AD/AS - Assignment Essays

question

If the price level in an economy increases, other things constant, consumption spending is likely to _____

answer

decrease because the real value of wealth decreases.

question

A technological change that positively affects business expectations will _____

answer

cause a rightward shift of the investment demand curve.

question

Fluctuations in investment _____

answer

account for more of the variability in gross domestic product (GDP) than consumption.

question

A decrease in stock prices will _____ the net wealth of households and _____ consumption.

answer

reduce; decrease

question

If consumption is greater than income, saving must be negative.

answer

True

question

Which of these is an advantage of long-term contracts in resource markets?

answer

Long-term contracts reduce the average cost of negotiation.

question

Which of the following is true of an expansionary gap?

answer

In the long run, this gap will close when resource suppliers negotiate higher resource payments.

question

An increase in the marginal propensity to consume (MPC) will cause the consumption function to become steeper.

answer

True

question

Which of the following is most likely to cause a rightward shift of the investment demand curve?

answer

an improvement in business expectations

question

A household that expects a decrease in disposable income in the future will _____

answer

decrease its current consumption spending.

question

_____ is the reward savers earn for deferring consumption.

answer

Interest

question

Which of the following is true of a beneficial supply shock?

answer

It can lead to a temporarily lower price level.

question

The slope of the short-run aggregate supply curve depends on how sharply _____

answer

the marginal cost of production rises as real GDP expands

question

If the price level in an economy turns out to be higher than that expected by workers and firms, _____.

answer

firms increase production.

question

When actual output exceeds potential output, _____

answer

prices tend to increase.

question

Which of the following occurs when an expansionary gap is closed in the long run by the action of firms?

answer

Output decreases, and the price level increases.

question

The slope of the consumption function equals the marginal propensity to consume.

answer

True

question

Historically, consumption spending in the United States has _____

answer

remained approximately constant as a percentage of income.

question

An increase in the market interest rate will _____

answer

decrease investment for individual firms, so total investment in the economy decreases.

question

An increase in the market interest rate, other things equal, will _____

answer

reduce the amount invested because the opportunity costs of investing will be higher.

question

The relationship in the economy between consumption and income is called _____

answer

the consumption function.

question

When the economy's actual price level exceeds the expected price level in the short run, _____

answer

the nominal wages of workers decline.

question

The rate at which aggregate supply changes to restore equilibrium at potential output depends crucially on _____

answer

how quickly real wages adjust to restore full employment in the labor market.

question

What is the relationship between wages and the supply of labor?

answer

The higher the wage, other things constant, the more labor supplied.

question

When an economy is producing its potential output, which of the following is true?

answer

The economy is producing its maximum sustainable output.

question

How much is the output gap if short-run output is $18.0 trillion and potential output is $18.2 trillion?

answer

+ $0.2 trillion.

question

Expectations that the price level will decrease in the future will _____

answer

shift the current consumption function downward.

question

Which of the following is illustrated by the distance between the aggregate expenditure line and the 45-degree line at each level of real GDP?

answer

unplanned inventory change

question

Which of the following best describes aggregate expenditure?

answer

C + I + G + (X − M)

question

A decrease in the price level in an economy is likely to cause a(n) _____

answer

increase in consumption spending.

question

The short-run aggregate supply curve shows a(n) _____

answer

direct relationship between the actual price level and real GDP supplied.

question

The potential output of an economy is the level of output produced when the _____

answer

expected price level equals the actual price level.

question

The aggregate demand-aggregate supply model shows that closing an expansionary gap involves deflation and closing a recessionary gap involves inflation.

answer

False

question

If global pollution causes climatic changes that permanently harm crop production worldwide, aggregate supply and demand analysis would lead us to expect _____

answer

an increase in the price level.

question

The slope of the consumption function is equal to the marginal propensity to save (MPS).

answer

False

question

How does an expected change in car prices affect consumption?

answer

Higher car prices in the future prompts some to buy a new car now.

question

The aggregate demand curve of an economy illustrates the relationship between _____

answer

the price level and real gross domestic product (GDP).

question

The fact that some resource prices are fixed by contracts helps explain why firms _____

answer

increase output in the short run when the price level increases.

question

When an economy is not producing at its potential output, which of the following is likely?

answer

The actual price level is unexpected.

question

If resource prices are "sticky" downward and a recessionary gap develops in an economy, the short-run aggregate supply curve will _____

answer

not shift rightward to return the economy to its potential output.

question

The international oil price hike by OPEC was an adverse supply shock faced by the United States in the 1970s.

answer

True

question

Suppose the price level increases by 5 percent and the nominal wages of workers increase by 3 percent during a particular year. This implies that the real wage has _____

answer

declined by 2 percent.

question

A decrease in disposable income will _____

answer

cause a downward movement along the consumption function.

question

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is the change in her saving per month after the increase in income?

answer

$50

question

An increase in the price level in an economy will decrease the real GDP demanded along the aggregate demand curve.

answer

True

question

An adverse supply shock would shift _____

answer

both the long-run and the short-run aggregate supply curves inward.

question

How much is the output gap if short-run output is $21.0 trillion and potential output is $20.0 trillion?

answer

+$1.0 trillion

question

The potential output of an economy is _____

answer

also referred to as the natural rate of output.

question

A beneficial supply shock such as a breakthrough in technology _____

answer

lowers the price level and increases output.

question

Which of the following is correct if real GDP is $20 trillion and spending is $20.5 trillion?

answer

Spending is greater than output by $0.5 trillion.

question

If the marginal propensity to consume (MPC) is less than 1 and a household's disposable income increases by $2,000, the household's consumption will _____

answer

increase by less than $2,000.

question

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her marginal propensity to consume?

answer

Her marginal propensity to consume is 0.90.

question

Movement along the aggregate demand curve may be caused by a change in autonomous investment spending.

