ECON 1110.009 Ch9, ECON 1110.009 Ch7, ECON 1110.009 Ch8, ECON 1110.009 Ch9, Econ 1110 Exam 2

In this example, at disposable income of $5,000, saving is equal to: a. $5,000. b. $0. c. $250. d. -$250.

$250.

Suppose consumer spending behavior in an economy is described by the equation C = $50 + 0.90(YD). At disposable income equal to $400, consumption spending is equal to: a. $360. b. $400. c. $410. d. $500.

$410.

Suppose consumer spending behavior in an economy is described by the equation C = $50 + 0.90(YD). Break-even disposable income is equal to: a. $950. b. $400. c. $450. d. $500.

$500.

Suppose consumer spending behavior in an economy is described by the equation C = $50 + 0.90(YD). At disposable income equal to $600, consumption spending is equal to: a. $590. b. $600. c. $610. d. $540.

$590.

Suppose consumer spending behavior in an economy is described by the equation C = $50 + 0.90(YD). At disposable income equal to $400, personal saving is equal to: a. $0. b. -$10. c. $10. d. $400.

-$10.

In the 2-sector Keynesian model, if equilibrium income decreases by $100 billion when investment spending falls by $10 billion, then the autonomous spending multiplier is equal to: a. 1. b. 5. c. 10. d. The value of the autonomous spending multiplier cannot be determined from the information given.

10.

The notion that the wealth of a nation is more likely to increase if individuals are allowed to pursue their own self-interest in a market economy was first put forth by: a. John Maynard Keynes in The General Theory of Employment, Interest and Money. b. Adam Smith in An Inquiry Into the Nature and Causes of the Wealth of Nations. c. Karl Marx in Das Kapital. d. Jean-Baptiste Say in his Treatise on Political Economy.

Adam Smith in An Inquiry Into the Nature and Causes of the Wealth of Nations.

The beginning of the classical model is most often associated with: a. the Great Depression. b. Karl Marx. c. Adam Smith. d. Jean-Baptiste Say.

Adam Smith.

The Wealth of Nations addresses the economic concepts of: a. comparative advantage. b. division of labor. c. the market mechanism. d. All of the above are concepts addressed in The Wealth of Nations

All of the above are concepts addressed in The Wealth of Nations

According to Keynes: a. short-term fluctuations in real GDP are a result of changes in aggregate demand. b. opportunities for employment are limited by the extent of aggregate demand. c. consumption spending is a function of current disposable income. d. All of the above are true according to Keynes.

All of the above are true according to Keynes.

According to the international trade effect: a. when the domestic price level falls, exports become cheaper and imports become more expensive, ceteris paribus. b. an increase in the domestic price level leads to a decrease in net exports, ceteris paribus. c. the aggregate demand curve slopes downward to the right, ceteris paribus. d. All of the above are true according to the international trade effect.

All of the above are true according to the international trade effect.

Aggregate demand: a. is comprised of spending on domestic output by consumers, businesses, foreigners, and government. b. reflects the inverse relationship between the price level and the quantity of real GDP demanded. c. graphs as a curve that slopes downward to the right due to the real balance effect and the international trade effect. d. All of the above statements regarding aggregate demand are true.

All of the above statements regarding aggregate demand are true.

Which of the following events will lead to a leftward shift of the short-run aggregate supply curve? a. A decrease in the price level b. A decrease in government expenditures c. An adverse supply shock d. An increase in productivity

An adverse supply shock

Which of the following events will NOT increase aggregate demand in U.S. and cause the AD curve to shift to the right? a. An increase in income and wealth for American consumers b. An increase in American business optimism regarding future sales and profits c. An increase in interest rates in the U.S. d. Depreciation of the U.S. dollar relative to foreign currencies

An increase in interest rates in the U.S.

