Econ Exam 2

Front 1

Why Does recession occur?

Back 1

1. Difficulties in coordinating economic affairs
2. Shocks to technology
3. Real adverse shocks to the economy

Front 2

Aggregate demand refers to the relationship between:

Back 2

The Price level and the quantity of real GDP demanded

Front 3

The increase in spending that occurs because the real value of money increases when the price level fall is called what?

Back 3

Wealth Effect

Front 4

In modern economies which prices are flexible?

Back 4

Some prices are very flexible, while others are not

Front 5

what problem within the price system can lead to a break down in the coordination of economic activity?

Back 5

Prices can be slow to adjust

Front 6

To determine the price level and real GDP, the aggregate demand and aggregate demand must do what?

Back 6

Intersect

Front 7

Output in the short run is determined by what factor when an economy operates at full employment?

Back 7

demand

Front 8

When there is a shift in the aggregate supply curve caused by factors of external to a nation's economy, it is called what??

Back 8

Supply Shock

Front 9

What happens in a boom economy?

Back 9

It is difficult for firms to recruit and retain workers

Front 10

Policies aimed to reduce the level of real GDP are called:

Back 10

Contractionary policies

Front 11

Tax cuts aimed at businesses can stimulate what?

Back 11

investment spending

Front 12

Stabilization policies are policies aimed to do what?

Back 12

Move the economy closer to potential output

Front 13

When the government conducts activist fiscal policy, what type of spending does it use?

Back 13

discretionary spending

Front 14

The Laffer curve shows the relationship between:

Back 14

Tax rates and tax revenue

Front 15

Suppose the government runs a budget surplus in a given year. It can reduce its overall spending debt by doing what?

Back 15

Buying back bond it has sold to the public

Front 16

Suppose the economy is operating below potential output. If policy makers try to avoid a budget deficit by raising taxes or reducing government spending, these action would do what?

Back 16

Make a recession worse

Front 17

Taxes can have an important effect on what?

Back 17

1. Economic Growth
2. The Labor Supply
3. Saving

Front 18

The prospect of future deficits does what?

Back 18

Limits the ability of government to conduct fiscal policy in the near future.

Front 19

Spending on programs that Congress authorizes on an annual basis is known as what?

Back 19

Discretionary spending

Front 20

When prices do not change very much, the income- expenditure model can be used to understand economic fluctuation in what?

Back 20

The short run

Front 21

The marginal propensity to consume (MPC) is the what?

Back 21

Fraction of additional income that is spent

Front 22

If consumption function is C=50+.75y, then the marginal propensity to save is what?

Back 22

.25

Front 23

If the consumption function is C=25+.9y and income increases by $100, then autonomous consumption spending will be what?

Back 23

$25

Front 24

What causes the consumption function to rotate downwards?

Back 24

A decrease in the marginal propensity to consume (MPC)

Front 25

Let C=100 + .6y and I=40. Autonomous consumption is:

Back 25

100

Front 26

The formula for the tax multiplier is:

Back 26

-MPC/ (1-MPC)

Front 27

The balanced- budget multiplier is equal to the:

Back 27

Government spending multiplier plus the tax multiplier

Front 28

In the income- expenditure model, for each price level there is a different equilibrium output level. These various price level and equilibrium output combinations are used to derive what?

Back 28

The aggregate demand curve

Front 29

An upward shift of the planned expenditure curve corresponds to:

Back 29

a movement down along the aggregate demand curve

Front 30

In an open economy including the government, planned expenditures equals:

Back 30

C+I+G+X-M

Front 31

A $5 billion decrease in both government spending taxes will do what?

Back 31

Decrease GDP by $5 billion

Front 32

Give examples of investment

Back 32

1. A student attends college
2. The government builds a dam to have a source of hydroelectric power
3. A firm builds a new plant

Front 33

The theory of investment that emphasizes the role of expected growth in real GDP on investment spending is known as:

Back 33

The accelerator theory

Front 34

Ceteris Paribus, as real GDP growth ______, investment spending ______

Back 34

Increases, Increases

Front 35

The maximum amount a person is willing to pay today to receive a payment in the future is known as what?

Back 35

Present Value

Front 36

Suppose that a girm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should:

Back 36

Not invest in the project because the opportunity cost is greater than the return on investment

Front 37

If you want to purchase a swimming pool in five years for $25,000, how much would you need to have in your bank account, so after five years you will have $25,000 to buy the swimming pool? Assume your bank pays 8% interest.

Back 37

$17,014

Front 38

Financial intermediaries are what?

Back 38

Firms that receive funds from savers and channel them to the investors

Front 39

In a boom, real GDP exceeds potential GDP. That implies what?

Back 39

Unemployment if falling, driving wages up. This results in a leftward shift of the short- run aggregate supply curve.

Front 40

If taxes are lowered. Ceteris Paribus this decrease in taxes represents what?

Back 40

A shift of the aggregate demand curve from AD1 to AD2

Front 41

What are the components of aggregate demand?

