ECON 2301 Exam 3 – Flashcards
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1. Whom among the following was a classical economist? A. Adam Smith B. C. Pigou C. David Ricardo D. all of the above
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D. all of the above
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2. Classical economists assumed that A) prices were sticky. B) individuals suffered from money illusion. C) wages were inflexible. D) none of the above.
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D) none of the above.
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3. "Supply creates its own demand" is known as A) Smith's law. B) Say's law. C) the circular flow. D) the Ricardian dilemma.
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B) Say's law.
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4. If a consumer buys less gasoline because gas prices increased by 10 percent, even though all other prices have also increased by 10 percent, then A) the consumer is paying too close attention to changes in relative prices. B) wages and prices are too flexible. C) the consumer has been fooled by money illusion. D) inflation is not a problem in the economy.
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C) the consumer has been fooled by money illusion.
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5. Which of the following is an example of money illusion? A) An individual is willing to work more hours when the nominal wage rises by 5 percent and the overall price level rises by 4 percent. B) An individual is willing to work more hours when the nominal wage rises by 5% and the overall price level rises by 7 percent. C) An individual will neither increase nor decrease the number of hours she is willing to work when the nominal wage rises by 5 percent and the overall price level rises by 5 percent. D) none of the above.
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B) An individual is willing to work more hours when the nominal wage rises by 5% and the overall price level rises by 7 percent.
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6. According to the circular flow of income and output, saving causes A) total output to fall. B) consumption expenditures and total output to fall. C) consumption expenditures to fall short of total output. D) investment spending to fall.
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C) consumption expenditures to fall short of total output.
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7. A congressman states, "If a government attempts to increase employment through increased government spending, all we will end up with is a higher price level." This congressman assumes that the A) aggregate demand curve is a horizontal line. B) aggregate demand curve is a vertical line. C) aggregate supply curve is a horizontal line. D) aggregate supply curve is a vertical line.
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D) aggregate supply curve is a vertical line.
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8. Q: How many economists does it take to screw in a light bulb? A: None. If the light bulb really needed changing, market forces would have already caused it to happen. This joke represents the view of A) classical economists. B) Keynesian economists. C) economists who conclude that money illusion is widespread. D) economists who conclude that wages and prices are inflexible.
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A) classical economists.
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9. The Keynesian model is basically A) a long-run theory. B) a short-run theory. C) a combination of long- and short-run theories. D) a theory about the economy in both the long run and the short run.
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B) a short-run theory.
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10. A decrease in aggregate demand will cause A) prices to fall according to classical economists, and unemployment to increase according to Keynes. B) prices to fall and unemployment to increase according to both classical economists and Keynes. C) aggregate supply to fall according to classical economists, and prices to fall according to Keynes. D) aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists.
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A) prices to fall according to classical economists, and unemployment to increase according to Keynes.
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11. The Keynesian short-run aggregate supply (SRAS) curve is A) upward sloping. B) vertical. C) horizontal. D) downward sloping.
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C) horizontal.
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12. The above figure presents the view of the economy according to A) Keynesian economics. B) classical economics. C) microanalysis. D) Ricardian economics.
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A) Keynesian economics.
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13. Refer to the above figure. Suppose the current aggregate demand is represented by AD2. If aggregate demand falls to line AD3, then A) the new equilibrium will be at j. B) the new equilibrium will be at k. C) the new equilibrium real Gross Domestic Product (GDP) will be x. D) a new price level will be established at a.
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C) the new equilibrium real Gross Domestic Product (GDP) will be x.
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14. Keynes and his followers believed that A) capitalism was one economic system that guaranteed full employment. B) wages and prices in the short run were flexible. C) the economy could not operate at any level of real Gross Domestic Product (GDP) less than full capacity. D) there was no guarantee that a capitalist economy would reach a full employment equilibrium.
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D) there was no guarantee that a capitalist economy would reach a full employment equilibrium.
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15. A major hurricane causes production problems in Gulf Coast region of the United States. This would cause A) the short-run aggregate supply curve to shift to the left, but there would be no effect on the long-run aggregate supply curve. B) the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right. C) both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts. D) both the short-run and the long-run aggregate supply curves to shift to the left, but the long-run aggregate supply curve would shift more than the short-run curve.
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A) the short-run aggregate supply curve to shift to the left, but there would be no effect on the long-run aggregate supply curve.
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16. In the Keynesian model, an aggregate demand shock A) will cause the aggregate demand curve to shift, leading to a change in the price level and real GDP. B) will cause the aggregate demand curve to shift, leading to a change in the price level but not real GDP. C) will cause the aggregate demand curve to shift, leading to a change in real GDP but not the price level. D) will not lead to a shift of the aggregate demand curve.
