Chapter 12 MCQ Flashcards by Gabriel .

Indicate whether the following component is an injection into, or a leakage from, the circular flow.

Component
1. exports
A) Injection
B) Leakage

government purchases
A) Injection
B) Leakage

A)
Injection Include Exports
A)

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Indicate whether the following component is an injection into, or a leakage from, the circular flow.

Component
1. investment spending
A) Injection
B) Leakage

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The multiplier effect will increase real GDP when there is

A.
a decrease in government purchases.
B.
a tax increase.
C.
a tax cut.
D.
a decrease in transfers.

In the circular flow, a tax cut would increase real GDP.

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The multiplier effect will decrease real GDP when there is

A.
an increase in transfers.
B.
a tax cut.
C.
an increase in government purchases.
D.
a decrease in government purchases.

In the circular flow, an increase in transfers would increase real GDP.

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The multiplier effect is larger

A.
for business spending changes than for export changes.
B.
for changes in saving than for changes in business spending.
C.
when there are more leakages.
D.
for government spending changes than for tax and transfer changes.

The multiplier effect for government spending changes is larger than it is for tax and transfer changes.

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Which statement correctly describes the ”Yes minus markets quickly self minus adjust” view?

A.
Government spending should be used to correct recessionary gaps.
B.
Spending reductions should be used to slow down economic activity.
C.
Aggregate supply shocks are a more important cause of business cycles than aggregate demand shocks.
D.
Government spending should be used to accelerate economic activity.

Positive aggregate demand shocks are the result of fiscal policies that counter recessionary gaps. These include increased government spending, tax cuts, and increased transfers. Negative aggregate demand shocks are the result of fiscal policies that counter inflationary gaps. These include decreased government spending, tax increases, and decreased transfers. The “Yes” camp favours tax cuts instead of government spending to accelerate the economy and spending reductions instead of tax increases to slow down the economy. The “No” camp favours government spending instead of tax cuts to accelerate the economy, and tax increases instead of government spending reductions to slow down the economy.

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The multiplier effect is smaller
Part 2
A.
for government spending changes than for tax and transfer changes.
B.
when there are more leakages.
C.
for changes in saving than for changes in business spending.
D.
for business spending changes than for export changes.

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The multiplier effect is smaller

A.
for changes in saving than for changes in business spending.
B.
when there are fewer leakages.
C.
for tax and transfer changes than for government spending changes.
D.
for business spending changes than for export changes.

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Which statement correctly describes the ”No minus markets can fail to adjust” view?

A.
Spending reductions should be used to slow down economic activity.
B.
Aggregate supply shocks are a more important cause of business cycles than aggregate demand shocks.
C.
Government spending should be used to accelerate economic activity.
D.
Spending reductions should be used to correct inflationary gaps.

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When the economy is at or above potential GDP, more of the increase in aggregate demand

A.
increases real GDP.
B.
is due to increases in saving than increases in business spending.
C.
is due to increases in business spending than increases in exports.
D.
drives up prices.

Multiplier effects of an injection on equilibrium real GDP depend on how close the economy is to potential GDP.
- When the economy is in recession and below potential GDP, more of the increase in aggregate demand increases real GDP.
- When the economy is at or above potential GDP, more of the increase in aggregate demand drives up prices.

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When the economy is in recession and below potential GDP, more of the increase in aggregate demand

A.
increases real GDP.
B.
is due to increases in business spending than increases in exports.
C.
is due to increases in saving than increases in business spending.
D.
drives up prices.

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Aggregate demand and short-run aggregate supply are initially at AD 0 and SAS 0 respectively.

Suppose the government spends $ 50 million on a new bridge. How is the graph affected?

We can see from this example that an increase in government spending results in
_____ (rise/fall)
in the price level and real GDP.

If the government spends $ 50 million on a new bridge, then it shifts the aggregate demand curve to the right.

If the government spends $ 50 million on a new bridge, then it shifts the aggregate demand curve to the right. Consequently, the price level rises.

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Much economic growth, the expansion of the economy’s capacity to produce products and services, results from

A.
increases in export spending.
B.
increases in consumer spending.
C.
increases in the quality of inputs.
D.
increases in the quality of outputs.

Economic growth expands the economy’s capacity to produce products and services – an increase in potential GDP. Increases in aggregate supply, not adjustments to aggregate demand, produce economic growth. Increases in the quality of inputs, including technological change, increase productivity – each person produces more. Living standards rise when economic growth increases potential GDP per person.

