Macroeconomics Weeks 2 AND 3: Aggregate Expenditures Model

question

In the aggregate expenditure identity, the equilibrium condition is that

answer

aggregate expenditure equals output.

question

Which of the following describes the macroeconomic equilibrium?

answer

Total spending = total output

question

Which of the following statements regarding aggregate expenditures is correct?

answer

When the interest rate is low, investment spending increases.

question

Assume taxes = $0. According to the chart, Steve's consumption is equal to

answer

$34

question

Assume taxes = $0. According to the chart, Dean's consumption is equal to

answer

$50

question

Assume taxes = $0. According to the chart, Bruce's consumption is equal to

answer

$66

question

Assume taxes = $0. According to the chart, Steve is able to contribute $4 to his savings.

answer

False

question

Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.

answer

True

question

When graphing Keynes's consumption function, we place __________ on the horizontal axis and __________ on the vertical axis.

answer

real GDP; consumption

question

According to Keynes, consumption is a function of

answer

Real GDP

question

Point A on the graph represents the

answer

point where consumption equals income.

question

According to the graph, if real GDP is below $500, inventories will be

answer

below the planned level, and firms will increase their production.

question

Given the linear consumption function C = 20 + 0.9Y, the y-intercept is ______.

answer

question

Given the linear consumption function C = 20 + 0.9Y, the slope of the line is ______.

answer

0.9

question

According to the graph, point Y2 represents the point at which

answer

income exceeds consumption.

question

According to the graph, the point Y1 represents the point at which

answer

consumption exceeds income.

question

Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.

answer

True

question

The fraction of each additional dollar of income spent defines which of the following terms?

answer

Marginal propensity to consume (MPC)

question

Which of the following statements regarding the marginal propensity to consume (MPC) is correct?

answer

Assuming taxes = 0, MPC = 1 − the marginal propensity to save (MPS).

question

According to the graph, what will happen to C(Y) when autonomous consumption increases to $30?

answer

C(Y) will shift upward with no change in the slope.

question

According to the graph, what will happen to C(Y) when the marginal propensity to consume increases?

answer

The slope of C(Y) will steepen

question

If the marginal propensity to consume = .85 and taxes = 0, we know that consumers typically save $.15 of each additional dollar of income they receive.

answer

True

question

Assuming taxes equal zero, if the average propensity to consume = .9, we can conclude that consumers typically save 10% of their total income

answer

True

question

If households saved each additional dollar of income they received, the slope of the consumption function would equal

answer

zero

question

The change in savings that results from a change in income represents the

answer

marginal propensity to save.

question

If a household's disposable income increases from $80,000 to $87,500 and their consumption increases from $60,000 to $66,000, the

answer

slope of the savings function is .2.

question

If autonomous spending = $10,

answer

the y-intercept of the savings function will be −$10.

question

Suppose your total consumption = $800, and your total income = $1,000, your average propensity to consume is _____.

answer

question

Which of the following statements regarding Keynes's aggregate expenditures (AE) model is correct?

answer

Taxes are leakages out of the circular flow model and reduce disposable income.

question

Which of the following is not a component of aggregate expenditures?

answer

Taxes

question

This graph shows a shift in the aggregate expenditures (AE) line. Which of the following statements regarding the causes of the shift are true?

answer

An autonomous spending component increased.

question

An increase in consumer income will cause the consumption function to shift outward.

answer

False

question

Taxes

answer

decrease disposable income.

question

___________ are leakages out of the circular flow model.

answer

taxes

question

An increase in autonomous spending will shift the aggregate expenditures (AE) line upward.

answer

True

question

The Keynesian model of aggregate expenditures

answer

All of the above

question

According to Keynes's aggregate expenditures model, macroeconomic equilibrium occurs when

answer

aggregate expenditures equal income.

question

Which of the following identifies a problem with the Keynesian model?

answer

The model ignores the effects of price changes on income, or real GDP.

question

The aggregate demand/aggregate supply model relates the effects of changing prices on the components of the Keynesian model.

answer

True

question

According to the aggregate demand/aggregate supply curve, when prices rise,

answer

businesses will cut back spending.

question

According to the aggregate demand/aggregate supply model, when prices rise,

answer

consumers will decrease their spending.

question

Macroeconomic equilibrium can be expressed as

answer

leakages = injections

question

According to Keynes, which of the following could have helped pull the United States out of the Great Depression?

answer

an increase in government spending

question

Which of the following would cause output to fall as a result of an increase in the price level?

answer

All of the above

question

What would happen if the government increased its spending in response to an increase in consumer savings?

answer

The increase in government spending would offset (fully or partially) the decline in consumer spending.

question

What is the effect on output of an increase in spending of $50 if the marginal propensity to consume is 0.8?

answer

$250

question

Which of the following factors would increase the size of the multiplier?

answer

An increase in the marginal propensity to consume

question

How does the household savings rate affect the impact on output of an increase in government spending?

