Final Exam Study Guide for Economics Chapter 3 (133-200)

133. According to the savings–investment spending identity: a. savings equals investment spending. b. government spending equals tax receipts. c. total income equals consumption spending plus savings. d. savings equals investment spending plus consumption spending. Answer: A 134. Which statement is CORRECT? a. The budget deficit equals tax revenues plus transfer payments. b. Government spending equals private savings plus the budget deficit. c. Tax revenues equal national savings plus the budget deficit. d. The budget deficit equals government spending minus tax revenues. Answer: D 135. The sources of financing of physical capital include: a. domestic consumption. b. foreign borrowing from the home country. c. foreign investment in the home country. d. domestic consumption, foreign borrowing from the home country, and foreign investment in the home country. Answer: C 136. All of the following scenarios are associated with government budget deficits EXCEPT that: a. the government becomes a borrower in the market for loanable funds. b. the interest rate rises. c. the total amount of borrowing decreases. d. private investment spending is crowded out. Answer: C 137. Crowding out hampers the economy by: a. increasing private borrowing. b. decreasing consumption. c. decreasing government borrowing. d. reducing private investment spending on physical capital. Answer: D 138. Which of the following is FALSE? When there is an increase in: a. the government budget deficit, the total amount of borrowing falls. b. private savings, the total amount of borrowing increases. c. private savings, the interest rate decreases. d. the government budget deficit, private investment is crowded out. Answer: A 139. The marginal propensity to consume is: a. increasing if the marginal propensity to save is increasing. b. the proportion of total disposable income that the average family consumes. c. the change in consumer spending divided by the change in aggregate disposable income. d. the change in consumer spending minus the change in aggregate disposable income. Answer: C 140. If the multiplier equals 4, then the marginal propensity to save must be equal to: a. 0.25 b. 0.50 c. 0.75 d. 1.00 Answer: A 141. The multiplier is: a. 1 / (1 – MPC). b. MPS / MPC. c. 1 / (MPC). d. 1(1 + MPC). Answer: A 142. The marginal propensity to consume (MPC) equals the change in _____ divided by the change in _____. a. consumer spending; disposable income b. consumer spending; investment spending c. consumer spending; gross domestic product d. disposable income; consumer spending Answer: A 143. An increase in the marginal propensity to consume: a. increases the multiplier. b. shifts the autonomous investment line upward. c. decreases the multiplier. d. shifts the autonomous investment line downward. Answer: A 144. The _____ the _____, the _____ the multiplier. a. smaller; level of wealth; bigger b. bigger; marginal propensity to save; bigger c. bigger; marginal propensity to consume; smaller d. bigger; marginal propensity to consume; bigger Answer: D 145. Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function? a. The slope will get steeper. b. Autonomous consumption will increase. c. The function will shift downward. d. The slope will get steeper and autonomous consumption will increase. Answer: A 146. If the aggregate consumption equals $100 million + 0.75 × YD, then autonomous consumption is: a. 0.75 b. 0.25 c. $75 million d. $100 million Answer: D 147. An increase in the wealth of households, all other things unchanged, will result in _____ the aggregate consumption function. a. no effect on b. an upward shift in c. a downward shift of d. a movement to the right along Answer: B 148. The aggregate consumption function depends on: a. disposable income. b. expected disposable income. c. wealth. d. disposable income, expected disposable income, and wealth. Answer: D 149. Rising inventories typically indicate _____ unplanned inventory investment and a _____ economy. a. positive; slowing b. negative; slowing c. positive; expanding d. negative; expanding Answer: A 150. Which of the following is TRUE? a. Using retained earnings has a higher opportunity cost than does using borrowed money because retained earnings come from past profits. b. Borrowing money will always be more expensive than using retained earnings. c. The tradeoff a firm faces whether using retained earnings or borrowed funds is the same. d. The cost of retained earnings is unrelated to the cost of borrowing money. Answer: C 151. Planned investment spending is _____ related to the interest rate because a _____ in the market interest rate _____. a. positively; fall; decreases the supply of loanable funds b. negatively; rise; makes any given investment project less profitable c. positively; fall; decreases the opportunity cost of investing d. negatively; rise; causes consumption to crowd out investment Answer: B 152. According to the _____, there is a positive relationship between planned investment spending and the expected growth rate of real GDP. a. paradox of thrift b. life-cycle hypothesis c. multiplier effect d. accelerator principle Answer: D 153. Suppose that consumer expectations improve. The aggregate demand curve will undergo a: a. shift to the left b. movement upward c. shift to the right d. movement downward Answer: C 154. Besides consumption, the component(s) of aggregate demand is (are): a. investment expenditures and net exports. b. investment expenditures and government expenditures. c. investment expenditures. d. investment expenditures, government expenditures, and