Question 1

One potential problem with using fiscal policy to close recessionary output gaps is that:

Accepted Answer

A)  sustained government deficits can be harmful to long-run economic growth.
B)  decreased government spending can cause inflationary pressure to build.
C)  reductions in interest rates can reduce savings and,therefore,investment.
D)  it may be offset by automatic stabilizers.E) A) and D)
F) A) and C)

Question 2

An economic recession in the U.S.______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada.

Accepted Answer

A)  reduces;expansionary
B)  increases;expansionary
C)  reduces;recessionary
D)  increases;recessionaryE) None of the above
F) All of the above

Question 3

Government policies that are used to affect planned aggregate expenditure,with the objective of eliminating output gaps,are called ______ policies.

Accepted Answer

A)  structural
B)  cyclical
C)  productivity
D)  stabilizationE) A) and D)
F) All of the above

Question 4

The expenditure line in the Keynesian cross diagram represents the:

Accepted Answer

A)  equilibrium condition that Y = PAE.
B)  relationship between planned expenditure and output.
C)  relationship between consumption and after-tax disposable income.
D)  equilibrium condition that Y = Y*.E) None of the above
F) A) and C)

Question 5

If short-run equilibrium output equals 10,000,the income-expenditure multiplier equals 5,the mpc equals 0.8,and potential output (Y*) equals 9,000,then taxes must be ______ by approximately ______ to eliminate any output gap.

Accepted Answer

A)  decreased;250
B)  decreased;200
C)  increased;250
D)  increased;200E) A) and D)
F) A) and C)

Question 6

Firms do not change prices frequently because:

Accepted Answer

A)  there are legal prohibitions against doing so.
B)  it is easier to change the quantity of capital used in production.
C)  it is costly to do so.
D)  customers will refuse to patronize firms that change prices frequently.E) A) and D)
F) All of the above

Question 7

In Macroland autonomous consumption equals 100,the marginal propensity to consume equals 0.75,net taxes are fixed at 40,planned investment is fixed at 50,government purchases are fixed at 150,and net exports are fixed at 20.The vertical intercept of the Expenditure Line is:

Accepted Answer

A)  0.25.
B)  0.75.
C)  290.
D)  320.E) A) and B)
F) B) and C)

Question 8

Suppose the stock market crashed,wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends,consumption spending might fall by as much as,but probably not more than,______.

Accepted Answer

A)  $35 billion
B)  $200 billion
C)  $350 billion
D)  $2 trillionE) All of the above
F) A) and C)

Question 9

All of the following would be included in planned aggregate expenditure EXCEPT:

Accepted Answer

A)  purchases of services provided by government employees.
B)  planned changes in inventories.
C)  sales of domestically produced goods to foreigners.
D)  social security payments.E) B) and C)
F) A) and D)

Question 10

In the Keynesian model,a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.

Accepted Answer

A)  a $5 billion increase
B)  a greater than $5 billion decrease
C)  no change
D)  a $5 billion decreaseE) None of the above
F) All of the above

Question 11

A decrease in stock prices alters the consumption function by:

Accepted Answer

A)  increasing the mpc.
B)  decreasing the mpc.
C)  increasing the constant term.
D)  decreasing the constant term.E) A) and B)
F) B) and C)

Question 12

The largest component of planned aggregate expenditure is:

Accepted Answer

A)  consumption.
B)  investment.
C)  government purchases.
D)  exports.E) A) and B)
F) A) and C)

Question 13

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

Accepted Answer

A)  the direct changes in spending change the income of producers which leads to additional changes in spending.
B)  multiple deposits are generated when new reserves are produced through fractional reserve banking.
C)  autonomous spending supports more output than induced spending.
D)  planned changes in inventories signal producers to adjust the level of output.E) B) and D)
F) C) and D)

Question 14

If consumption increases by $9 when after-tax disposable income increases by $10,the marginal propensity to consume (mpc) equals:

Accepted Answer

A)  0.1.
B)  0.9.
C)  1.0.
D)  9.0.E) None of the above
F) C) and D)

Question 15

In response to the 2007-2009 recession,the Economic Stimulus Act of 2008,under President Bush,was composed of approximately _____;the American Recovery and Reinvestment Act,under President Obama,was composed of approximately ______.

Accepted Answer

A)  one-fourth tax cuts and three-fourths spending increases;two-thirds tax cuts and one-third spending increases
B)  half tax cuts and half spending increases;only spending increases
C)  two-thirds tax cuts and one-third spending increases;one-fourth tax cuts and three-fourths spending increases
D)  only tax cuts;half tax cuts and half spending increasesE) B) and C)
F) A) and D)

Question 16

An economic expansion in the U.S.______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico.