answer

If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been.

question

Which of the following would cause output to rise if the economy were operating below the full-employment level of output?

answer

An increase in the marginal propensity to consume

question

Which of the following must be true if output rises by $400 million following an increase in government spending of $100 million?

answer

The marginal propensity to consume must be 0.75.

question

When interest rates rise, we can predict that businesses will

answer

decrease their quantity invested.

question

When graphing the investment demand curve, we place _________ on the horizontal axis and _________ on the vertical axis.

answer

investment, interest rate

question

Business spending, or investment, is an injection into the circular flow model.

answer

True

question

When investment is added to the consumption function,

answer

the y-intercept shifts upward.

question

Which of the following does not directly influence investment expenditures?

answer

Marginal propensity to consume

question

If businesses predict an upcoming recession, they will increase their investments.

answer

False

question

When businesses decide to increase their investments,

answer

equilibrium income rises.

question

When income is above equilibrium,

answer

unintended inventory accumulation causes businesses to cut back production.

question

In a simple model where aggregate expenditures (AE) are comprised only of consumption and investment, the intersection of the AE line and the 45-degree line is

answer

above the point where savings equals zero.

question

Which of the following is not a source of savings in an economy?

answer

Government spending

question

According to the graph below, at point A

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businesses are not producing enough and must increase production.

question

Suppose the linear consumption funtion is C = 15 + 0.8Y. Using the savings approach, what is the y-intercept of the savings function?

answer

−15

question

Assume that consumers are the only players in the economy. When income equals consumption, we can conclude that

answer

savings is equal to zero.

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Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment.

answer

True

question

Suppose that investment spending increases by $4.5 billion, and the slope of the aggregate expenditures (AE) line is .75. What is the change in the equilibrium level of real GDP?

answer

$18 billion

question

If a $6 billion increase in investment spending causes a $30 billion increase in equilibrium real GDP, the slope of the aggregate expenditures (AE) line equals ______.

answer

question

Assume taxes = 0 and imports = 0. If the marginal propensity to consume = .5, the value of the multiplier is

answer

question

An increase in autonomous spending raises GDP by more than the original increase in spending, because

answer

individuals spend part of the money, increasing incomes of other individuals, who then spend part of their extra money.

question

If the marginal propensity to consume is 0.5, to how much will GDP increase if autonomous spending increases by $5 million?

answer

$10 million

question

If income increases by $250 million as a result of a $50 million autonomous increase in investment spending, how large is the multiplier?

answer

question

Which of the following statements about the multiplier is true?

answer

The higher the marginal propensity to consume, the larger the multiplier.

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If the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system?

answer

Autonomous spending increases by $2,000, and GDP rises by $20,000.

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Keynes believed government could do nothing to stimulate the economy during recessionary times or to slow down the economy during inflationary times.

answer

False

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Suppose the government provides an extra incentive for consumers to save. What do you predict will happen?

answer

The slope of the AE line will flatten.

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A shift in the aggregate expenditures (AE) line causes

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a change in equilibrium GDP larger than the shift of the AE line.

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What is the effect on output of an increase in government spending of $1 million, if the marginal propensity to consume is 0.8?

answer

$5 million

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When the equilibrium level of output in the economy is greater than the full-employment level, the economy is said to have

answer

an inflationary gap.

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What determines the slope of the aggregate expenditures line?

answer

The marginal propensity to consume

question

Which of the following policy measures would help close a recessionary gap?

answer

An increase in government spending

question

Which of the following is the correct expression of the tax multiplier?

answer

−b / (1 − b)

question

If the slope of the aggregate expenditures line (AE) is .8 and taxes increase by $5, what is the change in equilibrium income? Assume government spending equals 0.

answer

$20 decrease in equilibrium income

question

Which of the following does not represent a leakage from household consumption?

answer

Purchases

question

What happens if the government increases taxes without increasing spending?

answer

Aggregate demand falls, and output declines.

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How do households react to an increase in taxes?

answer

They reduce both consumption and savings.

question

An increase in taxes reduces aggregate expenditures by an amount equal to

answer

the change in taxes multiplied by −b.

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By how much does output increase if government spending and taxes rise by $20 million and the marginal propensity to consume is 0.75?

answer

$20 million

question

Suppose the U.S. dollar strengthens relative to the German deutsche mark. Which of the following is most likely to occur?

answer

German imports into the U.S. will increase

question

Which of the following correctly expresses how savings equals investment?

answer

I = S + (T − G) − NX

question

If the value of the U.S. dollar rises relative to the French franc,

answer

French imports into the U.S. rise.

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Which of the following factors affects the demand for imports and exports?

answer

All of the above

question

Which of the following provides the savings with which businesses finance their investments?

answer

The trade deficit

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If the level of imports remains constant and the marginal propensity to consume is 0.75, what happens to output when exports increase from $550 to $750 million?

answer

Output rises by $800 million.