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The ”Yes, Hands-Off” camp

A.
focuses on the long run benefits of increased aggregate supply to promote growth.
B.
is less enthusiastic than the ‘No camp’ about fiscal policies to encourage savings and capital investment.
C.
focuses on the short minus run costs of increased aggregate supply to promote growth.
D.
argues that there are no externalities associated with fiscal policies.

The two camps agree that government policies to stimulate saving can eventually promote economic growth in the long run. But the camps place different emphasis on the importance of the long run (“Yes, Hands-Off” camp) and the short run (“No, Hands-On” camp).

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Additional savings will

A.
decrease aggregate supply in the future and increase aggregate demand in the present.
B.
increase aggregate supply in the future and increase aggregate demand in the present.
C.
increase aggregate supply in the future and reduce aggregate demand in the present.
D.
decrease aggregate supply in the future and decrease aggregate demand in the present.

An increase in savings means a decrease in consumer spending and vice versa. There is a trade-off between increased aggregate supply in the future - through business investment spending - and reduced aggregate demand in the present due to lower consumer spending. Every choice has an opportunity cost!
Thus additional savings will increase aggregate supply in the future and reduce aggregate demand in the present.

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A reduction in savings will

A.
decrease aggregate supply in the future and decrease aggregate demand in the present.
B.
increase aggregate supply in the future and increase aggregate demand in the present.
C.
increase aggregate supply in the future and decrease aggregate demand in the present.
D.
reduce aggregate supply in the future and increase aggregate demand in the present.

An increase in savings means a decrease in consumer spending and vice versa. There is a trade-off between reduced aggregate supply in the future - through business investment spending - and increased aggregate demand in the present due to higher consumer spending. Every choice has an opportunity cost!
Thus a reduction in savings will reduce aggregate supply in the future and increase aggregate demand in the present.

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If government increases spending on post-secondary education by reducing tuition fees for students, this will

A.
increase the quality of labour inputs.
B.
decrease the quantity of labour inputs.
C.
increase the quantity of labour inputs.
D.
decrease the quality of labour inputs.

Human capital dash the quality of labour inputs dash increases through education and training. Education, training, and work experience increase your earning potential. Businesses are willing to pay higher wages to workers with more human capital because they are more productive. Government can provide subsidies to schools (as it does to colleges and universities) and to students (bursaries and grants). There are also tax incentives to improve education and training. If government increases spending on post-secondary education by reducing tuition fees for students, this will increase the quality of labour inputs.

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If government decreases spending on post-secondary education by increasing tuition fees for students, this will

A.
increase the quality of labour inputs.
B.
decrease the quality of labour inputs.
C.
increase the quantity of labour inputs.
D.
decrease the quantity of labour inputs.

If government decreases spending on post-secondary education by increasing tuition fees for students, this will decrease the quality of labour inputs.

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Automatic stabilizers

A.
automatically produce surpluses during recessions and deficits during inflation.
B.
reduce the size of the public debt during times of recession.
C.
help counteract changes to real GDP and steer the economy back toward potential GDP.
help counteract changes to real GDP and steer the economy back toward potential GDP.
D.
have been created to reduce cyclical deficits and cyclical surpluses.

Automatic stabilizers are designed to counteract changes to real GDP without requiring explicit government decisions. Automatic stabilizers counteract business cycles and steer the economy back toward potential GDP.

Employment insurance is an automatic stabilizer because payments increase during

A.
recessions.
B.
expansions.
C.
both recessions and expansions.
D.
supply shocks.

During expansions and increasing employment (decreasing unemployment), the number of people eligible for Employment Insurance benefits decreases. Consequently, transfer payments, in programs like Employment Insurance, automatically decrease.

Employment insurance is an automatic stabilizer because payments decrease during

A.
supply shocks.
B.
both recessions and expansions.
C.
expansions.
D.
recessions.

During recessions and decreasing employment (increasing unemployment), the number of people eligible for Employment Insurance benefits increases. Consequently, transfer payments, in programs like Employment Insurance, automatically increase.

During an expansion,

A.
tax revenue increase and transfer payments increase.
B.
tax revenue decreases and transfer payments decrease.
C.
tax revenue increase and transfer payments decrease.
D.
tax revenue decreases and transfer payments increase.

Automatic stabilizers create automatic changes in transfer payments and tax revenues. If a positive aggregate demand shock pushes the economy into an expansion, tax revenues will increase and transfer payments decrease.

