Chapter 6, 8-10 Macro

Assume that the MPC is 0.75, and investment spending rises by $25 billion. How much will real GDP change?

$100 Billion

In a simple, private economy, suppose that the MPC is 0.8 and investment rises by $20 million. At the new equilibrium, how much will saving have increased?

$20 Million

In Figure 25-3, equilibrium GDP is

$4,000 billion

Based on the scatter diagram in Figure 8-1, if real disposable income is $800 billion, the consumption spending would be approximately

$540 Billion

In Figure 26-3, investment plus net exports equals

$800 Billion

Assume that the MPC is 0.85 and investment spending rises by $100 million. How much consumption spending will this generate in the second round of spending?

$85 million

If disposable income increases by $400 billion and consumption increases by $300 billion, the MPC equals

.75

If DI falls by $100 billion, and C falls by $90 billion, the slope of the consumption is

0.90.

Given the scatter diagram in Figure 8-1, what is the MPC (your best estimate)?

2/3

If the MPC is 0.67, then the oversimplified multiplier is

3.00

In Table 25-1, inventories will be increasing as long as output is above

3000

If wages rise by 12 percent at the same time prices rise by 3 percent, then the increase in real wages is equal to

9%

In Figure 8-2, which of the following moves can be explained by a decrease in the price level?

A to D

Which of the following would be removed from the U.S. aggregate demand measurement?

An American professor's purchase of a vintage manuscript from Rome, Italy

What is the usual response of firm to an increase in the price of what they sell?

An increase in output An increase in hiring factors of production An increase in the profit level of the firm An increase in employment at the firm

Why does an increase in the price level tend to cause the consumption function to shift downward?

An increase in the price level decreases the value of fixed money assets.

Which of the diagrams in Figure 26-7 shows an economic expansion caused primarily by a change in aggregate demand?

C

In Figure 8-2, which of the following moves can be explained by a decrease in disposable income?

E to B

What does inflation do to the value of the oversimplified multiplier?

Inflation decreases the value of the multiplier below the value of the oversimplified formula.

Using the standard 45° line diagram, how does a decrease in net exports effect the expenditure schedule?

It shifts the expenditure schedule downward.

A decrease in the price level will most likely have what effect on the consumption function?

It will shift upward.

If the price level decreases, what will happen to the level of real GDP supplied?

It will usually decrease.

Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent.

Kay receives extra real income.

The marginal propensity to consume (MPC) is calculated by which formula?

MPC = change in C divided by change in DI

Rachel agrees to lend Phoebe $100 for six months and charges her interest of 2 percent. At the end of the six-month period, prices have risen by 4 percent.

Purchasing power has been redistributed to Phoebe.

If the MPC increases in value, what will happen to the slope of the consumption function?

The slope will increase and the consumption function will become steeper.

Which of the following would impose the greatest costs to society?

Variable rates of inflation

According to Baumol, Blinder & Solow, does the U.S. economy have a self-correcting mechanism?

Yes, and it works very slowly.

Which of the following will most likely cause movement along the consumption function?

a change in DI

Which of the following will most likely cause a shift in the consumption function?

a change in consumer confidence

Which of the following is an example of wealth?

a mutual fund balance of $1,000

The reason why inflation reduces the value of the multiplier is that part of the change in demand is

absorbed by price changes.

Government spending and income taxes can affect the level of

aggregate demand

The equilibrium level of GDP is the level at which

aggregate demand equals output

Quantity supplied of all goods and services at different price levels is known as

aggregate supply

Compared to the unemployed during the Great Depression, persons unemployed in today's economy are

better off due to unemployment insurance.

Olga owns her own business. Sven is an unpaid worker in his family's business. Who is included in the Bureau of Labor Statistics' "employed" category?

both Olga and Sven

If the price level in Figure 26-1 were 100,

both c and d would occur.

The largest component of aggregate demand is

consumer spending

In a market economy, the decisions about what to produce and how much of each good or service to produce are made by

consumers and producers

Full employment implies which of the following is reduced to zero?

cyclical unemployment only

Richard loses his job at the microbrewery due to a downturn in general business conditions. He is experiencing

cyclical unemployment.

