A marginal propensity to consume (MPC) of 0.80 means: 1. people spend $0.20 of every new $1 they receive. 2. people spend $0.80 of every new $1 they receive. 3. people spend $1 of every new $0.80 they receive. 4. people save $0.80 of every new $1 they receive. If someone suddenly developed a new technology that caused energy prices to drop significantly, it would most likely cause a 1. period of high unemployment 2. positive supply shock 3. period of high inflation 4. negative supply shock Economic growth is shown as a: 1. movement up along the short-run aggregate supply curve. 2. shift to the left in the long-run aggregate supply curve. 3. shift to the left in the short-run aggregate supply curve. 4. shift to the right in the long-run aggregate supply curve. Consider the short run AS-AD model. What would happen to the equilibrium price level and output level (real GDP) if consumers significantly decrease spending due to falling equity in their homes, ceteris paribus? 1. the price level will rise; real GDP will fall 2. the price level will fall; real GDP will rise 3. the price level will fall; real GDP will fall 4. the price level will rise; real GDP will rise Consider the short run AS-AD model. What would happen to the equilibrium price level and output level (real GDP) if production costs increase significantly for producers due to an extensive drought. 1. the price level will rise; real GDP will fall 2. the price level will fall; real GDP will fall| 3. the price level will rise; real GDP will rise 4. the price level will fall; real GDP will rise The idea of the spending multiplier is that: 1. people spend money on some items, such as food and toiletries, multiple times. 2. when a person saves money in a bank, the bank lends it out to another person to be spent. 3. one person's spending becomes another person's income, which stimulates more spending. 4. people tend to spend a greater amount (a multiple) in stores than they originally intend. Ron and Jen are discussing the best way to get our economy out of the recession. Ron wants to see government cut taxes by $150 billion. Jenn prefers to see government spending increase by $150 billion. Whose prescription would have the larger total impact on aggregate demand? 1. Jen's, because all of the additional government spending will enter the spending stream, while part of a tax cut would be saved (and not spent) 2. Ron's, because firms and households are better spenders than the government, whose spending decisions are bogged down in political debating 3. Ron's, because households and firms have a higher marginal propensity to consume than the government 4. Jen's, because the government has more information available to it than do households and firms Supply-side fiscal policies include all of the following EXCEPT: 1. investment in human capital. 2. increasing transfer payments. 3. policies that encourage investment in research and development. 4. projects that include the encouragement of new technologies. Papa Smurf, the president of Smurfsville, hires you as an economic consultant. Papa Smurf is worried that the output level of Smurfsville is too high and that this will lead to inflation. He feels that it is necessary to reduce economic activity by $50 billion. Through your analysis, you learn that the MPC of Smurfsville is 0.80. What advice would you give to Papa Smurf? 1. reduce government spending by $15 billion. 2. reduce government spending by $50 billion. 3. increase taxes by $10 billion. 4. increase taxes by $12.5 billion. Using demand-side fiscal policy to stimulate aggregate demand when the economy is at full employment will primarily result in: 1. a large economic expansion. 2. unemployment. 3. inflation. 4. underemployment