The algebraic form of the consumption function for this example is: a. C = $1,000 + 0.75(YD), or C = $1,000 + 0.75(Y - T). b. C = $1,000 - 0.75(YD), or C = $1,000 - 0.75(Y - T). c. C = $1,000 + 0.80(YD), or C = $1,000 + 0.80(Y - T). d. There is not enough information to derive the consumption function for this example.

C = $1,000 + 0.75(YD), or C = $1,000 + 0.75(Y - T).

A car produced in Canada in 2018 and sold in the U.S. in 2020 is counted in GDP for:

Canada in 2018.

U.S. household spending on restaurant meals

Consumption

Pessimistic business expectations

Decrease in AD

Unexpected sharp increase in the price oil

Decrease in SRAS

Spending by companies in Mexico on industrial equipment produced in the U.S.

Exports

Net Domestic Product

GDP minus consumption of fixed capital

Spending by U.S. counties and states on roads and bridges

Government

U.S. household spending on pasta and wine produced in Italy

Imports

Disposable Personal Income

Income available to households for spending or saving

National Income

Income earned by the factors of production in a given year

Personal Income

Income received by persons from all sources

Increase in consumer income and wealth

Increase in AD

Spending by companies in the U.S. on industrial equipment produced in the U.S.

Investment

Which of the following statements is NOT correct regarding the simplified Keynesian model? a. MPC - MPS = 1 b. MPC + MPS = 1 c. Break-even disposable income is at the income where saving = 0 d. Disposable Income = Consumption Spending + Personal Saving

MPC - MPS = 1

Gross National Product

Market value of final goods and services produced by resources owned by residents of a country

Which of the following statements is best associated with Keynesian theory? a. Supply creates its own demand. b. Recessions are due to inadequate demand for goods and services throughout the economy. c. The focus of policy should be on the long run, not the short run. d. Prices, wages, and interest rates are completely flexible.

Recessions are due to inadequate demand for goods and services throughout the economy.

The statement "supply creates its own demand" is commonly referred to as: a. the Law of Supply. b. the Law of Scarcity. c. Classical Law . d. Say's Law.

Say's Law.

Which of the following items would NOT increase measured U.S. GDP for 2019? a. Spending by American households on cars produced in Canada in 2019 and sold in the U.S. in 2019 b. Spending by American state governments to improve roads and bridges in 2019 c. Spending by American businesses on machines built and sold in the U.S. in 2019 d. All of the above are types of spending that occur in the U.S. so all will increase U.S. GDP.

Spending by American households on cars produced in Canada in 2019 and sold in the U.S. in 2019

Which of the following is not a point of difference between Keynes and classical economists? a. The validity of Say's Law; Keynes said it is demand, not supply, that determines income and output b. The flexibility of prices of wages; Keynes argued that prices and wages may be sticky, especially downward c. The interest rate as the determinant of how much households save; Keynes said the amount of saving depends on income d. The role of government in the economy; Keynes believed government should take a laissez-faire approach to managing the macroeconomy during economic downturns

The role of government in the economy; Keynes believed government should take a laissez-faire approach to managing the macroeconomy during economic downturns

Which of the following is NOT an assumption of the classical model? a. Flexible prices and wages b. Say's Law is true c. Unemployment does not occur d. Saving equates with investment

Unemployment does not occur

Adam Smith's notion of the invisible hand is best summarized by which of the following statements? a. When individuals are allowed to pursue their own self-interest in their economic interactions, resources will naturally flow to their highest-valued use b. Allowing people to choose how to use their own labor allows government to allocate output so that the interest of society is best served c. Individuals are more likely to intentionally promote the public interest when taxes are low and government remains invisible d. In a capitalist economy, markets are more efficient when government directs productive activity behind the scenes

When individuals are allowed to pursue their own self-interest in their economic interactions, resources will naturally flow to their highest-valued use

Assuming nothing else changes, for a given money income, an increase in the domestic price level leads to: a. an increase in real income and an increase in purchasing power. b. a decrease in real income and a decrease in purchasing power. c. an increase in real income and a decrease in purchasing power. d. a decrease in real income and an increase in purchasing power.

a decrease in real income and a decrease in purchasing power.

