Macroeconomics exam 3

Question 1

According to Keynesian Theory

Answer 1

Factors other than the interest rate affect savings and investment and if investor are pessimistic about future returns, they may NOT invest more as interest rates fall

Question 2

According to Keynesian Theory

Answer 2

excessive savings could lead to inadequate Total Expenditures

Question 3

According to Keynesian theory

Answer 3

The economy can get stuck in a recessionary gap for an extended period

Question 4

According to Keynesian theory

Answer 4

Spending is the driving force in the economy and the level of Total Expenditures determines the level of total output

Question 5

Consumption

Answer 5

Is determined primarily by the level of disposable income, is directly related to Real GDP, and is the largest component of Total Expenditures

Question 6

If disposable income increases from $21,000 to $27,000, and consumption increases from $15,000 to $19,000, the marginal propensity to consume is

Answer 6

.67

Question 7

The marginal propensity to consume is

Answer 7

The slope of the consumption function and the change in consumption divided by the change in income

Question 8

If the consumption function lies below the 45 degree angle line

Answer 8

Consumption is less than disposable income

Question 9

The Total Expenditures curve

Answer 9

Consists of consumption, investment, government purchases, and net exports, AND has the same slope as the consumption function

Question 10

According to Keynesian theory, if Total Expenditures is greater than the ideal level of Total Expenditures

Answer 10

An inflationary gap will occur

Question 11

According to Keynesian theory, a change in one of the components of Total Expenditures will lead to

Answer 11

A multiplied change in Real GDP

Question 12

If the MPC is .75 what is the Multiplier

Answer 12

4

Question 13

If the MPC is .75, and investment increases by $90 billion, what is the resulting change in Real GDP?

Answer 13

$360 billion increase

Question 14

Suppose the MPC is .75 and the economy has a recessionary gap of $90 billion. Which of the following would eliminate the gap?

Answer 14

$22.5 billion increase

Question 15

When the government’s tax revenues are greater than the government’s expenditures

Answer 15

There is a budget surplus

Question 16

Which of the following would be expansionary fiscal policy

Answer 16

An increase in the money supply

Question 17

During an inflationary gap

Answer 17

Individual income tax payments will increase, acting as an automatic stabilizer and unemployment compensation payments will decrease, acting as an automatic stabilizer

Question 18

Since Keynesian theory was introduced in 1936

Answer 18

The federal government has had budget deficits in most years

Question 19

Crowding out

Answer 19

occurs when increases in government spending leads to decreases in private spending

Question 20

The ____ lag occurs because, once a change in fiscal policy os enacted, it takes times before the new policy has its full effect on Real GDP

Answer 20

Impact

Question 21

According to supply-side economists

Answer 21

Keynesian theory has led to high marginal tax rates and high marginal tax rates reduce both SRAS and LRAS

Question 22

Supply-side economists

Answer 22

Favor lower marginal tax rates

Question 23

M2 consists of

Answer 23

M1, small-denomination time deposits, and retail money market funds

Question 23

Using money to make an exchange

Answer 23

Eliminates the need for a double coincidence of wants, reduces the transaction costs of making exchanges, and increases specialization and trade.

Question 24

Specifying prices in terms of dollars and cents is an example of which function of money?

Answer 24

Measure of value

Question 25

M1 includes

Answer 25

Liquid deposits and currency in circulation