ECON 105 Lecture Notes - Lecture 8: Real Interest Rate
ECON 105 Full Course Notes
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| a) | In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.
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| b) | The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
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| c) | Stagflation arises in the context of the AD-AS model when some external factor causes
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| d) | If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.
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| e) | Which of the following will shift the aggregate demand curve to the right?
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| f) | Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?
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| g) | An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of
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| h) | The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.
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| i) | The aggregate demand curve shows
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| j) | Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.
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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. |