answer

False

question

A change in consumers' expectations about the future will shift both the aggregate expenditure curve and the aggregate demand curve.

answer

True

question

Given a downward-sloping aggregate demand curve, if short-run aggregate supply increases, real GDP must increase and nominal GDP must fall.

answer

False

question

An upward shift of the consumption function might be caused by _____

answer

a decrease in the price level.

question

The consumption function assumes that _____

answer

factors other than disposable income affect consumption, but those are held constant along the consumption function.

question

Linda earned an income of $3,000 per month which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is her disposable income after the increase?

answer

$3,500

question

Which of the following is true in the short run?

answer

Per-unit costs do not increase as much as output prices when the price level rises.

question

The most important determinant of a household's consumption spending is _____

answer

its disposable income.

question

An increase in planned investment will shift the _____

answer

aggregate demand curve rightward.

question

A decrease in planned investment will shift the _____

answer

aggregate demand curve leftward.

question

Which of the following is generally true of nominal wages?

answer

Nominal wages tend to adjust slowly in the downward direction.

question

The nominal wage represents _____

answer

the wage measured in terms of the dollar value of the goods and services a worker can purchase with it.

question

In aggregate spending, investment does not include _____

answer

buying stocks and bonds.

question

As the U.S. price level rises relative to price levels in other countries, U.S. _____

answer

consumption and net exports will both decrease.

question

Consumption reflects _____

answer

income

question

Suppose an increase in disposable income from $3 trillion to $3.2 trillion increases consumption from $2.5 trillion to $2.6 trillion. The marginal propensity to consume (MPC) is _____

answer

0.5

question

Which of the following is true of the relationship between disposable income and consumption?

answer

Consumption is the dependent variable and disposable income is the independent variable.

question

Which of the following is true of a beneficial supply shock?

answer

It can lead to a temporarily lower price level.

question

An increase in income in other countries, other things equal, would cause U.S. _____

answer

imports to remain unchanged and exports to increase.

question

If incomes in the United States increase, other things equal, then U.S. _____

answer

imports increase and exports remain constant.

question

If planned spending exceeds planned output in an economy, the result is a(n) _____

answer

unintended decrease in inventories.

question

Which of the following is correct if real GDP is $20 trillion and spending is $20 trillion?

answer

Spending and GDP are in equilibrium.

question

If resource suppliers and demanders find out that the actual price level exceeds the expected price level, they will take corrective actions that will _____

answer

shift the short-run aggregate supply curve of an economy.

question

Suppose an economy is initially in long-run equilibrium, and it then experiences a supply shock in the form of exceptionally high energy prices. Which of these will be true in this economy?

answer

The short-run aggregate supply curve and the long-run aggregate supply curve will shift leftward.

question

Suppose Jack's salary increased from $100,000 to $200,000 per year between 2004 and 2014 and the price index increased from 100 to 300 during the same period. Which of the following statements best describes Jack's situation?

answer

His real income has decreased and money income has increased.

question

If nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per year, real wages will _____

answer

decrease by 3 percent per year.

question

In the long run, an economy will produce its potential output if _____

answer

wages and prices are sufficiently flexible.

question

Suppose at a particular level of real gross domestic product (GDP), there are no unintended inventory adjustments. In this context, which of the following is true?

answer

Real GDP equals the equilibrium level of real GDP demanded.

question

Expectations that the price level will increase in the future will _____

answer

shift the current consumption function upward.

question

The real wage is equal to the _____

answer

wage measured in terms of the quantity of goods and services it buys.

question

A temporary adverse supply shock, such as a drought _____

answer

temporarily shifts both the short-run and the long-run aggregate supply curves to the left.

question

If the price level in an economy turns out to be higher than that expected by workers and firms, firms _____

answer

increase the quantity supplied more than the economy's potential output.

question

Fewer of an economy's resources will be channeled into building new factories and equipment when _____

answer

interest rates are high.

question

Movement along the aggregate expenditure line is caused by a change in the level of income.

answer

True

question

The fraction of a change in disposable income that is consumed is called _____

answer

the marginal propensity to consume.

question

Given the aggregate demand curve, a beneficial supply shock will _____

answer

increase potential output and decrease the price level.

question

Which of these changes is observed in an economy when a recessionary gap is closed in the long run?

answer

an increase in the level of output and a decrease in the price level

question

The fraction of an increase in income that is saved is referred to as the _____

answer

marginal propensity to save.

question

Which of the following is true of government purchases?

answer

They are decided by public officials.

question

Suppose the actual and expected price levels in an economy are initially equal. However, the actual price level falls eventually due to a change in economic conditions. Which of the following will occur in the long run?

answer

The short-run aggregate supply curve will shift to the right.

question

If costs decrease, what happens to the aggregate supply curve?

answer

It shifts rightward.

question

A decrease in net wealth will _____

answer

increase saving and decrease consumption.

question

If income increases by $100 and saving increases by $25, the slope of the consumption function equals _____.

answer

3/4

question

Given the aggregate demand curve, an increase in the supply of a productive resource will _____

answer

decrease the price level and increase the output level.

question

Which of the following, if true, would suggest that an expansionary gap exists in an economy?

answer

an unemployment rate below its natural rate and an unexpected increase in the consumer price index

question

If the market interest rate decreases, then there will _____

answer

be a downward movement along the investment demand curve.

question

The consumption function relates consumption spending to _____

answer

disposable income.

question

In the long run, a decrease in aggregate demand will lead to a(n) _____

answer

decrease in the price level and no change in the output level.

question

The actual price level is assumed to be constant along a given short-run aggregate supply curve.

answer

False

question

Which of these is not a beneficial supply shock?

answer

establishment of the Occupational Safety and Health Administration (OSHA)

question

When an economy produces its potential output, _____ is zero.

answer

cyclical unemployment

question

What is true of disposable income?

answer

It equals consumption expenditures plus saving.

