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186 Cards in this Set

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John Maynard Keynes's central proposition that a dollar increase in disposable income would increase consumption, but by less than the increase in disposable income, means the marginal propensity to consume (MPC) is:
less than one, but greater than zero.
The nation has its own MPC. When disposable income increases from $300 billion to $400 billion, national consumption increases from $300 billion to $360 billion. At Y = $400 billion, the MPC is:
0.6.
The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment in the long run is:
classical economics.
Real investment spending for the past 35 years is more volatile than real personal consumption.
True
If autonomous consumption is greater than zero and the marginal propensity to consume is greater than zero, but less than one, the consumption function will first be above and then below the 45 degree line.
True
The consumption function shows the relationship between consumption and:
disposable income.
The consumption function will shift upward if real asset and money holdings:
increase, if people expect prices to increase, if interest rates decrease, and if taxes decrease.
If your disposable personal income increases from $33,000 to $41,000 and your consumption increases from $8,000 to $12,000, your marginal propensity to consume (MPC) is:
0.5.
The change in consumption divided by a change in disposable income is defined as:
the marginal propensity to consume.
The demand curve for investment in the economy as a function of interest rates is:
downward sloping.
If the marginal propensity to consume (MPC) is 0.60, what is the expenditure multiplier?
2.5.
When households' marginal propensity to consume (MPC) increases, the size of the spending multiplier:
also increases.
The Keynesian model shows that the economy has a natural tendency toward full employment.
False
In the aggregate expenditures model, if an economy operates below equilibrium GDP, there will be:
unplanned inventory depletion.
In the aggregate expenditures model, an increase in government spending causes a(n):
upward shift in the aggregate expenditures curve.
Superhighways, public housing facilities, and defense projects are all ways that the President can:
close a recessionary gap
In the aggregate expenditures model, if aggregate expenditures (AE) are less than GDP, then GDP decreases.
True
Within the framework of the aggregate expenditures model, what will happen if an economy is operating at a real GDP greater than full-employment real GDP?
An inflationary gap exists.
A shift in the investment demand curve can be caused by a change in the expectations of profits by businessmen.
True
If your disposable personal income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:
0.2.
Which one of the following will shift the investment demand curve leftward?
None of these.
In the Keynesian aggregate consumption-income graph, the vertical distance between the consumption function and the 45-degree line shows the:
amount of savings (or dissavings) at that level of disposable income.
A shift in the consumption function:
can be caused by a change in the price level.
Which of the following statements is true about Say's law?
It states that supply creates its own demand.
Autonomous consumption is consumption that:
is independent of the level of disposable income.
Which of the following would cause the investment demand curve to shift?
All of these.
Which of the following correctly describes the mechanics of the spending multiplier?
All of the above answers are correct.
Within the Keynesian aggregate expenditures model, if the economy is below equilibrium, then there will be:
an increase in real GDP.
If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier is:
5.
If the MPC = .80, and investment rises from $100 to $150, real GDP will increase by:
$250.
If real gross domestic product is $2,000 billion and aggregate demand is $2,500 billion, unplanned inventory depletion must be taking place.
True
Using the aggregate expenditure-output model, assume the aggregate expenditures (AE) line is above the 45-degree line at full-employment GDP. This vertical distance is called a(n):
inflationary gap.
The spending multiplier does not apply to investment spending by businesses.
False
A $2,000 decrease in investment will shift the aggregate expenditures curve down by:
exactly $2,000 and will decrease the equilibrium level of real GDP by more than $2,000.
"Lower marginal tax rates encourage people to work, save, and invest, resulting in more output and a larger tax base." This statement most closely reflects which of the following schools of economic thought?
Supply-side economics.
To combat a recession, Keynesian fiscal policy recommends:
an increase in government spending.
The Laffer curve is a graph of the relationship between tax rates and:
total tax revenues.
Contractionary fiscal policy is designed to combat demand-pull inflation and consists of a decrease in government spending and/or an increase in taxes.
True
If no fiscal policy changes are implemented to fight inflation, suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is 0.90, this increase in aggregate demand could be prevented by:
increasing taxes by $100 billion.
If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 5.
True
The balanced budget multiplier is always equal to 1.
True
When an economy is operating below its potential capacity, Keynesian economists argue that:
the government should cut taxes and/or increase spending in order to stimulate aggregate demand.