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A) will cause the aggregate demand curve to shift, leading to a change in the price level and real GDP.
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17. Suppose we observe the price level increasing and real GDP decreasing. An explanation for this is that A) the dollar weakened and the effect on aggregate supply was less than the effect on aggregate demand. B) the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand. C) the dollar strengthened and the effect on aggregate supply was less than the effect on aggregate demand. D) the dollar strengthened and the effect on aggregate supply was greater than the effect on aggregate demand.
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B) the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand.
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18. Equilibrium real GDP rises after the dollar strengthened. From this, we can conclude that A) the increase in aggregate demand was greater than the decrease in aggregate supply. B) the decrease in aggregate demand was less than the increase in aggregate supply. C) the decrease in aggregate demand was more than the increase in aggregate supply. D) the increase in aggregate demand was less than the decrease in aggregate supply.
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B) the decrease in aggregate demand was less than the increase in aggregate supply.
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19. In the original Austin Powers, Dr. Evil is cryogenically frozen for thirty years (from the late 1960s to the late 1990s). Upon his return he hatches a plan to extort one million dollars from various world governments. His henchmen are unimpressed. What type(s) of inflation have made Dr. Evil's proposed blackmail amount seem too small? A) cost-push inflation B) demand-pull inflation C) both cost-price and price-pull inflation D) both cost-push and demand-pull inflation
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D) both cost-push and demand-pull inflation
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20. The exchange rate last month was $1 = 1.15 euros. This month it is $1 = 1.35 euros. We can say that the value of the dollar A) fell; causing net exports to increase and aggregate demand to rise. B) fell; causing net exports to decrease and aggregate demand to fall. C) increased; causing net exports to decrease and aggregate demand to fall. D) increased; causing net exports to decrease and aggregate demand to rise.
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C) increased; causing net exports to decrease and aggregate demand to fall.
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1. Which of the following represents the relationship between disposable income (DI), consumption (C), and saving (S)? A) DI + C = S B) DI = C + S C) DI = C * S D) DI = C - S
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B) DI = C + S
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2. When you purchase Gap clothing and baseball tickets A) you are buying consumption goods. B) you are buying capital goods. C) you are consuming intermediate goods. D) you are buying physical capital.
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A) you are buying consumption goods.
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3. The income-expenditure model of real GDP determination is due to the work of A) Adam Smith. B) J. B. Say. C) John Maynard Keynes. D) Roger Miller.
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C) John Maynard Keynes.
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4. Which of the following is considered investment? A) Maina purchases a new car for commuting to and from work. B) Jane purchases a new car for commuting to and from school. C) Johnny buys a new car for his wife as an anniversary gift. D) James purchases a new car to replace an old car in his cab business.
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D) James purchases a new car to replace an old car in his cab business.
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5. Investment is A) a flow concept and is made up of fixed investment and inventory investment. B) a flow concept and is made up of fixed investment. C) a stock concept and is made up of fixed investment and inventory investment. D) a stock concept and is made up of fixed investment.
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A) a flow concept and is made up of fixed investment and inventory investment.
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6. Nonconsumable goods that firms use to make other goods are A) consumption goods. B) capital goods. C) dissaving. D) the MPC.
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B) capital goods.
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7. How is investment defined as an economic concept? A) Investment is primarily the market value of all shares of stock held by the public. B) Investment is primarily the market value of all equipment, buildings, and inventories held by corporations, partnerships, and proprietorships. C) Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income. D) Investment is primarily the portion of your savings held in an interest-earning account.
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C) Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income.
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8. According to the above table, if real Gross Domestic Product (GDP) is $30,000, planned saving equals A) $2,000. B) $3,000. C) $4,000. D) $5,000.
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C) $4,000.
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9. According to the above table, the marginal propensity to consume is A) 0.6. B) 0.5. C) 0.75. D) 0.8.
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D) 0.8.
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10. According to the above table, if real Gross Domestic Product (GDP) equals $30,000, what is the average propensity to consume? A) 0.67 B) 0.75 C) 0.8 D) 0.87
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D) 0.87
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11. The break-even point on the consumption function represents the point where A) consumption equals spending. B) income equals consumption plus spending. C) consumption is zero. D) consumption equals income.
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D) consumption equals income.
