macro exam 2

Question 1:
When consumer confidence falls in an economy, _____ will decrease which is going to be _____ by the spending multiplier.

Answers:

• spending; unaffected
  ✅ spending; magnified

• taxes; unaffected

• taxes; magnified

Question 2:
What does the "paradox of thrift" say?

Answers:

• People who consume too much will go broke.

• Businesses that are greedy will make the most profit.
  ✅ An economy that saves too much can end up with lower total savings.

• People who save too little are harming the economy.

Question 3:
How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected?

Answers:
✅ An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

• An increase in government spending has a smaller spending multiplier than an equivalent tax decrease.

• An increase in government spending has the same spending multiplier as an equivalent tax decrease.

• Neither an increase in government spending nor a decrease in taxes generates any multiplier at all.

Question 4:
According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?

Answers:

• Income will not change.

• Income will increase by $8,000.
  ✅ Income will increase by $10,000.

• Income will increase by $50,000.

Question 5:
If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ gap exists and will require a(n) _____ in spending to bring the economy back to full employment.

Answers:

• recessionary; increase

• recessionary; decrease

• inflationary; increase
  ✅ inflationary; decrease

Question 6:
The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100?

Answers:

• Total spending exceeds income, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached.

• Total income exceeds spending, firms expand production, workers are hired, and incomes rise until equilibrium is reached.
  ✅ Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

• Total income exceeds spending, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached.

Question 7:
Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by $:

Answers:

• 75 billion.

• 4 billion.

• 5 billion.
  ✅ 20 billion.

Question 8:
If the marginal propensity to save is 0.20, the spending multiplier is:

Answers:

• 10.00.

• 0.20.
  ✅ 5.

• 5.55.

Question 9:
In the simple Keynesian model with no government and foreign sectors, assume that full employment occurs at an output level of $20,000. With a marginal propensity to save of 0.20 and equilibrium output at $15,000, by how much will investment spending have to increase to move the economy to full employment?

Answers:
✅ $1,000

• $5,000

• $2,500

• $2,000

Question 10:
What occurs when spending is above the full employment level?

Answers:
✅ inflationary gap

• depressionary gap

• recessionary gap

• contractionary gap

Question 11:
Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment?

Answers:

• increase spending by $25 billion

• increase spending by $10 billion
  ✅ reduce spending by $25 billion

• reduce spending by $100 billion

Question 12:
Potential GDP

Answers:

• increases as the price level increases because firms supply more goods and services.

• decreases as the price level increases because people demand fewer goods and services.

• might either increase or decrease as the price level increases, depending on whether aggregate demand increases or decreases.
  ✅ is independent of the price level.

Question 13:
If disposable income increases from $5,000 to $5,400 and consumption increases from $4,000 to $4,200, what is the average propensity to consume when disposable income is $5,400?

Answers:
✅ 0.78

• 0.22

• 0.65

• 0.35

Question 14:
The short-run aggregate supply curve shows the relationship between

Answers:

• potential GDP and the price level.

• potential GDP and real GDP.
  ✅ the quantity of real GDP supplied and the price level.

• the quantity of real GDP supplied and the interest rate

Question 15:
If the cost of production increases, there is

Answers:

• an increase in aggregate supply and the SRAS curve shifts rightward.
  ✅ a decrease in aggregate supply and the SRAS curve shifts leftward.

• an increase in the quantity of real GDP supplied and a movement up along the SRAS curve.

• a decrease in the quantity of real GDP supplied and a movement down along the SRAS curve.

Question 16:
Which of the following best describes the effect on the aggregate supply curve if political negotiations result in a substantial decrease in the price of oil?

Answers:
✅ The SRAS curve shifts rightward.

• There is no change to the SRAS curve.

• The SRAS curve does not shift but there is an upward movement along it.

• The SRAS curve does not shift but there is a downward movement along it.

Question 17:
Refer to the figure. The potential level of output occurs at

Answers:

• Y1.
  ✅ Y2.

• Y3.

• both Y1 and Y3.

Question 18:
Other things the same, if technology increases, then in the long run

Answers:

• both output and prices are higher.
  ✅ output is higher and prices are lower.

• output is lower and prices are higher.

• both output and prices are lower.

Question 19:
_____ occurs when aggregate demand expands so much that equilibrium output exceeds full employment output.

Answers:
✅ Demand-pull inflation

• Demand-push inflation

• Cost-push inflation

• Cost-pull inflation

Question 20:
Assume the economy depicted in the figure above is in long-run equilibrium, where the aggregate demand curve is AD0 and the short-run aggregate supply curve is SRAS0. If there is a supply shock, such as a drastic increase in the price of oil, this will cause a _____ and a movement to a short-run equilibrium at point _____.