During a recession,

A.
tax revenue increases and transfer payments decrease.
B.
tax revenue decrease and transfer payments decrease.
C.
tax revenue increases and transfer payments increase.
D.
tax revenue decrease and transfer payments increase.

Automatic stabilizers create automatic changes in transfer payments and tax revenues. If a negative aggregate demand shock pushes the economy into a recession, tax revenues will decrease and transfer payments increase.

When there is a budget surplus,

A.
spending > revenues.
B.
spending < revenues.
C.
spending = revenues.
D.
spending may be greater or less than revenues.

When there is a budget surplus, spending less than revenues.

When there is a balanced budget, A. spending = revenues. B. spending < revenues. C. spending > revenues. D. spending minus revenues must equal GDP.

If a country with $50 billion in debt had revenues of $7 billion and spending of $2 billion, debt at the end of the year would be A. $47 billion. B. $43 billion. C. $45 billion. D. $41 billion.

When there is a budget deficit, A. spending > revenues. B. spending < revenues. C. spending may be greater or less than revenues. D. spending = revenues.

A deficit is a A. stock since it is measured at a moment in time. B. flow since it is measured per unit of time. C. flow since it is measured at a moment in time. D. stock since it is measured per unit of time.

B. A flow is an amount per unit of time. Your income is a flow. To say your income is $2000 makes no sense, unless we know if it is $2000 a week, $2000 a month, or $2000 a year. The number is meaningful only when there is a time dimension specified. Deficits (and surpluses) are flows. They must be measured for a specified time dimension. You may have monthly deficits for January of $500 and for February of $1000. For government, deficits and surpluses are usually measured annually long-per year. Debt is a stock a fixed amount at a moment in time. If your debt on February 28 is $1500, this is the total amount you owe at that moment in time.

Debt is a A. flow since it is measured at a moment in time. B. stock since it is measured at a moment in time. C. flow since it is measured per unit of time. D. stock since it is measured per unit of time.

Debt is a stock a fixed amount at a moment in time. If your debt on February 28 is $1500, this is the total amount you owe at that moment in time.

There are many arguments about whether national debt is a problem. One argument is: The national debt is a burden for future generations. Which of the following statements best describes this argument? A. As it stands now the interest payments on the national debt are a serious problem for future generations. B. As it stands now comma the interest payments on the national debt are not a serious problem for future generations. C. As it stands now the interest payments on the national debt can never be reduced. D. As it stands now the interest payments on the national debt do not exist.

b. One common argument about whether national debt is a problem is: The national debt is a burden for future generations. As it stands now the interest payments on the national debt are not a serious problem for future generations.

There are many arguments about whether national debt is a problem. One argument is: Interest payments create self minus perpetuating debt. Which of the following statements best describes this argument? A. Rising interest payments can create self perpetuating debt . B. Rising interest payments cannot create self perpetuating debt. C. Rising interest payments will create shrinking debt. D. Rising interest payments will create self reducing debt.

A. One common argument about whether national debt is a problem is: Interest payments create self perpetuating debt. Rising interest payments can create self perpetuating debt.

There are many arguments about whether national debt is a problem. One argument is: Government borrowing raises interest rates comma which reduces private investment. Which of the following statements best describes this argument? A. This is called fiscal policy. B. This is called government mandated policy. C. This is called crowding in. D. This is called crowding out .

D. Government borrowing raises interest rates comma which. This is called crowding out.

There are many arguments about whether national debt is a problem. One argument is: Debt is always bad. Which of the following statements best describes this argument? A. Debt is a poor choice if the expected profits or benefits from spending borrowed money are greater than interest costs. B. Debt cannot be identified. C. Debt is a smart choice if the expected profits or benefits from spending borrowed money are greater than interest costs. D. Debt cannot be measured properly.

C. One common argument about whether national debt is a problem is: Debt is always bad. Debt is a smart choice if the expected profits or benefits from spending borrowed money are greater than interest costs.

There are many arguments about whether national debt is a problem. One argument is: The national debt will bankrupt Canada. Which of the following statements best describes this argument? A. This argument is largely correct because the national debt is an automatic stabilizer. B. This argument is largely a myth . C. This argument is strongly supported. D. This argument is largely ignored.

There are many arguments about whether national debt is a problem. One argument is: Government debt - financed fiscal policy will increase private investment spending by improving expectations. Which of the following statements best describes this argument? A. This is called fiscal policy. B. This is called debt minus reduction policy. C. This is called crowding in . D. This is called crowding out.

