Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

63 Cards in this Set

  • Front
  • Back
The most important determinant of a household's consumption spending is

a. its disposable income
As disposable income increases, consumption spending

c. increases by less than the increase in disposable income
An increase in the interest rate would shift the consumption function upward.

b. False
As disposable income increases,

a. consumption and saving both increase
The consumption function assumes that

d. factors other than disposable income affect consumption, but those are held constant along the consumption function
If the MPC < 1 and a household's disposable income increases by $2,000, the household's consumption will

a. increase by less than $2,000
The MPC is a relationship between

a. a change in consumption and a change in income
The fraction of an increase in income that is saved is referred to as the

a. marginal propensity to save
The MPC plus the MPS equals

d. 1.0
Along the aggregate consumption function, an increase in income will

d. cause movement along the given consumption function
An upward shift of the consumption function might be caused by

c. a decrease in the price level
What is the effect on the consumption function of a decrease in disposable income?

d. There is movement downward along the consumption function.
An increase in wealth will

d. increase consumption and decrease saving at each level of income
Expectations that disposable income will increase in the future will

a. shift the current consumption function up
The non-income determinants of consumption include all of the following except one. Which is the exception?

b. the profitability of new investment
An rise in stock prices will __________ net wealth and __________ consumption.

d. increase; increase
Which of the following is not investment spending?

c. the purchase of stock in Potomac Electric Company
The interest rate is important to the investment decision

c. regardless of whether funds must be borrowed or firms have the funds on hand
An increase in the interest rate, other things equal, would

d. reduce the amount invested because the opportunity costs of investing would be higher
Which of the following would tend to shift the investment function upward?

c. a cut in corporate taxes that raises after-tax profits
The main determinants of investment are the interest rate and expected profit.

a. True
When economists say investment is autonomous, they mean that

c. investment is independent of the level of income
If business managers become more optimistic about future sales and profits, then there will be

c. an upward shift of the autonomous investment function

a. makes up about two-thirds of GDP in a typical year
Fluctuations in consumption

c. are roughly similar to fluctuations in GDP
Which of the following is the most volatile component of GDP?

a. investment (I)
An increase in real disposable income will

c. cause a rightward movement along the autonomous net export function
The amount of U.S. exports purchased by the rest of the world is primarily determined by

b. real disposable income in other nations
As domestic income rises, net exports

a. fall, since exports remain the same but imports increase
The economy’s investment demand curve shows the inverse relationship between the quantity of investment demanded and the market interest rate, other things held constant.

a. True
If money demand increases and the Fed does not alter its monetary policy, then

d. interest rates will increase
Which of the following would cause an increase in the velocity of money?

a. increased use of credit cards
In the long run, changes in the money supply affect only the price level because

c. the long-run aggregate supply curve is vertical
If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between

a. the money supply and the price level
In the long run, an increase in aggregate demand

d. affects only the price level
Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?

a. a higher price level
If the money supply is $1,000, the price level is 3, and real income (or output) is $5,000, then the velocity of money is

e. 15
Velocity measures

d. how quickly money changes hands
The equation of exchange is

c. M x V = P x Y
In the situation shown in Exhibit 16-3, how could the Fed return the economy to potential output?

d. decrease the money supply
To eliminate a contractionary gap, the Fed can __________ the money supply, which would __________.

b. increase; decrease the interest rate and increase investment
For monetary policy to be effective in changing planned investment spending,

c. investment must be sensitive to changes in interest rates
If investment is not sensitive to changes in the interest rate, then changes in the money supply

c. will have no effect on aggregate demand
An increase in the money supply leads to a(n)

a. decline in interest rates, an increase in investment, and an increase in aggregate demand
If the Fed decreases the money supply, GDP

c. decreases because the resulting increase in the interest rate leads to a decrease in investment
If the Fed increases the money supply, GDP

b. increases because the resulting decrease in the interest rate leads to an increase in investment
What is the effect of an expansionary monetary policy on the demand for investment curve?

c. It causes downward movement along the curve.
As the interest rate decreases,

c. there is a downward movement along the demand for investment curve
If the Fed increases the money supply, then

a. the interest rate declines and the quantity of money demanded increases
In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run

b. decrease in both the price level and real GDP
In the aggregate demand-aggregate supply model, an increase in the money supply will cause in the short run a(n)

a. increase in both the price level and real GDP
In a macroeconomic model, increases in the money supply decrease the interest rate, increase investment, and thus raise employment and real GDP.

a. True
Given the demand for money in Exhibit 16-2, if the supply of money is given by the supply curve labelled S, the equilibrium interest rate and quantity of money would be

a. r and m
If the quantity of money supplied exceeds the quantity of money demanded,

c. the interest rate will fall
The equilibrium interest rate is determined by

e. both the supply of and demand for money
If the money supply increases, the interest rate will __________ and people will want to hold a __________ quantity of money.

d. fall; greater
As the price level rises, money __________ causing interest rates to __________ and investment spending to __________.

b. demand rises; rise; fall
The supply of money is depicted diagrammatically as a vertical line because the quantity of money supplied is totally dependent on the rate of interest.

b. False
The opportunity cost of holding money

b. is the interest foregone on potential interest-earning assets
If the price level rises, then the

e. demand for money will increase
Which of the following, other things constant, will shift the money demand curve to the right?

c. an increase in real GDP
An increase in the price level will

a. shift the money demand curve to the right
The money demand curve slopes

a. downward because the cost of holding money decreases as the interest rate decreases
What is the opportunity cost of holding money rather than some other financial asset?