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How is it possible for the United States to import more than it exports?

answer

Foreigners lend the U.S. the money to pay for the imports.

question

What effect does a depreciation in the dollar have on net exports by the United States?

answer

It increases net exports, increasing output.

question

Which of the following events will most likely cause an inward shift of the short-run aggregate supply curve?

answer

The economy experiences a supply shock

question

Which of the following events most likely caused the aggregate demand curve to shift inward?

answer

A tax increase reduced consumers' disposable income.

question

Which of the following events will most likely cause an outward shift in the aggregate demand curve?

answer

The government increases spending.

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What is the most likely short-run result of an inward shift of the aggregate demand curve?

answer

A lower equilibrium price and output

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Rising production costs will shift the short-run aggregate supply curve inward.

answer

True

question

When the price level is above the equilibrium price,

answer

businesses recognize increasing profits.

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When an economy is operating above full employment, we expect prices to adjust upwards.

answer

True

question

Adaptive expectations will speed up the adjustment process that takes place when an economy operates above or below full employment.

answer

False

question

Which of the following will occur when the economy operates above full employment?

answer

Prices will adjust upward.

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What happens when the economy is operating beyond the full-employment level of output?

answer

Prices and wages begin to rise, causing firms to cut back on production until the full-employment level of output is reached.

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In the long run, what happens to the levels of prices and output as a result of an outward shift in the short-run aggregate supply curve?

answer

Prices rise, and output returns to the full-employment level.

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A kink in the short-run aggregate supply curve reflects the fact that

answer

wages rise when the economy operates beyond full employment but tend not to fall when the economy's resources are underemployed.

question

Adaptive expectation formation means that

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people base their expectations of the future on what has occurred in the past.

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According to the graph below, a change in the spending plans of consumers, businesses, government, or foreigners is illustrated by the movement from point ______ to point ______.

answer

A; B

question

An increase in an economy's resource pool will

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will shift both the long-run and short-run aggregate supply curves outward.

question

Suppose a supply shock causes an inward shift of the short-run aggregate supply curve. In the short run,

answer

prices rise, and output falls.

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In the short run, what is the effect of an outward shift in the aggregate demand curve?

answer

Prices and output rise.

question

What happens in the short run to prices and output if the price of oil rises temporarily?

answer

Prices rise, and output falls below the short-run equilibrium level.

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What is the effect of technological progress on prices and output?

answer

Both the long-run and the short-run aggregate supply curves shift outward.

question

Over time, the long-run aggregate supply curve can shift outward as a result of

answer

increases in productivity.

question

Which of the following could cause aggregate demand to decrease?

answer

Consumers decide to increase their savings.

question

Fiscal and monetary policies are often useful in pulling an economy out of a recession.

answer

True

question

Which of the following policies should be used to stimulate the economy?

answer

Buying government securities

question

An example of fiscal policy is

answer

raising taxes.

question

Which of the following factors would cause aggregate demand to fall?

answer

All of the above

question

"Bad deflation" refers to the process in which

answer

prices and output fall.

question

According to classical economists, what happens to prices and output in the long run if there is an autonomous decline in aggregate demand?

answer

Prices fall, and output returns to the full-employment level of output.

question

Which policy tools could be used to deal with an autonomous decrease in aggregate demand?

answer

The government could offset the drop in consumer spending with spending of its own

question

According to supporters of rational expectations, which of the following explains why increases in government spending do not cause output to rise?

answer

Consumers recognize that government spending today will have to be paid for by an increase in taxes tomorrow

question

A supply shock will shift the short-run aggregate supply curve __________ and create __________.

answer

inward; excess demand

question

Which of the following statements regarding the long-run aggregate supply (LRAS) curve is true?

answer

Increased immigration can shift the LRAS curve outward.

question

Demand-driven deflation is often referred to as bad deflation.

answer

True

question

What was the effect on prices and output when oil prices rose in the 1970s?

answer

The short-run aggregate supply curve shifted to the left, output declined, and prices rose.

question

What would happen if the government cut taxes to stimulate aggregate demand during a period of stagflation?

answer

Prices, output, and employment would all rise.

question

Which of the following factors would not cause the equilibrium level of output to increase?

answer

Increases in the money supply

question

In the short run, what happens to the level of output and the level of prices as a result of a technological improvement?

answer

Prices fall, and output rises.

question

What would happen if the government decided to reduce inflation by cutting government spending during a period of stagflation?

answer

Unemployment would rise while output and prices would fall.

question

The supply curve for loanable funds slopes upward because

answer

people will forego consumption at higher interest rates and save.

question

Which of the following will increase the supply of loanable funds in the U.S.?

answer

Reduction in government spending

question

In the macroeconomy, savings comes from

answer

The savings of households, a budget surplus, and a trade deficit.

question

Which of the following is affected by the rate of interest?

answer

The supply of and demand for loanable funds

question

Which of the following will occur when the real interest rate rises?

