final exam questions pt 2 Flashcards by Ruby Bjalme

The aggregate demand curve will shift to the right ________ the initial increase in government
purchases.

A. by less than
B. by more than
C. by the same amount as
D. sometimes by more than and other times by less than

by more than

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Refer to Figure 5- A-B from AD1 - AD2. In the graph above, the shift from AD1 to AD2 represents the total change (both
primary and induced) in aggregate demand due to an increase in government purchases, G. If government
purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion.

A. would be equal to
B. would be greater than
C. would be less than
D. may be greater than or less than

would be greater than

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A change in consumption spending caused by income changes is ________ change in spending, and a
change in government spending that occurs to improve roads and bridges is ________ change in spending.

A. an induced; an autonomous
B. an expansionary; a contractionary
C. an autonomous; an induced
D. a contractionary; an expansionary

an induced; an autonomous

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The tax multiplier equals the change in ________ divided by the change in ________.
A. taxes; equilibrium real GDP
B. equilibrium real GDP; taxes
C. taxes; consumption spending
D. consumption spending; taxes

equilibrium real GDP; taxes

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A decrease in the tax rate will ________ the disposable income of households and ________ the size of
the multiplier effect.
A. increase; increase
B. decrease; increase
C. increase; decrease
D. decrease; decrease
E. increase; not change

increase; increase

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Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the
budget balanced. What will happen to real equilibrium GDP?

A. Real equilibrium GDP will fall.
B. Real equilibrium GDP will rise.
C. There will be no change in real equilibrium GDP.
D. Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value

Real equilibrium GDP will rise.

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Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to
potential GDP, Congress should

A. lower government purchases by an amount less than $200 billion.
B. lower government purchases by $200 billion.
C. raise taxes by $200 billion.
D. lower taxes by $200 billion.
E. raise taxes by an amount more than $200 billion

lower government purchases by an amount less than $200 billion.

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The tax multiplier

A. is negative.
B. is larger in absolute value as compared to the government spending multiplier.
C. is a measure of how much taxes will fall when income is falling.
D. is always less than one.

is negative

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Cutting taxes

A. will lower disposable income and lower spending.
B. will raise disposable income and lower spending.
C. will lower disposable income and raise spending.
D. will raise disposable income and raise spending.

will raise disposable income and raise spending.

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The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy
because

A. the Federal Reserve can more quickly change monetary policy than the president and the Congress can
change fiscal policy.
B. the Federal Reserve can immediately recognize when real GDP is below or above potential GDP.
C. changes in interest rates have a considerably larger effect on the economy than changes in government
purchases or taxes.
D. changes in interest rates have their full effect on the economy in a short period of time, whereas changes
in government spending and taxes have their full effect over a long period of time.

the Federal Reserve can more quickly change monetary policy than the president and the Congress can
change fiscal policy.

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Crowding out refers to a decline in ________ as a result of an increase in ________.

A. tax revenues; unemployment
B. government purchases; tax rates
C. government purchases; private expenditures
D. private expenditures; government purchases

private expenditures; government purchases

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If policy makers implement an expansionary fiscal policy but do not take into account the potential for
crowding out, the new equilibrium level of GDP is likely to

A. be at potential GDP.
B. be above potential GDP.
C. be below potential GDP.
D. There is insufficient information given here to draw a conclusion.

be below potential GDP.

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Following a decrease in government spending, as the price level falls we would expect the level of
interest rates to ________ and investment to ________.

A. decrease; decrease
B. decrease; increase
C. increase; decrease
D. increase; increase

decrease; increase

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An increase in government spending may expedite recovery from a recession in the short run, but in the
long run this policy may

A. reduce investment in new capital.
B. make domestic businesses less competitive in international markets as the dollar appreciates in value.
C. raise interest rates and reduce consumer expenditures on automobiles and new houses.
D. All of the above are correct.

all of the above are correct

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The federal budget deficit acts as an automatic stabilizer because

A. government tax revenues decrease during a recession.
B. unemployment insurance payments decrease during a recession.
C. food stamp payments increase during expansionary periods.
D. Medicaid payments increase during expansionary periods

government tax revenues decrease during a recession.

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During recessions, government expenditure automatically

A. falls because of programs such as unemployment insurance and Medicaid.
B. rises because of programs such as unemployment insurance and Medicaid.
C. falls because of the progressive income tax system.
D. rises because of the progressive income tax system.

rises because of programs such as unemployment insurance and Medicaid.

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Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy
falls into recession government would need to ________ taxes, which would cause aggregate demand to
________.