question

Only a change in the price level can cause shifts in both the aggregate expenditure line and the aggregate demand curve.

answer

False

question

An increase in aggregate demand in the long run will most likely result in _____

answer

an increase in the price level but no change in the output level.

question

Which of the following supply shocks will shift the long-run aggregate supply curve rightward?

answer

an increase in agricultural output

question

If the price level in the current year is much higher than the expected price level in an economy, _____

answer

firms will increase production beyond the economy's potential level.

question

answer

$450

question

If there are no unintended changes in inventories, the economy is at its equilibrium level of real gross domestic product (GDP) demanded.

answer

True

question

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals _____

answer

1.0

question

What does aggregate supply reflect?

answer

It reflects billions of production decisions made by millions of individual resource suppliers and firms in the economy.

question

Which of these is true of the expected price level in a labor market?

answer

It allows firms and resource owners to make long-term wage agreements.

question

The capital stock of an economy increases _____

answer

only if net investment is positive.

question

answer

$300; $350

question

A higher interest rate will _____

answer

shift the consumption function downward.

question

As actual output falls below the potential level in the short run, which of the following is most likely to occur?

answer

More resources will become unemployed.

question

Workers usually negotiate compensation in terms of the nominal wage because wage agreements are based on expected price levels.

answer

True

question

An adverse supply shock generally decreases the price level and real GDP.

answer

False

question

Identify the correct statement about net exports.

answer

The value of net exports increases as real domestic income decreases.

question

The market interest rate is important to the investment decisions of firms _____

answer

regardless of whether funds must be borrowed or firms have the funds on hand.

question

If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its _____

answer

marginal propensity to save is 0.

question

Which of the following is true about real wages?

answer

Both workers and employers care more about the real wage than the nominal wage.

question

Unexpected events that increase aggregate supply, sometimes only temporarily, are _____ shocks.

answer

beneficial supply shocks.

question

The long run is the period of time during which _____

answer

all resource prices are variable.

question

A recessionary gap is usually closed in the long run by a(n) _____

answer

rightward shift of the short-run aggregate supply curve.

question

An increase in the price level in an economy will _____

answer

decrease the quantity of real gross domestic product (GDP) demanded.

question

Linda earns an income of $3,000 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her consumption per month?

answer

$2,700

question

Which of the following is true of a recessionary gap?

answer

In the long run, this gap closes when resource suppliers negotiate lower resource payments.

question

The short-run aggregate supply curve _____

answer

is positively sloped.

question

Which of the following is least likely to cause a shift of the consumption function?

answer

a change in investment spending

question

An increase in real disposable income will _____

answer

increase the value of net imports of a country.

question

A decrease in the price level in an economy implies that _____

answer

there will be an increase in investment.

question

In the long run, the price level in an economy is determined solely by _____

answer

the aggregate demand curve.

question

If resource prices are flexible, the long-run aggregate supply curve is vertical.

answer

True

question

A decrease in the price level will _____

answer

shift the consumption function upward.

question

The marginal propensity to consume (MPC) is _____

answer

the relationship between a change in consumption and a change in income.

question

A decrease in the price level in an economy will _____

answer

increase the level of aggregate quantity demanded.

question

A firm's level of investment depends on the market interest rate _____

answer

because the interest rate represents the opportunity cost of investing in capital.

question

Which of the following is true when an economy is in long-run equilibrium?

answer

Actual output must equal potential output.

question

The nominal cost per unit of output rises when production is pushed beyond an economy's potential output.

answer

True

question

In the income-expenditure framework, if planned aggregate expenditures are greater than real gross domestic product (GDP), _____

answer

inventories will decrease.

question

Which of the following is correct if real GDP is $20 trillion and spending is $20.5 trillion?

answer

Inventories decrease by 0.5 trillion.

question

How much is the output gap if short-run output is $20.0 trillion and potential output is $20.0 trillion?

answer

question

Which of these is not assumed to be constant along a short-run aggregate supply curve?

answer

the actual price level

question

The difference between consumption spending and disposable income _____

answer

equals saving.

question

When economists say investment is autonomous, they mean that investment is independent of the level of saving.

answer

False

question

The main determinants of investment are the interest rates and expected profit.

answer

True

question

The short run is a period of time during which _____

answer

resource buyers and sellers cannot adjust fully to changes in the price level.

question

An expansionary gap in the short run results in _____

answer

cost-push inflation in the long run.

question

answer

Her marginal propensity to save is 0.10.

question

If a household's income rises from $46,000 to $46,700, and its consumption spending rises from $35,800 to $36,400, then its _____

answer

marginal propensity to consume is 0.86.

question

Which of the following is true about wage agreements?

answer

Explicit wage agreements are based on a labor contract and implicit wage agreements are based on labor market practices.

question

Which of these does not hold true if an economy is simultaneously in long-run and short-run equilibrium?

answer

The aggregate demand curve is horizontal at the potential output level.

question

The amount by which actual output falls short of potential output is called _____

answer

a recessionary gap.

question

A failure in coordination between workers and employers is most likely to cause an expansionary gap.

answer

False

question

The main effect of an increase in capital stock is a(n) _____

answer

rightward shift of the long-run aggregate supply curve.

question

In 2009, actual output in the United States was 4.6 percent below the potential output. This implies that _____

answer

there was a recessionary gap in the economy.

question

Which of the following does not influence the position of the long-run aggregate supply curve?

answer

the actual price level

question

Given implicit or explicit resource price agreements, if the actual price level is below the expected price level in an economy, the _____

answer

economy will move downward along the short-run aggregate supply curve.

question

Which of the following supply shocks would shift the aggregate supply curve inward?

answer

Both workers and employers care more about the real wage than the nominal wage.

question

What is the correct definition of the short run?

answer

a period during which some resource prices, especially those for labor, remain fixed

question

A decrease in the U.S. price level, other things constant, will _____

answer

stimulate U.S. exports but discourage imports, causing a downward movement along a given aggregate demand curve.

