chapter 12 economic 2301

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Which of the following equalities is​ correct?

Disposable income is equal to national income minus net taxes.

A consumer in Japan orders a computer online from Dell

Net Exports

The article states​ that: "Though the inventory drawdown weighed on GDP​ growth, that is likely to provide a boost to output in the coming​ quarters." Why would an inventory drawdown boost output in the coming​ quarters?

Once inventories reach desired​ levels, firms will increase production to match expected planned aggregate expenditures.

Prudential Insurance Company purchases 250 new computers from Dell

Planned Investment

What relevance does your answer have to how the Bureau of Economic Analysis calculates data on U.S.​ imports?

Producers increasingly rely on global supply​ chains, so there are flaws in accounting for imports and exports.

How would an increase in interest rates affect​ investment?

Real investment spending declines.

Consider the following four statements. i. The iPhone is made in​ China, using​ Chinese-made parts. ii. The iPhone is made in the United​ States, using​ U.S.-made parts. iii. The iPhone is made in the United​ States, using​ Chinese-made parts. iv. The iPhone is made​ China, using parts that are all made outside of China. Which of the statements above is​ correct?

Statement iv is correct. The iPhone is assembled in China using parts shipped to China from many countries.

Which one of the following is not a determinant of consumption​ spending?

The growth rate in the United States relative to the growth rates in other countries.

An economics student raises the following​ objection: ​"The textbook said that a higher interest rate lowers​ investment, but this​ doesn't make sense. I know that if I can get a higher interest​ rate, I am certainly going to invest more in my savings​ account." The problem with the​ student's argument is which of the​ following?

The student is confusing saving with investment.

When incomes rise faster in the United States than in other​ countries,

U.S. net exports will fall.

Which of the following causes saving to​ increase?

an increase in the interest rate

Aggregate​ expenditure, or the total amount of spending in the​ economy, equals

consumption spending plus planned investment spending plus government purchases plus net exports.

The diagram shows the relationship betwen consumption and income for the years 1960 through 2016. Which of the following statements is​ true? The line that represents the relationship between consumption and disposable income is called the​ __________. The slope of the this line is the​ __________.

consumption​ function; marginal propensity to consume

The most important determinant of consumption is

current disposable income.

Assume that Intel sells​ $1 billion of computer chips to​ Dell, Inc., for use in​ Dell's personal computers. This transaction

does not affect aggregate expenditure because computer chips are an intermediate​ good, and including the value of the computer chip would be double counting.

Inventories refer to

goods that have been produced but have not yet been sold

Business spending on information processing​ equipment, particularly​ computers, has

grown only slowly since the end of the recession of​ 2007-2009, due in part to a shift toward software and away from equipment.

In a speech to a conference of government trade​ officials, Angel​ Gurría, secretary general of the Organization for Economic Cooperation and​ Development, made the following​ observation: ​"As goods and services cross borders several times at different stages of​ processing, conventional trade statistics may not tell the whole​ story." ​Source: Angel​ Gurra', "Understanding Global Value​ Chains," speech delivered at the G20 trade ministers conference in Puerto​ Vallarta, Mexico, 19 April​ 2012, www.oecd.org/about/secretary-general/g20understandingglobalvaluechains.htm. When​ Gurría refers to​ "conventional trade​ statistics," he means statistics that have

historically been publically available and commonly used.

The trend toward delaying marriage and childbearing could be connected with the slow recovery from the​ 2007-2009 recession because the recovery

left millions of young people​ unemployed, and unable to afford to marry and have children.

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment​ insurance? The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle

less likely

Which of the following is not​ correct?

mps=1-(c/yd)

Conventional trade statistics may no longer be as reliable as they once were because

once goods and services cross borders several​ times, double counting may occur.

A decline in demand does not always lead to an increase in​ firms' holdings of inventories because

sometimes the decline is anticipated and inventories can be adjusted.

Macroeconomic equilibrium occurs where

total​ spending, or aggregate​ expenditure, equals total​ production, or GDP.

The primary explanation for this is​ because:

with unemployment​ insurance, current disposable income fluctuates less over the business cycle.

When aggregate expenditure is greater than​ GDP, inventories will​ __________ and GDP and total employment will​

​fall; increase

U.S. real net exports are typically

​negative, and usually rise in recessions and fall in expansions.

