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practice exam test 3 - Flashcards

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Class:ECON 2006 - Principles of Economics
Subject:Economics
University:Virginia Polytechnic Institute And State University
Term:Spring 2010
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The potential output of an economy is the level of output produced when the expected price level equals the actual price level
If the actual price level exceeds the expected price level reflected in long-term contracts, firms will find production more profitable than they had expected and will increase the quantity of output supplied
the price level turns out to be higher than expected, businesses increase production
If the price level turns out to be lower than expected, businesses cut back production
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The aggregate supply curve reflects the relationship between the price level and the quantity of all goods supplied in the economy
Which of the following is not assumed to be constant along a short-run aggregate supply curve? the actual price level
For the purpose of aggregate supply analysis, the long run is the period of time during which all resource prices can be varied
Suppose that the actual and expected price levels are initially equal, and that the expected price level falls. Which of the following will occur over the long run? (Hint: Recall the actual price level is on the vertical axis.) The short-run aggregate supply curve will shift to the left.
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If the economy is experiencing an expansionary gap, which of the following will occur in the long run? Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.
An expansionary gap is closed in the long run by a(n) leftward shift of the short-run aggregate supply curve
In the long run, an increase in aggregate demand will cause an increase in the price level and no change in output
Which of the following is true in the long run? The actual price level and the expected price level are equal
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Which of the following is not a tool of fiscal policy? money supply
Fiscal policy focuses on manipulating aggregate demand to smooth out business fluctuations
Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increase to $1,400
When government purchases increase, the spending multiplier tells us the size of the rightward shift of the aggregate demand curve at a given price level
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Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending? Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption
If autonomous net taxes decline by $40 billion and the MPC = 0.75, then equilibrium real GDP demanded increases by $120 billion
Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will fall by $1,500
If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will reduce both the price level and real GDP
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By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9? $100
When net taxes increase and government purchases decrease, the money supply must rise
Which of the following government policies would increase aggregate demand? a deficit in the government budget
To close an expansionary gap using fiscal policy, the government can decrease government spending or increase taxes
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The steeper the short-run aggregate supply curve, the smaller the impact of a shift in aggregate demand on equilibrium output
If the economy is already producing at its potential the spending multiplier equals zero in the long run
If the U.S. government spent $20 million paying people to dig holes in 2005, and then spent $30 million paying the same people to fill the holes up again that same year, we would expect the net effect to be a(n) increase in the budget deficit as government purchases of goods and services increased by $50 million
Which component of aggregate expenditure is most subject to crowding out? investment spending
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a federal budget deficit causes crowding out, real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines
If government deficits stimulate the economy crowding in may occur
as the number of goods and services increases, barter becomes harder because the chance of there being a double coincidence of wants decreases
If two kinds of money are circulating at the same time, the poorer quality one will be offered by purchasers of goods and the better one will be hoarded
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A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is the federal funds rate
If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier? It increases by $50,000.
increase the money supply, the Fed might sell government securities and increase the discount rate
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 The potential output of an economy is the level of output produced when theexpected price level equals the actual price level
 If the actual price level exceeds the expected price level reflected in long-term contracts,firms will find production more profitable than they had expected and will increase the quantity of output supplied
 the price level turns out to be higher than expected,businesses increase production
 If the price level turns out to be lower than expected,businesses cut back production
 The aggregate supply curve reflects the relationship between theprice level and the quantity of all goods supplied in the economy
 Which of the following is not assumed to be constant along a short-run aggregate supply curve?the actual price level
 For the purpose of aggregate supply analysis, the long run is the period of time during which all resource prices can be varied
 Suppose that the actual and expected price levels are initially equal, and that the expected price level falls. Which of the following will occur over the long run? (Hint: Recall the actual price level is on the vertical axis.)The short-run aggregate supply curve will shift to the left.
 If the economy is experiencing an expansionary gap, which of the following will occur in the long run?Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.
 An expansionary gap is closed in the long run by a(n)leftward shift of the short-run aggregate supply curve
 In the long run, an increase in aggregate demand will causean increase in the price level and no change in output
 Which of the following is true in the long run?The actual price level and the expected price level are equal
 Which of the following is not a tool of fiscal policy?money supply
 Fiscal policy focuses on manipulatingaggregate demand to smooth out business fluctuations
 Assume that initially G is $100 and equilibrium real GDP demanded is $1,000. If the multiplier is 4 and G increases to $200, real GDP demanded will increaseto $1,400
 When government purchases increase, the spending multiplier tells us thesize of the rightward shift of the aggregate demand curve at a given price level
 Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption
 If autonomous net taxes decline by $40 billion and the MPC = 0.75, then equilibrium real GDP demandedincreases by $120 billion
 Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded willfall by $1,500
 If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap willreduce both the price level and real GDP
 By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?$100
 When net taxes increase and government purchases decrease,the money supply must rise
 Which of the following government policies would increase aggregate demand?a deficit in the government budget
 To close an expansionary gap using fiscal policy, the government candecrease government spending or increase taxes
 The steeper the short-run aggregate supply curve,the smaller the impact of a shift in aggregate demand on equilibrium output
 If the economy is already producing at its potentialthe spending multiplier equals zero in the long run
 If the U.S. government spent $20 million paying people to dig holes in 2005, and then spent $30 million paying the same people to fill the holes up again that same year, we would expect the net effect to be a(n)increase in the budget deficit as government purchases of goods and services increased by $50 million
 Which component of aggregate expenditure is most subject to crowding out?investment spending
 a federal budget deficit causes crowding out,real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines
 If government deficits stimulate the economycrowding in may occur
 as the number of goods and services increases, barter becomesharder because the chance of there being a double coincidence of wants decreases
 If two kinds of money are circulating at the same time,the poorer quality one will be offered by purchasers of goods and the better one will be hoarded
 A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan isthe federal funds rate
 If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier? It increases by $50,000.
 increase the money supply, the Fed mightsell government securities and increase the discount rate
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