According to economists, one of the signs of an unhealthy economy is a(n)

declining real GDP.

If the Japanese economy is currently suffering from a recession, we should expect U.S. exports to Japan to

decrease

When inflation occurs, net exports will

decrease as imports increase

One reason the oversimplified multiplier is incorrect is that inflation

decreases the multiplier by decreasing consumer spending.

A rising price level should shift the expenditure schedule

downward and decrease equilibrium real GDP.

If net exports are reduced, the expenditure schedule will shift

downward and equilibrium real GDP will fall.

When economists refer to the economy's self-correcting mechanism, they are referring to the fact that the

economy will react automatically to an inflationary gap through inflation.

An inflationary gap will exist when

equilibrium GDP is greater than full employment GDP.

A recessionary gap exists when potential GDP

exceeds equilibrium GDP

If you as a lender want an increase in purchasing power of 4 percent from making a loan and you set the nominal interest rate at 9 percent, then your

expected rate of inflation is 5 percent.

45° line diagrams show how

expenditures vary with income

The most likely group of the following that would be eligible for unemployment insurance benefits is

experienced workers recently laid off.

The net export component of aggregate demand is defined as U.S.

exports minus U.S. imports.

Cyrus just graduated from flight school. He received multiple offers, but is waiting to hear back from all the jobs he applied to before he makes a decision. Cyrus is experiencing

frictional unemployment

Government stabilization policy would be unnecessary if the economy automatically gravitated toward

full employment

One difficulty of computing the value of GDP is that there are no market prices for

government goods and services.

When governments rapidly increase the supply of money, the usual result is

hyperinflation

According to the income-expenditure diagram, total production must always equal total

income

If the population increase in India is smaller than the increase in Indian real GDP, then GDP per capita will

increase

If personal taxes are cut temporarily, the resulting

increase in personal saving would be smaller than if they were cut permanently.

An increase in the capital stock would be expected to

increase real GDP per capita.

If disposable income rises by $100 billion, we can expect that consumers will

increase their spending by less than $100 billion.

The shortfall between actual real GDP and potential GDP

increases as the unemployment rate rises.

Government spending is an injection in the sense that it

increases the amount of total spending.

In Table 25-1, at output of 4,000, inventories are

increasing by 200

According to the relationship represented by the consumption function, governments can indirectly decrease consumption spending by

increasing taxes

Economists generally assume that there is a short-run trade-off between

inflation and unemployment.

The principal way in which an economy self-corrects from an inflationary gap is through

inflation, which reduces purchasing power.

In Figure 26-3, both graphs (a) and (b) indicate that the economy is experiencing a(n)

inflationary gap of RE.

If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that

inventory levels are decreasing

Which of the following would be associated with an inflationary gap?

inventory levels are too low

In the circular flow model, savings is considered a leakage because

it is the amount that consumers do not spend of their disposable income.

Labor productivity is calculated by dividing GDP by

labor force

The economic impact of the multiplier is ____, and then becomes ____.

large; smaller

Paying into a pension fund while you are earning wages and salaries is equivalent to

lending money

If part of the labor force is unemployed, the foregone goods and services are

lost forever

As the unemployment rate rises,

lost national output rises

If total spending is less than the value of total output, firms

may decide to cut prices.

If 10 years ago, the price of a movie ticket was $5 and the average hourly wage was $10, and today the price of a movie ticket is $8 and the average hourly wage is $20, then

movies are now relatively cheaper in terms of work hours.

The sum of all factor payments in the economy yields

national income

When aggregate demand exceeds current production

neither output nor the price level is in equilibrium

The existence of an inflationary gap should cause

net exports to rise

Which of the following is not part of the investment component of GDP?

net imports

The real interest rate is equal to

nominal interest rate - expected inflation rate

In Figure 26-6, which graph best illustrates an adverse supply shock accompanied by an increase in government spending?

not -2 or -3

The national income accounts include a value for the amount of capital stock "used up" during the production of current output. This dollar amount is called

not amortization

If aggregate quantity supplied exceeds aggregate quantity demanded, we can expect an unplanned

not depletion of inventories, causing firms to raise prices.