Which of the following statements is​ correct?

Actual investment will equal planned investment only when there is no unplanned change in inventories.

Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this​ quarter? If​ not, what other information do we​ need? increased by $13 billion

Aggregate expenditure was less than GDP in this quarter

​*Real-time data provided by Federal Reserve Economic Data​ (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this​ quarter? If​ not, what other information do we​ need? decreased by $1934 billion

Aggregate expenditure was less than GDP in this quarter

Which of the following statements about investment spending is​ correct?

All of the above are correct.

In the aggregate expenditure​ model, why is it important to know the factors that determine consumption​ spending, investment​ spending, government​ purchases, and net​ exports? Because they help us understand

All of the above.

Which of the following statements is​ correct?

An increase in the corporate income tax decreases the​ after-tax profitability of investment spending.

How are these automakers likely to react to the increase in​ inventories?

Automakers will likely produce fewer trucks than they otherwise would have.

The Jones family buys a new car

Consumption expenditure

The behavior of consumption and investment over time can be described as​ follows:

Consumption follows a​ smooth, upward​ trend, but investment is subject to significant fluctuations.

We can use the diagram to compare movements in real consumption between 1979 and 2017. Which of the following statements is​ true?

Consumption follows a​ smooth, upward​ trend, interrupted only infrequently by brief recessions.

Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the first quarter of​ 2017?

Consumption increased steadily but investment​ fluctuated, and during the​ mid-to-late 90s, investment increased very strongly before declining sharply in​ 2001, only to rise again during the​ mid-2000s and decline sharply again during the 2007minus2009 recession.

Which of the following is not a main determinant of net​ exports?

Expectations of future profitability in the United States.

What are the four main determinants of​ investment?

Expectations of future​ profitability, interest​ rates, taxes and cash flow

The San Diego Unified School District buys 12 new school buse

Government Purchases

The San Diego Public School Disrict buys 12 new school buses

Government expenditure

An article in the Wall Street Journal stated that at the beginning of May​ 2017, inventories of pickup trucks were​ "touching 97​ days' supply as of the beginning of​ May, or a​ 12% increase in actual vehicles on dealer lots compared with the prior year... That number is far above the industry norm for​ inventory..." ​Source: John D. Stoll and Adrienne​ Roberts, "As GM Adjusts to Changing Auto​ Market, Its Sales Slide Behind​ Ford's," Wall Street Journal​, June​ 1, 2017. Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly​ rising?

If inventories are unexpectedly​ rising, this would indicate that sales of pickup trucks were lower than expected.

Into which category of aggregate expenditures LOADING... would the following transaction​ fall? Prudential insurance company purchases 250 new computers from Dell

Investment expenditure

In reporting on real GDP growth in the second quarter of​ 2016, an article on Reuters news noted​ that: ​"U.S. economic growth unexpectedly remained tepid in the second quarter as inventories​ fell" and also that the​ "inventory drawdown was almost across the​ board." ​Source: Lucia​ Matikani, "Inventory Reduction Curbs U.S. Economic​ Growth; Rebound​ Expected," reuters.com, July​ 20, 2016. If companies are drawing down inventories is aggregate expenditure likely to have been larger or smaller than​ GDP?

Larger than​ GDP, because more is being bought than produced.

The Jones family buys a newly constructed house from the Garcia Construction

Planned Investment

What component of aggregate expenditure does purchases of new houses fall​ under?

Planned investment

Usually at the beginning of a​ recession, inventories rise, but at the beginning of an​ expansion, inventories fall

Rise,Fall

Tsuang Pey and Chang Jiang are debating economic growth in their country. Inventory in this closed agricultural economy is increasing and Tsuang thinks that this is a sure sign of declining demand and troubled times ahead.​ Chang, however, claims that the country has been through similar situations before but growth has never been too low for too long. He thinks that even if demand is currently​ low, things should improve in the medium term. Which of the​ following, if​ true, will weaken​ Chang's claim that things should improve in the medium​ term?

The central bank of this country recently increased interest rates.

