ECON 2301 EXAM 3

As the depression continued in the 1930's, economists began to question the theory of ____________ espoused by the Classical Model.

self correction

Economic activity will decrease when Savings are ____________ "Planned Investment" (what businesses intend to invest without changes in inventory).

greater than

Aggregate Demand (AD) is the total demand at various __________ levels for goods and services within the economy.

price

Keynesian Theory assumptions are shown in the AS/AD graph below. Because there is much unused capacity in Stage _____, if Government spending increases then AD can increase (in theory) without increasing prices.

1

The Keynesian Theory "Bathtub" is illustrated below. If Leakages (withdrawals) exceed the inflows, then employment, income and output (water level in the tub) will _________________ .

decrease

With a recession, Classical Theorists recommend that government _________ spending and raise taxes if necessary to balance the budget.

decrease

__________________ argues that the expansion of government results in bureaucracy and payments to special interest groups thereby having little positive impact.

Public ChoiceTheory

The APC is the amount of _____________ divided by the amount of income at a specific point.

consumption

If one saves $2,000 out of $10,000 of income then the APS is _________.

0.2

According to the multiplier concept when there is a change in any one of the ________ factors (C, I , G, or Xn), a multiple impact upon the income, employment, and output of the nation will occur.

Aggregate Demand

Assume there is an increase in Government spending of $10 and the aggregate MPS is 0.2. On the first round of the multiplier, only ______of the new income is then spent on Consumption.

$8

The Monetarist Theory (or Monetarism) encourages ______________ government involvement in the economy when compared to Keynesian policy and utilizes a modified form of the Classical Theory.

much less

In this example of the Keynesian adjustment process, the overall decrease in Net Saving that results from the multiplied decline in income is $ ___________ billion dollars.

100

In this example of the Keynesian adjustment process, the total number of unemployed people after the downward multiplier effects are completed is _______ million.

10

Creating more money to finance a deficit frequently results in inflation since there is more money chasing a limited amount of products (right shift of AD with a ___________ AS).

stable/fixed

One of the potential benefits of the borrowing that creates national debt is the ___________ that it can create if the money is invested wisely in public projects.

economic growth (expanding PPF)

When government taxation is greater than government spending, the __________ may be used to pay off past debt (retiring old debt).

surplus

To stimulate the economy during a recession Liberals will normally seek to ___________ government spending (G) for social needs and infrastructure.

increase

If there is a structural deficit at full employment then G is still __________________ .

expansionary

Making the perfect _________ for fiscal policy would require knowing fully all the current information, correctly determining the timing of implementation, and correctly determining the amount of fiscal policy change.

choice

The __________ budget multiplier is the amount of magnification applied to economic activity when an equal change is made in G and T.

balanced

Assuming no change in government spending, an decrease in taxes of $100 billion with an MPC of 0.80 will add a total of $_____________ billion to the economy after the multiplier effect.

400

If MPC is 0.8, then the simple multiplier is __________ .

5

The Laffer curve shows the relationship between tax rates and ____________ and depicts the benefits of cutting taxes when tax rates are too high.

tax revenues

In this example of an "inflation cooling" tax increase, the economy was initially struggling with a ________ annual rate of increase in the price level.

17%

In this example of a Keynesian tax increase, the overall left-shift in Aggregate Demand resulting from the tax increase causes the Nominal GDP to slide back to $________ where it is once again balanced with the Real Production GDP at full employment.

500

The Classical Theory is based on the assumption that an economy has ______________ or, if nudged away, quickly returns to that condition.

full employment

Classical Economics assumes that businesses do not hold ____________

savings

According to the Classical Theory, the level of water in the "Bathtub" remains constant because the amount of injection of investment is equal to the leakage of ____________.

Savings

In the Classical Theory, it is the price-wage-interest rate _____________ that restores the economy to full employment if Household or Business spending declines.

flexibility

In the Classical stage of the figure below, an increase in Aggregate Demand will only result in a movement _____________ along the Aggregate Supply line with a corresponding change in prices.

upward

In the early 1930's, _____________ had less revenue from taxes and believed in a balanced budget (taxes = revenue), so ___________ spending was reduced.

Government

In the Great Depression, spending on U.S. _________was reduced by foreign countries as well as U.S. spending on their products which made the downward spiral even worse on a global basis.

Exports

In the 1930's Classical Theory was unable to explain the continuing reductions in economic activity since that activity was supposed to be restored through ___________ interest rates, wages and prices.

flexible

A Bathtub model of the start of the Great Depression would show the water level becoming lower with Investment inflow being less than Savings leakage and, therefore, quantity of AD being ______________ quantity of AS.

less than

In the 1930's "bad psychology" in the business sector overwhelmed the attractiveness of lower interest rates and caused businesses to avoid borrowing money for Investment when they already had too much ___________ relative to AD.

capacity

In this example of the Classical adjustment process, the Real Spending GDP _________ drop below the "full employment" level of $5000 billion.

either b. or c. (correct)

In this example of the Classical adjustment process, Output will tend to be maintained at the "full employment" level of _________ billion units.

2500

IE 7-1 ... AS/AD Model - Assume the Real GDP in this economy is composed of a $4000 b Private Sector and a $1000 b Public Sector, but then "I" spending decreases by $100 b. A small, initial movement in the PPF Model will be from Point ______ slightly toward Point ______.

W ... R (toward a Recession) (correct)

IE 7-5 ... AS/AD Model - If this economy moves from Year 3 to Year 4, then the Unemployment Rate will be _______ and the Inflation Rate for that twelve month period is ________ .

2.4% ... 17%

IE 8-2 ... AS/AD Model - If the Real GDP in this economy is composed of a $4000 b Private Sector and a $1000 b Public Sector. There will be a balance of AD with AS in Year _________. In the Business Cycle the economy will be positioned at Point _________ .

Zero ... "x" (Full Employment)

IE 8-3 ... Business Cycle Diagram - If this economy has encountered a Recessionary slide from Point "x" to Point "r" (as viewed by the Keynesian Model), then one Risk is _______________________ . The corresponding AS/AD Model has moved from a Price Level of $2.00 down to $1.95, but a Benefit could be the purging of ____________________ .

Continuing the slide into a Depression ... Unhealthy practices

IE 9-1 ... AS/AD Model - If the Real GDP in this economy is composed of $3100 b of "C", $400 b of "I", and $1000 b of "G", then there will be a balance of AD with AS in Year _________. In the PPF Model the economy will be positioned at Point _________ .

One ... R (Moderate Recession)

IE 9-3 ... AS/AD Model - Suppose this economy was temporarily at Year 4, but then experienced a large LEFT shifts of AS. If the Price Level rises to $2.54, then Real Production GDP will have fallen to $4500 b and employment will be only __________. In the Business Cycle the economy will have moved beyond Point _________ .

115 million ... "m" (Stagflation) (correct)

IE 9-4 ... AS/AD Model - Suppose this economy is at Year 4 as a result of an "over-expansion" of Government spending . With the Price Level at $2.34 and employment at __________, then Real Production GDP will be $5200 b. In the PPF Model the economy will be at Point _________ .

122 million ... S (Demand Inflation) (correct)

IE 9-5 ... PPF Model - If a $250 b tax increase is imposed to pull this economy from Point "S" back toward Point "Y", then the Benefit will be a reduced level of ____________ , but a major Risk will be a reduced level of ___________ .

Inflation ... Productivity (correct)

Through fiscal policy, government seeks to avoid _________ as well as high inflation.

recession (and unemployment above the natural rate)

Adam Smith's explanations of national economic living standards became known as the ___________ Theory.

Classical