question

Which of the following types of unemployment is likely to exist in an economy that is at its potential output level?

answer

frictional, structural, and seasonal unemployment

question

Which of the following is correct if real GDP is $20.5 trillion and spending is $20 trillion?

answer

Spending is less than output by $0.5 trillion.

question

Does an expansionary gap or a recessionary gap exist if short-run output is $18.2 trillion and potential output is $18.0 trillion?

answer

an expansionary gap

question

A beneficial supply shock such as a breakthrough in technology _____

answer

permanently shifts both the short-run and the long-run aggregate supply curves to the right.

question

Suppose the real wage of a worker remains unchanged between Year 1 and Year 2 but the nominal wage decreases from $20 in Year 1 to $18 in Year 2. This implies that the price level has _____

answer

fallen by 10 percent.

question

Which of the following will shift the consumption function upward?

answer

an increase in stock prices

question

If the marginal propensity to consume (MPC) is positive and less than one, an increase in disposable income will _____.

answer

increase both consumption and saving

question

A decrease in the market interest rate will _____

answer

increase investment for individual firms, so total investment in the economy increases.

question

Which of the following is an effect of an increase in the price level in an economy?

answer

The equilibrium real gross domestic product will decrease.

question

How much is the output gap if short-run output is $18.0 trillion and potential output is $18.0 trillion?

answer

question

Which of the following supply shocks would shift the aggregate supply curve inward?

answer

a decrease in agricultural output

question

Which of the following will shift the consumption function upward?

answer

an increase in net wealth

question

The slope of the consumption function shows how _____

answer

consumption changes as the level of income changes.

question

In constructing the short-run aggregate supply curve, we assume that the goal of business is to _____

answer

maximize profit.

question

Does an expansionary gap or a recessionary gap exist if short-run output is $20.0 trillion and potential output is $21.0 trillion?

answer

a recessionary gap

question

The more the short-run output exceeds an economy's potential, _____

answer

the greater the upward pressure on the price level.

question

Which of the following will shift the consumption function upward?

answer

an increase in net wealth

question

If the level of autonomous spending in an economy increases at a given price level, _____

answer

the aggregate expenditure line shifts upward and the aggregate demand curve shifts to the right.

question

Which of the following is true of a higher price level?

answer

The higher the price level, any given money wage purchases less, so the wage is less attractive to workers.

question

The nominal wage is _____

answer

measured in current dollars rather than in constant dollars.

question

If a household's income falls from $26,000 to $24,000 and its savings fall from $1,000 to $500, then its _____

answer

marginal propensity to save is 0.25.

question

Potential output depends on all of the following except one. Which is the exception?

answer

the number of consumers in the market

question

The higher the opportunity cost of borrowing, the higher the amount of investment, other things constant.

answer

False

question

When the actual price level in an economy turns out to be lower than that expected in the short run, _____

answer

businesses cut back production.

question

Which of the following is true of the short-run aggregate supply curve?

answer

It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.

question

If the price level in the current year is much lower than the expected price level in an economy, _____

answer

firms will increase production beyond the economy's potential level.

question

At the equilibrium level of real gross domestic product (GDP), unplanned inventory adjustment equals _____

answer

zero

question

Stagflation is defined as _____

answer

decreased output accompanied by a higher price level.

question

Purchases of existing commodities, such as gold and precious gems, are considered investment spending by economists.

answer

False

question

Which of the following is not an example of a government purchase?

answer

Chinese toys to be sold in stores

question

Which of the following is true in the long run?

answer

The actual price level and the expected price level are equal.

question

In the short run, there is a positive relationship between _____

answer

the actual price level and the aggregate quantity supplied.

question

If the price level increases by 5 percent and the nominal wage increases by 3.5 percent, the real wage will decrease by 1.5 percent.

answer

True

question

An increase in the price level will _____

answer

decrease consumption because the value of net wealth will decrease.

question

The fraction of a change in income that is saved is known as _____

answer

the marginal propensity to save.

question

Which of the following changes best represents the effect of the oil embargo (a shut-off of oil from certain OPEC countries) of the 1970s on the U.S. economy?

answer

a leftward shift of the long-run aggregate supply curve

question

An expansionary gap is equal to _____

answer

the actual short-run output minus potential output.

question

If costs increase, what happens to the aggregate supply curve?

answer

It shifts leftward.

question

In the long run, the price level is determined by aggregate supply.

answer

False

question

Which of the following is most likely to increase long-run aggregate supply in an economy?

answer

a reduction in the cost of using computers

question

The marginal propensity to consume _____

answer

is the change in consumption relative to a change in disposable income.

question

Which of the following is most likely to cause the long-run aggregate supply curve to shift rightward?

answer

a technological breakthrough with widespread practical applications

question

A recessionary gap develops _____

answer

only when unemployment exceeds its natural rate.

question

If current aggregate expenditure equals current production, an economy is in equilibrium.

answer

True

question

When resource prices are negotiable, the long-run aggregate supply curve is represented by _____

answer

a vertical line at potential output.

question

When the current production of goods and services in an economy is greater than planned aggregate expenditure, _____

answer

inventories of goods and services will increase.

question

The fraction of a change in income that is spent on consumption is known as _____

answer

the marginal propensity to consume.

question

If the expected price level exceeds the actual price level in an economy, _____

answer

firms decrease production in the short run.

question

Net wealth is _____

answer

the value of household's assets minus liabilities.

question

Aggregate expenditure means total or combined spending.

answer

True

question

If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion in an economy, then consumption spending will increase by _____

answer

$14 billion.

question

In constructing the short-run aggregate supply curve, we define the short run as the period in which _____

answer

the costs of some resources are fixed.

question

Which of the following is most likely to increase the potential output of an economy?

