Question 1

If the economy has automatic stabilizers built in, the multiplier will

Accepted Answer

Automatic stabilizers, such as unemployment insurance and progressive income taxes, help to cushion the impact of economic fluctuations by automatically increasing government spending or decreasing taxation during recessions and reducing government spending or increasing taxation during booms. This reduces the amplitude of the fluctuations in the economy, which in turn means that the multiplier effect of any government spending or taxation changes will be smaller than it would have been without these stabilizers.

Question 2

Which of the following statements is true?

Accepted Answer

The statement that the multiplier effects for policy changes that are perceived to be temporary are smaller than those for policy changes that are perceived to be permanent is true. This is because households and businesses are more likely to adjust their behavior in response to permanent changes compared to temporary changes, thus leading to a larger multiplier effect for permanent changes.

Question 3

Firms report that their workers are working six hours of overtime per week. The government reports that the unemployment rate is 3.5%. In this situation, the multiplier is likely to be

Accepted Answer

When the unemployment rate is low and workers are already working overtime, the economy is likely operating near full capacity. In such a situation, the multiplier effect is small because there is limited scope for increasing output through additional spending.

Question 4

The multiplier reaches its peak about ________ months after a spending increase began.

Accepted Answer

The multiplier reaches its peak about 9 to 12 months after a spending increase began, as it takes some time for the effects of the increased spending to ripple through the economy and for businesses to adjust their production levels accordingly.

Question 5

If it becomes more expensive for firms to hold excess capital and labor, the multiplier will

Accepted Answer

The answer of If it becomes more expensive for firms...

Question 6

According to Okun's law, if output increased by 15 percent, unemployment should decrease by 3 percent.

Accepted Answer

Okun's law suggests that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. Therefore, the relationship between output increase and unemployment decrease does not directly translate to the percentages provided.

Question 7

The government spending multiplier is likely to be smaller during periods of

Accepted Answer

The government spending multiplier is likely to be smaller during periods of high output and low unemployment because in this situation, the economy is already operating close to its maximum capacity. As a result, any increase in government spending is likely to be offset by a decrease in private spending, reducing the overall impact of the spending multiplier.

Question 8

In practice, the size of the multiplier is about

Accepted Answer

The size of the multiplier varies depending on various factors such as the type of economy, the strength of the monetary policy, etc. However, research suggests that in most economies, the size of the multiplier is around 1.4. Therefore, option B) 1.4 would be the best choice.

Question 9

As the economy approaches full employment, the size of the multiplier will

Accepted Answer

As the economy approaches full employment, the size of the multiplier will become smaller. This is because as the economy approaches full employment, the availability of resources becomes constrained, leading to diminishing returns to additional investment. As a result, each additional dollar of spending will have a smaller impact on overall output.

Question 10

For every 3% growth in output, the unemployment rate always declines 1%.

Accepted Answer

The relationship between output growth and unemployment rate is not fixed and can vary due to factors such as labor market dynamics, productivity changes, and economic conditions. This relationship is often discussed in terms of Okun's Law, but even then, the ratio is not a constant 3:1 across different economies or periods.

Question 11

Firms have inventories that they can draw down to meet an increase in demand. This will

Accepted Answer

Drawing down inventories may make it seem like output is responding to changes in demand, but it is not an immediate response, as firms are using stored goods instead of increasing production. This delay in output response decreases the size of the multiplier.

Question 12

Discouraged workers are counted as part of the labor force.

Accepted Answer

Discouraged workers are defined as those who are no longer actively seeking employment because they believe there are no available jobs for them. As they are not actively seeking employment, they are not considered part of the labor force. Therefore, they are not counted in the official unemployment rate.

Question 13

Suppose that the value of the multiplier has increased in recent years. Which of the following could have caused this?

Accepted Answer

The answer of Suppose that the value of the multiplier...

Question 14

Okun's law demonstrates the relationship between unemployment and inflation.

Accepted Answer

Okun's law actually demonstrates the relationship between unemployment and GDP. It does not directly address inflation.

Question 15

The labor force increases when output increases because discouraged workers re-enter the labor force.

Accepted Answer

As output increases, businesses need more labor to produce and sell more goods and services. This creates more job opportunities, which can attract discouraged workers back into the labor force, leading to an increase in the size of the labor force.

Question 16

Suppose that input prices respond very quickly to output price. This will

Accepted Answer

If input prices respond very quickly to output prices, it means that any increase in output prices will lead to an immediate increase in input prices. This will result in a decrease in profit margins for businesses, leading to a decrease in investment and ultimately a decrease in the value of the multiplier.

Question 17

Which of the following statements is true?

Accepted Answer

Increases in the interest rate lead to a decrease in consumption and investment spending, and this reduces the size of the multiplier. This happens because higher interest rates make borrowing more expensive, causing consumers and firms to reduce their spending. As a result, the multiplier effect of any initial increase in spending is reduced.

Question 18

If you have more than one job, you are counted more than once in the persons-employed data.

Accepted Answer

In employment statistics, individuals are counted once in the persons-employed data, regardless of how many jobs they hold, because the data typically measure the number of people employed rather than the number of jobs.

Question 19

The government spending multiplier is likely to be larger during periods of

Accepted Answer

The government spending multiplier is likely to be larger during periods of low output and high unemployment. This is because during times of low output and high unemployment, there is a lot of excess capacity in the economy, meaning that an increase in government spending will not lead to an increase in prices and inflation. Rather, the extra spending will lead to an increase in economic activity which will in turn create jobs and reduce unemployment. Additionally, during this time, people are likely to spend the additional income they receive from the government, which will further stimulate economic growth. Therefore, a larger multiplier effect is likely to be seen during periods of low output and high unemployment.

Question 20

If the economy is on the steep part of the AS curve, the multiplier will be

Accepted Answer

When the economy is on the steep part of the Aggregate Supply (AS) curve, it indicates that the economy is near its capacity, and additional increases in demand lead to higher prices rather than increases in output. Therefore, the multiplier effect is smaller because additional spending leads more to inflation than to increases in real GDP. This contrasts with the flat portion of the AS curve, where there is slack in the economy, and increases in demand can lead to increases in output without significant price increases, resulting in a larger multiplier effect.

Quiz 15: Household and Firm Behavior in the Macroeconomy: a Further Look

If the economy has automatic stabilizers built in, the multiplier will

Which of the following statements is true?

Firms report that their workers are working six hours of overtime per week. The government reports that the unemployment rate is 3.5%. In this situation, the multiplier is likely to be

The multiplier reaches its peak about ________ months after a spending increase began.

If it becomes more expensive for firms to hold excess capital and labor, the multiplier will

According to Okun's law, if output increased by 15 percent, unemployment should decrease by 3 percent.

The government spending multiplier is likely to be smaller during periods of

In practice, the size of the multiplier is about

As the economy approaches full employment, the size of the multiplier will

For every 3% growth in output, the unemployment rate always declines 1%.

Firms have inventories that they can draw down to meet an increase in demand. This will

Discouraged workers are counted as part of the labor force.

Suppose that the value of the multiplier has increased in recent years. Which of the following could have caused this?

Okun's law demonstrates the relationship between unemployment and inflation.

The labor force increases when output increases because discouraged workers re-enter the labor force.

Suppose that input prices respond very quickly to output price. This will

Which of the following statements is true?

If you have more than one job, you are counted more than once in the persons-employed data.

The government spending multiplier is likely to be larger during periods of

If the economy is on the steep part of the AS curve, the multiplier will be