Answers:
✅ leftward shift to SRAS2; a

• leftward shift to AD1; a

• rightward shift to AD1; c

• rightward shift to SRAS2; c

Question 21:
What would cause inflation and employment to increase?

Answers:

• a leftward shift of the AS curve

• a leftward shift of the AD curve

• a rightward shift of the AS curve
  ✅ a rightward shift of the AD curve

Question 22:
Cost-push inflation occurs when:

Answers:

• total spending expands so much that equilibrium output exceeds full-employment output.

• a supply shock shifts the short-run aggregate supply curve to the right.
  ✅ rising resource costs reduce short-run aggregate supply.

• subsidies to businesses rise.

Question 23:
Refer to the Figure. Assuming the country begins on the long-run equilibrium, what will happen in the short-run if the price of oil rises significantly?

Answers:

• The economy will move from point C to E.

• The economy will move from point B to E.
  ✅ The economy will move from point C to A.

• The economy will move from point B to C.

Question 24:
Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Which curve shifts and in which direction?

Answers:
✅ Aggregate demand shifts left.

• Aggregate demand shifts right.

• Aggregate supply shifts left.

• Aggregate supply shifts right.

Question 25:
If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve

Answers:

• will not change until income actually rises.

• will shift leftward because people will spend less now.
  ✅ will shift rightward because people will increase spending now.

• and the AS curve will both shift leftward because people will increase their saving.

Question 26:
The “sticky-wage” hypothesis explains the

Answers:

• slope of the aggregate demand curve
  ✅ slope of the short-run aggregate supply curve

• slope of the long-run aggregate supply curve

• position of the aggregate demand curve

Question 27:
The above table has data from the nation of Atlantica. Based on these data, autonomous consumption is

Answers:
✅ $1.8 trillion.

• $2.6 trillion.

• $3.2 trillion.

• $4.0 trillion.

Question 28:
Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals is called _____ debt.

Answers:
✅ internally held

• personal

• proper

• national

Question 29:
If interest rates rise, the burden of a nation's public debt will _____ and it will be _____ difficult to service its debt.

Answers:

• fall; less

• fall; more

• rise; less
  ✅ rise; more

Question 30:
According to the crowding-out effect, if the government sells bonds to finance spending, _____ can eventually fall.

Answers:

• consumption and government expenditures

• government expenditures and investment
  ✅ consumption and investment

• exports and investment

Question 31:
Which of the following is an example of an expansionary fiscal policy tool?

Answers:

• Decreasing government spending and increasing taxes.
  ✅ Increasing government spending and decreasing taxes.

• Increasing government regulations on businesses.

• Selling government bonds in the open market.

Question 32:
All of these programs are considered mandatory spending EXCEPT:

Answers:

• Social Security.

• Medicare.
  ✅ national defense.

• interest on national debt.

Question 33:
If an economy is in a recession, what would expansionary fiscal policy do?

Answers:
✅ shift AD to the right

• shift AD to the left

• shift SRAS to the right

• shift SRAS to the left

Question 34:
A recessionary gap is

Answers:
✅ a situation where the actual level of output is below the potential level of output.

• a situation where aggregate demand exceeds aggregate supply.

• a situation where the economy is operating at its full potential output.

• a situation where the government increases its spending to stimulate economic growth.

Question 35:
If the ultimate goal of fiscal policy aimed at aggregate supply is achieved, what happens to the aggregate price level and aggregate output?

Answers:

• aggregate price level decreases; aggregate output decreases

• aggregate price level increases; aggregate output increases
  ✅ aggregate price level decreases; aggregate output increases

• aggregate price level increases; aggregate output decreases

Question 36:
Which of these is an example of an automatic stabilizer?

Answers:

• consumers spending more when the economy is strong

• business laying off workers during a recession
  ✅ unemployed workers claiming unemployment benefits during a recession

• the government raising interest rates to reduce inflation

Question 37:
If the national debt is $6 million and this year's deficit is $5 million, what would the new national debt be?

Answers:
✅ $11 million

• $50 million

• $60 million

• $275 million

Question 38:
If the economy is at full employment, increases in government spending:

Answers:

• have a multiplier effect on equilibrium output.

• have no effect on the aggregate price level.
  ✅ are primarily absorbed by price increases.

• reduce aggregate output.

Question 39:
What is stagflation in economics?

Answers:

• A period of high economic growth accompanied by low inflation.

• A period of economic recession with falling prices.
  ✅ A period of economic recession with rising prices.

• A state of economic equilibrium with no price or output changes.

Question 40:
There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations?

Answers:

• shrinking area of law-maker discretion

• law-making time lag

• estimating potential GDP
  ✅ fiscal multiplier