answer

People are more willing to forgo spending in order to save.

question

Which of the following would cause an inward shift in the supply of loanable funds?

answer

A decline in the trade deficit

question

When the government runs a budget deficit,

answer

the supply curve for loanable funds shifts inward.

question

The time between the realization of economic conditions and the implementation of fiscal policy is called the _____________ lag.

answer

administrative

question

The theory of implementing fiscal policy always works in practice

answer

false

question

The implementation of fiscal policy might be delayed because of constituent-supported programs that are difficult to retract.

answer

True

question

Which of the following will not occur during a recession?

answer

Prices rise.

question

The "recognition lag" refers to the fact that

answer

it takes a while before policymakers recognize that aggregate demand has shifted inward.

question

The fact that it may take months to actually distribute government spending once that spending has been approved is known as the

answer

operational lag.

question

Which of the following is one of the factors that makes the use of fiscal policy difficult?

answer

Once programs have been established, it is difficult to cut spending.

question

The time between the realization of economic conditions and the implementation of fiscal policy is called the _____________ lag.

answer

administrative

question

The theory of implementing fiscal policy always works in practice.

answer

false

question

The implementation of fiscal policy might be delayed because of constituent-supported programs that are difficult to retract.

answer

True

question

Which of the following will not occur during a recession?

answer

Prices rise.

question

The "recognition lag" refers to the fact that

answer

it takes a while before policymakers recognize that aggregate demand has shifted inward.

question

The fact that it may take months to actually distribute government spending once that spending has been approved is known as the

answer

operational lag.

question

Which of the following is one of the factors that makes the use of fiscal policy difficult?

answer

Once programs have been established, it is difficult to cut spending.

question

Automatic stabilizers control

answer

the fluctuations of the business cycle.

question

Which of the following represents an automatic stabilizer?

answer

Unemployment insurance

question

How does the tax system act as an automatic stabilizer?

answer

When income rises, people move into higher tax brackets, reducing somewhat the amount of money available for consumption.

question

Which of the following does not occur as a result of automatic stabilizers?

answer

Increases in income cause greater increases in consumer spending than they otherwise would.

question

What effect would a decrease in aggregate demand have on output, given the presence of automatic stabilizers?

answer

Output would fall but by less than it would without stabilizers.

question

Which of the following represents an aim of automatic stabilizers?

answer

To reduce consumer spending in a boom in order to avoid overheating the economy

question

The volatile fluctuations of the business cycle occur because of the multiplier effect.

answer

True

question

According to the new classical view of economics, when the aggregate demand curve shifts outward,

answer

prices and output automatically adjust to the long-run equilibrium.

question

New classical economists believe that the rationality of people who save in preparation for higher future taxes shifts the aggregate demand curve outward.

answer

False

question

Suppose the government purchased a $10 million satellite. New Keynesian economists predict that

answer

prices would be slow to adjust and create profit opportunities for suppliers.

question

According to the new classical view of the macroeconomy, what might be the effect on output of an increase in aggregate demand?

answer

Output remains unchanged, and prices rise.

question

What is the effect on prices and output if people recognize that an increase in government spending will have to be paid for by an increase in taxes?

answer

Prices and output will not change.

question

According to new Keynesians, fiscal policy can have an effect on output because of which of the following factors?

answer

Wages are sticky

question

What is the likely effect of an increase in government spending if prices and wages are very flexible?

answer

Prices will rise, and output will remain unchanged.

question

Which of the following statements is false?

answer

Keynesians believe that prices and wages adjust quickly to new economic conditions.

question

Which of the following is not a role of the Federal Reserve Bank?

answer

To insure depository institutions

question

How many Federal Reserve districts are there in the U.S.?

answer

question

Which of the following groups makes up the Federal Open Market Committee (FOMC)?

answer

The seven-member Board of Governors plus five presidents of the twelve district banks

question

On the Fed's balance sheet

answer

Treasury securities appear as assets, and U.S. dollars appear as liabilities.

question

The primary role of the Fed is to control inflation through monetary policy set by the Federal Open Market Committee (FOMC).

answer

True

question

Which of the following is an additional role of the Fed?

answer

All of the above are additional roles of the Fed.

question

The Federal Reserve Bank is a type of commercial bank.

answer

False

question

Which of the following is not a monetary policy tool of the Fed?

answer

The prime rate

question

The Fed's most commonly used tool of monetary policy is

answer

Open market operations

question

The purchase of Treasury securities by the Fed will increase the money supply.

answer

True

question

The supply curve of money ______________, while the demand curve for money ___________.

answer

is a vertical line; slopes downward

question

Because changing the required reserve ratio can have drastic effects on the economy, the Fed rarely exercises this tool of monetary policy.

answer

True

question

Lowering the discount will increase the money supply.

answer

True

question

The Fed can increase the money supply by

answer

decreasing the required reserve ratio.

