Ec 210 Test 3

Suppose your nominal income rises by 3%. Give an inflation rate which your real income will rise

2%

A decline in disposable income: a. decreases consumption by moving downward along a specific consumption schedule. b. increases consumption because it shifts the consumption schedule upward c. increases consumption by moving upward along a specific consumption schedule d. decreases consumption because it shifts the consumption schedule downward.

A

An inflationary gap occurs when equilibrium GDP is ________ full employment. a. above b. below

A

As disposable income increases, ceteris paribus: a. both consumption and saving rise b. consumption increases and saving falls c. consumption falls and saving rises d. both consumption and saving fall

A

Changes in stock market prices: a. do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy b. greatly impact the macroeconomy but used alone are not reliable predictors of the future health of the economy c. greatly impact the macroeconomy and used alone are reliable predictors of the future health of the economy d. do not greatly impact the macroeconomy but used alone are reliable predictors of the future

A

Compared with a closed economy, aggregate expenditures and GDP will: a. increase when net exports are positive b. fall when net exports are positive c. increase when net exports are negatived. d. decrease when net exports are zero

A

Given the expected rate of return on all possible investment opportunities in the economy: a. an increase in the real rate of interest will reduce the level of investment b. a decrease in the real rate of interest will reduce the level of investment c. a change in the real interest rate will have no impact on the level of investment d. an increase in the real interest rate will increase the level of investment

A

If Sara Thomas' disposable income increases from $4,000 to $4,500 and her level of saving increase from $200 to $325, it may be concluded that her marginal propensity to: a. consume is .75 b. consume is .80 c. save is .30 d. consume is .60

A

If net exports rise from zero to some positive amount, the aggregate expenditures schedule would: a. shift upward b. shift downward c. not move (net exports do not affect aggregate expenditures) d. become steeper

A

If the marginal propensity to consume (MPC) is .67 and initial spending increase by $25, real GDP will: a. increase by a total of $75 b. decrease by a total of $75 c. increase by a total of $25 d. decrease by a total of $25

A

If the marginal propensity to consume (MPC) is 0.67 and initial spending icrease by $25, equilibrium real GDP will: a. increase by a total of $75 b. decrease by a total of $75 c. increase by a total of $25 d. decrease by a total of $25

A

If the value of the dollar drops, net exports will likely a. increase b. decrease

A

In an effort to stop the US recession of 2007-2009, the federal government: A. reduced taxes and increased government spending b. imposed large tariffs on many imported goods to protect domestic jobs c. raised interest rates to encourage greater business investment d. avoided Keynesian policies because of the threat of inflation

A

In the aggregate expenditures model, a reduction in taxes may: a. increase saving b. decrease real GDP c. increase unemployment d. reduce consumption

A

Taxes tend to reduce consumption at each level of real GDP by an amount equal to the taxes multiplied by the marginal propensity to: a. consume b. save

A

The increase in income that results from an increase in investment spending would be greater the: a. smaller the MPS b. Smaller the APC c. larger the MPS d. smaller the MPC

A

The increase in income that results from an increase in investment spending would be smaller the: a. greater the MPS, b. greater the MPC

A

Which of the following statements is correct? Unanticipated inflation: a. arbitrarily redistributes income and wealth b. increases the real value of savings c. increases the purchasing power of the dollar d. benefits creditors at the expense of debtors.

A

If the MPC is .8 and disposable income is $200, then a. consumption and saving cannot be determined from the information given b. saving will be $20 c. personal consumption expenditures will be $80 d. Saving will be $40

A. need to have another DR

An inflationary gap occurs when equilibrium GDP is ____ full employment GDP. a. above b. below

Above

Demand pull inflation: a. occurs when prices of resources rise, pushing up costs and the price level. b. occurs when total spending exceeds the economy's ability to provide output at the existing price level c. occurs only when the economy has reached its absolute production capacity. d. is also called cost-push inflation

B

IF a $100 billion decrease in investment spending causes income to decline $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by: a. $500 billion b. $400 billion c. $300 billion d. $200 billion

B

IF the rate of inflation is 12% per year, the price level will double in about: a. 4 years b. 6 years. c. 10 years d. 12 years

B

If an unintended increase in business inventories occurs at some level of GDP, then GDP a. is too low for equilibrium b. is too high for equilibrium

B

If government spending and taxes both rise by the same amount there would be: a. no effect on AE and hence on GDP b. a rise in AE and in GDP c. a fall in AE and in GDP d. a rise in AE and a fall in GDP

B

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose also that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is: a. 2% b. 20% c. 80% d. 8%

B

The most important determinant of consumer spending is: a. the level of household borrowing b. the level of income c. the stock of wealth d. consumer expectations

B

When diposable income rises, the resulting rise in consumption is a ________ the consumption function. a. shift of b. movement along

B

Which of the following would most likely be brought on by a supply shock, a huge decrease in the supply of a natural resource such as oil?? a. demand-pull inflation b. cost-push inflation c. structural inflation d. frictional inflation

