question
leakages equal injections
answer
Equilibrium GDP is attained when
question
total spending equals GDP,
leakages equal injections,
inventories are constant
leakages equal injections,
inventories are constant
answer
The circular flow model shows that the economy is in equilibrium when
question
consumer, government, investment, net exports
answer
The size ranking, biggest to smallest, of the four spending groups is
question
autonomous spending
answer
Spending that is not caused by a change in income is called
question
the economy is in equilibrium.
answer
According to the Circular Flow diagram, when total spending equals GDP
question
inventories fall, production rises, and GDP rises to catch up to total spending.
answer
When total spending is greater than GDP
question
True
answer
The economy can be at equilibrium and in a recession at the same time.
question
taxes
answer
According to the Circular Flow diagram, leakages out of the spending stream could be
question
inventories rise, production falls, and GDP falls to meet total spending.
answer
According to the Circular Flow diagram, when total spending is less than GDP
question
government transfer; NOT next exports, savings, taxes
answer
According to the Circular Flow diagram, injections into the spending stream include
question
true
answer
The marginal propensity to consume is defined as the amount spent of each new dollar earned.
question
unplanned spending equals zero
answer
GDP is equal to the value of the money spent as long as
question
the mpc is less than unity
answer
GDP rises faster than total spending because
question
a decrease in inventories
answer
Unplanned spending could be identified as
question
1) a rise in optimism among consumers and businesses about the future
2)an increase in autonomous consumer and business spending.
3)total spending is greater than GDP
4)a decrease in unplanned spending.
5)an increase in production and income.
6)an increase in induced spending.
7)GDP and total spending rise but GDP rises faster until the two are equal.
8)the adjustment stops until there is another exogenous change in spending.
2)an increase in autonomous consumer and business spending.
3)total spending is greater than GDP
4)a decrease in unplanned spending.
5)an increase in production and income.
6)an increase in induced spending.
7)GDP and total spending rise but GDP rises faster until the two are equal.
8)the adjustment stops until there is another exogenous change in spending.
answer
Put into order the following events.
question
spend 90 dlls
answer
If the mpc is .9 then out or each 100 dollars of income consumers will
question
a change in autonomous spending
answer
The causes of the business cycle can be traced back to
question
A decrease in employment and perhaps a decrease in inflation
Reduced consumer confidence is likely to decrease consumer spending. A decrease in spending causes a decrease in aggregate demand by shifting the aggregate demand curve to the left and the equilibrium down and to the left. This puts downward pressures on prices and decreases output and employment.
Reduced consumer confidence is likely to decrease consumer spending. A decrease in spending causes a decrease in aggregate demand by shifting the aggregate demand curve to the left and the equilibrium down and to the left. This puts downward pressures on prices and decreases output and employment.
answer
Increased consumer worries about job security may affect consumption spending and be most likely to cause which of the following?
question
Increase investment, real GDP, prices, inflation, and employment
A decrease in interest rates decreases the opportunity cost associated with investing, so investment increases. This increase in aggregate demand results in a higher level of real GDP, higher employment, and likely higher prices. The question asks about the short run effects. Thus, it is likely that investment will not have sufficient time to affect aggregate supply.
A decrease in interest rates decreases the opportunity cost associated with investing, so investment increases. This increase in aggregate demand results in a higher level of real GDP, higher employment, and likely higher prices. The question asks about the short run effects. Thus, it is likely that investment will not have sufficient time to affect aggregate supply.
answer
A fall in interest rates is likely to change investment, real GDP, prices, inflation, and employment in the short run in the following manners.
question
An increase in employment and perhaps an increase in inflation
An increase in consumption spending may result from a booming stock market as wealth increases. The increase in aggregate demand will increase output, employment, and put upward pressure on prices.
An increase in consumption spending may result from a booming stock market as wealth increases. The increase in aggregate demand will increase output, employment, and put upward pressure on prices.
answer
A booming stock market may affect consumption spending and be most likely to cause which of the following?
question
As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending; Falling inflation that decreases interest rates causing investment spending to rise; People from around the world want to buy more Teslas as the inflation rate in the U.S. falls.