1 of 181

question

In the aggregate expenditure identity, the equilibrium condition is that

answer

aggregate expenditure equals output.

question

Which of the following describes the macroeconomic equilibrium?

answer

Total spending = total output

question

Which of the following statements regarding aggregate expenditures is correct?

answer

When the interest rate is low, investment spending increases.

question

Assume taxes = $0. According to the chart, Steve's consumption is equal to

answer

$34

question

Assume taxes = $0. According to the chart, Dean's consumption is equal to

answer

$50

question

Assume taxes = $0. According to the chart, Bruce's consumption is equal to

answer

$66

question

Assume taxes = $0. According to the chart, Steve is able to contribute $4 to his savings.

answer

False

question

Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.

answer

True

question

When graphing Keynes's consumption function, we place __________ on the horizontal axis and __________ on the vertical axis.

answer

real GDP; consumption

question

According to Keynes, consumption is a function of

answer

Real GDP

question

Point A on the graph represents the

answer

point where consumption equals income.

question

According to the graph, if real GDP is below $500, inventories will be

answer

below the planned level, and firms will increase their production.

question

Given the linear consumption function C = 20 + 0.9Y, the y-intercept is ______.

answer

question

Given the linear consumption function C = 20 + 0.9Y, the slope of the line is ______.

answer

0.9

question

According to the graph, point Y2 represents the point at which

answer

income exceeds consumption.

question

According to the graph, the point Y1 represents the point at which

answer

consumption exceeds income.

question

Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.

answer

True

question

The fraction of each additional dollar of income spent defines which of the following terms?

answer

Marginal propensity to consume (MPC)

question

Which of the following statements regarding the marginal propensity to consume (MPC) is correct?

answer

Assuming taxes = 0, MPC = 1 − the marginal propensity to save (MPS).

question

According to the graph, what will happen to C(Y) when autonomous consumption increases to $30?

answer

C(Y) will shift upward with no change in the slope.

question

According to the graph, what will happen to C(Y) when the marginal propensity to consume increases?

answer

The slope of C(Y) will steepen

question

If the marginal propensity to consume = .85 and taxes = 0, we know that consumers typically save $.15 of each additional dollar of income they receive.

answer

True

question

Assuming taxes equal zero, if the average propensity to consume = .9, we can conclude that consumers typically save 10% of their total income

answer

True

question

If households saved each additional dollar of income they received, the slope of the consumption function would equal

answer

zero

question

The change in savings that results from a change in income represents the

answer

marginal propensity to save.

question

If a household's disposable income increases from $80,000 to $87,500 and their consumption increases from $60,000 to $66,000, the

answer

slope of the savings function is .2.

question

If autonomous spending = $10,

answer

the y-intercept of the savings function will be −$10.

question

Suppose your total consumption = $800, and your total income = $1,000, your average propensity to consume is _____.

answer

question

Which of the following statements regarding Keynes's aggregate expenditures (AE) model is correct?

answer

Taxes are leakages out of the circular flow model and reduce disposable income.

question

Which of the following is not a component of aggregate expenditures?

answer

Taxes

question

This graph shows a shift in the aggregate expenditures (AE) line. Which of the following statements regarding the causes of the shift are true?

answer

An autonomous spending component increased.

question

An increase in consumer income will cause the consumption function to shift outward.

answer

False

question

Taxes

answer

decrease disposable income.

question

___________ are leakages out of the circular flow model.

answer

taxes

question

An increase in autonomous spending will shift the aggregate expenditures (AE) line upward.

answer

True

question

The Keynesian model of aggregate expenditures

answer

All of the above

question

According to Keynes's aggregate expenditures model, macroeconomic equilibrium occurs when

answer

aggregate expenditures equal income.

question

Which of the following identifies a problem with the Keynesian model?

answer

The model ignores the effects of price changes on income, or real GDP.

question

The aggregate demand/aggregate supply model relates the effects of changing prices on the components of the Keynesian model.

answer

True

question

According to the aggregate demand/aggregate supply curve, when prices rise,

answer

businesses will cut back spending.

question

According to the aggregate demand/aggregate supply model, when prices rise,

answer

consumers will decrease their spending.

question

Macroeconomic equilibrium can be expressed as

answer

leakages = injections

question

According to Keynes, which of the following could have helped pull the United States out of the Great Depression?

answer

an increase in government spending

question

Which of the following would cause output to fall as a result of an increase in the price level?

answer

All of the above

question

What would happen if the government increased its spending in response to an increase in consumer savings?

answer

The increase in government spending would offset (fully or partially) the decline in consumer spending.

question

What is the effect on output of an increase in spending of $50 if the marginal propensity to consume is 0.8?

answer

$250

question

Which of the following factors would increase the size of the multiplier?

answer

An increase in the marginal propensity to consume

question

How does the household savings rate affect the impact on output of an increase in government spending?

answer

If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been.