As the price level decreases real GDP demanded increases because

not int rates decrease

Aggregate demand is defined as the total spending

of all consumers, business firms, government agencies, and foreigners on final goods and services produced in the United States.

Each C + I + G + (X − IM) expenditure schedule is drawn assuming a specific

price level

In Figure 26-4, if full employment occurs at 5,000 and the price level is currently 130, then we can expect the

price level to fall to 110

An inflationary gap will occur when

real GDP exceeds potential GDP.

If the expenditure schedule must be shifted upward to reach potential GDP, then the economy is experiencing a(n)

recessionary gap

When the expenditure schedule is too low, the result is a(n)

recessionary gap

The federal government could stimulate investment spending by

reducing the tax rate on capital gains.

The principal benefit of unemployment insurance is that it

replaces income lost due to unemployment.

When equilibrium GDP is below potential GDP, jobs are

scarce and unemployment is high.

When money wages rise, the most significant effect on the aggregate supply curve is that it

shifts inward.

The typical movement of the aggregate supply curve resulting from an increase in productivity is that it

shifts outward

The aggregate demand curve

slopes downward

The aggregate supply curve normally

slopes upward to the right due to short-run fixed costs of production

In Figure 25-1, at $3,000 billion real GDP,

spending exceeds total output and inventories will fall.

A consequence of an inflationary gap is ____ as output begins to decrease and prices continue to increase.

stagflation

Technological change or the effects of automation cause

structural unemployment.

When inflation occurs, consumers

suffer a decrease in real wealth

An increase in the capital stock has the same effect on the production function as an increase in

technology

The main reason that the 1975, 2008, and 2009 tax cuts did not have a large effect on GDP is that they were

temporary tax cuts rather than a permanent tax cuts.

The most volatile part of wealth is

the Stockmarket

Labor productivity is defined as

the amount of output a typical worker turns out in an hour of work.

If actual inflation is greater than the expected rate of inflation, then probably

the borrowers are made better off than lenders?

If consumers' expectations about future income are very optimistic, then we should expect

the consumption function to shift upward.

In Table 26-1, if full employment occurs at $3,400 billion, then

the economy experiences a recessionary gap of $150 billion.

In Table 26-1, if full employment occurs at $3,100 billion, then

the economy experiences an inflationary gap of $150 billion.

Inventories are goods that can be considered as "purchased" by

the firms that produce them

Growth in potential GDP depends on

the labor force growth rate, capital stock growth rate, and rate of technical progress.

An increase in investment spending will be multiplied into a larger increase in GDP illustrates the concept of

the multiplier

When constructing a basic macroeconomic model, several assumptions (not realistic, but necessary to simplify the analysis) are made. Which of the following are assumed to be constant?

the price level

The slope of the aggregate demand curve illustrates that real GDP demanded will increase when

the price level falls.

If the price level in Figure 26-1 were 120,

there would be excess goods on the market.

Real GDP is the product of the

total hours of work times the output per hour

In the 2007-2009 period, the expenditure level in the United States intersected the 45° line below potential GDP, causing

unemployment

Recessionary gaps are most likely to be accompanied by

unemployment

Keynes focused on problems of

unemployment and inflation

If the labor force grows faster than the number employed, the

unemployment rate will rise

In the national income accounts, the symbol G represents the

value of goods and services purchased by all levels of government.

The federal government increases spending by $50 billion, and the main effect is an increase in the price level. It must be true that the economy is operating on the

vertical portion of the aggregate supply curve.

The largest income component in the national income accounts is

wages

The reason that inflation rarely harms workers in the long run is that

wages rise at the same time prices rise.

Older people often reminisce about the "good old days" when prices were much lower. This is misplaced nostalgia primarily because in the "good old days,"

wages were much lower also.

The tax cut of 2009 had little significant effect on consumer spending because it

was perceived as temporary.

One of the main conclusions of Keynes in The General Theory of Employment, Interest, and Money is that the economy

will not automatically gravitate to full employment.

Economic growth is most likely to solve the problems of

world poverty