a. the forgone interest income
The opportunity cost of holding money is measured by the

a. interest rate
The demand for money is depicted by a curve downward sloping curve because if the interest rate falls, the opportunity cost of holding assets in the form of money decreases.

a. True
Discretionary fiscal policy works by shifting the aggregate demand curve.

a. True
Which of the following is not a tool of fiscal policy?

a. money supply
Discretionary fiscal policy is policy that

e. is an intentional change in taxation or government spending
If government purchases increase by $10 billion when the MPC is 0.8, then real GDP will increase by $50 billion.

a. True
The combined effect of changes in government purchases and net taxes can be determined by adding their individual effects.

a. True
Equal increases in government purchases and in net taxes have equal but opposite effects on the level of real GDP demanded.

b. False
When government purchases increase, the spending multiplier tells us the

c. size of the rightward shift of the aggregate demand curve at a given price level
The simple tax multiplier must always be smaller than the simple spending multiplier, regardless of the value of the MPC.

a. True
Which of the following statements best explains the effects of transfer payments and taxes on aggregate spending?

b. Transfer payments and taxes affect aggregate spending indirectly by first changing disposable income and thereby changing consumption.
If transfer payments and autonomous taxes both increase by identical amounts,

e. there will be no change in equilibrium income
If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will

e. reduce both the price level and real GDP
To close a contractionary gap using fiscal policy, the government can

d. increase government spending by less than the size of the gap
When spending by the federal government exceeds net taxes,

c. the aggregate demand curve shifts rightward
When spending by the federal government exceeds net taxes,

a. the price level tends to rise
If government purchases increase and net taxes decrease,

e. output and employment will increase
Which of the following government policies would increase aggregate demand?

a. a deficit in the government budget
All of the following might be effective in eliminating a contractionary gap except one. Which is the exception?

a. reducing Social Security payments to beneficiaries
A decrease in government purchases can close an expansionary gap by shifting the aggregate demand curve.

a. True
One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output but at the cost of increasing the price level.

a. True
Which of the following might be considered the most contractionary set of fiscal policies?

b. decrease in government purchases, increase in taxes, and decrease in transfer payments
Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?

b. Increase taxes to reduce aggregate demand.
A federal budget surplus occurs when

b. federal government net taxes exceed purchases
If the economy is already at its potential output, then the spending multiplier is

a. zero in the long run
John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that

b. natural economic forces were not necessarily adequate to move the economy toward its potential output level
Because of automatic stabilizers, disposable income varies proportionately less than real GDP during periods of economic fluctuations.

a. True
During economic contractions, transfer payments such as welfare benefits

b. automatically increase, reducing the impact of the contraction on disposable income
The effect of automatic stabilizers on the business cycle is to

c. make both upswings and downswings smaller
Which of the following best describes stagflation?

d. rising unemployment and inflation rates
The natural rate of unemployment is that rate at which the economy achieves its potential real GDP.

a. True
If policy makers think the natural rate of unemployment is lower than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will

a. cause continuing inflation
A major foreign holder of U.S. Treasury securities is

e. All of the answers are correct
When crowding out occurs,

c. public spending replaces private spending
National debt held by the public includes public debt held by all of the following, except one. Which is the exception?

c. the U.S. Treasury
If the federal government budget deficit increases, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________.

b. increase; appreciate; increase
If action by the President and Congress reduces the federal government budget deficit, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________.

e. decrease; depreciate; decrease
Increased government borrowing to cover a budget deficit causes

b. a higher interest rate and appreciation of the U.S. dollar
The key link between the so-called twin deficits involves

a. higher interest rates and a stronger dollar
The crowding in of private investment is associated with

e. more favorable business expectations resulting from an increase in aggregate demand induced by increased government borrowing
If a federal budget deficit causes crowding out,

b. real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines
Crowding out refers to the government's increased demand for credit, which

c. displaces some private sector borrowing by increasing the interest rate
Which component of aggregate expenditure is most subject to crowding out?

b. investment spending
Discretionary policy deficits are associated with

b. higher interest rates, higher prices, and higher output
As a result of an increased deficit associated with discretionary fiscal policy,

b. both the interest rate and nominal output rise
If the deficit is increasing because of the effects of the automatic stabilizers,

b. the economy is contracting
If aggregate output is increasing,

d. automatic stabilizers will tend to decrease the size of the deficit
Which of the following would decrease the size of a federal budget deficit?

c. growth in real GDP
If the government runs a cyclically balanced budget, its revenue will equal its expenditure

c. over the course of the business cycle
Federal budget deficits grow during recessions because

c. tax revenues decrease while transfer payments increase
During a recession, higher welfare outlays

a. increase the size of the budget deficit even if the government does not undertake discretionary fiscal policy
If a budget is cyclically balanced, the government should run a surplus when the economy experiences an expansionary gap.

a. True
The accepted philosophy on U.S. federal deficits prior to the Great Depression was that

c. the budget should be annually balanced
In Keynes’ philosophy of government budgets,

e. deficits are appropriate during recessions
Because of automatic stabilizers, government budget deficits are

e. smaller during expansions and larger during contractions
The federal budget deficit becomes __________ during recessions because __________.

b. larger; transfer payments increase and tax revenues decline
Which of the following is true of an increase in a federal government budget surplus?

d. Such an increase in the surplus might close an expansionary gap.
The Employment Act of 1946

a. created the Council of Economic Advisers
The Budget of the United States Government is officially submitted by

a. the President to the Congress and contains proposals for government expenditures
Transfer payments are included in the government budget deficit but not included in the government purchases component of GDP.

a. True
The largest category of federal government expenditures is

c. direct benefit payments to individuals
The federal government budget is

b. a plan for government expenditures and revenues for the coming year