C. Government debt minus financed fiscal policy will increase. This is called crowding in.

According to the Ricardian equivalence argument, A. consumers will expect higher spending in the future to stimulate the economy. B. consumers will expect lower spending in the future to curb inflation. C. taxpayers tend to save their stimulus dollars rather than spend them . D. taxpayers tend to spend their stimulus dollars rather than save them .

C. Robert Barro long dash a prominent hands-off economist at Harvard University long dash argues that any government spending financed by going into debt will have no impact on the economy, so why bother? He argues that consumers, with rational expectations, will expect higher taxes in the future to pay for the interest on the debt. So to save for future taxes, consumers cut back spending now and offset any government spending. The result is government debt without any impact on economy. The argument long dash called Ricardian equivalence long dash was first suggested almost 200 years ago by David Ricardo, an English economist and member of parliament. Government "stimulus spending is doomed to failure because taxpayers tend to save their stimulus dollars rather than spend them."

According to the Ricardian equivalence argument, A. consumers will expect lower spending in the future to curb inflation. B. any government spending financed by going into debt will have a very negative impact on the economy. C. consumers will expect higher spending in the future to stimulate the economy. D. any government spending financed by going into debt will have no impact on the economy.

Normative statements A. are about what you believe should be. B. can be verified. C. are about what is. D. are claims about public debt.

A. Normative statements are about what you believe should be and involve value judgments. Positive statements are about what is and can be evaluated as true or false by checking facts.

Which statement is true about the U.S.? A. It stresses government's responsibility to promote and protect the public good. B. It was created by an act of government. C. It has hands on origins. D. It has hands off origins.

D. The United States was created through a revolution against government interference. The founding political principles emphasized "life, liberty, and the pursuit of happiness." The focus was on the individual's right to pursue his own destiny, free from government restrictions. The U.S. has hands-off origins. Canada, created by an act of government, has founding political principles that stress "peace, order, and good government." Canada, as a civil society, stresses government's responsibility to promote and protect the public good. Canada has hands-on origins. Today, citizens in both countries are attracted to both hands-off and hands-on approaches for government.

Which statement is true about Canada? A. It has hands minus off origins. B. It focuses on the individual's right to pursue his divided by her own destiny. C. It has hands minus on origins. D. It was created through revolution against government interference.

Positive statements A. cannot be verified. B. are about what you believe should be. C. are claims about public debt. D. are about what is.

D. Positive statements are about what is and can be evaluated as true or false by checking facts.

For those supporting a hands-off role, government is often paired with the word A. interfere. B. act. C. responsibility. D. participate.

A. For those supporting a hands-off role, government is often paired with words like intervene, interfere, and mistake. For example, "the government should not intervene," "that is government interference," or "it is a mistake for government to ...." This choice of words shows the speaker believes that the government has no legitimate business in taking action, and if government does act, it usually gets it wrong. For those supporting a hands-on role, government is often paired with words like act, participate, and responsibility. For example, "the government needs to act to ...," "this initiative requires government participation," or "the government has a responsibility to ...."

For those supporting a hands-on role, government is often paired with the word A. intervene. B. interfere. C. mistake. D. responsibility.

D. For those supporting a hands-off role, government is often paired with words like intervene, interfere, and mistake. For example, "the government should not intervene," "that is government interference," or "it is a mistake for government to ...." This choice of words shows the speaker believes that the government has no legitimate business in taking action, and if government does act, it usually gets it wrong. For those supporting a hands-on role, government is often paired with words like act, participate, and responsibility. For example, "the government needs to act to ...," "this initiative requires government participation," or "the government has a responsibility to ...."

Balancing the budget over the business cycle A. is a consequence of the Laffer Curve. B. makes political sense but may not make economic sense. C. makes economic sense but may not make political sense D. is incompatible with cyclical deficits and surpluses.

C. Government spending increases and tax cuts can make economic sense in a contraction, but it is hard for politicians to stop spending and raise taxes both politically unpopular when the contraction ends. Deficits are too politically tasty to trust politicians to stop at just one. Therefore, policy advice that makes economic sense balance the budget over the business cycle might be reasonably rejected because it doesn't make political sense.

Which one of the following statements is positive? A. Owners of apartment buildings ought to be free to charge whatever rent they want. B. The Bank of Canada ought to cut the interest rate. C. Increasing the minimum wage results in more unemployment. D. Government should control the rents charged by owners of apartment buildings.

Which one of the following statements is normative? A. Governments should pay down the national debt. B. Increasing the minimum wage results in more unemployment. C. Low rents restrict the supply of housing. D. Tax cuts will increase government tax revenues.