Supply-side economic policies are designed to shift the aggregate supply curve to the left, whereas Keynesian economic policies focus on shifting the aggregate demand curve to the right during recessions and to the left during economic expansions.
False
Supply-side fiscal policies were advocated by the Reagan administration.
True
If the marginal propensity to consume (MPC) is 0.75, the value of the spending multiplier is:
4.
Expansionary fiscal policy consists of:
increasing government spending.
Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:
decreasing government spending or increasing taxes.
In the____________range of the aggregate supply curve, expansionary fiscal policy causes aggregate ___________ to increase, which results in a higher price level and a higher equilibrium level of real GDP.
Intermediate, demand
According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:
0
Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?
Increased government spending.
Suppose the economy is in equilibrium at 9.5 trillion dollars of GDP per year and a price (CPI) level of 125 and the MPC is .80. If full employment GDP is at 10 trillion dollars, according to Keynesian economics, how much should government spending increase?
$100 billion
When an economy is operating below its potential capacity, Keynesian economists argue that:
the government should cut taxes and/or increase spending in order to stimulate aggregate demand.
If the MPC is .80, what is the value of the tax multiplier?
-4
The government is pursuing an expansionary policy if it:
increases its spending and/or reduces its tax revenues.
Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:
decreasing government spending or increasing taxes.
The marginal propensity to consume is:
the change in consumption divided by the change in income.
If the economy is experiencing unemployment, then the most appropriate government policy would be to:
shift the aggregate demand curve by using a tax cut coupled with more spending.
Expansionary fiscal policy consists of:
increasing government spending.
The presence of the automatic stabilizers means an increase in the budget deficit will be automatically experienced during an economic expansion whereas a budget surplus will be automatically experienced during a recession.
False
A balanced budget is present when:
government revenues equal government expenditures.
Automatic stabilizers are government programs that:
shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion.
The change in saving divided by the change in income is the:
marginal propensity to save.
If the marginal propensity to consume = 0.75, then:
the marginal propensity to save = 0.25.
If the marginal propensity to consume (MPC) is 0.75, the value of the spending multiplier is:
4.
Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:
decreasing government spending or increasing taxes.
According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:
0.
In the____________range of the aggregate supply curve, expansionary fiscal policy causes aggregate ___________ to increase, which results in a higher price level and a higher equilibrium level of real GDP.
Intermediate, demand
Expansionary fiscal policy consists of:
increasing government spending.
If the MPC is .80, what is the value of the tax multiplier?
-4
Which of the following would be an appropriate discretionary fiscal policy to use when the economy is in a recession?
Increased government spending.
The government is pursuing an expansionary policy if it:
increases its spending and/or reduces its tax revenues.
Suppose the economy is in equilibrium at 9.5 trillion dollars of GDP per year and a price (CPI) level of 125 and the MPC is .80. If full employment GDP is at 10 trillion dollars, according to Keynesian economics, how much should government spending increase?
$100 billion
When an economy is operating below its potential capacity, Keynesian economists argue that:
the government should cut taxes and/or increase spending in order to stimulate aggregate demand.
The Keynesian range of the aggregate supply curve applies when the economy is at or near full employment.
False
Which of the following will not shift the aggregate demand cure to the left?
Consumers become more optimistic about the future.
How will an increase in the world price of crude oil influence the economy of an oil-importing country such as the United States?
Aggregate supply will decrease, leading to a decrease in real GDP.
According to classical macroeconomic theory, if real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?
Real GDP will remain unchanged but the price level will rise.
_________ inflation can be explained by an _________ shift in the aggregate _________ curve.
Demand-pull, rightward, demand
According to classical theory, if the aggregate demand curve decreased and the economy experienced unemployment, then:
prices and wages would fall quickly to restore full employment.
Stagflation means a simultaneous decrease in the unemployment and inflation rates.
False
The classical approach to a downturn in the business cycle was for the government to do nothing.
True
The interest-rate effect is the impact on real GDP caused by the inverse relationship between the price level and the interest rate.
False
The classical economists believed there was no role for government to play in restoring full employment.
True
In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate demand curve to shift outwards, which of the following ismost likely to occur?
The price level and real GDP will both rise.
Which of the following could be expected to shift the aggregate demand curve?
All of these.