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12. Which of the following statements is true? A) APC + APS = 1 B) APC + APS < 1 C) APC + MPS = 1 D) APC + APS + MPC + MPS = 1
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A) APC + APS = 1
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13. In the above figure, point E represents the level of real GDP at which planned saving equals planned investment. At point A, A) unplanned inventories increase. B) changes in inventories cannot be determined. C) unused industrial capacity exists in the economy. D) unplanned inventories decrease.
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D) unplanned inventories decrease.
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14. When the economy is operating at the equilibrium level of GDP, we know that A) total planned real consumption expenditures equal real GDP. B) planned real investment spending equals real net exports of zero. C) total planned real expenditures equal real GDP. D) real net exports equal inventory changes.
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C) total planned real expenditures equal real GDP.
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15. Refer to the above figure. The equilibrium level of real GDP occurs A) at point A. B) to the right of point A. C) to the left of point A. D) at the undetermined point on the graph depending upon the level of investment.
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A) at point A.
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16. Refer to the above table. The equilibrium real GDP is A) $12 trillion. B) $13 trillion. C) $14 trillion. D) $15 trillion.
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C) $14 trillion.
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17. Refer to the above table. If real GDP is $12 trillion, total planned expenditures and unplanned inventory changes are respectively A) $14 trillion and 0. B) $13.2 trillion and -$0.8 trillion. C) $12.4 trillion and -$0.4 trillion. D) $12.4 trillion and $0.4 trillion.
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C) $12.4 trillion and -$0.4 trillion.
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18. Refer to the above table. When real GDP equals $16 trillion, A) government expenditures will increase. B) the economy is in equilibrium. C) unplanned inventories will increase. D) unplanned inventories will decrease.
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C) unplanned inventories will increase.
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19. The size of the multiplier depends on A) the level of autonomous investment. B) the marginal propensity to consume. C) the level of net exports. D) the level of autonomous consumption.
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B) the marginal propensity to consume.
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20. Suppose government spending decreases by $100 billion and the marginal propensity to consume (MPC) is 0.8. Given this information, this decrease in government spending will cause a(n) A) increase in equilibrium real GDP equal to $500 billion. B) increase in equilibrium real GDP equal to $800 billion. C) decrease in equilibrium real GDP equal to $500 billion. D) decrease in equilibrium real GDP equal to $800 billion.
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C) decrease in equilibrium real GDP equal to $500 billion.
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1. When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising A) monetary policy. B) discretionary fiscal policy. C) a Ricardian policy. D) a laissez-faire policy.
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B) discretionary fiscal policy.
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2. Which of the following would shift the aggregate demand curve to the right? A) An increase in government spending B) An increase in taxes C) An increase in interest rates D) An increase in input prices
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A) An increase in government spending
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3. Fiscal policy is defined as A) the design of a tax system to transfer income from the rich to the poor. B) the use of Congressional power to pursue social and political goals. C) the discretionary changing of government expenditures and/or taxes to achieve national economic goals. D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner.
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C) the discretionary changing of government expenditures and/or taxes to achieve national economic goals.
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4. Refer to the above figure. If the economy is currently operating at point C, then there is A) a stable long-run equilibrium situation. B) a recessionary gap. C) an inflationary gap. D) unemployment.
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C) an inflationary gap.
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5. Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States? A) Reduce taxes to stimulate investment, consumption and net exports. B) Increase government spending while holding taxes constant. C) Engage in contractionary fiscal policy by reducing government spending. D) Reduce the interest rate to stimulate investment minimizing the crowding out effect.
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C) Engage in contractionary fiscal policy by reducing government spending.
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6. Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap? A) Increase government spending. B) Decrease interest rates. C) Increase the money supply. D) all of the above
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A) Increase government spending.
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7. Fiscal policy may end up being destabilizing to an economy because A) there is never a long enough time lag. B) the economy is almost always at full employment. C) the President may have different goals than Congress. D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.
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D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.
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8. The concept that increased government spending will lead to lower investment and consumer spending is referred to as the A) inflationary effect. B) crowding-out effect. C) aggregate demand effect. D) Keynesian effect.
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B) crowding-out effect.
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9. Supply-side economics focuses on tax cuts to stimulate A) aggregate demand by reducing saving. B) aggregate supply by increasing production. C) government spending. D) military research.
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B) aggregate supply by increasing production.
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10. If the government increases spending but does not raise taxes, A) aggregate demand will increase without any effect on the price level. B) borrowing by the government will take place. C) the government will have to sell some assets, such as oil and national parks. D) the government will have to either lower expenditures or raise taxes the next year.
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B) borrowing by the government will take place.