question

Which of the following would cause output to rise if the economy were operating below the full-employment level of output?

answer

An increase in the marginal propensity to consume

question

Which of the following must be true if output rises by $400 million following an increase in government spending of $100 million?

answer

The marginal propensity to consume must be 0.75.

question

When interest rates rise, we can predict that businesses will

answer

decrease their quantity invested.

question

When graphing the investment demand curve, we place _________ on the horizontal axis and _________ on the vertical axis.

answer

investment, interest rate

question

Business spending, or investment, is an injection into the circular flow model.

answer

True

question

When investment is added to the consumption function,

answer

the y-intercept shifts upward.

question

Which of the following does not directly influence investment expenditures?

answer

Marginal propensity to consume

question

If businesses predict an upcoming recession, they will increase their investments.

answer

False

question

When businesses decide to increase their investments,

answer

equilibrium income rises.

question

When income is above equilibrium,

answer

unintended inventory accumulation causes businesses to cut back production.

question

In a simple model where aggregate expenditures (AE) are comprised only of consumption and investment, the intersection of the AE line and the 45-degree line is

answer

above the point where savings equals zero.

question

Which of the following is not a source of savings in an economy?

answer

Government spending

question

According to the graph below, at point A

answer

businesses are not producing enough and must increase production.

question

Suppose the linear consumption funtion is C = 15 + 0.8Y. Using the savings approach, what is the y-intercept of the savings function?

answer

−15

question

Assume that consumers are the only players in the economy. When income equals consumption, we can conclude that

answer

savings is equal to zero.

question

Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment.

answer

True

question

Suppose that investment spending increases by $4.5 billion, and the slope of the aggregate expenditures (AE) line is .75. What is the change in the equilibrium level of real GDP?

answer

$18 billion

question

If a $6 billion increase in investment spending causes a $30 billion increase in equilibrium real GDP, the slope of the aggregate expenditures (AE) line equals ______.

answer

question

Assume taxes = 0 and imports = 0. If the marginal propensity to consume = .5, the value of the multiplier is

answer

question

An increase in autonomous spending raises GDP by more than the original increase in spending, because

answer

individuals spend part of the money, increasing incomes of other individuals, who then spend part of their extra money.

question

If the marginal propensity to consume is 0.5, to how much will GDP increase if autonomous spending increases by $5 million?

answer

$10 million

question

If income increases by $250 million as a result of a $50 million autonomous increase in investment spending, how large is the multiplier?

answer

question

Which of the following statements about the multiplier is true?

answer

The higher the marginal propensity to consume, the larger the multiplier.

question

If the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system?

answer

Autonomous spending increases by $2,000, and GDP rises by $20,000.

question

Keynes believed government could do nothing to stimulate the economy during recessionary times or to slow down the economy during inflationary times.

answer

False

question

Suppose the government provides an extra incentive for consumers to save. What do you predict will happen?

answer

The slope of the AE line will flatten.

question

A shift in the aggregate expenditures (AE) line causes

answer

a change in equilibrium GDP larger than the shift of the AE line.

question

What is the effect on output of an increase in government spending of $1 million, if the marginal propensity to consume is 0.8?

answer

$5 million

question

When the equilibrium level of output in the economy is greater than the full-employment level, the economy is said to have

answer

an inflationary gap.

question

What determines the slope of the aggregate expenditures line?

answer

The marginal propensity to consume

question

Which of the following policy measures would help close a recessionary gap?

answer

An increase in government spending

question

Which of the following is the correct expression of the tax multiplier?

answer

−b / (1 − b)

question

If the slope of the aggregate expenditures line (AE) is .8 and taxes increase by $5, what is the change in equilibrium income? Assume government spending equals 0.

answer

$20 decrease in equilibrium income

question

Which of the following does not represent a leakage from household consumption?

answer

Purchases

question

What happens if the government increases taxes without increasing spending?

answer

Aggregate demand falls, and output declines.

question

How do households react to an increase in taxes?

answer

They reduce both consumption and savings.

question

An increase in taxes reduces aggregate expenditures by an amount equal to

answer

the change in taxes multiplied by −b.

question

By how much does output increase if government spending and taxes rise by $20 million and the marginal propensity to consume is 0.75?

answer

$20 million

question

Suppose the U.S. dollar strengthens relative to the German deutsche mark. Which of the following is most likely to occur?

answer

German imports into the U.S. will increase

question

Which of the following correctly expresses how savings equals investment?

answer

I = S + (T − G) − NX

question

If the value of the U.S. dollar rises relative to the French franc,

answer

French imports into the U.S. rise.

question

Which of the following factors affects the demand for imports and exports?

answer

All of the above

question

Which of the following provides the savings with which businesses finance their investments?

answer

The trade deficit

question

If the level of imports remains constant and the marginal propensity to consume is 0.75, what happens to output when exports increase from $550 to $750 million?

answer

Output rises by $800 million.