net exports. Answer: D 155. The Great Depression was caused by _____ shocks, and the stagflation of the 1970s was caused by _____ shocks. a. demand; demand b. demand; supply c. supply; demand d. supply; supply Answer: B 156. The interest rate effect of a change in the aggregate price level occurs when: a. a higher price level decreases the purchasing power of money, resulting in an increase in the interest rate. b. the price of a bond increases, reducing the interest rate. c. the Fed uses contractionary monetary policy, causing an increase in the interest rate. d. government borrowing in the loanable funds market raises the interest rate. Answer: A 157. In general, a change in the price level, all other things unchanged, causes: a. a movement along the aggregate demand curve. b. a shift of the aggregate demand curve. c. no change in the purchasing power of assets. d. both a movement along the aggregate demand curve and a shift in the curve. Answer: A 158. In 2008 the Federal Reserve worried about: a. the threat of stagflation, and it had a difficult time stabilizing the economy, as stabilization policies are not very effective in managing negative supply shocks. b. a deep recession with falling prices, and it used stabilization policies to take the economy out of the slump. c. a healthy, booming economy, and it used fine-tuning methods to keep the growing economy on track. d. hyperinflation, and it used strong disinflationary policies to bring the rise in prices under control. Answer: A 159. When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____. a. interest rate; aggregate demand; downward b. wealth; aggregate demand; downward c. interest rate; investment demand; downward d. wealth; short-run aggregate supply; upward Answer: B 160. Stagflation is a combination of _____ unemployment and _____ inflation. a. increasing; increasing b. decreasing; decreasing c. increasing; decreasing d. decreasing; increasing Answer: A 161. The aggregate supply curve shows the relationship of prices to: a. sales b. both the amount of output people want to buy and the amount of output producers want to provide. c. the quantity of output producers are willing to provide. d. the quantity of output people want to buy. Answer: C 162. According to the aggregate demand curve, when the aggregate price level _____, the quantity of aggregate output _____. a. rises; supplied falls b. falls; demanded falls c. rises; demanded falls d. rises; demanded does not change Answer: C 163. The wealth effect suggests: a. a positive relationship between the price level and consumption spending. b. that price level changes do not affect real wealth. c. a negative relationship between the price level and consumption spending. d. that when the price level increases, the real value of money increases also. Answer: C 164. According to the interest rate effect, an increase in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending: a. increase; increases; decreases b. decrease; increases; decreases c. increase; decreases; decreases d. decrease; decreases; increases Answer: A 165. If the price level falls by 10%, the purchasing power of $10,000 will: a. increase to $11,000. b. decrease to $9,000. c. decrease to $1,000. d. remain constant. Answer: A 166. Raising taxes shifts the _____ curve to the _____. a. aggregate demand; left b. long-run aggregate supply; left c. aggregate demand; right d. short-run aggregate supply; left Answer: A 167. A change in _____ has the most DIRECT effect on aggregate demand. a. taxes b. interest rates c. the money supply d. government spending Answer: D 168. The aggregate supply curve shows the relationship between the aggregate price level and the aggregate: a. output supplied. b. money supply. c. unemployment rate. D. employment. Answer: A 169. The positive relationship between the aggregate price level and aggregate output supplied gives the short-run aggregate supply curve a(n) _____ slope. a. upward b. vertical c. horizontal d. downward Answer: A 170. Nominal wages are sticky because: a. wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant. b. wages are slow to fall when there are labor shortages and slow to rise even when the level of unemployment is significant. c. wages remain fixed in the long run, increasing the profitability of the firms. d. in the long run all wages are adjusted for inflation. Answer: A 171. The short-run aggregate supply curve will shift to the right if: a. commodity prices rise. b. nominal wages rise. c. productivity decreases. d. nominal wages fall. Answer: D 172. An inflationary gap gradually: a. increases short-run aggregate supply. b. decreases short-run aggregate supply. c. increases aggregate demand. d. decreases aggregate demand. Answer: B 173. Because the aggregate price level has no effect on aggregate output in the long run, the long-run aggregate supply curve is: a. upward sloping. b. vertical. c. horizontal. d. downward sloping. Answer: B 174. Potential output: a. is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible. b. varies with the price level. c. is greater in periods of expansion than in recessions. d. depends on the level of consumer confidence. Answer: A 175. When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as _____ fall(s) and the _____ aggregate _____ curve shifts to the _____. a. the aggregate price level; short-run; demand; right b. the aggregate price level; long-run; supply; left c. nominal wages; short-run; supply; right d. nominal wages; long-run; supply; left Answer: C 176. All of the following are examples of demand shocks EXCEPT: a. a tax increase. b. a reduction in money