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63 Cards in this Set
- Front
- Back
The most important determinant of a household's consumption spending is
a. its disposable income |
As disposable income increases, consumption spending
c. increases by less than the increase in disposable income |
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An increase in the interest rate would shift the consumption function upward.
b. False |
As disposable income increases,
a. consumption and saving both increase |
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The consumption function assumes that
d. factors other than disposable income affect consumption, but those are held constant along the consumption function |
If the MPC < 1 and a household's disposable income increases by $2,000, the household's consumption will
a. increase by less than $2,000 |
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The MPC is a relationship between
a. a change in consumption and a change in income |
The fraction of an increase in income that is saved is referred to as the
a. marginal propensity to save |
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The MPC plus the MPS equals
d. 1.0 |
Along the aggregate consumption function, an increase in income will
d. cause movement along the given consumption function |
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An upward shift of the consumption function might be caused by
c. a decrease in the price level |
What is the effect on the consumption function of a decrease in disposable income?
d. There is movement downward along the consumption function. |
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An increase in wealth will
d. increase consumption and decrease saving at each level of income |
Expectations that disposable income will increase in the future will
a. shift the current consumption function up |
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The non-income determinants of consumption include all of the following except one. Which is the exception?
b. the profitability of new investment |
An rise in stock prices will __________ net wealth and __________ consumption.
d. increase; increase |
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Which of the following is not investment spending?
c. the purchase of stock in Potomac Electric Company |
The interest rate is important to the investment decision
c. regardless of whether funds must be borrowed or firms have the funds on hand |
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An increase in the interest rate, other things equal, would
d. reduce the amount invested because the opportunity costs of investing would be higher |
Which of the following would tend to shift the investment function upward?
c. a cut in corporate taxes that raises after-tax profits |
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The main determinants of investment are the interest rate and expected profit.
a. True |
When economists say investment is autonomous, they mean that
c. investment is independent of the level of income |
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If business managers become more optimistic about future sales and profits, then there will be
c. an upward shift of the autonomous investment function |
Consumption
a. makes up about two-thirds of GDP in a typical year |
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Fluctuations in consumption
c. are roughly similar to fluctuations in GDP |
Which of the following is the most volatile component of GDP?
a. investment (I) |
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An increase in real disposable income will
c. cause a rightward movement along the autonomous net export function |
The amount of U.S. exports purchased by the rest of the world is primarily determined by
b. real disposable income in other nations |
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As domestic income rises, net exports
a. fall, since exports remain the same but imports increase |
The economy’s investment demand curve shows the inverse relationship between the quantity of investment demanded and the market interest rate, other things held constant.
a. True |
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If money demand increases and the Fed does not alter its monetary policy, then
d. interest rates will increase |
Which of the following would cause an increase in the velocity of money?
a. increased use of credit cards |
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In the long run, changes in the money supply affect only the price level because
c. the long-run aggregate supply curve is vertical |
If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between
a. the money supply and the price level |
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In the long run, an increase in aggregate demand
d. affects only the price level |
Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?
a. a higher price level |
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If the money supply is $1,000, the price level is 3, and real income (or output) is $5,000, then the velocity of money is
e. 15 |
Velocity measures
d. how quickly money changes hands |
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The equation of exchange is
c. M x V = P x Y |
In the situation shown in Exhibit 16-3, how could the Fed return the economy to potential output?
d. decrease the money supply |
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To eliminate a contractionary gap, the Fed can __________ the money supply, which would __________.
b. increase; decrease the interest rate and increase investment |
For monetary policy to be effective in changing planned investment spending,
c. investment must be sensitive to changes in interest rates |
|
If investment is not sensitive to changes in the interest rate, then changes in the money supply
c. will have no effect on aggregate demand |
An increase in the money supply leads to a(n)
a. decline in interest rates, an increase in investment, and an increase in aggregate demand |
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If the Fed decreases the money supply, GDP
c. decreases because the resulting increase in the interest rate leads to a decrease in investment |
If the Fed increases the money supply, GDP
b. increases because the resulting decrease in the interest rate leads to an increase in investment |
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What is the effect of an expansionary monetary policy on the demand for investment curve?
c. It causes downward movement along the curve. |
As the interest rate decreases,
c. there is a downward movement along the demand for investment curve |
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If the Fed increases the money supply, then
a. the interest rate declines and the quantity of money demanded increases |
In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run
b. decrease in both the price level and real GDP |
|
In the aggregate demand-aggregate supply model, an increase in the money supply will cause in the short run a(n)
a. increase in both the price level and real GDP |
In a macroeconomic model, increases in the money supply decrease the interest rate, increase investment, and thus raise employment and real GDP.
a. True |
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Given the demand for money in Exhibit 16-2, if the supply of money is given by the supply curve labelled S, the equilibrium interest rate and quantity of money would be
a. r and m |
If the quantity of money supplied exceeds the quantity of money demanded,
c. the interest rate will fall |
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The equilibrium interest rate is determined by
e. both the supply of and demand for money |
If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money.
d. fall; greater |
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As the price level rises, money __________ causing interest rates to __________ and investment spending to __________.
b. demand rises; rise; fall |
The supply of money is depicted diagrammatically as a vertical line because the quantity of money supplied is totally dependent on the rate of interest.
b. False |
|
The opportunity cost of holding money
b. is the interest foregone on potential interest-earning assets |
If the price level rises, then the
e. demand for money will increase |
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Which of the following, other things constant, will shift the money demand curve to the right?
c. an increase in real GDP |
An increase in the price level will
a. shift the money demand curve to the right |
|
The money demand curve slopes
a. downward because the cost of holding money decreases as the interest rate decreases |
What is the opportunity cost of holding money rather than some other financial asset?
