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Econ Chapter 9-13 Exam Study

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

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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

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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

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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

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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:
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In Exhibit 11-2, an expansionary gap would be represented by the distance
Y3 - Y1
Exhibit 11-3
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http://bit.ly/1bXfDB3

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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
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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

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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

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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:
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In Exhibit 11-6, the distance between Y1 and Y2 is called
a contractionary gap
Exhibit 11-6
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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
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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
Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?

A.) Decrease taxes to protect consumers from the effects of inflation.
B.) Increase taxes to reduce aggregate demand.
C.) Increase government spending to provide some of the goods consumers can no longer afford at the higher prices.
D.) Decrease government spending so that the demand for money will fall.
E.) Increase transfer payments to poor people, who are hurt the most by the inflation
B.) Increase taxes to reduce aggregate demand.
Who argued that the economy should be left to itself to close a contractionary gap?
the classical economists
Which of the following best describes the concept of laissez-faire?

A.) Government should not intervene in the economy.
B.) Government should actively intervene in the economy whenever it judges the action to be beneficial.
C.) Government should intervene in the economy only to promote short-term economic stability.
D.) Government should intervene in the economy only to maximize long-term growth rates.
E.) Government should intervene in the economy only when the economy is not at full employment or there is substantial inflation.
A.) Government should not intervene in the economy.
The opposite of a laissez-faire economic policy is
active government intervention
John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that
natural economic forces were not necessarily adequate to move the economy toward its potential output level
Keynes thought that one macroeconomic problem is that
the equilibrium level of output can fall below the potential level
Which of the following best describes stagflation?

A.) rising unemployment together with economic growth
B.) deflation coupled with a decline of the money supply
C.) deficits coupled with rising unemployment
D.) Rising unemployment and inflation rates
E.) inflation coupled with balance of trade deficits
D.) Rising unemployment and inflation rates
The natural rate of unemployment is
the unemployment rate at which the economy is producing its potential GDP
If policy makers estimate the natural rate of unemployment incorrectly,
policies that appear to be successful in the short run will lead to further economic problems
The largest category of federal government expenditures is
direct benefit payments to individuals
The U.S. government's fiscal year covers from
October of one year through September of the next year
The federal government budget is
a plan for government expenditures and revenues for the coming year
The Employment Act of 1946
created the Council of Economic Advisers
A continuing resolution provides authorization for continuing agency operation even after its budget has expired.
True
The federal government spends more for national defense than for anything else.
False
Which of the following is not a problem with the U.S. federal budget process?
the lack of detail in the budget
Approximately __________ of the budget falls into expenditure categories that are determined by existing law.
three-quarters
One proposal for improving the budget process is to
switch to a two-year or biennial budget
With few exceptions, the U.S. federal government has historically run a balanced budget.
False
The federal budget deficit becomes __________ during recessions because __________.
larger; transfer payments increase and tax revenues decline
Because of automatic stabilizers, government budget deficits are
smaller during expansions and larger during contractions
In Keynes' philosophy of government budgets,
deficits are appropriate during recessions
The accepted philosophy on U.S. federal deficits prior to the Great Depression was that
the budget should be annually balanced
The functional finance philosophy is based on the idea that balancing the federal budget is less important than using it to promote an economy operating to its potential.
True
In the United States since the Great Depression, the federal government has
run a budget deficit in almost every year
If government budgets were required to be annually balanced,
either government spending would have to fall or tax rates would have to increase during recessions
If the government runs a cyclically balanced budget, its revenue will equal its expenditure
over the course of the business cycle
Which of the following best describes the philosophy of functional finance?

A.) The federal budget should be balanced each year.
B.) A federal budget deficit should be permitted only during a business expansion.
C.) A federal budget deficit should be permitted only during a recession.
D.) Policy makers should focus on keeping the unemployment rate at the natural rate, even if this means budget deficits.
E.) Policy makers should be less concerned about budget deficits and more concerned with increasing the natural rate of unemployment.
D.) Policy makers should focus on keeping the unemployment rate at the natural rate, even if this means budget deficits.
An annually balanced budget
accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions
Until 1980, the national debt was mostly the result of
wartime borrowing
A possible explanation for the persistence of the U.S. federal budget deficits is that
it is easier politically to increase government spending than to increase taxes
Discretionary policy deficits are associated with
higher interest rates, higher prices, and higher output
Discretionary expansionary fiscal policy may lead to
decreased unemployment, inflation, and crowding out
Which component of aggregate expenditure is most subject to crowding out?

A.) consumption expenditures
B.) investment spending
C.) U.S. imports
D.) government purchases of goods and services
E.) saving
B.) investment spending
Crowding out refers to the government's increased demand for credit, which
displaces some private sector borrowing by increasing the interest rate
The crowding in of private investment is associated with
more favorable business expectations resulting from an increase in aggregate demand induced by increased government borrowing
Increasing U.S. trade deficits result in
accumulation of dollars overseas
The key link between the so-called twin deficits involves
higher interest rates and a stronger dollar
Increased government borrowing to cover a budget deficit causes
a higher interest rate and appreciation of the U.S. dollar
Increases in the fraction of national debt held by foreigners __________ the burden of debt service on future generations __________.
increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside
Including the unfunded liabilities of government retirement programs like Social Security in the deficit would
triple the size of the national debt
Which of the following is not true about the U.S. twin deficits?
The U.S. is now the world's leading creditor