An increase in government spending.


Consumption spending decreases.


Net exports fall.

If aggregate demand increases in the intermediate range of the aggregate supply curve then the:
price level rises and real GDP rises.
When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:
interest-rate effect.
The aggregate demand curve is drawn downward-sloping, because increases in the price level cause decreases in:
total spending (real GDP).
In the aggregate demand/aggregate supply model, a country's full-employment real GDP is represented by:
aggregate supply.
As prices rise, people will buy fewer goods and services because:
the purchasing power of the fixed quantity of money has declined.
Which of the following correctly describes the aggregate supply curve?
A curve that shows the level of real GDP produced at different possible price levels.
A decrease in aggregate supply will cause the price level to:
rise and GDP to fall.
The aggregate demand curve:
shows the level of real GDP purchased in the economy at different possible price levels during a period of time.
In the upward-sloping segment of the aggregate supply curve,
firms are willing to pay higher wages to get more labor.
In the aggregate demand and supply model, the:
vertical axis measures the average price level.
The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the:
price level.
Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?
As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services.
Along the classical or vertical range of the aggregate supply curve, an increase in the aggregate demand curve will increase:
only the price level.
Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:
both real GDP and the price level will fall.
In the intermediate range of the aggregate supply curve, higher aggregate demand will increase:
both the price level and real GDP.
An increase in input prices will cause the aggregate supply curve to shift rightward.
False
According to the net exports effect, as the price level falls relative to the rest of the world,
foreigners buy more U.S. goods.
The aggregate demand curve is drawn downward-sloping, because increases in the price level cause decreases in:
total spending (real GDP).
Which of the following will increase aggregate demand in the United States?
An increase in wealth due to a substantial appreciation in the value of stocks.
The aggregate demand curve indicates the relationship between:
the general price level and the aggregate quantity of goods and services demanded.
The aggregate demand curve shifts due to changes in consumption expenditures, investment expenditures government spending, and net exports.
True
Which of the following are inherent in classical theory?
Flexible prices. Flexible wages. Long-run full employment.

ALL OF THESE
The aggregate demand curve is downward sloping because:
at lower price levels, exports increase, causing an increase in real GDP.
As prices rise, people will buy fewer goods and services because:
the purchasing power of the fixed quantity of money has declined.
Which definition of the money supply includes credit cards?
None of these includes credit card balances.
The members of the Federal Reserve Board of Governors serve:
14-year terms.
Comparing how many dollars it takes to attend college each year to annual earnings on a job represents the use of money as a:
unit of account.
Which of the following is counted as part of M2?
Currency. Checkable deposits. Money-market mutual funds.

ALL OF THESE
The Federal Reserve System was founded in:
1913.
The M1 definition of the money supply includes:
coins and currency in circulation and checkable deposits.
Which of the following assets is most liquid?
Funds in a checking account.
In the United States, the money supply (M1) consists of:
coins, paper currency, checkable deposits, and traveler's checks.
The government agency that provides insurance for all checkable deposits up to $100,000 in banks choosing its protection is the:
Federal Deposit Insurance Corporation.
Which of the following is the most important protection against fears of bank collapse?
The Federal Deposit Insurance Corporation.
A direct exchange of fish for corn is an example of:
barter.
An economy using money is more efficient that a barter economy because the use of money reduces the time spent searching for trading partners with a coincidence of wants and therefore more time can be spent producing goods and services.
True
Compared to a barter economy, using money increases efficiency by reducing:
transaction costs.
If something is a unit of account, then it:
serves as a yardstick for measuring the relative value of other goods
The major protection against sudden mass attempt to withdraw cash from banks is the:
deposit insurance provided by the FDIC.
M1 money includes all but which one of the following?
Savings accounts.
Which of the following provides the best explanation of why money is valuable?
Money is valuable because it is scarce.
Which of the following is not a store of value?
Credit card.
The Federal Reserve System was created by an act of Congress in 1933 in an effort to end a wave of bank failures brought on the Great Depression.
False
Members of the Federal Reserve Board of Governors serve one nonrenewable term of:
14 years.
In order for a bank to earn as much profit as possible, its excess reserves should be:
as small as possible.
Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum money supply that can be supported is:
$333.3 million.
An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.
True
Which of the following appears on the asset side of a bank's balance sheet?
Required reserve deposits. Loans. Excess reserves.