The downward-sloping aggregate demand curve indicates that, ceteris paribus: a. there is an inverse relationship between demand and the average level of prices. b. a greater quantity of real GDP will be demanded at higher price levels than at lower price levels. c. a decrease in the price level leads to an increase in the quantity demanded of real GDP. d. inflation and output are directly related.

a decrease in the price level leads to an increase in the quantity demanded of real GDP.

In The General Theory of Employment, Interest, and Money, Keynes disagreed with the classical contention that: a. a market economy is self-regulating and automatically moves to equilibrium at the full-employment level of real GDP. b. a market economy is self-regulating and can never achieve macroeconomic equilibrium at the full-employment level of real GDP in the long run. c. a decrease in aggregate demand causes the rate of unemployment to rise. d. an increase in aggregate demand causes the rate of unemployment to fall.

a market economy is self-regulating and automatically moves to equilibrium at the full-employment level of real GDP.

An increase in government spending on infrastructure leads to: a. an increase in AD and a movement down along the AD curve. b. an increase in AD and a rightward shift of the AD curve. c. a decrease in AD and a movement up along the AD curve. d. a decrease in AD and a leftward shift of the AD curve.

an increase in AD and a rightward shift of the AD curve.

All of the following statements are true EXCEPT: a. an increase in the price level leads to an increase in the quantity supplied of real GDP, ceteris paribus. b. a decrease in the price level leads to a decrease in the quantity supplied of real GDP, ceteris paribus. c. an increase in costs of production leads to an increase in SRAS, ceteris paribus. d. a decrease in costs of production leads to an increase in SRAS, ceteris paribus.

an increase in costs of production leads to an increase in SRAS, ceteris paribus.

Ceteris paribus, aggregate demand will decrease (shift to the left) when there is: a. an increase in personal wealth. b. an increase in foreign real national income. c. an increase in consumer optimism. d. an increase in interest rates.

an increase in interest rates.

Ceteris paribus, an increase in the price level leads to: a. an increase in the quantity supplied of real GDP and a movement along the SRAS curve. b. an increase in the quantity supplied of real GDP and a rightward shift of the SRAS curve. c. a decrease in the quantity supplied of real GDP and a movement along the SRAS curve. d. a decrease in the quantity supplied of real GDP and a leftward shift of the SRAS curve.

an increase in the quantity supplied of real GDP and a movement along the SRAS curve.

The direct (positive) relationship between the quantity of real GDP suppliers are willing and able to make available at alternative price levels is illustrated by: a. a downward-sloping aggregate demand curve. b. an upward-sloping short-run aggregate supply curve. c. a downward-sloping long-run aggregate supply curve. d. any combination of outputs on the production possibilities frontier.

an upward-sloping short-run aggregate supply curve.

Macroeconomic equilibrium occurs: a. at the price level for which aggregate demand is equal to aggregate supply. b. at the price level for which the quantity demanded of real GDP is equal to the quantity supplied of real GDP. c. only when actual real GDP is equal to potential real GDP. d. only when the macroeconomic goals of full employment, price stability, and economic growth have been met.

at the price level for which the quantity demanded of real GDP is equal to the quantity supplied of real GDP.

Economists who advocate a macroeconomic policy of laissez-faire: a. believe the economy is self-regulating so long as government intervenes to move the economy to equilibrium at natural real GDP. b. believe the economy is self-regulating and will move to equilibrium at natural real GDP in the long run. c. also advocate central planning and government control of resources. d. also advocate active government intervention in the macroeconomy.

believe the economy is self-regulating and will move to equilibrium at natural real GDP in the long run.

Ceteris paribus, in the 2-sector Keynesian model, a $50 billion increase in investment spending when the MPC = 0.80: a. causes equilibrium income to increase by a maximum of $250 billion. b. causes equilibrium income to increase by a maximum of $50 billion. c. causes consumption spending to increase by a maximum of $50 billion. d. has no impact on equilibrium income because investment spending is assumed to be autonomous.

causes equilibrium income to increase by a maximum of $250 billion.