A. decrease; decrease
B. decrease; increase
C. increase; decrease
D. increase; increase

increase; decrease

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Refer to Figure 6- ad increases from a - b. Given that the economy has moved from A to B in the graph above, which of the
following would the appropriate fiscal policy to achieve potential GDP?

A. increase taxes
B. increase government spending
C. decrease the money supply
D. increase interest rates

increase taxes

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Economists who believe the supply-side effects of tax cuts are small essentially believe that

A. tax cuts mainly affect aggregate demand.
B. tax cuts mainly affect aggregate supply.
C. tax cuts will increase the quantity of labor supplied.
D. tax cuts will result in relatively small changes in the price level

tax cuts mainly affect aggregate demand.

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Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side
effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for
the decrease in tax rates will cause the price level to increase ________ and real GDP to increase
________.

A. less; less
B. less; more
C. more; less
D. more; more

less; more

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Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase
________ through changing ________.

A. aggregate demand; government spending
B. aggregate supply; taxes
C. aggregate demand; taxes
D. aggregate supply; government spending

aggregate supply; taxes

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As the tax wedge associated with a given economic activity gets smaller, we would expect

A. more of that economic activity to occur.
B. the distortions caused by taxes on that activity to be greater.
C. people to engage in less of that particular activity.
D. no change in the practice of that activity until the tax wedge ultimately disappears.

more of that economic activity to occur.

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Tax revenues tend to grow more quickly when

A. people have higher incomes due to overall economic growth
B. the economy is in a recession
C. the Federal Reserve increases tax rates
D. it is an election year

people have higher incomes due to overall economic growth

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If government spending and the price level increase, then

A. the interest rate increases, consumption declines, and investment spending declines.
B. the interest rate decreases, consumption declines, and investment spending declines.
C. the interest rate increases, consumption increases, and investment spending increases.
D. the interest rate decreases, consumption increases, and investment spending increases.

the interest rate increases, consumption declines, and investment spending declines.

The impact of crowding out may be the least A. during a deep recession. B. when real GDP is above but close to potential GDP. C. during an expansion. D. when real GDP is below but close to potential GDP.

during a deep recession

What is net public debt? A. The total national debt subtract what foreign countries owe us B. The total national debt subtract what the government owes itself C. The total national debt subtract what the government owes American households and firms D. The total national debt subtract what we pay in interest each year on the debt

The total national debt subtract what the government owes itself

What is currently the largest part of the federal budget deficit? A. Interest that we must pay on the debt each year B. National defense spending C. Income taxes owed to the government by people who couldn’t afford to pay D. Entitlement programs

Entitlement programs

The Great Recession (2007 – 2009) A. was the worst recession the U.S. has ever experienced B. was not as bad as most recessions since 1950 C. was longer with deeper effects than most recessions D. was the result of a bank panic

was longer with deeper effects than most recessions

A criticism of quantitative easing is that it A. will cause deflation B. is effectively the same as artificially creating a lot new money out of nothing C. will raise interest rates D. makes private banks less likely to lend money

is effectively the same as artificially creating a lot new money out of nothing

How did the Smoot-Hawley Tariff Act play a role in the Great Depression? A. it weakened the dollar B. it decreased net exports after starting a trade war with other countries C. it greatly increased imports, lowering AD and GDP D. it led to a bank panic

it decreased net exports after starting a trade war with other countries

Classical economists are more likely to call for policies that affect A. AD B. SRAS C. LRAS

LRAS

Say’s Law says “supply creates its own demand”. What does this mean? A. people will always buy goods that are produced B. production leads to income, which means people can purchase other goods and services C. firms can force people to buy goods through anti-competitive market structures D. when people work, they want to spend the money they earn

production leads to income, which means people can purchase other goods and services

According to Keynes, what could be a cause of sticky downward wages? A. people don’t want to take a pay cut in a recession, even if all other prices are falling B. people are willing to take pay cuts, but only if the recession lasts a long time C. lack of wage contracts D. workers not planning properly for retirement

people don’t want to take a pay cut in a recession, even if all other prices are falling

Refer to Figure 7(question 91). Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from A. A to B B. B to C C. C to B D. A to E E. C to D

A to B

Refer to Figure 7. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A. A to B B. B to C C. C to B D. B to A E. A to E

A to B

Refer to Figure 7. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A. A to B B. B to C C. C to B D. B to A E. A to E

A to B

Refer to Figure 7. Suppose the economy is in a recession and no active policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A. A to B B. B to A C. C to B D. A to E E. C to D

A to E

Refer to Figure 7. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from A. A to B B. B to C C. C to B D. A to E E. C to D