answer

an increase in the supply of educated and skilled workers

question

The aggregate demand curve of an economy _____

answer

is downward sloping

question

Which of these is most likely to shift the long-run aggregate supply curve to the left?

answer

a civil war

question

In periods of high inflation, real wages change even if nominal wages remain constant.

answer

True

1 of 219

question

If the price level in an economy increases, other things constant, consumption spending is likely to _____

answer

decrease because the real value of wealth decreases.

question

A technological change that positively affects business expectations will _____

answer

cause a rightward shift of the investment demand curve.

question

Fluctuations in investment _____

answer

account for more of the variability in gross domestic product (GDP) than consumption.

question

A decrease in stock prices will _____ the net wealth of households and _____ consumption.

answer

reduce; decrease

question

If consumption is greater than income, saving must be negative.

answer

True

question

Which of these is an advantage of long-term contracts in resource markets?

answer

Long-term contracts reduce the average cost of negotiation.

question

Which of the following is true of an expansionary gap?

answer

In the long run, this gap will close when resource suppliers negotiate higher resource payments.

question

An increase in the marginal propensity to consume (MPC) will cause the consumption function to become steeper.

answer

True

question

Which of the following is most likely to cause a rightward shift of the investment demand curve?

answer

an improvement in business expectations

question

A household that expects a decrease in disposable income in the future will _____

answer

decrease its current consumption spending.

question

_____ is the reward savers earn for deferring consumption.

answer

Interest

question

Which of the following is true of a beneficial supply shock?

answer

It can lead to a temporarily lower price level.

question

The slope of the short-run aggregate supply curve depends on how sharply _____

answer

the marginal cost of production rises as real GDP expands

question

If the price level in an economy turns out to be higher than that expected by workers and firms, _____.

answer

firms increase production.

question

When actual output exceeds potential output, _____

answer

prices tend to increase.

question

Which of the following occurs when an expansionary gap is closed in the long run by the action of firms?

answer

Output decreases, and the price level increases.

question

The slope of the consumption function equals the marginal propensity to consume.

answer

True

question

Historically, consumption spending in the United States has _____

answer

remained approximately constant as a percentage of income.

question

An increase in the market interest rate will _____

answer

decrease investment for individual firms, so total investment in the economy decreases.

question

An increase in the market interest rate, other things equal, will _____

answer

reduce the amount invested because the opportunity costs of investing will be higher.

question

The relationship in the economy between consumption and income is called _____

answer

the consumption function.

question

When the economy's actual price level exceeds the expected price level in the short run, _____

answer

the nominal wages of workers decline.

question

The rate at which aggregate supply changes to restore equilibrium at potential output depends crucially on _____

answer

how quickly real wages adjust to restore full employment in the labor market.

question

What is the relationship between wages and the supply of labor?

answer

The higher the wage, other things constant, the more labor supplied.

question

When an economy is producing its potential output, which of the following is true?

answer

The economy is producing its maximum sustainable output.

question

How much is the output gap if short-run output is $18.0 trillion and potential output is $18.2 trillion?

answer

+ $0.2 trillion.

question

Expectations that the price level will decrease in the future will _____

answer

shift the current consumption function downward.

question

Which of the following is illustrated by the distance between the aggregate expenditure line and the 45-degree line at each level of real GDP?

answer

unplanned inventory change

question

Which of the following best describes aggregate expenditure?

answer

C + I + G + (X − M)

question

A decrease in the price level in an economy is likely to cause a(n) _____

answer

increase in consumption spending.

question

The short-run aggregate supply curve shows a(n) _____

answer

direct relationship between the actual price level and real GDP supplied.

question

The potential output of an economy is the level of output produced when the _____

answer

expected price level equals the actual price level.

question

The aggregate demand-aggregate supply model shows that closing an expansionary gap involves deflation and closing a recessionary gap involves inflation.

answer

False

question

If global pollution causes climatic changes that permanently harm crop production worldwide, aggregate supply and demand analysis would lead us to expect _____

answer

an increase in the price level.

question

The slope of the consumption function is equal to the marginal propensity to save (MPS).

answer

False

question

How does an expected change in car prices affect consumption?

answer

Higher car prices in the future prompts some to buy a new car now.

question

The aggregate demand curve of an economy illustrates the relationship between _____

answer

the price level and real gross domestic product (GDP).

question

The fact that some resource prices are fixed by contracts helps explain why firms _____

answer

increase output in the short run when the price level increases.

question

When an economy is not producing at its potential output, which of the following is likely?

answer

The actual price level is unexpected.

question

If resource prices are "sticky" downward and a recessionary gap develops in an economy, the short-run aggregate supply curve will _____

answer

not shift rightward to return the economy to its potential output.

question

The international oil price hike by OPEC was an adverse supply shock faced by the United States in the 1970s.

answer

True

question

Suppose the price level increases by 5 percent and the nominal wages of workers increase by 3 percent during a particular year. This implies that the real wage has _____

answer

declined by 2 percent.

question

A decrease in disposable income will _____

answer

cause a downward movement along the consumption function.

question

answer

$50

question

An increase in the price level in an economy will decrease the real GDP demanded along the aggregate demand curve.

answer

True

question

An adverse supply shock would shift _____

answer

both the long-run and the short-run aggregate supply curves inward.

question

How much is the output gap if short-run output is $21.0 trillion and potential output is $20.0 trillion?

answer

+$1.0 trillion

question

The potential output of an economy is _____

answer

also referred to as the natural rate of output.

question

A beneficial supply shock such as a breakthrough in technology _____

answer

lowers the price level and increases output.

question

Which of the following is correct if real GDP is $20 trillion and spending is $20.5 trillion?

answer

Spending is greater than output by $0.5 trillion.

question

If the marginal propensity to consume (MPC) is less than 1 and a household's disposable income increases by $2,000, the household's consumption will _____

answer

increase by less than $2,000.