a. the forgone interest income |
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The opportunity cost of holding money is measured by the
a. interest rate |
The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases.
a. True |
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Discretionary fiscal policy works by shifting the aggregate demand curve.
a. True |
Which of the following is not a tool of fiscal policy?
a. money supply |
|
Discretionary fiscal policy is policy that
e. is an intentional change in taxation or government spending |
If government purchases increase by $10 billion when the MPC is 0.8, then real GDP will increase by $50 billion.
a. True |
|
The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.
a. True |
Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded.
b. False |
|
When government purchases increase, the spending multiplier tells us the
c. size of the rightward shift of the aggregate demand curve at a given price level |
The simple tax multiplier must always be smaller than the simple spending multiplier, regardless of the value of the MPC.
a. True |
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Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?
b. Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption. |
If transfer payments and autonomous taxes both increase by identical amounts,
e. there will be no change in equilibrium income |
|
If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will
e. reduce both the price level and real GDP |
To close a contractionary gap using fiscal policy, the government can
d. increase government spending by less than the size of the gap |
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When spending by the federal government exceeds net taxes,
c. the aggregate demand curve shifts rightward |
When spending by the federal government exceeds net taxes,
a. the price level tends to rise |
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If government purchases increase and net taxes decrease,
e. output and employment will increase |
Which of the following government policies would increase aggregate demand?
a. a deficit in the government budget |
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All of the following might be effective in eliminating a contractionary gap except one. Which is the exception?
a. reducing Social Security payments to beneficiaries |
A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.
a. True |
|
One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output but at the cost of increasing the price level.
a. True |
Which of the following might be considered the most contractionary set of fiscal policies?
b. decrease in government purchases, increase in taxes, and decrease in transfer payments |
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Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?
b. Increase taxes to reduce aggregate demand. |
A federal budget surplus occurs when
b. federal government net taxes exceed purchases |
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If the economy is already at its potential output, then the spending multiplier is
a. zero in the long run |
John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that
b. natural economic forces were not necessarily adequate to move the economy toward its potential output level |
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Because of automatic stabilizers, disposable income varies proportionately less than real GDP during periods of economic fluctuations.
a. True |
During economic contractions, transfer payments such as welfare benefits
b. automatically increase, reducing the impact of the contraction on disposable income |
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The effect of automatic stabilizers on the business cycle is to
c. make both upswings and downswings smaller |
Which of the following best describes stagflation?
d. rising unemployment and inflation rates |
|
The natural rate of unemployment is that rate at which the economy achieves its potential real GDP.
a. True |
If policy makers think the natural rate of unemployment is lower than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will
a. cause continuing inflation |
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A major foreign holder of U.S. Treasury securities is
e. All of the answers are correct |
When crowding out occurs,
c. public spending replaces private spending |
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National debt held by the public includes public debt held by all of the following, except one. Which is the exception?
c. the U.S. Treasury |
If the federal government budget deficit increases, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________.
b. increase; appreciate; increase |
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If action by the President and Congress reduces the federal government budget deficit, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________.
e. decrease; depreciate; decrease |
Increased government borrowing to cover a budget deficit causes
b. a higher interest rate and appreciation of the U.S. dollar |
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The key link between the so-called twin deficits involves
a. higher interest rates and a stronger dollar |
The crowding in of private investment is associated with
e. more favorable business expectations resulting from an increase in aggregate demand induced by increased government borrowing |
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If a federal budget deficit causes crowding out,
b. real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines |
Crowding out refers to the government's increased demand for credit, which
c. displaces some private sector borrowing by increasing the interest rate |
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Which component of aggregate expenditure is most subject to crowding out?
b. investment spending |
Discretionary policy deficits are associated with
b. higher interest rates, higher prices, and higher output |
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As a result of an increased deficit associated with discretionary fiscal policy,
b. both the interest rate and nominal output rise |
If the deficit is increasing because of the effects of the automatic stabilizers,
b. the economy is contracting |
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If aggregate output is increasing,
d. automatic stabilizers will tend to decrease the size of the deficit |
Which of the following would decrease the size of a federal budget deficit?
c. growth in real GDP |
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If the government runs a cyclically balanced budget, its revenue will equal its expenditure
c. over the course of the business cycle |
Federal budget deficits grow during recessions because
c. tax revenues decrease while transfer payments increase |
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During a recession, higher welfare outlays
a. increase the size of the budget deficit even if the government does not undertake discretionary fiscal policy |
If a budget is cyclically balanced, the government should run a surplus when the economy experiences an expansionary gap.
a. True |
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The accepted philosophy on U.S. federal deficits prior to the Great Depression was that
c. the budget should be annually balanced |
In Keynes’ philosophy of government budgets,
e. deficits are appropriate during recessions |
|
Because of automatic stabilizers, government budget deficits are
e. smaller during expansions and larger during contractions |
The federal budget deficit becomes __________ during recessions because __________.
b. larger; transfer payments increase and tax revenues decline |
|
Which of the following is true of an increase in a federal government budget surplus?
d. Such an increase in the surplus might close an expansionary gap. |
The Employment Act of 1946
a. created the Council of Economic Advisers |
|
The Budget of the United States Government is officially submitted by
a. the President to the Congress and contains proposals for government expenditures |
Transfer payments are included in the government budget deficit but not included in the government purchases component of GDP.
a. True |
|
The largest category of federal government expenditures is
c. direct benefit payments to individuals |
The federal government budget is
b. a plan for government expenditures and revenues for the coming year |