An article in the Wall Street Journal on the housing market states that​ "Steady job​ growth, rising wages and low interest rates have helped prop up housing​ demand." ​Source: Steven​ Russolillo, "Why the Housing Market is Getting​ Stronger," Wall Street Journal​, May​ 22, 2016. Why do low interest rates increase the demand for​ housing?

The lower the interest​ rate, the less expensive it is for households to borrow money.

The chief economist at UniCredit Research is quoted in the article as stating​ that: "The U.S. economy just went through a meaningful inventory correction​ cycle." What would an​ "inventory correction​ cycle" be?

The process of companies decreasing or increasing actual inventories to match planned inventories.

An economics student raises the following objection: "The textbook said that a higherinterest rate lowers investment, but this doesn't make sense. I know that if I can get ahigher interest rate, I am certainly going to invest more in my savings account." Do youagree with this reasoning?

This thinking is wrong because he is not thinking about investment in the correct terms. Investment spending decreases with high interest rate because of the cost of borrowing for the investment is higher.

The most important determinant of consumption spending is

current personal disposable income.

A decrease in consumer spending in the economy Demand is expected to

decline

The growth in real investment spending

declines significantly during​ recessions, and is subject to larger changes than is real consumption.

According to an article in the Wall Street Journal​, in late​ 2014, the Japanese economy experienced a large increase in business inventories. The article​ noted, "The large buildup of inventories is a reflection that the ... drop in demand was bigger than​ expected." ​Source: Eleanor​ Warnock, "Rising Inventories Hamper Japan​ Recovery," Wall Street Journal​, September​ 30, 2014. Because the Japanese firms​ didn't expect the drop in​ demand, they

did not reduce their inventories.

An article in the Wall Street Journal on changes in​ Intel's sales​ noted, "Intel sells its chips to customers in U.S.​ dollars, but many PC makers that buy those chips sell their products in local​ currencies." ​Source: Tess​ Stynes, "Intel​ Earnings: What To​ Watch," Wall Street Journal​, July​ 15, 2015. In these​ circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to

hurt​ Intel's sales because the cost of the chip is more expensive in terms of the foreign​ currency, but the selling price of the product is in the​ lower-valued foreign currency.

What is the key idea in the aggregate expenditure macroeconomic​ model? The key idea in the aggregate expenditure model is that

in any particular​ year, the level of GDP is determined mainly by the level of aggregate expenditure.

Suppose Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by the​ following? Upper A decrease in real interest rates. Demand is expected to

increase

How would an increase in the growth rate of GDP in the BRIC nations​ (Brazil, Russia,​ India, and​ China) affect U.S. net​ exports? An increase in the growth rate of GDP in the BRIC nations​ (Brazil, Russia,​ India, and​ China) will

increase U.S. net exports by increasing exports to these countries.

If inflation in the United States is lower than inflation in other​ countries, then U.S. exports​ ________ and U.S. imports​ ________, which​ _________ net exports.

increase; decrease; increases

A rise in stock prices and housing prices

increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

From an economic point of​ view, the trend toward delaying marriage and childbearing is not helpful because

it reduces investment spending on new houses and weakens economic growth.

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

one.

On the graph of the consumption​ function, the horizontal axis measures​ _______, while the vertical axis measures​ _______.

real national income or real​ GDP; real consumption spending

Inaccurate trade statistics cause problems because they

reduce the accuracy of export and import information.

For most of the​ 1979-2010 period, real government purchases

rose steadily.

The growth in U.S. real government purchases

tends to be​ positive, but has fallen in recessions and in response to concerns about the size of budget deficits.

Which of the following does the aggregate expenditure macroeconomic model seek to​ explain?

the business cycle

In an opinion column in the Wall Street Journal​, Purdue University President Mitchell Daniels wrote that​ "today's 20- and​ 30-year-olds are delaying marriage and delaying​ childbearing, both unhelpful trends from an economic and social​ standpoint." ​Source: Mitchell​ E, Daniels,​ "How Student Debt Harms the​ Economy," Wall Street Journal​, January​ 27, 2015. From an economic point of​ view, young people might be delaying marriage and childbearing because

their student debt levels are so high they cannot afford to marry and have children.

If the marginal propensity to consume ​(MPC​) is​ 0.9, how much additional consumption will result from an increase of​ $100 billion of disposable​ income?

​$90 billion


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