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The marginal propensity to consume is

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the fraction of each additional dollar of disposable income spent on consumption.

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Suppose lower expectations lead to a decrease of $240 in desired investment in the economy and the marginal propensity to consume is 0.75.

Table 10.2

Spending CyclesChange in this Cycle's Spending and IncomeCumulative Decrease in Spending and IncomeFirst-cycle spending−$ 240−$ 240Second-cycle spending________Third-cycle spending________

(Table 10.2) What will be the total decrease in aggregate demand resulting from the initial $240 decrease in investment expenditure after an infinite number of cycles?

Table 10.2

Spending CyclesChange in this Cycle's Spending and IncomeCumulative Decrease in Spending and IncomeFirst-cycle spending−$ 240−$ 240Second-cycle spending________Third-cycle spending________

(Table 10.2) What will be the total decrease in aggregate demand resulting from the initial $240 decrease in investment expenditure after an infinite number of cycles?

answer

$960.00

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Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion. If AD shifts to the left by $10 billion,

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real output will fall by less than $10 billion.

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The formula for the multiplier is

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1 / (1 − MPC).

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Suppose an economy can be described by the consumption function C = 250 + 0.90YD and I = $300. What is the multiplier?

answer

10

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If the marginal propensity to save is 0.80 and the initial decline in investment is $985, by how much will aggregate demand eventually change?

answer

$1,231.25

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A decrease in a recessionary GDP gap will most likely be associated with a decrease in

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cyclical unemployment.

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Assuming an upward-sloping AS curve, if an economy is at full employment and consumption spending decreases while all other levels of spending remaining constant, then

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increased unemployment results.

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A rightward shift in an aggregate demand curve will cause

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higher prices, but not higher output, if the aggregate supply curve is vertical.

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Assuming an upward-sloping AS curve, if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant, then the price level

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decreases and output decreases.

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If aggregate demand shifts to the left by $400 billion and aggregate supply is upward-sloping, then real output will decrease by

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less than $400 billion, and the price level will fall.

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There is a trade-off between unemployment and inflation when the aggregate

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supply curve is upward-sloping.

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If firms collectively find themselves unable keep up with consumer demand and constantly run out of products to sell, this is a sign of

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impending inflation.

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Which of the following is eliminated when the economy's output is equal to full-employment GDP?

answer

the real GDP gap

question

Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80.

Table 10.1

Spending CyclesChange in this Cycle's Spending and IncomeCumulative Increase in Spending and IncomeFirst-cycle spending$ 325$ 325Second-cycle spending________Third-cycle spending________

(Table 10.1) What is the change in the second cycle of spending resulting from the higher initial investment?

Table 10.1

Spending CyclesChange in this Cycle's Spending and IncomeCumulative Increase in Spending and IncomeFirst-cycle spending$ 325$ 325Second-cycle spending________Third-cycle spending________

(Table 10.1) What is the change in the second cycle of spending resulting from the higher initial investment?

answer

$260

question

Which of the following can eliminate a recessionary GDP gap, ceteris paribus?

answer

an increase in consumption expenditure

question

Assuming an upward-sloping aggregate supply curve, when aggregate demand decreases, unemployment

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increases, and the price level decreases.

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If the marginal propensity to consume is 0.75, then the multiplier equals

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1 / (1 − 0.75).

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If equilibrium GDP exceeds full-employment GDP,

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the difference is the inflationary GDP gap.

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A decrease in sales expectations may shift the AD curve to the

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left, causing more undesired investment.

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If the marginal propensity to save is 0.78 and the initial injection of in investment is $810, by how much will aggregate demand eventually decrease?

answer

$3,681.82

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If an initial investment change of $500 creates a $625 eventual change in aggregate demand, then we can infer the MPS is

answer

0.80.

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Assuming an upward-sloping aggregate supply curve, when aggregate demand increases, unemployment

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decreases, and the price level increases.

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If consumers spend 52 cents out of every extra dollar received, the multiplier is

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2.08.

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Because the aggregate supply curve rises more steeply as the economy approaches full employment,

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inflation tends to accelerate.

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If consumers spend 90 cents out of every extra dollar received, the

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MPC is 0.90.

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If the marginal propensity to consume is 0.60, then the multiplier equals

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2.50.

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Which of the following is an example of the multiplier at work as a result of an increase in consumption expenditures?

answer

Households and businesses receive income from consumption expenditures; they spend a portion of this new income; these expenditures, in turn, generate income for other businesses and households, which in turn spend a portion of the new income, and so on.

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Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion. If aggregate demand increases by a total of $50 billion,

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he resulting equilibrium GDP will be lower than full-employment GDP because some of the additional spending will drive up prices instead of increasing output.

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The recessionary GDP gap represents the

answer

value of the goods and services that could be produced but were not due to unemployed resources.

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If the MPC = 0.80, the cumulative decrease in total spending resulting from an initial $150 decrease in spending would be

answer

$750.

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Calculate the total change in spending due to an initial $100 increase in aggregate demand, given that the MPC = 0.60.

answer

$250 increase

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Macro disturbances can be caused by changes in

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consumption, investment, government spending, or exports.

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If firms plan for $113 billion in investment for the year, but actual investment for the year was $138 billion, then

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unplanned investment was $25 billion, and unemployment is likely to rise.

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Assuming an upward-sloping AS curve, if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant, then

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a GDP gap emerges.

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Assume the equilibrium level of output is less than full employment. To achieve full-employment equilibrium, the aggregate demand curve must shift to the right by

answer

an amount greater than the recessionary GDP gap because the spending increase raises the price level.

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Which of the following can eliminate an inflationary GDP gap, ceteris paribus?

answer

a decrease in consumption expenditure

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Given the MPS = 0.40, with no government and no foreign trade, a $10 billion increase in investment will eventually result in an increase in

answer

total spending by $25 billion.

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Given that C = $1,000 + 0.60YD, if investment rises by $1,000, then aggregate demand should eventually rise by

answer

$2,500.00.

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Suppose an economy can be described by the consumption function C = 250 + 0.90YD and I = $300. What is the multiplier?

answer

10

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Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion. If AD shifts to the left by $10 billion,

answer

real output will fall by less than $10 billion.

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To illustrate the ultimate impact of the multiplier process when investment spending falls, we should

answer

shift the AD curve leftward twice, once for the autonomous change and second for the multiplier effect.