question

How is it possible for the United States to import more than it exports?

answer

Foreigners lend the U.S. the money to pay for the imports.

question

What effect does a depreciation in the dollar have on net exports by the United States?

answer

It increases net exports, increasing output.

question

Which of the following events will most likely cause an inward shift of the short-run aggregate supply curve?

answer

The economy experiences a supply shock

question

Which of the following events most likely caused the aggregate demand curve to shift inward?

answer

A tax increase reduced consumers' disposable income.

question

Which of the following events will most likely cause an outward shift in the aggregate demand curve?

answer

The government increases spending.

question

What is the most likely short-run result of an inward shift of the aggregate demand curve?

answer

A lower equilibrium price and output

question

Rising production costs will shift the short-run aggregate supply curve inward.

answer

True

question

When the price level is above the equilibrium price,

answer

businesses recognize increasing profits.

question

When an economy is operating above full employment, we expect prices to adjust upwards.

answer

True

question

Adaptive expectations will speed up the adjustment process that takes place when an economy operates above or below full employment.

answer

False

question

Which of the following will occur when the economy operates above full employment?

answer

Prices will adjust upward.

question

What happens when the economy is operating beyond the full-employment level of output?

answer

Prices and wages begin to rise, causing firms to cut back on production until the full-employment level of output is reached.

question

In the long run, what happens to the levels of prices and output as a result of an outward shift in the short-run aggregate supply curve?

answer

Prices rise, and output returns to the full-employment level.

question

A kink in the short-run aggregate supply curve reflects the fact that

answer

wages rise when the economy operates beyond full employment but tend not to fall when the economy's resources are underemployed.

question

Adaptive expectation formation means that

answer

people base their expectations of the future on what has occurred in the past.

question

According to the graph below, a change in the spending plans of consumers, businesses, government, or foreigners is illustrated by the movement from point ______ to point ______.

answer

A; B

question

An increase in an economy's resource pool will

answer

will shift both the long-run and short-run aggregate supply curves outward.

question

Suppose a supply shock causes an inward shift of the short-run aggregate supply curve. In the short run,

answer

prices rise, and output falls.

question

In the short run, what is the effect of an outward shift in the aggregate demand curve?

answer

Prices and output rise.

question

What happens in the short run to prices and output if the price of oil rises temporarily?

answer

Prices rise, and output falls below the short-run equilibrium level.

question

What is the effect of technological progress on prices and output?

answer

Both the long-run and the short-run aggregate supply curves shift outward.

question

Over time, the long-run aggregate supply curve can shift outward as a result of

answer

increases in productivity.

question

Which of the following could cause aggregate demand to decrease?

answer

Consumers decide to increase their savings.

question

Fiscal and monetary policies are often useful in pulling an economy out of a recession.

answer

True

question

Which of the following policies should be used to stimulate the economy?

answer

Buying government securities

question

An example of fiscal policy is

answer

raising taxes.

question

Which of the following factors would cause aggregate demand to fall?

answer

All of the above

question

"Bad deflation" refers to the process in which

answer

prices and output fall.

question

According to classical economists, what happens to prices and output in the long run if there is an autonomous decline in aggregate demand?

answer

Prices fall, and output returns to the full-employment level of output.

question

Which policy tools could be used to deal with an autonomous decrease in aggregate demand?

answer

The government could offset the drop in consumer spending with spending of its own

question

According to supporters of rational expectations, which of the following explains why increases in government spending do not cause output to rise?

answer

Consumers recognize that government spending today will have to be paid for by an increase in taxes tomorrow

question

A supply shock will shift the short-run aggregate supply curve __________ and create __________.

answer

inward; excess demand

question

Which of the following statements regarding the long-run aggregate supply (LRAS) curve is true?

answer

Increased immigration can shift the LRAS curve outward.

question

Demand-driven deflation is often referred to as bad deflation.

answer

True

question

What was the effect on prices and output when oil prices rose in the 1970s?

answer

The short-run aggregate supply curve shifted to the left, output declined, and prices rose.

question

What would happen if the government cut taxes to stimulate aggregate demand during a period of stagflation?

answer

Prices, output, and employment would all rise.

question

Which of the following factors would not cause the equilibrium level of output to increase?

answer

Increases in the money supply

question

In the short run, what happens to the level of output and the level of prices as a result of a technological improvement?

answer

Prices fall, and output rises.

question

What would happen if the government decided to reduce inflation by cutting government spending during a period of stagflation?

answer

Unemployment would rise while output and prices would fall.

question

The supply curve for loanable funds slopes upward because

answer

people will forego consumption at higher interest rates and save.

question

Which of the following will increase the supply of loanable funds in the U.S.?

answer

Reduction in government spending

question

In the macroeconomy, savings comes from

answer

The savings of households, a budget surplus, and a trade deficit.

question

Which of the following is affected by the rate of interest?

answer

The supply of and demand for loanable funds

question

Which of the following will occur when the real interest rate rises?