Accepted Answer

A)  reduces;expansionary
B)  increases;expansionary
C)  reduces;recessionary
D)  increases;recessionaryE) All of the above
F) A) and C)

Question 17

In the short run with predetermined prices,when output is greater than planned aggregate expenditure,firms will:

Accepted Answer

A)  reduce production.
B)  increase production.
C)  increase planned aggregate expenditure.
D)  decrease planned aggregate expenditure.E) All of the above
F) A) and D)

Question 18

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000,then this economy has a(n) ______ gap that can be closed by _________.

Accepted Answer

A)  expansionary;decreasing taxes
B)  expansionary;increasing transfer payments
C)  expansionary;decreasing government purchases
D)  recessionary;increasing government purchasesE) All of the above
F) A) and C)

Question 19

The vertical intercept of the consumption function equals ______ and the slope equals _____.

Accepted Answer

A)  the mpc;autonomous consumption
B)  autonomous consumption;the mpc
C)  the unplanned component of consumption;the planned component of consumption
D)  the planned component of consumption;the unplanned component of consumptionE) B) and D)
F) A) and B)

Question 20

The portion of planned aggregate expenditure that is independent of output is called ______ expenditure.

Accepted Answer

A)  potential
B)  planned
C)  actual
D)  autonomousE) All of the above
F) B) and C)

Exam 22: Spending, Output, and Fiscal Policy

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

Correct AnswerverifiedShow Answer

The vertical intercept of the consumption function equals ______ and the slope equals _____.

Correct AnswerverifiedShow Answer

If consumption increases by $9 when after-tax disposable income increases by $10,the marginal propensity to consume (mpc) equals:

Correct AnswerverifiedShow Answer

The expenditure line in the Keynesian cross diagram represents the:

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All of the following would be included in planned aggregate expenditure EXCEPT:

Correct AnswerverifiedShow Answer

One potential problem with using fiscal policy to close recessionary output gaps is that:

Correct AnswerverifiedShow Answer

In the short run with predetermined prices,when output is greater than planned aggregate expenditure,firms will:

Correct AnswerverifiedShow Answer

A decrease in stock prices alters the consumption function by:

Correct AnswerverifiedShow Answer

Government policies that are used to affect planned aggregate expenditure,with the objective of eliminating output gaps,are called ______ policies.

Correct AnswerverifiedShow Answer

Firms do not change prices frequently because:

Correct AnswerverifiedShow Answer

Suppose the stock market crashed,wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends,consumption spending might fall by as much as,but probably not more than,______.

Correct AnswerverifiedShow Answer

An economic expansion in the U.S.______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico.

Correct AnswerverifiedShow Answer

In Macroland autonomous consumption equals 100,the marginal propensity to consume equals 0.75,net taxes are fixed at 40,planned investment is fixed at 50,government purchases are fixed at 150,and net exports are fixed at 20.The vertical intercept of the Expenditure Line is:

Correct AnswerverifiedShow Answer

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000,then this economy has a(n) ______ gap that can be closed by _________.

Correct AnswerverifiedShow Answer

If short-run equilibrium output equals 10,000,the income-expenditure multiplier equals 5,the mpc equals 0.8,and potential output (Y*) equals 9,000,then taxes must be ______ by approximately ______ to eliminate any output gap.

Correct AnswerverifiedShow Answer

In response to the 2007-2009 recession,the Economic Stimulus Act of 2008,under President Bush,was composed of approximately _____;the American Recovery and Reinvestment Act,under President Obama,was composed of approximately ______.

Correct AnswerverifiedShow Answer

The largest component of planned aggregate expenditure is:

Correct AnswerverifiedShow Answer

An economic recession in the U.S.______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada.

Correct AnswerverifiedShow Answer

In the Keynesian model,a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.

Correct AnswerverifiedShow Answer

The portion of planned aggregate expenditure that is independent of output is called ______ expenditure.

Correct AnswerverifiedShow Answer

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The vertical intercept of the consumption function equals __ and the slope equals _.

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An economic expansion in the U.S. the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) output gap in Mexico.

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If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000,then this economy has a(n) gap that can be closed by ___.

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If short-run equilibrium output equals 10,000,the income-expenditure multiplier equals 5,the mpc equals 0.8,and potential output (Y*) equals 9,000,then taxes must be by approximately to eliminate any output gap.

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In response to the 2007-2009 recession,the Economic Stimulus Act of 2008,under President Bush,was composed of approximately _;the American Recovery and Reinvestment Act,under President Obama,was composed of approximately __.

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An economic recession in the U.S. the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) output gap in Canada.

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