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29 Nov 2019

Macroeconomics: Match Concepts to Definitions

1. Fiscal Policy

2. Balanced trade

3. Aggregate Expenditure Model.

4. Aggregate Demand-Supply Model

5. Liquidity Preference

6. Liquidity Trap

7. MPC

8. Natural rate hypothesis

9. Long run Phillips Curve

10. Rational Expectations

A. Positive level of net exports

B. Net exports are equal to zero.

C. Economy fluctuates around potential output, cannot be persistently below potential

D. Relationship between real Consumption plus Investment plus Government plus Net Exports and price level.

E. The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

F. When interest rates are close to zero.

G. Government spending and taxation policy.

H. Interest rate adjusts to bring money supply and money demand into equilibrium.

I. Relationship between total desired or planned expenditures on goods and services in the economy and real income assuming no change in the price level.

J. Only unanticipated changes in monetary policy had real effects. As soon as people understood that Fed targeted a lower rate of inflation, prices and wages would adjust, without the need for sustained high unemployment.

K. Fraction of extra income that households consume rather than save

L. Any attempt to keep the unemployment rate below the natural rate will cause inflation to spiral upward.

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Related questions

1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

a.

The aggregate demand curve will shift to the right.

b.

The economy will always approach potential GDP.

c.

The marginal propensity to consume will increase.

d.

The average price level will increase.

e.

The aggregate demand curve will shift to the left.


2. If the government wants to close a GDP gap, it can:

Answer

a.

lower government spending on social security.

b.

adopt contractionary fiscal policies to control inflation.

c.

increase its budget deficit.

d.

repay its borrowings.

e.

raise both direct and indirect tax rates.


3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

a.

lowering average tax rates such that aggregate supply is increased.

b.

increasing government spending such that aggregate expenditures are increased.

c.

increasing transfer payments such that aggregate expenditures decline.

d.

raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.

e.

decreasing government spending such that aggregate demand is reduced.


4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

a.

the multiplier effect.

b.

crowding out.

c.

an expansionary gap.

d.

the paradox of thrift.

e.

the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

a.

the deliberate manipulation of the money supply to expand the economy.

b.

the deliberate change in tax laws and government spending to change equilibrium income.

c.

the policy action taken by the Congress to reduce the federal budget deficit.

d.

the arbitrary fluctuation in tax laws and budget requirements.

e.

the automatic change in certain fiscal instruments when real GDP changes.


6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

a.

Money supply

b.

Disposable income

c.

Real exchange rate

d.

Real interest rate

e.

Unemployment insurance


7. Which of the following is true about automatic stabilizers?

Answer

a.

When income rises, automatic stabilizers increase/boost spending.

b.

Automatic stabilizers are a part of discretionary fiscal policy.

c.

An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.

d.

Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.

e.

The interest rate is an example of an automatic stabilizer.


8. Increased budget deficits

Answer

a.

can cause interest rates to increase and hence decrease net exports

b.

have no effect on net exports

c.

can cause interest rates to decrease and hence increase net exports

d.

never impose additional interest costs on the government


9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

a.

there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.

b.

there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.

c.

increasing borrowing is the best option

d.

increasing current taxes is the best option


10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

a.

right; decrease; increase

b.

right; decrease; decrease

c.

left; decrease; decrease

d.

left; increase; increase

e.

right; increase; increase


11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

a.

A decrease of $35

b.

An increase of $105

c.

An increase of $35

d.

A decrease of $105

e.

A decrease of $15

1.

12.12. The term fiscal policy refers to

Answer

a.

the adjustment of the GDP for inflation.

b.

the purchase and sale of U.S. government securities to regulate the money supply.

c.

the use of government spending and taxation to influence the level of economic growth and inflation.

d.

the use of fines to penalize unfair business practices.

e.

a policy action by Congress to overrule unpopular budget cuts by the president.


13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

a.

raise the price level and leave real GDP unchanged.

b.

raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.

c.

raise both real GDP and the price level by a multiple of the initial spending increase.

d.

have no effect on real GDP or on the price level, because all private investment will be crowded out.

e.

lower real GDP by an amount equal to the spending increase and reduce inflation.

14. Which of the following is not a means to finance government spending?

Answer

a.

Government subsidies

b.

Government debt

c.

Capital gains taxes

d.