question

answer

Her marginal propensity to consume is 0.90.

question

Movement along the aggregate demand curve may be caused by a change in autonomous investment spending.

answer

False

question

A change in consumers' expectations about the future will shift both the aggregate expenditure curve and the aggregate demand curve.

answer

True

question

Given a downward-sloping aggregate demand curve, if short-run aggregate supply increases, real GDP must increase and nominal GDP must fall.

answer

False

question

An upward shift of the consumption function might be caused by _____

answer

a decrease in the price level.

question

The consumption function assumes that _____

answer

factors other than disposable income affect consumption, but those are held constant along the consumption function.

question

answer

$3,500

question

Which of the following is true in the short run?

answer

Per-unit costs do not increase as much as output prices when the price level rises.

question

The most important determinant of a household's consumption spending is _____

answer

its disposable income.

question

An increase in planned investment will shift the _____

answer

aggregate demand curve rightward.

question

A decrease in planned investment will shift the _____

answer

aggregate demand curve leftward.

question

Which of the following is generally true of nominal wages?

answer

Nominal wages tend to adjust slowly in the downward direction.

question

The nominal wage represents _____

answer

the wage measured in terms of the dollar value of the goods and services a worker can purchase with it.

question

In aggregate spending, investment does not include _____

answer

buying stocks and bonds.

question

As the U.S. price level rises relative to price levels in other countries, U.S. _____

answer

consumption and net exports will both decrease.

question

Consumption reflects _____

answer

income

question

Suppose an increase in disposable income from $3 trillion to $3.2 trillion increases consumption from $2.5 trillion to $2.6 trillion. The marginal propensity to consume (MPC) is _____

answer

0.5

question

Which of the following is true of the relationship between disposable income and consumption?

answer

Consumption is the dependent variable and disposable income is the independent variable.

question

Which of the following is true of a beneficial supply shock?

answer

It can lead to a temporarily lower price level.

question

An increase in income in other countries, other things equal, would cause U.S. _____

answer

imports to remain unchanged and exports to increase.

question

If incomes in the United States increase, other things equal, then U.S. _____

answer

imports increase and exports remain constant.

question

If planned spending exceeds planned output in an economy, the result is a(n) _____

answer

unintended decrease in inventories.

question

Which of the following is correct if real GDP is $20 trillion and spending is $20 trillion?

answer

Spending and GDP are in equilibrium.

question

If resource suppliers and demanders find out that the actual price level exceeds the expected price level, they will take corrective actions that will _____

answer

shift the short-run aggregate supply curve of an economy.

question

Suppose an economy is initially in long-run equilibrium, and it then experiences a supply shock in the form of exceptionally high energy prices. Which of these will be true in this economy?

answer

The short-run aggregate supply curve and the long-run aggregate supply curve will shift leftward.

question

answer

His real income has decreased and money income has increased.

question

If nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per year, real wages will _____

answer

decrease by 3 percent per year.

question

In the long run, an economy will produce its potential output if _____

answer

wages and prices are sufficiently flexible.

question

Suppose at a particular level of real gross domestic product (GDP), there are no unintended inventory adjustments. In this context, which of the following is true?

answer

Real GDP equals the equilibrium level of real GDP demanded.

question

Expectations that the price level will increase in the future will _____

answer

shift the current consumption function upward.

question

The real wage is equal to the _____

answer

wage measured in terms of the quantity of goods and services it buys.

question

A temporary adverse supply shock, such as a drought _____

answer

temporarily shifts both the short-run and the long-run aggregate supply curves to the left.

question

If the price level in an economy turns out to be higher than that expected by workers and firms, firms _____

answer

increase the quantity supplied more than the economy's potential output.

question

Fewer of an economy's resources will be channeled into building new factories and equipment when _____

answer

interest rates are high.

question

Movement along the aggregate expenditure line is caused by a change in the level of income.

answer

True

question

The fraction of a change in disposable income that is consumed is called _____

answer

the marginal propensity to consume.

question

Given the aggregate demand curve, a beneficial supply shock will _____

answer

increase potential output and decrease the price level.

question

Which of these changes is observed in an economy when a recessionary gap is closed in the long run?

answer

an increase in the level of output and a decrease in the price level

question

The fraction of an increase in income that is saved is referred to as the _____

answer

marginal propensity to save.

question

Which of the following is true of government purchases?

answer

They are decided by public officials.

question

answer

The short-run aggregate supply curve will shift to the right.

question

If costs decrease, what happens to the aggregate supply curve?

answer

It shifts rightward.

question

A decrease in net wealth will _____

answer

increase saving and decrease consumption.

question

If income increases by $100 and saving increases by $25, the slope of the consumption function equals _____.

answer

3/4

question

Given the aggregate demand curve, an increase in the supply of a productive resource will _____

answer

decrease the price level and increase the output level.

question

Which of the following, if true, would suggest that an expansionary gap exists in an economy?

answer

an unemployment rate below its natural rate and an unexpected increase in the consumer price index

question

If the market interest rate decreases, then there will _____

answer

be a downward movement along the investment demand curve.

question

The consumption function relates consumption spending to _____

answer

disposable income.

question

In the long run, a decrease in aggregate demand will lead to a(n) _____

answer

decrease in the price level and no change in the output level.

question

The actual price level is assumed to be constant along a given short-run aggregate supply curve.

answer

False

question

Which of these is not a beneficial supply shock?

answer

establishment of the Occupational Safety and Health Administration (OSHA)

question

When an economy produces its potential output, _____ is zero.

answer

cyclical unemployment

question

What is true of disposable income?

answer

It equals consumption expenditures plus saving.

question

Only a change in the price level can cause shifts in both the aggregate expenditure line and the aggregate demand curve.

answer

False

question

An increase in aggregate demand in the long run will most likely result in _____

answer

an increase in the price level but no change in the output level.