supply. c. an increase in government expenditure. d. an increase in commodity prices. Answer: D 177. A negative short-run supply shock _____ aggregate output and _____ the aggregate price level. a. reduces; increases b. increases; reduces c. reduces; reduces d. increases; increases Answer: A 178. A decrease in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run. a. an increase; no change b. a decrease; no change c. a decrease; a decrease d. no change; an increase Answer: C 179. In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____. a. rise; increase b. fall; decrease c. rise; remain stable d. fall; remain stable Answer: C 180. A recessionary gap will be eliminated because there is _____ pressure on wages, shifting the _____. a. downward; short-run aggregate supply curve rightward b. downward; short-run aggregate supply curve leftward c. downward; aggregate demand curve downward d. upward; aggregate demand curve leftward Answer: A 181. Government payments to households for which no good or service is provided in return are called: a. consumption expenditures. b. transfer payments. c. investment expenditures. d. government purchases. Answer: B 182. The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand. a. expansionary; increased b. contractionary; increased c. expansionary; decreased d. contractionary; decreased Answer: A 183. The basic equation of national income accounting is GDP = C + I + G + X – M. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects: a. M b. I c. C d. X Answer: C 184. Consumer spending will likely fall if: a. government transfers rise. b. the government raises tax rates. c. the government lowers tax rates. d. government transfers rise or tax rates are lowered. Answer: B 185. If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____. a. decrease government purchases; right b. raise tax rates; right c. increase government purchases; left d. decrease government purchases; left Answer: D 186. Expansionary fiscal policy: a. increases long-run aggregate supply. b. increases aggregate demand. c. decreases aggregate demand. d. decreases long-run aggregate supply. Answer: B 187. A cut in taxes _____, shifting the aggregate demand curve to the _____. a. increases corporate profits and investment; left b. increases disposable income and consumption; right c. decreases the marginal propensity to save, increasing consumption; left d. decreases government transfers and consumption; right Answer: B 188. To close an inflationary gap with fiscal policy, the government could: a. reduce budget allocations to interstate highway maintenance. b. raise the average amount awarded for a disability pension. c. lower the corporate income tax rate. d. increase federal subsidies to state universities. Answer: A 189. Contractionary fiscal policy includes: a. increasing government expenditures. b. decreasing the money supply. c. decreasing government expenditures. d. decreasing taxes. Answer: C 190. Each of the following is an expansionary fiscal policy EXCEPT: a. an increase in government transfers. b. a reduction in marginal tax rates. c. an increase in tax rates. d. an increase in government purchases. Answer: C 191. Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate. a. high; increase; increase b. high; increase; decrease c. low; decrease; decrease d. low; increase; decrease Answer: A 192. One of the shortcomings of fiscal policy is that: a. it affects aggregate demand indirectly through the interest rate. b. it takes effect immediately, so it is the best policy to use in an economic crisis. c. it has significant time lags, which make it more effective. d. it has time lags, so sometimes it may end up destabilizing the economy. Answer: D 193. Decreasing funding for space exploration will shift the _____ curve to the _____. a. aggregate demand; left b. aggregate demand; right c. short-run aggregate supply; left d. short-run aggregate supply; right Answer: A 194. If the marginal propensity to consume is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by: a. $40 million. b. $50 million. c. $200 million. d. $250 million. Answer: D 195. The multiplier effect of changes in government transfers is: a. greater than the multiplier effect of a change in government spending. b. impossible to determine. c. less than the multiplier effect of a change in government spending. d. zero because transfer payments do not affect aggregate demand. Answer: C 196. A cut in taxes will have the most effect on aggregate demand if it is given to: a. those who hold a large amount of wealth. b. people with a high marginal propensity to consume. c. people with a low marginal propensity to consume. d. everyone in the economy. Answer: B 197. Discretionary fiscal policy refers to changes in: a. the money supply. b. taxes to account for externalities and control pollution. c. government spending or taxes to close a recessionary or inflationary gap. d. interest rates. Answer: C 198. Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts. a. contractionary b. ineffective c. neutral d. expansionary Answer: D 199. Government transfer payments rise when the economy is contracting and fall when the economy is expanding. In this role, transfer payments are described as: a. automatic stabilizers. b. balanced budget policy. c. deficit reduction policy. d. discretionary fiscal policy. Answer: A 200. The government has a budget deficit if: a. the money supply is less than total expenditures. b. its total revenues are less than its total expenditures. c. its total revenues are equal to its total expenditures. d. its total revenues are greater than its total expenditures. Answer: B