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macroeconomics

Questions and Answers of Macroeconomics

The distinction between M1 and M2 is based ona. liquidity—the ease with which an asset can be converted into cash.b. storability—the ease with which an asset can be stored.c. divisibility—the
Credit cardsa. are included in the M1 definition of the money supply.b. are included in the M2 definition of the money supply.c. are included in the M3 definition of the money supply.d. are included
The money supply that includes only currency, checkable deposits, and traveler’s checks is known asa. M1.b. M2.c. M3.d. L.
What backs our money?
What is included in the money supply?
What is liquidity?
What is currency?
Why do virtually all societies create something to function as money?
In a world of barter, would useful financial statements such as balance sheets be possible? Would stock markets be possible? Would it be possible to build cars?
How can uncertain and rapid rates of inflation erode money’s ability to perform its functions efficiently?
Why does the advantage of monetary exchange over barter increase as an economy becomes more complex?
Without money to serve as a medium of exchange,a. gains from trade would be severely limited.b. our standard of living would probably be reduced.c. the transaction costs of exchange would increase.d.
Money isa. whatever is generally accepted in exchange for goods and services.b. an object to be consumed.c. a highly illiquid asset.d. widely used in a barter economy.
Money makes it easier to borrow and repay loans. This function of money is referred to asa. a store of value.b. a means of deferred payment.c. a unit of account.d. a standard of value.e. none of the
Currency is a poor store of value whena. the unemployment rate is high.b. banks are failing at an abnormally high rate.c. the rate of inflation is very high.d. gold can be purchased at bargain
Barter is inefficient compared to using money for trading becausea. it is more expensive over long distances.b. potential buyers may not have appropriate items of value to sellers with which to
Money’s principal role is to serve asa. a standard for credit transactions.b. a medium of exchange.c. a standard for making bank loans.d. a standard for the real bills doctrine.
How does money serve as a store of value?
How does money lower the costs of making transactions?
Is using money better than barter?
What is money?
Answer the following questions:a. Describe the crowding-out effect of an increase in government purchases.b. Why does the magnitude of the crowding-out effect depend on how responsive interest rates
Why do automatic stabilizers minimize the lag problem with fiscal policy?
How do automatic stabilizers affect budget deficits and surpluses? How would automatic stabilizers be affected by an annually balanced budget rule?
Why can a decrease in tax rates increase AS as well as AD, whereas an increase in government purchases will increase AD but not AS?
Use the accompanying diagram to answer the following questions.a. Starting from the initial equilibrium in the diagram, illustrate the case of a supply-side fiscal policy that left the price level
Explain why an equal dollar increase in both government purchases and net taxes would increase aggregate demand.
Why does it take a larger reduction in taxes to create the same increase in AD as a given increase in government purchases?
Could the multiplier be written as 1 divided by the marginal propensity to save (MPS)?
If government purchases increased by $20 billion, other things being equal, what would be the resulting change in aggregate demand, and how much of that change would be a change in consumption, if
What would the multiplier be if the marginal propensity to consume wasa. 1/3?b. 1/2?c. 3/4?
What is a recessionary gap? What would be the appropriate fiscal policy to combat or offset one? What is an inflationary gap? What would be the appropriate fiscal policy to combat or offset one?
Use the accompanying diagram to answer the following questions.a. At what short-run equilibrium point might expansionary fiscal policy make sense to help stabilize the economy?b. What would be the
Answer the following questions.a. If the current budget shows a deficit, what would an increase in taxes do to it?b. What would that increase in taxes do to aggregate demand?c. When would an increase
Answer the following questions.a. If the current budget shows a surplus, what would an increase in government purchases do to it?b. What would that increase in government purchases do to aggregate
Are increases in both government purchases and net taxes at the same time expansionary or contractionary? Would both changes together increase or decrease the federal government deficit?
Why are federal government actions that increase deficits considered expansionary fiscal policy and those that decrease deficits considered contractionary fiscal policy?
Starting at a full-employment equilibrium, once the economy has returned to its long-run equilibrium after an increase in government purchases, employment will be _____________________ full
Starting at a full-employment equilibrium, the only long-term effect of an increase in aggregate demand will be an increase in the _____________________ level.
If unemployed resources are put to work by government spending, the opportunity cost of expanded public activity would be _____________________ than otherwise.
_____________________ a federal budget deficit could be an appropriate fiscal policy if the economy were in a recession.
Deficit reduction is a(n) _____________________ fiscal policy in the short run.
Historically, the largest budget deficits have tended to be in _____________________ years.
If the federal government is running a(n)___________________, the federal debt would be getting smaller.
Timed correctly, contractionary fiscal policy could correct a(n) _____________________; timed incorrectly, it could cause a(n) _____________________.
Because of the _____________________ in implementing fiscal policy, a fiscal policy designed to deal with a contracting economy may actually take effect during a period of economic expansion.
The larger the crowding-out effect, the _____________________ the actual effect of a given change in fiscal policy.
The monetary authorities could _____________________ the money supply to offset the _____________________ interest rates due to the crowding-out effect of expansionary fiscal policy.
