Macro Economics Midterm 2

marginal propensity to consume (MPC)

the change in consumption divided by the change in income

marginal propensity to save (MPS)

the change in saving divided by the change in income

Fiscal policy

the spending and tax policies used by the government to influence the economy

If the marginal propensity to save is 0.7, then the marginal propensity to consume is

0.3

Suppose the consumption function is represented as follows: C = 200 + .50Y. If Y increases by $1, then consumption will increase by

0.5

government purchases multiplier

the ratio of the change in the equilibrium level of output to a change in government purchases

Assuming there is no government or foreign sector if the multiplier is 10, the MPC is

0.9

If the MPC is .75, the government spending multiplier is

4

If the MPC is .5, the tax multiplier is

-1

If your income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPS is

0.4

If the marginal propensity to save decreases from 0.6 to 0.5

the slope of the consumption function increases from 0.4 to 0.5

If the MPS is .1, then the multiplier is 10

True

A decrease in lump-sum taxes will

shift the consumption function upward

If MPC is greater than zero but less than one, then we can be sure that when income rises by $1, consumption will

will rise by less than $1

tax multiplier

the ratio of the change in the equilibrium level of output to the change in taxes

When David has no income, he spends $500. If his income (Y) increases to $2,000, he spends $1,900. Which of the following represents his consumption function?

C = $500 + 0.7 × Y

What is part of a fiscal policy

• tax rates set by the government

• government transfers to individuals

• government purchases of goods and services

A tax cut will have a greater impact on the consumption expenditure of

People with a high MPC

After the government is added to the income-expenditure model, the formula for the aggregate consumption function is

C = a + b (Y + T )

In the absence of government, planned aggregate expenditure is a/an ____ shift of consumption function by the amount of planned investment

upward

Planned investment spending

is negatively related to the interest rate

If the consumption function is of the form [C = 80 + 0.4 Y] , the MPS equals

0.6

When you pay $8 for a salad you ordered for lunch, you are using money as a(n)

medium of exchange

Which of the following will most likely cause a decrease in the quantity of money demanded?

an increase in the interest rate

The demand for money and the interest rate are

negatively related

When the interest rate rises, bond values

fall

When the manager of a department store attaches price tags to his/her products, he/she is using money as a

unit of account

Which of the following instruments is not used by the Federal Reserve to change the money supply?

the federal tax code

The Fed uses open market operations to

buy or sell government securities

The discount rate is

the interest rate the Fed charges commercial banks for borrowing funds.

Assume that all commercial banks are loaned up. Total deposits in the banking system are $200 million. The required reserve ratio is increased.
The money supply will

decrease

Which of the following alternatives is TRUE

Higher interest rate causes lower planned investments, lower planned aggregate expenditures, and equilibrium income or output

Which of the following represents an action by the Federal Reserve that is designed to increase the money supply?

a decrease in the required reserve ratio

If the Fed sells government securities (bonds), then there is

a decrease in the supply of money

As investment becomes more responsive to the changes in the interest rate

a given increase in the money supply will cause a larger change in equilibrium income or output

An open-market sale of securities by the Fed results in ________ in reserves and ________ in the supply of money

a decrease; a decrease

A commercial bank lists

deposits as liabilities

A reduction in the money supply will cause

a leftward shift of the aggregate demand curve

An increase in the money supply can cause both the interest rate and the price level to go up

false

Which of the following sequence of events follows an open market purchase by the Fed?

r↓ ⇒ I↑ ⇒ PAE↑ ⇒ Y↑

Which of the following sequences of events follows a rise in the discount rate?

r↑ ⇒ I↓ ⇒ PAE↓ ⇒ Y↓

Which of the following could cause the quantity of money demanded to increase?

a decrease in the interest rate