ALL OF THESE

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?
It purchases U.S. government securities.
If there is no one who is interested in borrowing from a bank:
there will be no process of money creation.
Which of the following would appear on the asset side of a commercial bank balance sheet?
Loans.
When the Fed raises the required reserve ratio, then the:
ability of banks to make loans is restricted.
Which of the following would cause the money supply in the United States to expand?
A decrease in reserve requirements.
Which of the following policy actions by the Fed would cause the money supply to increase?
A decrease in the discount rate.
Which of the following is in charge of the buying and selling of government securities by the Fed?
The Federal Open Market Committee.
A lowering of the required reserve ratio might not expand the money supply if:
borrowers are unwilling to borrow the new funds the banks have available for loans.
Which of the following directs open market operations?
Federal Open Market Committee
If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new checkable deposit, the:
Paris First National Bank will not get $800 in new reserves.
Banks would be expected to minimize holding excess reserves because this practice is:
not profitable.
Which of the following is a valid statement?
All of these.
When the Fed wishes to reduce the economy's money supply, it:
sells some of its government securities.
The percentage of the national debt held by foreigners is approximately 25 percent.
False
The sum of past federal deficits is reflected in the federal:
national debt.
Which of the following is false?
All of the above are false.
Currently, how much of the U.S. national debt is owed to foreigners?
About 30 percent.
Compared to most other industrialized countries shown in the text, the national debt as a percentage of GDP in the United States is:
slightly larger.
Which of the following is true?
The current U.S. national debt is over $16.0 trillion.
When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of:
World War II.
Which of the following statements is true?
Deficits are financed by the government issuing for sale more government securities.
Which of the following countries has the largest national debt as a percentage of GDP?
Japan
One concern over external national debt is that interest and principal payments transfer wealth overseas. The percentage of the national debt held in recent years by foreigners is approximately:
30 percent.
Currently, the U.S. national debt is more than $20 trillion.
False
The federal government never has to pay off the national debt.
True
Which of the following statements is true?
U.S. national debt is 12 times its size in 1980.
The U.S. Treasury is responsible for preparing and submitting the initial budget recommendation to the president.
False
Currently, the national debt is approximately:
80 percent of GDP.
As the investment demand curve becomes steeper, the crowding-out effect will become smaller.
True
The national debt is unlikely to cause national bankruptcy because the federal government can:
raise taxes. print money. refinance its debt.

ALL OF THESE

External debt refers to the portion of the national debt owned by private individuals and internal debt refers to that part owned by the public sector.
False
If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?
It will make fiscal policy less potent.
The United States has a much higher national debt as a percentage of GDP compared to other industrialized nations.
False
An increase in a budget deficit financed by borrowing can increase interest rates and reduce investment spending thereby creating lower rates of economic growth.
True
Which of the following statements about crowding out istrue?
It can completely offset the multiplier.

It is caused by a budget deficit.


It is not caused by a budget surplus.


ALL OF THESE ARE TRUE.
How does the national debt as a percentage of GDP in the United States compared to the United Kingdom?
U.S. national debt ratio is slightly larger.
The national debt as a percentage of GDP has remained roughly constant since the end of World War II.
False
Critics of Keynesian fiscal policy argue that deficit spending will not stimulate the economy, because higher interest rates will discourage consumption and investment. This argument is known as the:
crowding-out effect.
The national debt is unlikely to cause national bankruptcy because the:
national debt can be refinanced by issuing new bonds.
Since the U.S. government can continue to issue new Treasury bonds, bills, and notes as old ones mature, we do not necessarily have to worry about suddenly have to pay back all of the national debt.
True
In recent years, the national debt was about 120 percent of the U.S. GDP.
False
Which of the following statements about crowding out isfalse?
It affects interest rates and not economic growth.
The sum of past federal budget deficits is the:
national debt.
Which of the following is false?
All of the above are false.
When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of:
World War II.
The way to prevent the national debt from growing is for the budget not to be in deficit.
True
An increase in fiscal deficit spending financed by borrowing will not affect the national debt but decrease interest rates.
False
The federal government never has to pay off the national debt.
True
Each year, the president must submit a budget proposal to Congress by:
January
External debt refers to the portion of the national debt owned by private individuals and internal debt refers to that part owned by the public sector.
False
One concern over external national debt is that interest and principal payments transfer wealth overseas. The percentage of the national debt held in recent years by foreigners is approximately:
30 percent.
Which of the following is true?
A budget deficit will increase the national debt.
Less of the federal debt is owned by federal, state, and local governments than is owned by foreigners.
False