Movement along the curve involves changes in prices while holding all else constant. In A, consumers spend more because they're optimistic, not because the price level fell. This would be a shift in AD.
Movement along the curve involves changes in prices while holding all else constant. In A, consumers spend more because they're optimistic, not because the price level fell. This would be a shift in AD.
answer
Which of the following represents movement along the aggregate demand curve? Select all that apply.
question
Movement along the aggregate supply curve; A shift in the aggregate demand curve
The key here is that we are talking about input prices and production so we are describing something about aggregate supply. Since the increase in input prices is driven by businesses attempting to produce more in response to increases in spending, we know this is movement along the AS curve.
The key here is that we are talking about input prices and production so we are describing something about aggregate supply. Since the increase in input prices is driven by businesses attempting to produce more in response to increases in spending, we know this is movement along the AS curve.
answer
As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________.
question
I and III only
A shift in the aggregate demand curve is caused by changes in factors influencing the amount of spending in the economy. Thus, both investment spending and consumption spending will shift the aggregate demand curve. A change in productivity will affect the amount that businesses can produce at each price level. Thus, a decrease in productivity will reduce aggregate supply and shift the aggregate supply curve to the left.
A shift in the aggregate demand curve is caused by changes in factors influencing the amount of spending in the economy. Thus, both investment spending and consumption spending will shift the aggregate demand curve. A change in productivity will affect the amount that businesses can produce at each price level. Thus, a decrease in productivity will reduce aggregate supply and shift the aggregate supply curve to the left.
answer
Which of the following changes would cause a shift in the aggregate demand curve?
I. Increase in investment
II. Decrease in productivity
III. Increase in consumption
I. Increase in investment
II. Decrease in productivity
III. Increase in consumption
question
A shift in the AD curve to the left
While there is a decrease in wealth here, it is caused by a decrease in assets other than money. The wealth effect that moves us along the Aggregate Demand curve talks about money holdings, that is wealth derived from cash and deposits. If the wealth is reduced by changes in the values of other assets, such as real estate or stock holdings, then the AD curve shifts.
While there is a decrease in wealth here, it is caused by a decrease in assets other than money. The wealth effect that moves us along the Aggregate Demand curve talks about money holdings, that is wealth derived from cash and deposits. If the wealth is reduced by changes in the values of other assets, such as real estate or stock holdings, then the AD curve shifts.
answer
In 2007, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this using the AS/AD model?
question
An increase in real GDP, An increase in the inflation rate, movement along the AS curve
Since we are near full capacity, output can still grow somewhat so real GDP rises. As the AD curve shifts to the right, the price level rises since we are on the upward-sloping part of the AS curve. A shift in the AD curve causes a movement along the AS curve.
Since we are near full capacity, output can still grow somewhat so real GDP rises. As the AD curve shifts to the right, the price level rises since we are on the upward-sloping part of the AS curve. A shift in the AD curve causes a movement along the AS curve.
answer
Assuming we are producing near full capacity, an increase in demand (a shift to the right in AD) will result in which of the following?
question
increase in income taxes
An increase in income taxes leads to less disposable income for consumers. Therefore, consumers are able to purchase less at any given price level, which causes the AD curve to shift to the left. (b and c are shifts to the right, d is a movement along the curve)
An increase in income taxes leads to less disposable income for consumers. Therefore, consumers are able to purchase less at any given price level, which causes the AD curve to shift to the left. (b and c are shifts to the right, d is a movement along the curve)
answer
Which of the following would cause AD to decrease, that is, shift to the left?
question
consumption, investment, net exports, saving
These are the reasons for why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports. (Government spending is assumed to be determined from outside the model). Saving would likely change too, but it is not one of the spending components of GDP.
These are the reasons for why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports. (Government spending is assumed to be determined from outside the model). Saving would likely change too, but it is not one of the spending components of GDP.
answer
Which of the following spending components of GDP will be affected by a change in the average price level or inflation rate?
question
Actions of the Federal Reserve Bank, The inflation rate affects the real value of currency, The inflation rate affects interest rates, The inflation rate affects imports and exports
nswer (a) is not correct - diminishing marginal utility explains why the demand for a particular good slopes down, but does not explain why the aggregate demand curve slopes down. . Answers b, c and d are the three effects of why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports.
nswer (a) is not correct - diminishing marginal utility explains why the demand for a particular good slopes down, but does not explain why the aggregate demand curve slopes down. . Answers b, c and d are the three effects of why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports.
answer
Aggregate demand slopes down because ______________.
question
At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices.