B

A burst stock market bubble might adversely affect the economy by: a. causing rapid inflation b. greatly reducing net exports c. causing a severe negative wealth effect and engendering pessimism about the economy's future d. raising interest rates

C

All else equal, a large decline in the real interest rate will shift the: a. lower net exports b. raise government spending c. raise investment spending d. lower investment spending

C

Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of: a. an increase in disposable income b. an increase in household wealth c. an increase in personal taxes. d. the expectation of a recession

C

Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of: a. an increase in disposable income. b. an increase in household wealth. c. an increase in personal taxes d. the expectation of a recession

C

Capital Goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending. a. nondurable; instability b. nondurable; stability c. durable; instability d. durable; stability

C

In the aggregate expenditures model, technological progress will shift the investment schedule: a. downward and increase aggregate expenditures b. downward and decrease aggregate expenditures c. upward and increase aggregate expenditures d. upward and decrease aggregate expenditures

C

Inflation means that: a. all prices are rising, but at different rates b. all prices are rising and at the same rate c. prices in the aggregate are rising, although some particular prices may be falling d. real incomes are rising

C

On a graph, the equilibrium real GDP is found at the intersection of the 45-degree line and the: a. saving curve b. consumption curve c. aggregate expenditures line d. investment demand curve

C

Suppose that a person's nominal income rises from $10,000 to $12,000, and the consumer price index rises from 100 to 105 the person's real income will: a. fall by about 20 percent b. fall by about 2% c. rise by about 15% d. rise by about 25%

C

The investment demand slopes downward and to the right because lower interest rates: a. expand consumer borrowing, making investments more profitable b. boost expected rates of returns on investment c. enable more investment projects to be undertaken profitably d. create tax incentives to invest

C

The investment demand slopes downward and to the right because lower real interest rates: a. expand consumer borrowing, making investments more profitable b. boost expected rates of returns on investment c. enable more investment projects to be undertaken profitably d. create tax incentives to invest

C

assume the MPC is .8. If government were to impose $50 Billion of new taxes on household income, consumption spending would decrease by: a. 100 billion b. $90 billion c. $40 billion d. $50 billion

C

We have to compute a particular variable to get a measure of inflation. What is this variable?

CPI Consumer Price Index

A decrease in the investment demand schedule would be a consequence of a decline in: a. the rate of interest b. the level of wages paid c. business taxes d. expected future sales

D

An increase in investment spending will have a greater effect on the equilibrium GDP: a. If the Royals win the World Series. b. the larger the MPS c. the smaller the MPC d. the larger the MPC

D

As disposable income decreases, ceteris paribus: a. both consumption and saving rise b. consumption increases and saving falls c. consumption falls and saving rises d. both consumption and saving fall

D

Expectations of a recession are likely to lead households to: a. increase consumption and saving b. decrease consumption and saving c. increase consumption and decrease saving d. decrease consumption and increase saving

D

If at some level of GDP the economy is experiencing an unintended decrease in inventories: a. the aggregate level of saving will decline b. the price level will fall c. the business sector will lay off workers d. domestic output will increase

D

On a graph, the equilibrium real GDP is found at the intersection of the 45-degree line and the: a. saving curve b. consumption curve c. investment demand curve d. aggregate expenditures line

D

Other things equal, an increase in an economy's exports will: a. lower the marginal propensity to import b. have no effect on domestic GDP because imports will change by an offsetting amount c. decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP. d. increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

D

The economy is operating at the full-employment level of output. A depreciation of the dollar most likely will result in: a. a decrease in exports b. an increase in imports c. a decrease in real GDP d. an increase in the price level

D

When unanticipated inflation occurs: a. both creditors and debtors benefit b. both creditors and debtors are hurt c. debtors are hurt, but creditors benefit d. Creditors are hurt, but debtors benefit

D

Which of the following would increase GDP by the greatest amount? a. a $20 billion reduction in taxes b. $20 billion increase in both government spending and taxes c. $20 billion decrease in both government spending and taxes d. a $20 billion increase in government spending

D

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But, if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of: a. 2% b. 4% c. 6% d. 10%

D

a decrease in investment demand would be a consequence of a decline in: a. the rate of interest b. the level of wages paid c. business taxes d. expected future sales

D

If a person's nominal income increases by 8% while the price level increases by 10%, the person's real income: a. rises by 2% b. rises by 18% c. falls by 18% d. falls by 2%

D (8-10)

A depression abroad will tend to _________ our exports, which in turn will _____ net exports, which in turn will _______ equilibrium real GDP.

Decrease, Decrease, Decrease

Distinguish between demand-pull inflation and Cost-push inflation. Give the cause of each

Demand pull inflation is when the demand for a good falls short because the total output is not there. This usually happens in inflationary periods. The cause of it is less output than for the demand. Spending is greater than the ability to produce. AE is greater than GDP full employment. Cost push inflation is when raw materials are higher than the expectations. It deals with the price of resources. The cause is with the increase in the price of key resources, which affects all businesses, the product price increases.

