Homework 2 Flashcards
The government budget balance
is the difference between government revenue and total spending on purchases and transfers.
Temporary tax cuts enacted by Congress to fight a recession are considered to be
a discretionary fiscal policy intended to be expansionary
An increase in government purchases of goods and services is an example of
an autonomous increase in aggregate spending
The American Recovery and Reinvestment Act of 2009 was a fiscal stimulus of
$787 billion.
If government transfer payments rise by $100 billion, and this increases real GDP by $100 billion, then we can conclude that
. the multiplier is equal to one.
If the economy is currently experiencing an inflationary gap,
then the level of real GDP at the current short-run macroeconomic equilibrium is above the level of real GDP at the long-run macroeconomic equilibrium.
The 2009 stimulus package was an example of using the government budget to
. stabilize the economy by increasing aggregate demand.
Contractionary fiscal policy is used to
shift aggregate demand to the left when the economy is experiencing an inflationary gap.
The basic equation of national income accounting states that GDP = C + I + G + X – IM.
In this equation, what does the term IM represent?
Imports
Which of the following would be a tool of expansionary fiscal policy?
An increase in government spending
Government spending and taxation rules that serve to automatically dampen swings of the business cycle are known as
automatic stabilizers.
Government programs designed to protect families against economic hardship are known as
social insurance programs.
If government transfer payments rise by $100 billion, and this increases real GDP by $75 billion, then we can conclude that
the multiplier is positive, but less than one.
Which of the following statements is FALSE?
A. The role of taxes and transfers as automatic stabilizers would be undermined if the budget is required to balance annually.
B. During periods of prosperity, the budget balance increases.
C. Most economists agree that it would be a good idea to require an annually balanced budget.
D. During recessions, the budget balance is reduced.
In 2007, taxes on personal income and corporate profits accounted for percent of total government revenue.
D. 48
Suppose that the marginal propensity to consume is 0.75. If government spending increases by $30 billion, what will be the total effect on real GDP?
D. It will increase by $120 billion.
The aggregate demand curve shows the relationship between
A. the overall price level and the aggregate quantity of output demanded.
- What is measured on the vertical axis of a graph showing the aggregate demand curve?
The aggregate price level
- When there is a widespread improvement in worker productivity,
aggregate supply increases, thereby shifting to the right
- When the government increases taxes,
A. aggregate demand decreases, thereby shifting to the left.
The short-run aggregate supply curve is _______, and the long-run aggregate supply curve is _______.
upward-sloping; vertical
When firms and individuals become more optimistic about their economic prospects
aggregate demand increases, thereby shifting to the right.
In a graph showing the aggregate demand curve, an increase in the aggregate price level will cause
a movement to a lower level of real GDP along the same curve.
The wealth effect and the interest rate effect explain
the downward slope of aggregate demand
An increase in aggregate demand is represented by
a rightward shift of the entire curve.
What is the effect of a negative supply shock?
The aggregate price level increases, and real output decreases.
- Which of the following is a positive supply shock?
The improvement in productivity arising from Internet technology
If potential output is increasing over time, it implies that the long-run aggregate supply curve is
shifting to the right.
An upward-sloping short-run aggregate supply curve indicates that
increases in the overall price level will increase the amount of aggregate output supplied by firms.
A negative demand shock is an event that
shifts the aggregate demand curve to the left.
A widespread increase in production costs for most industries would be represented by
a leftward shift of aggregate supply
Which of the following would cause an upward shift of the aggregate consumption function?
An increase in household wealth
Which of the following statements about investment spending is FALSE?
A. Investment spending is larger than consumer spending.
B. Investment spending is more volatile than consumer spending.
C. The level of investment spending is dependent on the interest rate.
D. Most recessions originate as a decline in investment spending.
At the income-expenditure equilibrium,
unplanned investment is zero.
The marginal propensity to consume is
the increase in consumer spending when disposable income increases by $1.
The consumption function shows that consumer spending by household varies with
current disposable income of the household
In our representation of the multiplier process, we assume that prices are constant, and therefore
real GDP will equal nominal GDP.
Actual investment spending is equal to
planned investment spending plus unplanned inventory investment.
What is the marginal propensity to save when the marginal propensity to consume is 0.8?
0.2
An initial rise or fall in aggregate spending that causes ripple effects on the level of total income is known as
an autonomous change in aggregate spending
Which one type of investment can be negative?
Investment in inventories
The slope of the consumption function
is equal to the marginal propensity to consume
Other things equal, firms will take on less investment spending when
they have large amounts of extra production capacity.
The expectation of lower disposable income in the future causes
a downward shift of the aggregate consumption function.
The downward slope of the demand for loanable funds shows that
more potential investment projects appear profitable when interest rates are lower
A surplus of loanable funds will result if
the interest rate is held above the equilibrium level
When there is a widely held belief that there is an abundance of promising business opportunities,
the demand for loanable funds will increase.
A budget surplus arises when
there is government-generated savings.
Which of the following accounting identities is NOT true for a simplified economy without government and without interaction with the rest of the world?
A. Total income + Savings = Consumption spending
B. Total income = Total spending
C. Total spending = Consumption spending + Investment spending
D. Total income = Consumption spending + Savings
Savers who supply loanable funds
incur an opportunity cost when they lend to businesses
When you borrow money from your bank, you are
incurring a liability.
The effect of an increase in the demand for loanable funds is to
- increase the equilibrium interest rate, thereby increasing the quantity of loanable funds supplied.
In an economy with a negative capital inflow,
some portion of national savings is used to finance investments in foreign countries.
The downward slope of the demand for loanable funds reflects the fact that
a higher interest rate means that fewer potential investment projects will be profitable
What is measured on the vertical axis of a graph depicting the loanable funds market?
The interest rate
The effect of an increase in the expected inflation rate is to
A. increase the demand for loanable funds, thereby increasing the equilibrium nominal interest rate.
Consider a loanable funds market in which the equilibrium interest rate is 6 percent. What would happen if the interest rate were set above equilibrium at 8 percent?
The quantity of loanable funds demanded would be less than the quantity supplied.
A bond is
a financial asset that promises to pay a fixed sum of interest every year and the principal value of the bond at some future date.
The presence of a positive capital inflow will cause
the supply of loanable funds to increase.
Which of the following statements is FALSE for an economy that has no interactions with the rest of the world?
If the budget balance is negative, private savings must also be negative.
In an open economy, savings is equal to
national savings plus capital inflow.
The existence of a federal budget deficit causes
the demand for loanable funds to increase.