C to B

Refer to Figure 7. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A. A to B B. B to D C. C to B D. B to C E. C to D

C to B

Refer to Figure 7. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A. D to C B. A to E C. C to B D. B to A E. E to A

C to B

Refer to Figure 7. Suppose the Fed lowers its target for the federal funds rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A. A to B B. B to A C. C to B D. E to A E. C to D

A to B

Refer to Figure 7. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A. D to C B. A to E C. C to D D. C to B E. E to A

C to D

The effect of crowding out of private spending by government spending will be greater if A. consumption, investment, and net exports are less sensitive to changes in interest rates. B. consumption, investment, and net exports are more sensitive to changes in interest rates. C. consumption, investment, and net exports are less sensitive to changes in the price level. D. consumption, investment, and net exports are more sensitive to changes in the price level.

consumption, investment, and net exports are more sensitive to changes in interest rates.

An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier. A. will decrease B. will increase C. will not change D. may increase or may decrease

will decrease

Crowding out will be greater A. the less sensitive consumption spending is to changes in the interest rate. B. the further equilibrium GDP is below potential GDP. C. the more sensitive investment spending is to changes in the interest rate. D. if the economy is in recession, rather than at full employment.

the more sensitive investment spending is to changes in the interest rate.

The tax wedge is the difference between the A. amount of taxes needed to balance the federal budget and the actual amount of taxes. B. amount of taxes needed to pay off the national debt and the actual amount of taxes. C. pretax and posttax returns to an economic activity. D. nominal and real interest rates.

pretax and posttax returns to an economic activity.

A decrease in which of the following would decrease the tax wedge? A. marginal tax rate B. money supply C. national debt D. federal budget deficit

marginal tax rate

What could be a drawback of requiring a balanced budget each year? A. It would require ending of international trade since we would need all the money in the U.S. B. Elderly people would collect more in social security payments C. We would lose the ability to enact some fiscal policy measures to shorten recessions D. It would cause rapid inflation

We would lose the ability to enact some fiscal policy measures to shorten recessions

If the economy is below full employment, higher deficits can _____________ in __________ A. close the inflationary gap; the short run B. close the expansionary gap; the long run C. close the recessionary gap; the short run D. reduce in interest rates; the loanable funds market

close the recessionary gap; the short run

Compared to Classical economists, Keynesian economists are more likely to believe that A. the long run is the most important time period to consider B. prices are flexible C. savings is important in the short run D. government interventions are necessary to keep markets stable

government interventions are necessary to keep markets stable

In an economy with ________, there are more prices than in an economy with ________. A. barter; money B. money; barter C. fiat money; commodity money D. fiat money; barter

barter; money

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds. A. increase; more B. decrease; less C. decrease; more D. increase; less E. increase; similar

increase; more

The United States has a progressive income tax. What specifically does this mean? A. High income people pay a larger total amount of tax than low income people B. Investments made by wealthy people are taxed at higher rates than income C. Marginal dollars earned at high income are taxed at a higher rate than marginal dollars earned at lower incomes D. Wealthy people have pay taxes on assets and income, not just income

Marginal dollars earned at high income are taxed at a higher rate than marginal dollars earned at lower incomes

Classical economists tend to favor A. Government direction and steering of the economy B. A strong Fed that continually influences aggregate demand C. A pro-market Laissez Faire (hands off) approach to the economy D. Policies that focus on short run growth

A pro-market Laissez Faire (hands off) approach to the economy

Keynes’ beliefs on government intervention in the economy can best be described by his quote: A. “The government can help before you lose your head” B. “In the long run we are all dead” C. “Run your business well so you’re not in the red” D. “A long recession is what we dread”

“In the long run we are all dead”

The concept of consumption smoothing predicts that people A. Want to have stable consumption patterns over the course of their lives B. Will consume a lot more in high earnings years and live meagerly during retirement C. Need to be subsidized while they are young and low earning D. Must be forced by law to save for retirement

Want to have stable consumption patterns over the course of their lives

Milton Friedman believed that A. The intention of policy matters most, even if it doesn’t work out as we hoped B. Policies can create unintended consequences C. Strong government regulation is needed in most industries D. Markets tend to fill

Policies can create unintended consequences

Milton Friedman believed that focusing too much on the short run is dangerous because A. he didn’t believe people understood economic policy being pushed by the government or the Fed B. people disagree about what “short run” and “long run” mean C. politicians, wanting to get votes, will do short run actions to appease voters, but these actions will have long run harmful effects D. his models only worked when technological advances occurred, and this happens in the long run

politicians, wanting to get votes, will do short run actions to appease voters, but these actions will have long run harmful effects