As production in the economy increases, eventually almost everyone will be working and all factories and machines run at maximum capacity. If output can no longer increase, increases in demand will lead to price increases only.
As production in the economy increases, eventually almost everyone will be working and all factories and machines run at maximum capacity. If output can no longer increase, increases in demand will lead to price increases only.
answer
Why does the aggregate supply curve become very steep at high levels of real GDP?
question
a shift to the right of the AS curve
If there is more capital in the economy, firms can produce more at any given price level. This leads to a shift of the AS curve to the right. Looking at the AS-AD model overall, the shift in the AS curve leads to a movement along the AD curve to the right.
If there is more capital in the economy, firms can produce more at any given price level. This leads to a shift of the AS curve to the right. Looking at the AS-AD model overall, the shift in the AS curve leads to a movement along the AD curve to the right.
answer
How would we model an increase in the amount of capital available in an economy?
question
right; a rightward
A change in investment spending directly affects aggregate demand through firms buying new equipment. Thus, the aggregate demand will increase and the AD curve will shift to the right. Eventually aggregate supply will also increase as the amount of capital in the economy increases. The aggregate supply curve shifts to the right.
A change in investment spending directly affects aggregate demand through firms buying new equipment. Thus, the aggregate demand will increase and the AD curve will shift to the right. Eventually aggregate supply will also increase as the amount of capital in the economy increases. The aggregate supply curve shifts to the right.
answer
The long-run effect of an increase in investment spending will be a shift of the aggregate demand curve to the ______________ and ______________ shift of the aggregate supply curve.
question
a shift left of the AS curve
If the new regulation is costly, then the cost of production increases at any level of output or alternatively firms are willing to produce less at any given price level (due to lower profits). This causes the AS curve to shift to the left.
If the new regulation is costly, then the cost of production increases at any level of output or alternatively firms are willing to produce less at any given price level (due to lower profits). This causes the AS curve to shift to the left.
answer
How would we model the effect of a new costly regulation on businesses?
question
1)the aggregate demand curve shifts to the right
2)At the old price level¸ desired spending exceeds production
3)Business inventory begins to fall
4)Businesses respond by increasing output
5)Marginal costs begin to rise as production increases
6)Businesses start to increase price.
7)Spending on consumption¸ investment¸ and net exports decrease as the price level rises
8)A new equilibrium is reached at a higher price and higher level of real GDP
2)At the old price level¸ desired spending exceeds production
3)Business inventory begins to fall
4)Businesses respond by increasing output
5)Marginal costs begin to rise as production increases
6)Businesses start to increase price.
7)Spending on consumption¸ investment¸ and net exports decrease as the price level rises
8)A new equilibrium is reached at a higher price and higher level of real GDP
answer
An economy is initially in equilibrium. Suppose that the government decides to increase spending and that simultaneously, consumers become more optimistic. Sort the statements in order so that they describe what happens.
question
higher inflation and higher RGDP
As the AD curve shifts to the right, spending exceeds production, inventories fall and firms produce more (higher real GDP), but they can only do so at a higher marginal cost of production, leading to increases in prices (the GDP deflator).
As the AD curve shifts to the right, spending exceeds production, inventories fall and firms produce more (higher real GDP), but they can only do so at a higher marginal cost of production, leading to increases in prices (the GDP deflator).
answer
An increase in Aggregate Demand results in a _______
question
higher inflation and lower RGDP
A shift of the AS to the left leads lowers real GDP. This situation causes spending to exceed production which causes inventories to fall. Firms respond by producing more (partial offset of the lower real GDP), but can only do so at a higher marginal cost of production, leading to increases in prices (the GDP deflator).