Back 41

1. Federal Government expenditures
2. Consumption
3. Exports

Front 42

The long-run aggregate supply curve is what?

Back 42

vertical

Front 43

Suppose the supply of money increases, causing output to exceed full employment. As a result in the short run:

Back 43

Both prices and real output will increase; in the long run prices will increase further, but real output will fall t the full employment level.

Front 44

In the short run, when prices are slow to adjust to changes in demand and supply, what determines production?

Back 44

Demand

Front 45

Arthur Okun distinguished between what prices?

Back 45

Auction prices, which changed rapidly, and custom prices which were slow to change.

Front 46

The short- run aggregate supply curve is relatively flat because in the short run, prices are what?

Back 46

"sticky" i.e. they adjust slowly

Front 47

What is the largest component of federal spending?

Back 47

Entitlement spending

Front 48

Which occurred in the late 1980s and 1990s, that made the policy makers reluctant to use fiscal policy to stabilize the economy?

Back 48

Huge Budget Deficits

Front 49

To increase aggregate demand, what can a government do?

Back 49

Increase spending or decrease taxes

Front 50

What is an example of an entitlement program

Back 50

-Medicare expenditures
-Social Security

Front 51

When output exceeds the equilibrium output expenditures:

Back 51

fall short of output and output begins to fall

Front 52

A fall in exports will lead to what?

Back 52

A larger reduction in GDP due to the multiplier effect

Front 53

An increase in the marginal propensity to import will do what?

Back 53

decrease the multiplier for investment spending

Front 54

Equilibrium output occurs where production is equal to:

Back 54

Planned expenditures

Front 55

What appropriately describes the slope of the consumption function?

Back 55

Marginal propensity to consume

Front 56

A decrease in price level will do what to GDP?

Back 56

Increase GDP. And thereby move the economy DOWN the aggregate demand curve

Front 57

Is the tax multiplier greater than or less than the government spending multiplier?

Back 57

Less than

Front 58

If autonomous consumption decreases, then the consumption function will:

Back 58

Shift downward

Front 59

An increase in the tax rate will do what to the government spending multiplier?

Back 59

Decrease it

Front 60

At any price level, the income- expenditure model determines the level of equilibrium output and the corresponding point on what?

Back 60

The aggregate demand curve

Front 61

The Price of a stock can be thought of as the present value of future what?

Back 61

Future Dividends

Front 62

Investment is a smaller component of GDP than consumption, but which component is more stable?

Back 62

Consumption

Front 63

If interest rates increase, the present value of a fixed payment in the future will:

Back 63

Decrease

Front 64

As real interest rates rise, investment spending in the economy will:

Back 64

Decrease

Front 65

Financial intermediaries reduce the risk of assets through:

Back 65

Diversification

Front 66

True or False. A Liquid financial asset is one that can easily be used to buy goods and services.

Back 66

True

Front 67

In the long run, if aggregate demand decreases, price level will:

Back 67

Decrease and output or real GDP will remain unchanged

Front 68

A positive shock temporarily ____ output:

Back 68

Raises output above full employment and LOWERS prices

Front 69

After the positive shock, is real GDP higher or lower than potential GDP?

Back 69

higher than

Front 70

During a positive shock unemployment is:

Back 70

Falling, driving wages up. This results in a LEFTWARD or UPWARD shift of the short- run aggregate supply curve.

Front 71

The aggregate demand curve shifts to the right if:

Back 71

firms suddenly become more optimistic about the future

Front 72

Who's wages would not adjust quickly?

Back 72

Union workers

Front 73

For most firms, what is the biggest cost of doing business?

Back 73

wages

Front 74

What is a primary source of federal government revenue?

Back 74

The social insurance tax

Front 75

In 2005, interest rates in the United States rose. As a result which component of federal spending increased automatically?

Back 75

Net interest on newly issued debt

Front 76

A contractionary fiscal policy shifts the aggregate demand curve in what way?

Back 76

Move to the left; lowers prices; and decreases real GDP

Front 77

What is the time taken by policy makers to recognize an economic problem and take appropriate actions are known as:

Back 77

Inside Lags

Front 78

Long run average income is known as what?

Back 78

Permanent Income

Front 79

A change in the price level will cause what on the aggregate demand curve?

Back 79

A movement along the curve

Front 80

If the MPC increases, the slope of the consumption function will:

Back 80

Increase as well

Front 81

At any point on the 45 degree line, planned expenditures are:

Back 81

equal to output or income

Front 82

If planned expenditures are higher than output, then inventories must be increasing or decreasing?

Back 82

Decreasing

Front 83

As a country's income increases, imports will:

Back 83

Increase

Front 84

If housing prices fall, you would expect the consumption function to:

Back 84

Shift downward

Front 85

If the MPC decreases, the value of the multiplier will:

Back 85

decrease

Front 86

A decrease in government spending and taxes by the same amount will:

Back 86

decrease GDP by the same amount

Front 87

The aggregate demand curve will shift to the left, and equilibrium income will decrease if:

Back 87

Government expenditure decreases