question

Which of the following supply shocks will shift the long-run aggregate supply curve rightward?

answer

an increase in agricultural output

question

If the price level in the current year is much higher than the expected price level in an economy, _____

answer

firms will increase production beyond the economy's potential level.

question

answer

$450

question

If there are no unintended changes in inventories, the economy is at its equilibrium level of real gross domestic product (GDP) demanded.

answer

True

question

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals _____

answer

1.0

question

What does aggregate supply reflect?

answer

It reflects billions of production decisions made by millions of individual resource suppliers and firms in the economy.

question

Which of these is true of the expected price level in a labor market?

answer

It allows firms and resource owners to make long-term wage agreements.

question

The capital stock of an economy increases _____

answer

only if net investment is positive.

question

answer

$300; $350

question

A higher interest rate will _____

answer

shift the consumption function downward.

question

As actual output falls below the potential level in the short run, which of the following is most likely to occur?

answer

More resources will become unemployed.

question

Workers usually negotiate compensation in terms of the nominal wage because wage agreements are based on expected price levels.

answer

True

question

An adverse supply shock generally decreases the price level and real GDP.

answer

False

question

Identify the correct statement about net exports.

answer

The value of net exports increases as real domestic income decreases.

question

The market interest rate is important to the investment decisions of firms _____

answer

regardless of whether funds must be borrowed or firms have the funds on hand.

question

If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its _____

answer

marginal propensity to save is 0.

question

Which of the following is true about real wages?

answer

Both workers and employers care more about the real wage than the nominal wage.

question

Unexpected events that increase aggregate supply, sometimes only temporarily, are _____ shocks.

answer

beneficial supply shocks.

question

The long run is the period of time during which _____

answer

all resource prices are variable.

question

A recessionary gap is usually closed in the long run by a(n) _____

answer

rightward shift of the short-run aggregate supply curve.

question

An increase in the price level in an economy will _____

answer

decrease the quantity of real gross domestic product (GDP) demanded.

question

answer

$2,700

question

Which of the following is true of a recessionary gap?

answer

In the long run, this gap closes when resource suppliers negotiate lower resource payments.

question

The short-run aggregate supply curve _____

answer

is positively sloped.

question

Which of the following is least likely to cause a shift of the consumption function?

answer

a change in investment spending

question

An increase in real disposable income will _____

answer

increase the value of net imports of a country.

question

A decrease in the price level in an economy implies that _____

answer

there will be an increase in investment.

question

In the long run, the price level in an economy is determined solely by _____

answer

the aggregate demand curve.

question

If resource prices are flexible, the long-run aggregate supply curve is vertical.

answer

True

question

A decrease in the price level will _____

answer

shift the consumption function upward.

question

The marginal propensity to consume (MPC) is _____

answer

the relationship between a change in consumption and a change in income.

question

A decrease in the price level in an economy will _____

answer

increase the level of aggregate quantity demanded.

question

A firm's level of investment depends on the market interest rate _____

answer

because the interest rate represents the opportunity cost of investing in capital.

question

Which of the following is true when an economy is in long-run equilibrium?

answer

Actual output must equal potential output.

question

The nominal cost per unit of output rises when production is pushed beyond an economy's potential output.

answer

True

question

In the income-expenditure framework, if planned aggregate expenditures are greater than real gross domestic product (GDP), _____

answer

inventories will decrease.

question

Which of the following is correct if real GDP is $20 trillion and spending is $20.5 trillion?

answer

Inventories decrease by 0.5 trillion.

question

How much is the output gap if short-run output is $20.0 trillion and potential output is $20.0 trillion?

answer

question

Which of these is not assumed to be constant along a short-run aggregate supply curve?

answer

the actual price level

question

The difference between consumption spending and disposable income _____

answer

equals saving.

question

When economists say investment is autonomous, they mean that investment is independent of the level of saving.

answer

False

question

The main determinants of investment are the interest rates and expected profit.

answer

True

question

The short run is a period of time during which _____

answer

resource buyers and sellers cannot adjust fully to changes in the price level.

question

An expansionary gap in the short run results in _____

answer

cost-push inflation in the long run.

question

answer

Her marginal propensity to save is 0.10.

question

If a household's income rises from $46,000 to $46,700, and its consumption spending rises from $35,800 to $36,400, then its _____

answer

marginal propensity to consume is 0.86.

question

Which of the following is true about wage agreements?

answer

Explicit wage agreements are based on a labor contract and implicit wage agreements are based on labor market practices.

question

Which of these does not hold true if an economy is simultaneously in long-run and short-run equilibrium?

answer

The aggregate demand curve is horizontal at the potential output level.

question

The amount by which actual output falls short of potential output is called _____

answer

a recessionary gap.

question

A failure in coordination between workers and employers is most likely to cause an expansionary gap.

answer

False

question

The main effect of an increase in capital stock is a(n) _____

answer

rightward shift of the long-run aggregate supply curve.

question

In 2009, actual output in the United States was 4.6 percent below the potential output. This implies that _____

answer

there was a recessionary gap in the economy.

question

Which of the following does not influence the position of the long-run aggregate supply curve?

answer

the actual price level

question

Given implicit or explicit resource price agreements, if the actual price level is below the expected price level in an economy, the _____

answer

economy will move downward along the short-run aggregate supply curve.

question

Which of the following supply shocks would shift the aggregate supply curve inward?

answer

Both workers and employers care more about the real wage than the nominal wage.

question

What is the correct definition of the short run?

answer

a period during which some resource prices, especially those for labor, remain fixed

question

A decrease in the U.S. price level, other things constant, will _____

answer

stimulate U.S. exports but discourage imports, causing a downward movement along a given aggregate demand curve.

question

Which of the following types of unemployment is likely to exist in an economy that is at its potential output level?

answer

frictional, structural, and seasonal unemployment

question

Which of the following is correct if real GDP is $20.5 trillion and spending is $20 trillion?