If the economy is initially in equilibrium at natural real GDP (full-employment real GDP), a decrease in investment spending will: a. increase aggregate demand, resulting in an increase output, an increase in the price level, and a decrease in the unemployment rate. b. increase short-run aggregate supply, resulting in an increase in output, a decrease in the price level, and a decrease in the unemployment rate. c. decrease short-run aggregate supply, resulting in a decrease in output, an increase in the price level, and a decrease in the unemployment rate. d. decrease aggregate demand, resulting in a decrease in output, a decrease in the price level, and an increase in the unemployment rate.

decrease aggregate demand, resulting in a decrease in output, a decrease in the price level, and an increase in the unemployment rate.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, an increase in interest rates: a. increases aggregate demand which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a higher price level. b. increases short-run aggregate supply which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a lower price level. c. decreases aggregate demand which leads to a new equilibrium at a lower level of output, a higher unemployment rate, and a lower price level. d. decreases short-run aggregate supply which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a lower price level.

decreases aggregate demand which leads to a new equilibrium at a lower level of output, a higher unemployment rate, and a lower price level.

Decreases in wages and other input prices lead to: a. decreases in costs of production which increases SRAS. b. decreases in costs of production which decreases SRAS. c. increases in costs of production which increases SRAS. d. increases in costs of production which decreases SRAS.

decreases in costs of production which increases SRAS.

In the simple Keynesian model, the amount of personal consumption spending depends on: a. aggregate supply; supply creates demand. b. aggregate demand; demand creates supply. c. disposable income. d. the interest rate.

disposable income.

An increase in the amount of resources available for production and improved production technology lead to: a. increases in aggregate demand, which are inflationary. b. increases in SRAS, which are inflationary. c. economic growth, which is best illustrated by a rightward shift of the SRAS curve. d. economic growth, which is best illustrated by a rightward shift of the LRAS curve.

economic growth, which is best illustrated by a rightward shift of the LRAS curve.

According to the Classical model: a. self-correcting markets are not possible. b. active government intervention is recommended for controlling ups and downs in economic activity. c. flexible prices, wages, and interest rates will eliminate shortages and surpluses in all markets. d. if aggregate demand increases then the price level will fall without increasing real GDP.

flexible prices, wages, and interest rates will eliminate shortages and surpluses in all markets.

The classical model assumes that: a. aggregate demand determines the equilibrium level of output and income. b. flexible wages ensure that labor shortages and surpluses (unemployment) will be temporary. c. product prices will rise to eliminate shortages but are not likely to fall to eliminate surpluses. d. household saving is a function of personal disposable income.

flexible wages ensure that labor shortages and surpluses (unemployment) will be temporary.

In The General Theory of Employment, Interest and Money, John Maynard Keynes argued that: a. the Great Depression was primarily a result of rising prices and wages. b. the Civil War illustrated that the national government should take a laissez-faire approach to managing the macroeconomy. c. government can use deficit spending to stimulate economic activity during a severe or prolonged economic downturn.

government can use deficit spending to stimulate economic activity during a severe or prolonged economic downturn.

In The General Theory of Employment, Interest and Money, John Maynard Keynes argued that: a. the Great Depression was primarily a result of rising prices and wages. b. the Civil War illustrated that the national government should take a laissez-faire approach to managing the macroeconomy. c. government can use deficit spending to stimulate economic activity during a severe or prolonged economic downturn. d. a market economy will automatically eliminate recessionary and inflationary gaps through shifts in AD and move toward equilibrium at full employment.

government can use deficit spending to stimulate economic activity during a severe or prolonged economic downturn.