The _____________________ effect refers to the theory that when the government borrows money to finance a deficit, it drives interest rates up, choking off some private spending on goods and services.
When the government borrows money to finance a deficit, it _____________________ the overall demand for money in the money market, driving interest rates _____________________.
Because incomes, earnings, and profits all fall during a recession, the government collects _____________________ in taxes. This reduced tax burden partially _____________________ any contractionary
Big increases and big decreases in GDP are both _____________________ by automatic changes in income tax receipts.
The most important automatic stabilizer is the _____________________ system.
Changes in government transfer payments or tax collections that automatically tend to counter business cycle fluctuations are called _____________________.
If the demand-side stimulus from reduced tax rates is _____________________ than the supply-side effects, the result will be a higher price level and a greater level of real output.
The _____________________ curve shows that high tax rates could conceivably reduce work incentives to the point that government revenues are lower at high marginal tax rates than they would be at
Supply-side economists believe that individuals will save _________________, work _________________, and provide ___________________ capital when taxes, government transfer payments (such as
The extent of the multiplier effect visible within a short time period will be _____________________ than the total effect indicated by the multiplier formula.
The _____________________ effect explains why, when an initial increase in purchases of goods or services occurs, the ultimate increase in total purchases will tend to be greater than the initial
Contractionary fiscal policy will result in a(n) _____________________ price level and _____________________ employment in the short run.
A tax _____________________ on consumers will reduce households’ disposable incomes and thus their purchases of _____________________ goods and services, while higher business taxes will reduce
The result of an expansionary fiscal policy in the short run would be a(n) _____________________ in the price level and a(n) _____________________ in RGDP.
If the government wishes to dampen a boom in the economy, it will _____________________ its purchases of goods and services, _____________________ taxes, or use some combination of these approaches.
_____________________ is the use of government purchases and/or taxes to alter real GDP and price levels.
What will happen to the interest rate when a budget deficit occurs?
Higher budget deficits would tend toa. raise interest rates.b. reduce investment.c. reduce the growth rate of the capital stock.d. do all of the above.
During a recession, government transfer payments automatically _____________________ and tax revenue automatically _____________________.a. fall; fallsb. increase; fallsc. increase; increasesd. fall;
Automatic stabilizersa. reduce the problems caused by lags, using fiscal policy as a stabilization tool.b. are changes in fiscal policy that act to stimulate AD automatically when the economy goes
Which automatic stabilizers are the most important?
Why does a larger government budget deficit increase the magnitude of the crowding-out effect?
Which of the following statements is true?a. The crowding-out effect will tend to reduce the magnitude of the effects of increases in government purchases.b. The crowding-out effect implies that
According to the crowding-out effect, if the federal government borrows to finance deficit spending,a. the demand for money will decrease, driving interest rates down.b. the demand for money will
How do time lags in policy implementation affect policy effectiveness?
How does the crowding-out effect limit the economic impact of increased government purchases or reduced taxes?
Lower marginal tax rates stimulate people to work, save, and invest, resulting in more output and a larger tax base. This statement most closely reflects which of the following views?a. The Keynesian
When taxes are increased, disposable income _____________________, and hence consumption _____________________.a. increases; increasesb. increases; decreasesc. decreases; increasesd. decreases;
The federal government buys $20 million worth of computers from Apple. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal?a. Aggregate demand will increase $12
If the marginal propensity to consume is two-thirds, the multiplier isa. 30.b. 66.c. 1.5.d. 3.
The expenditure multiplier isa. 1/MPC.b. 1/(1 2 MPC).c. (1 2 MPC)/1.d. 1/DMPC.
The multiplier effect is based on the fact that _____________________ by one person is (are) _____________________ to another.a. income; incomeb. expenditures; expendituresc. expenditures; incomed.
How does investment interact with the multiplier effect?
How does the marginal propensity to consume affect the multiplier effect?
How can the federal government stimulus of aggregate demand reduce unemployment?
What is the difference between fiscal policy in the short-run versus the long-run?
If autonomous expenditures decreased by $50 billion, what is the change in aggregate demand at a given price level if the marginal propensity to consume is
How do we move from aggregate expenditures to aggregate demand?
Why do aggregate expenditures depend on the price level?
If the marginal propensity to consume was
8.d. all of the above are true.
b. a $5 billion increase in investment would tend to increase output by $10 billion.c. the expenditure multiplier is less than if the MPC 5
5,a. the expenditure multiplier will equal
As the economy turns toward a recession, what happens to unplanned inventory investment? Why? What happens to planned investment? Why?
What is unplanned investment?
What is the impact of adding investment, government purchases, and net exports to aggregate expenditures?
75.c. Consumption would not always be 75 percent of income.d. All of the above are true.
If an economy’s marginal propensity to consume was
Why does expenditure equal output?
What are the autonomous factors that influence consumption spending?
Use the accompanying diagram to answer questions a and b.a. Illustrate an recessionary gap on the diagram provided.b. Using the results ina, illustrate and explain the eventual long-run equilibrium
What is cost-push inflation?

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