answer

Spending is less than output by $0.5 trillion.

question

Does an expansionary gap or a recessionary gap exist if short-run output is $18.2 trillion and potential output is $18.0 trillion?

answer

an expansionary gap

question

A beneficial supply shock such as a breakthrough in technology _____

answer

permanently shifts both the short-run and the long-run aggregate supply curves to the right.

question

Suppose the real wage of a worker remains unchanged between Year 1 and Year 2 but the nominal wage decreases from $20 in Year 1 to $18 in Year 2. This implies that the price level has _____

answer

fallen by 10 percent.

question

Which of the following will shift the consumption function upward?

answer

an increase in stock prices

question

If the marginal propensity to consume (MPC) is positive and less than one, an increase in disposable income will _____.

answer

increase both consumption and saving

question

A decrease in the market interest rate will _____

answer

increase investment for individual firms, so total investment in the economy increases.

question

Which of the following is an effect of an increase in the price level in an economy?

answer

The equilibrium real gross domestic product will decrease.

question

How much is the output gap if short-run output is $18.0 trillion and potential output is $18.0 trillion?

answer

question

Which of the following supply shocks would shift the aggregate supply curve inward?

answer

a decrease in agricultural output

question

Which of the following will shift the consumption function upward?

answer

an increase in net wealth

question

The slope of the consumption function shows how _____

answer

consumption changes as the level of income changes.

question

In constructing the short-run aggregate supply curve, we assume that the goal of business is to _____

answer

maximize profit.

question

Does an expansionary gap or a recessionary gap exist if short-run output is $20.0 trillion and potential output is $21.0 trillion?

answer

a recessionary gap

question

The more the short-run output exceeds an economy's potential, _____

answer

the greater the upward pressure on the price level.

question

Which of the following will shift the consumption function upward?

answer

an increase in net wealth

question

If the level of autonomous spending in an economy increases at a given price level, _____

answer

the aggregate expenditure line shifts upward and the aggregate demand curve shifts to the right.

question

Which of the following is true of a higher price level?

answer

The higher the price level, any given money wage purchases less, so the wage is less attractive to workers.

question

The nominal wage is _____

answer

measured in current dollars rather than in constant dollars.

question

If a household's income falls from $26,000 to $24,000 and its savings fall from $1,000 to $500, then its _____

answer

marginal propensity to save is 0.25.

question

Potential output depends on all of the following except one. Which is the exception?

answer

the number of consumers in the market

question

The higher the opportunity cost of borrowing, the higher the amount of investment, other things constant.

answer

False

question

When the actual price level in an economy turns out to be lower than that expected in the short run, _____

answer

businesses cut back production.

question

Which of the following is true of the short-run aggregate supply curve?

answer

It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.

question

If the price level in the current year is much lower than the expected price level in an economy, _____

answer

firms will increase production beyond the economy's potential level.

question

At the equilibrium level of real gross domestic product (GDP), unplanned inventory adjustment equals _____

answer

zero

question

Stagflation is defined as _____

answer

decreased output accompanied by a higher price level.

question

Purchases of existing commodities, such as gold and precious gems, are considered investment spending by economists.

answer

False

question

Which of the following is not an example of a government purchase?

answer

Chinese toys to be sold in stores

question

Which of the following is true in the long run?

answer

The actual price level and the expected price level are equal.

question

In the short run, there is a positive relationship between _____

answer

the actual price level and the aggregate quantity supplied.

question

If the price level increases by 5 percent and the nominal wage increases by 3.5 percent, the real wage will decrease by 1.5 percent.

answer

True

question

An increase in the price level will _____

answer

decrease consumption because the value of net wealth will decrease.

question

The fraction of a change in income that is saved is known as _____

answer

the marginal propensity to save.

question

Which of the following changes best represents the effect of the oil embargo (a shut-off of oil from certain OPEC countries) of the 1970s on the U.S. economy?

answer

a leftward shift of the long-run aggregate supply curve

question

An expansionary gap is equal to _____

answer

the actual short-run output minus potential output.

question

If costs increase, what happens to the aggregate supply curve?

answer

It shifts leftward.

question

In the long run, the price level is determined by aggregate supply.

answer

False

question

Which of the following is most likely to increase long-run aggregate supply in an economy?

answer

a reduction in the cost of using computers

question

The marginal propensity to consume _____

answer

is the change in consumption relative to a change in disposable income.

question

Which of the following is most likely to cause the long-run aggregate supply curve to shift rightward?

answer

a technological breakthrough with widespread practical applications

question

A recessionary gap develops _____

answer

only when unemployment exceeds its natural rate.

question

If current aggregate expenditure equals current production, an economy is in equilibrium.

answer

True

question

When resource prices are negotiable, the long-run aggregate supply curve is represented by _____

answer

a vertical line at potential output.

question

When the current production of goods and services in an economy is greater than planned aggregate expenditure, _____

answer

inventories of goods and services will increase.

question

The fraction of a change in income that is spent on consumption is known as _____

answer

the marginal propensity to consume.

question

If the expected price level exceeds the actual price level in an economy, _____

answer

firms decrease production in the short run.

question

Net wealth is _____

answer

the value of household's assets minus liabilities.

question

Aggregate expenditure means total or combined spending.

answer

True

question

If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion in an economy, then consumption spending will increase by _____

answer

$14 billion.

question

In constructing the short-run aggregate supply curve, we define the short run as the period in which _____

answer

the costs of some resources are fixed.

question

Which of the following is most likely to increase the potential output of an economy?

answer

an increase in the supply of educated and skilled workers

question

The aggregate demand curve of an economy _____

answer

is downward sloping

question

Which of these is most likely to shift the long-run aggregate supply curve to the left?

answer

a civil war

question

In periods of high inflation, real wages change even if nominal wages remain constant.

answer

True

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