A shift of the AS to the left leads lowers real GDP. This situation causes spending to exceed production which causes inventories to fall. Firms respond by producing more (partial offset of the lower real GDP), but can only do so at a higher marginal cost of production, leading to increases in prices (the GDP deflator).
answer
An decrease in Aggregate Supply results in a _______
question
lower inflation and lower RDGP
As the AD curve shifts to the left, production exceeds spending, inventories rise, firms produce less (lower real GDP) which lowers the marginal cost of production, leading to decreases in prices (the GDP deflator)
As the AD curve shifts to the left, production exceeds spending, inventories rise, firms produce less (lower real GDP) which lowers the marginal cost of production, leading to decreases in prices (the GDP deflator)
answer
A decrease in Aggregate Demand results in a _______
question
an increase in AS
As AS shifts to the right, production exceeds spending, which leads firms to lower prices over time. The shift in the AS to the right typically leads to higher output, which means higher income (since GDP represent both the production and income in the economy).
As AS shifts to the right, production exceeds spending, which leads firms to lower prices over time. The shift in the AS to the right typically leads to higher output, which means higher income (since GDP represent both the production and income in the economy).
answer
People tend to like higher incomes and lower inflation. What kind of change in our model results in higher incomes and lower inflation?
question
a decrease in AS
A shift of the AS to the left leads lowers real GDP, which lowers income. This situation causes spending to exceed production which causes inventories to fall. Firms respond by producing more (partial offset of the lower real GDP), but can only do so at a higher marginal cost of production, leading to increases in prices (the GDP deflator).
A shift of the AS to the left leads lowers real GDP, which lowers income. This situation causes spending to exceed production which causes inventories to fall. Firms respond by producing more (partial offset of the lower real GDP), but can only do so at a higher marginal cost of production, leading to increases in prices (the GDP deflator).
answer
People really dislike falling income and rising inflation. What kind of change in our model will make people really unhappy?
question
an increase in RGDP and an increase in inflation
answer
Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in:
question
1)with less capital, businesses cannot produce as much as before the disaster. Output initially falls and the AS curve shifts left
2)At the old price level¸ desired spending exceeds production.
3)Business inventory begins to fall.
4)Businesses respond by increasing output.
5)Marginal costs begin to rise as production increases.
6)Businesses start to increase prices.
7)Spending on consumption¸ investment¸ and net exports slows down as the price level rises.
8)A new equilibrium is reached at a higher price and lower level of real GDP.
2)At the old price level¸ desired spending exceeds production.
3)Business inventory begins to fall.
4)Businesses respond by increasing output.
5)Marginal costs begin to rise as production increases.
6)Businesses start to increase prices.
7)Spending on consumption¸ investment¸ and net exports slows down as the price level rises.
8)A new equilibrium is reached at a higher price and lower level of real GDP.
answer
An economy is initially in equilibrium. Suppose that a natural disaster destroys some of the physical capital in the economy. Sort the statements in order so that they describe what happens.
question
productivity
answer
A rightward shift in the aggregate supply curve is best explained by an increase in
question
decrease in AD
answer
A decrease in government spending will cause a(n)
question
an increase in RGDP
answer
An equal increase in government spending and taxes would result in
question
multiplier effect
answer
An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the
question
18 billion dollars
answer
An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. If the multiplier is 2, by how much should the government cut spending to achieve its objective?
question
intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
answer
discretionary fiscal policy refers to
question
is designed to expand real GDP
answer
Expansionary fiscal policy is so named because it
question
false
answer
Fiscal policy is mainly undertaken by the Federal Reserve.
question
2 trillion dlls
answer
If the recessionary gap is 2 trillion dollars and the multiplier is 2, then total spending would have to rise by
question
the debt would get larger from a decrease in taxes than an increase in spending.
answer
If the economy were in a 4 trillion dollar recessionary gap, and the multiplier were 2, then to close the gap
question
expansionary fiscal policy
answer
If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)
question
demand-side inflation
answer
Inflation caused by an increase in aggregate spending is referred to as
question
complement private investment
answer
Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely
question
Is not subject to the timing problems of discretionary policy.
answer
One advantage of automatic stabilization policy over discretionary policy is that it
question
government spending goes to infrastructure, government spending goes to the unemployed, government spending has a larger multiplier effect.
answer
Which of the following supports government spending over tax cuts for recession
question
countercyclical
answer
When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be
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