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11. Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to , but the increase in spending only shifts the aggregate demand curve to , then A) complete crowding out has occurred. B) some crowding out has occurred. C) the increased borrowing caused interest rates to fall. D) the short-run aggregate supply curve is steeper than the figure indicates.
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B) some crowding out has occurred.
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12. Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to . In the end, the aggregate demand curve is still . A possible reason for this is that A) the economy is already at full employment. B) the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving. C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending. D) some of the increased government spending is not counted in GDP.
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C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
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13. Expansionary fiscal policy falls short of its goal. Some economists claim it is due to indirect crowding out. What evidence would be consistent with this claim? A) An increase in consumer spending occurred. B) The interest rate increased. C) Saving decreased. D) The price level decreased.
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B) The interest rate increased.
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14. Supply-side economists argue that decreasing marginal tax rates A) increases productivity and shifts the AS curve to the right. B) increases productivity and shifts the AS curve to the left. C) increases productivity and shifts the AD curve to the left. D) due to the Ricardian equivalence, has no impact on the economy.
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A) increases productivity and shifts the AS curve to the right.
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15. The notion that a decline in tax rates and other incentives will spur individuals and firms to increase productivity is typically referred to as A) demand-side economics. B) Ricardian equivalence. C) supply-side economics. D) Keynesian economics.
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C) supply-side economics.
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16. If the federal government borrows from the private sector to pay for increased budget deficits and interest rates increase, this will cause A) a decrease in planned investment and planned consumption. B) an increase in planned investment and planned consumption. C) a decrease in planned investment and an increase in planned consumption. D) an increase in planned investment and a decrease in planned consumption.
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A) a decrease in planned investment and planned consumption.
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17. In the traditional Keynesian model, if the government increases government spending, A) the C + I + G + X line will shift down but the aggregate demand curve will not shift. B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. D) the C + I + G + X line will shift up but the aggregate demand curve will not shift.
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C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right.
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18. If the price level is fixed, then an increase in government spending will lead to A) a larger increase in nominal GDP than in real GDP. B) a smaller increase in nominal GDP than in real GDP. C) no increase in either nominal GDP or real GDP. D) an increase in nominal GDP by the same amount as an increase in real GDP.
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D) an increase in nominal GDP by the same amount as an increase in real GDP.
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19. The traditional Keynesian approach concludes that an increase in government spending A) generates a greater increase in investment spending. B) generates an equal increase in total spending because government spending makes up part of total spending. C) generates a greater increase in total spending because consumption spending increases as incomes increase. D) has no effect on total spending because consumers increase saving by an equal amount.
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C) generates a greater increase in total spending because consumption spending increases as incomes increase.
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20. According the traditional Keynesian approach, an increase in government spending is effective in lowering unemployment if A) the price level is fixed. B) the price level is flexible. C) the price level does not exist. D) Ricardian equivalence occurs, regardless of the price level.
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A) the price level is fixed.
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1. In the current year, a nation's government spending equals $1.5 trillion and its revenues are $1.9 trillion. Which of the following is true? A) The nation's national debt equals $0.4 trillion. B) This nation has a current year budget surplus of $0.4 trillion. C) This nation is currently running a budget deficit of $0.4 trillion. D) The nation has a current year trade surplus of $0.4 trillion.
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B) This nation has a current year budget surplus of $0.4 trillion.
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2. Public debt is held as A) corporate bonds and common stocks of the largest companies. B) Federal Reserve Notes. C) U.S. Notes. D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.
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D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.
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3. Which of the following is true when a budget deficit exists? A) Government expenditures exceed tax revenues. B) Tax revenues exceed government expenditures. C) A trade surplus exists. D) Dissaving exists.
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A) Government expenditures exceed tax revenues.
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4. If the government has no debt initially, but then has annual revenues of $10 billion per year for 4 years and annual expenditures of $10.5 billion per year for 4 years, then the government has A) a budget surplus of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. B) a budget deficit of $0.5 billion per year and a budget surplus of $2 billion at the end of the 4 years. C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. D) a budget surplus of $0.5 billion per year and a surplus of $2 billion at the end of the 4 years.
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C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.
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5. What is true about government budget deficits and surpluses since 1940? A) Balanced budgets have been more common than government budget deficits or government budget surpluses. B) There have been more government budget surpluses than government budget deficits. C) There have been more government budget deficits than government budget surpluses. D) The number of government budget deficits is about the same as the number of government budget surpluses.
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C) There have been more government budget deficits than government budget surpluses.
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6. Between the years 1998 and 2001, the U.S. government experienced A) budget surpluses. B) balanced budgets. C) budget deficits. D) contractionary budget cycles.