If the nominal interest rate is 8% and the real interest rate is 5%, the the inflation premium is 13% T/F

False

Investment is highly stable; it increases over time at a very steady rate. T/F

False

The durability of capital goods is one of the major reasons for the stability of investment spending. T/F

False

Core inflation measurements exclude the prices of _______ and ________ . The reason we measure core inflation is that these goods are mostly produced abroad. T/F

Food, Energy False

Dissaving is

Households are spending more than their current incomes

The investment schedule is:

Investment spending shifts when the interest rate changes

The simply GDP multiplier is (higher, lower) the smaller the MPC

Lower

Lump sum taxes tend to reduce consumption at each level of real GDP by an amount equal to the taxes multiplied by the:

MPC

Suppose a certain country has an MPC of .9 and a real GDP of $400 B. If its investment spending decrease by $4 B, what will its new level of equilibrium real GDP?

MPS= .1 Multiplier = (1/.1)= 10 Decrease of $4 B X 10= ($40) Change in GDP from 400 to 360 New equilibrium level of GDP is 360

Cost push inflation

Results from an increase in resource costs (i.e. raw materials price) and hence raises per unit production costs

Wealth effect

Tendency for consumption to rise when their assets rise in value

Real interest:

The interest rate after you adjust it for the inflation rate

Equilibrium GDP is

The total of expenditures = the sum of value of new production

A specific investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i. T/F

True

The greater the MPC, the greater the multiplier. T/F

True

The slope of the consumption schedule is measured by the MPC. T/F

True

Give one reason why the complex (real world) GDP multiplier is smaller than the simple multiplier in our worksheets examples.

We also buy imports and pay additional taxes. These are the leakages

What was the wealth effect of 2008 discussed in the textbook and in class?

Wealth disappeared because of the 1. the housing market 70% collapse 2. the stock market 45% collapse

deflation

When this happens, a price index, such as the GDP deflator drops

a. what is the variable that causes movement along the consumption schedule or line? b. Name three non-income determinants of consumption spending c. for these three shifters give the direction of the change for them to shift the consumption schedule upward?

a. Change in disposable income b. Expectations, borrowing, wealth c. increase wealth-> increase consumption increase borrowing-> increase consumption decrease expected recession-> increase consumption

List three factors that would shift the investment schedule downward. b. how would the shift the aggregate expenditure schedule? c. what would then happen to equilibrium GDP?

a. decrease technology, increase taxes, decrease expectations, increase cost of capital equipment b. down c. down

a. List three factors that would shift the consumption schedule downward. Indicate which direction the variable would shift b. Describe the operation of one of these factors c. How would this shift the aggregate expenditure schedule. (up, or down) d. What would then happen to equilibrium GDP? (up or down)

a. increase taxes, decrease saving, decrease wealth, increase interest rate, decrease borrowing b. a decrease in wealth leads to a increase in saving and leads to a decrease in consumption c. down d. down

a. What are three factors that might shift upward the investment demand curve? (name the factor and give the direction of the change) b. would these factors shift the investment schedule upward as well? c. give one example of investment spending.

a. increase technology, decrease taxes, increase planned inventory b. yes c. increase capital goods

45-degree line:

along here AE= real GDP

Multiplier

change in equilibrium GDP/ change in AE OR 1/(1-MPC)

Unplanned changes in inventories are

changes in unsold goods caused by unexpected changes in aggregate expenditures

unplanned changes in inventories

changes in unsold goods caused by unexpected changes in aggregate expenditures

Which would increase investment demand? a. increase in business taxes b. increase in the cost of acquiring capital goods c. sharp slowdown in the rate of technological change d. decrease in the stock of capital goods on hand

d

Leakage

decrease of spending via saving, taxes paid, or imports

balanced budget multiplier

equal changes in government spending and taxes change GDP

Marginal propensity to Save

fraction of a change in DI that households save

Marginal propensity to consume

fraction of a change in DI that households spend

If an economy has experienced an inflation rate of 500% per year for several years, this economic condition would best be described as:

hyper inflation

wealth effect

if the value of homes drops, spending by consumers drops

If the value of the dollar drops in currency markets, net exports will likely a. increase b. decrease

increase

Investment demand curve

investment spending is inversely related to real interest rates

Unplanned changes in inventories

occur when actual real GDP differs from equilibrium real GDP

increase in expected rate of return

the cause is expected profits that would rise with an increase in new technology to produce

nominal interest rate

the interest rate the bank teller offers you when you open a savings account

Expected rate of return

the profit rate to be earned by the purchase of capital

paradox of thrift

the result is that consumption falls and hence GDP falls, hurting the economy

45 degree line

value of GDP = value of AE

expected rate of return:

when there is strong recovery, the expected profit from purchasing productive capital goods will rise