answer

People are more willing to forgo spending in order to save.

question

Which of the following would cause an inward shift in the supply of loanable funds?

answer

A decline in the trade deficit

question

When the government runs a budget deficit,

answer

the supply curve for loanable funds shifts inward.

question

The time between the realization of economic conditions and the implementation of fiscal policy is called the _____________ lag.

answer

administrative

question

The theory of implementing fiscal policy always works in practice

answer

false

question

The implementation of fiscal policy might be delayed because of constituent-supported programs that are difficult to retract.

answer

True

question

Which of the following will not occur during a recession?

answer

Prices rise.

question

The "recognition lag" refers to the fact that

answer

it takes a while before policymakers recognize that aggregate demand has shifted inward.

question

The fact that it may take months to actually distribute government spending once that spending has been approved is known as the

answer

operational lag.

question

Which of the following is one of the factors that makes the use of fiscal policy difficult?

answer

Once programs have been established, it is difficult to cut spending.

question

The time between the realization of economic conditions and the implementation of fiscal policy is called the _____________ lag.

answer

administrative

question

The theory of implementing fiscal policy always works in practice.

answer

false

question

The implementation of fiscal policy might be delayed because of constituent-supported programs that are difficult to retract.

answer

True

question

Which of the following will not occur during a recession?

answer

Prices rise.

question

The "recognition lag" refers to the fact that

answer

it takes a while before policymakers recognize that aggregate demand has shifted inward.

question

The fact that it may take months to actually distribute government spending once that spending has been approved is known as the

answer

operational lag.

question

Which of the following is one of the factors that makes the use of fiscal policy difficult?

answer

Once programs have been established, it is difficult to cut spending.

question

Automatic stabilizers control

answer

the fluctuations of the business cycle.

question

Which of the following represents an automatic stabilizer?

answer

Unemployment insurance

question

How does the tax system act as an automatic stabilizer?

answer

When income rises, people move into higher tax brackets, reducing somewhat the amount of money available for consumption.

question

Which of the following does not occur as a result of automatic stabilizers?

answer

Increases in income cause greater increases in consumer spending than they otherwise would.

question

What effect would a decrease in aggregate demand have on output, given the presence of automatic stabilizers?

answer

Output would fall but by less than it would without stabilizers.

question

Which of the following represents an aim of automatic stabilizers?

answer

To reduce consumer spending in a boom in order to avoid overheating the economy

question

The volatile fluctuations of the business cycle occur because of the multiplier effect.

answer

True

question

According to the new classical view of economics, when the aggregate demand curve shifts outward,

answer

prices and output automatically adjust to the long-run equilibrium.

question

New classical economists believe that the rationality of people who save in preparation for higher future taxes shifts the aggregate demand curve outward.

answer

False

question

Suppose the government purchased a $10 million satellite. New Keynesian economists predict that

answer

prices would be slow to adjust and create profit opportunities for suppliers.

question

According to the new classical view of the macroeconomy, what might be the effect on output of an increase in aggregate demand?

answer

Output remains unchanged, and prices rise.

question

What is the effect on prices and output if people recognize that an increase in government spending will have to be paid for by an increase in taxes?

answer

Prices and output will not change.

question

According to new Keynesians, fiscal policy can have an effect on output because of which of the following factors?

answer

Wages are sticky

question

What is the likely effect of an increase in government spending if prices and wages are very flexible?

answer

Prices will rise, and output will remain unchanged.

question

Which of the following statements is false?

answer

Keynesians believe that prices and wages adjust quickly to new economic conditions.

question

Which of the following is not a role of the Federal Reserve Bank?

answer

To insure depository institutions

question

How many Federal Reserve districts are there in the U.S.?

answer

question

Which of the following groups makes up the Federal Open Market Committee (FOMC)?

answer

The seven-member Board of Governors plus five presidents of the twelve district banks

question

On the Fed's balance sheet

answer

Treasury securities appear as assets, and U.S. dollars appear as liabilities.

question

The primary role of the Fed is to control inflation through monetary policy set by the Federal Open Market Committee (FOMC).

answer

True

question

Which of the following is an additional role of the Fed?

answer

All of the above are additional roles of the Fed.

question

The Federal Reserve Bank is a type of commercial bank.

answer

False

question

Which of the following is not a monetary policy tool of the Fed?

answer

The prime rate

question

The Fed's most commonly used tool of monetary policy is

answer

Open market operations

question

The purchase of Treasury securities by the Fed will increase the money supply.

answer

True

question

The supply curve of money ______________, while the demand curve for money ___________.

answer

is a vertical line; slopes downward

question

Because changing the required reserve ratio can have drastic effects on the economy, the Fed rarely exercises this tool of monetary policy.

answer

True

question

Lowering the discount will increase the money supply.

answer

True

question

The Fed can increase the money supply by

answer

decreasing the required reserve ratio.

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