right
The existence of lags:
makes both fiscal and monetary policy more challenging to implement
MPC=.8, and potential output is $800 billion. IF current real GDP is $700 billion, which of the following policies would bring the economy to potential output?
Decreases taxes by $25 billion.
MPC=.8, and potential output is $800 billion. If current real GDP is $850 billion, which of the following policies would bring the economy to potential output?
Increase taxes by 12.5 billion.
If the MPC is 0.9, then the government spending multiplier is?
If the MPC is 0.9, then the government spending multiplier has a value of
If the MPC= .75, and the federal government increases spending by$100 billion the income expenditure model would predict that real GDP will increase by:
If the MPC is 0.9, then the tax multiplier will be
Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of:
cutting taxes by $35 billion to take the economy back to potential output.
Consider an economy where the households save %20 of their income. If the government lowers its transfers by $100 billion, then the real GDP will:
fall by $400 billion
The mechanism that causes government tax revenue to rise and fall with the business cycle is known as:
an automatic stabilizer
An example of an automatic stabilizer is:
tax receipts receipts rising when GDP rises.
When the economy is in a recession:
tax receipts decrease but unemployment insurance payments increase.
Suppose the economy is currently experiencing a recessionary gap. Which of the following fiscal policy options is most likely to increase real GDP by the largest amount?
an increase in government purchases
Assume the MPC is 0.8 and potential output is $800 billion. If current real GDP is $820, which of the following policies would bring the economy to potential output?
Decrease government spending by $10 billion
Suppose the economy is currently operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000 billion. Which of the following would be necessary to close this inflationary gap if the MPC is .75.
Decrease spending by $100 billion.
Why the LR aggregate supply Curve Might Shift
Is the unemployment rate zero at full employment?
Why are savings, taxes, and imports referred to as "leakages" in calculating the multiplier effect?
If the labor force is growing at a rate of 1.4% and labor productivity is growing at a rate of 2.3%, the rate of growth of potential GDP:
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Krugman's Macroeconomics for AP*
David Anderson, Margaret Ray
Gary E. Clayton
Essential Foundations of Economics
Michael Parkin, Robin Bade
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