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A) budget surpluses.
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7. When the Social Security Administration holds U.S. Treasury Bonds A) interagency borrowing has occurred and the government owes itself. B) there is a balanced budget. C) an entitlement has occurred. D) the gross public debt has increased.
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A) interagency borrowing has occurred and the government owes itself.
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8. Media reports often suggest that the increasing public debt is a burden on future generations. What they mean is that A) it reduces the current level of investment. B) it makes predicting future unemployment levels unpredictable. C) it causes deflation. D) it reduces both nominal and real interest rates.
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A) it reduces the current level of investment.
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9. Are federal budget deficits related to trade deficits? A) Yes. If U.S. consumers buy too many imported goods, they do not have funds to save, and a budget deficit results. B) No. The budget deficit is entirely a domestic matter, while the trade deficit only affects U.S. citizens who travel abroad. C) Yes. Higher deficit spending goes up results in more government borrowing, and foreign residents who lend funds to the U.S. government have fewer resources to spend U.S. export goods. D) Yes, but only if the quality of U.S. goods and services is deteriorating.
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C) Yes. Higher deficit spending goes up results in more government borrowing, and foreign residents who lend funds to the U.S. government have fewer resources to spend U.S. export goods.
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10. What is the short-run effect of increased deficit spending on an economy experiencing a recessionary gap? A) Aggregate demand increases, and the gap closes. B) Aggregate supply increases, closing the gap. C) Aggregate demand decreases, and the gap widens. D) Aggregate demand will increase, creating an inflationary gap.
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A) Aggregate demand increases, and the gap closes.
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11. The largest component of U.S. federal spending that contributes to the U.S. government budget deficit is A) entitlements. B) military spending. C) interest expenses. D) salaries of government employees.
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A) entitlements.
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12. What is the difference between the short run and the long run when there is full employment and the government engages in deficit spending? A) Real GDP will increase in both the short run and the long run. B) Real GDP will increase in the long run but not the short run. C) Real GDP will increase in the short run but not the long run. D) Real GDP will not increase in either the long run or the short run.
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C) Real GDP will increase in the short run but not the long run.
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13. Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the budget deficit will cause which of the following in the short run? A) a reduction in the size of the recessionary gap and increase in real GDP. B) an increase in the size of the recessionary gap and decrease in real GDP. C) an increase in inflation and increase in aggregate supply. D) an inflationary gap.
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B) an increase in the size of the recessionary gap and decrease in real GDP.
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14. Guaranteed benefits under government programs such as Social Security or Medicare are called A) discretionary spending. B) controllable expenditures. C) entitlements. D) automatic stabilizers.
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C) entitlements.
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15. The fastest growing component of the annual federal budgets since 2000 is A) the education budget. B) entitlement payments. C) funding for health research. D) funding for NASA.
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B) entitlement payments.
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16. In the short run, a fiscal policy action that results in a reduction in the size of the budget deficit will cause A) an increase in real GDP with stable prices if the economy was below full employment. B) a reduction in real GDP with falling prices if the economy was below or at full employment. C) an inflationary gap if the economy was initially operating at full employment. D) an inflationary gap if the economy was initially operating below full employment.
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B) a reduction in real GDP with falling prices if the economy was below or at full employment.
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17. According to the text, approximately what percentage of U.S. net public debt is held by foreign residents? A) 20% B) 50% C) 800% D) 90%
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B) 50%
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18. Which of the following statements is correct? A) Since the mid-1940s, expenditures on national defense have increased considerably as a percentage of total federal government spending. B) Since the mid-1940s, expenditures on income security and health programs have increased considerably as a percentage of total federal government spending. C) Taken together, expenditures on national defense and on income security and health programs now account for less than half of all federal government spending. D) Expenditures on national defense now account for more than twice as much federal government spending as expenditures on income security and health programs.
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B) Since the mid-1940s, expenditures on income security and health programs have increased considerably as a percentage of total federal government spending.
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19. By approximately how much would the federal government have to raise each worker's annual taxes to eliminate the current federal budget deficit? A) Between $50 and $100 per year B) Between $500 and $1,000 per year C) Between $1,500 and $2,500 per year D) Between $5,000 and $7,000 per year
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D) Between $5,000 and $7,000 per year
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20. How does the federal government finance a budget deficit? A) It redeems its IOUs. B) It purchases U.S. Treasury bonds. C) It cuts spending on entitlement programs. D) It borrows funds by selling Treasury bonds.
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D) It borrows funds by selling Treasury bonds.