Personal income taxes

e.

Money creation


15. An automatic stabilizer is

Answer

a.

a change in government spending aimed at achieving a policy goal.

b.

an element of fiscal policy that automatically changes in value as real GDP changes.

c.

an element of monetary policy that automatically changes in value as real GDP changes.

d.

a decrease in tax rates as the economy moves into a recession.

e.

a deliberate change in taxation aimed at increasing real GDP.


16. Budget deficits tend to grow during recessions because

Answer

a.

real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.

b.

real GDP growth is positive, which reduces both tax receipts and transfer payments.

c.

real GDP growth is negative, which reduces transfer payments in relation to tax receipts.

d.

real GDP growth is negative, which reduces tax receipts in relation to government expenditures.

e.

real GDP growth is positive, which increases tax receipts in relation to government expenditures.

MBA502, Economics for Business

Apply and Discover 7.2

You are responsible for economic policymaking in your country. Your desire is to eliminate inflation, keeping prices absolutely stable at P = 100, no matter what happens to output. Currently, the economy is in equilibrium at Q = 3200 (where Q = potential GDP) and P = 100. You can use monetary and fiscal policies to affect aggregate demand but you cannot affect aggregate supply in the short run. How would you respond to the following scenarios?

Explain and illustrate how each of these events would affect aggregate demand, aggregate supply, and prices, then explain how you would respond with economic policies.

1. A surprise increase in investment spending

In the short run, when investment spending increases, it results in an increase in Aggregate Demand (AD), which in turn pushes up both GPD and the price index.

To counterbalance this development, government might pursue contractionary fiscal policy by increasing taxes (to reduce consumption) or decreasing its own investment and spending so that the AD curve shifts back to its original position. Alternatively, the government can pursue contractionary monetary policy by reducing money supply and increasing interest rate to discourage economic activity.

2. Catastrophic floods that cause a sharp food price increase

In this case, sharp food shortages and consequent price increases cause a shock-type adjustment of the aggregate supply curve (it shift up and to the left). The result is a lower GDP and a higher price level.

The government cannot do anything to adjust AS in the short run. However, if the goal is to maintain the price level constant, the government can decide to do something to decrease the aggregate demand to force prices to come down, though it will be accompanies by another contraction in GDP and so it would not be a smart thing to do.

To cause AD to decrease, the government, similar to example above, can pursue fiscal policy (increase taxes, decrease spending) or monetary policy (reduce supply of money to the economy and thus increase interest rates).

3. A productivity decline that reduces potential output

In this case, AS shifts to the left, as was the case in example 2. As a result, price levels go up, as the same amount of money is chasing the reduced amount of goods and services, and GDP declines.

Government remedies here would be centered about causing AD to decrease through contractionary fiscal (higher taxes, lower spending) or monetary (reduce money supply and increase interest rates) policy. Again, this decision reduces inflation but at expense of GDP, as real output shrinks further.

4. A deep depression in East Asia that causes a sharp decrease in net exports to the United States

A decrease in exports of goods to from the United States to Asia will mean that the aggregate demand (which includes net exports

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True or False Questions:

1. Recessionary Expenditure Gap- Aggregate expenditures by which aggregate expenditures at the full employment GDP falls short of those required to achieve full employment GDP.

2. Private Closed Economy- An economy that includes consumer, business, and government segments of the economy.

3. Lump-sum taxes- A tax of a constant amount so the government obtains the same amount of tax at each level of GDP.

4. Aggregate Supply schedule- A relationship between a nation's price level and the amount of real domestic output that is produced.

5. Real Rate of Interest effect- The Nominal Rate of Interest earned on a project.

6. Savings- savings are planned investments by the consumer.

7. Wealth effect- The dollar amount of all the assets owned minus the dollar amount of all the liabilities or debt.

8. Savings Schedule - GDP less investment = savings

9. Aggregate Demand Schedule- a schedule that shows the amount of a nation's output (real GDP) that buyers desire to purchase at each price level.

10. Productivity- The measure of the level of the nation of real output and the amount of resources used to produce the output, less labor cost.

11. Multiplier effect- Measures the change in GDP to spending.

12. Injection- Investment by private business into the economy for capital goods is and injection into the economy.

13. Consumption schedule- The measurement of Disposable income less savings.

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