In modern terms, the wealth of a nation, is measured by: a. the amount of gold and other precious metals held by the government. b. gross domestic product. c. the value of labor in production. d. the amount of other country's debt held by the government.

gross domestic product.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, an increase in aggregate demand leads to a new equilibrium at a: a. higher level of output and a lower price level. b. higher level of output and a higher price level. c. lower level of output and a lower price level. d. lower level of output and a higher price level.

higher level of output and a higher price level.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, an increase in short-run aggregate supply leads to a new equilibrium at a: a. higher level of output and a lower price level. b. higher level of output and a higher price level. c. lower level of output and a lower price level. d. lower level of output and a higher price level.

higher level of output and a lower price level.

The majority of output in the U.S. is produced for purchase by:

households

The SRAS curve slopes upward to the right because: a. in the short run, some inputs and costs of production are fixed, which means suppliers are not able to increase output prices. b. in the short run, some inputs and costs of production are fixed, which means suppliers earn more profit if prices are rising. c. government requires suppliers who increase prices to also increase output. d. government sets the price level to encourage suppliers to produce more output and employ more workers.

in the short run, some inputs and costs of production are fixed, which means suppliers earn more profit if prices are rising.

According to the real balance effect, the real value of a given amount of money: a. is not affected by changes in the price level. b. increases as the price level increase. c. increases as the price level decreases. d. inflation and prices are inversely related.

increases as the price level decreases.

Ceteris paribus, when the short-run aggregate supply curve is upward sloping, a beneficial (positive) supply shock: a. increases aggregate demand which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a higher price level. b. increases short-run aggregate supply which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a lower price level. c. decreases aggregate demand which leads to a new equilibrium at a lower level of output, a higher unemployment rate, and a lower price level. d. decreases short-run aggregate supply which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a lower price level.

increases short-run aggregate supply which leads to a new equilibrium at a higher level of output, a lower unemployment rate, and a lower price level.

If the unemployment rate is less than the natural rate of unemployment, a(n): a. recessionary gap exists and equilibrium real GDP is less than natural real GDP. b. recessionary gap exists and equilibrium real GDP is greater than natural real GDP. c. inflationary gap exists and equilibrium real GDP is less than natural real GDP. d. inflationary gap exists and equilibrium real GDP is greater than natural real GDP.

inflationary gap exists and equilibrium real GDP is greater than natural real GDP.

The Keynesian model: a. helps explain inflationary gaps but not recessionary gaps. b. helps explain recessions but not depressions. c. is a short-run model that focuses on the demand-side of the economy. d. is a long-run model that focuses on the supply-side of the economy.

is a long-run model that focuses on the supply-side of the economy.

The Keynesian model: a. helps explain inflationary gaps but not recessionary gaps. b. helps explain recessions but not depressions. c. is a short-run model that focuses on the demand-side of the economy. d. is a long-run model that focuses on the supply-side of the economy.

is a short-run model that focuses on the demand-side of the economy.

Autonomous consumption: a. increases as disposable income increases. b. is consumption spending at disposable income equal to zero. c. decreases as personal saving increases. d. is the change in consumption spending that occurs when disposable income changes.

is consumption spending at disposable income equal to zero.

In the classical labor market, a surplus of labor: a. cannot occur because wages are flexible. b. is eliminated by falling wages. c. is likely to persist without government intervention. d. represents only voluntary unemployment.

is eliminated by falling wages.

Gross domestic product for a country:

is the sum of spending by all sectors of the economy on final goods and services produced in that country in a year.

All of the following statements are associated with J.M. Keynes EXCEPT: a. government can and should intervene when the economy is in a deep or long recession. b. recessions are a result of insufficient aggregate demand. c. the long run is not entirely relevant to the current period; in the long run we are all dead. d. laissez-faire is the appropriate macroeconomic policy for a market economy, but not for a planned economy.

laissez-faire is the appropriate macroeconomic policy for a market economy, but not for a planned economy.

All of the following are associated with the classical model EXCEPT: a. a general glut, or overproduction, of goods and services is not likely to occur. b. the economy is self-regulating and naturally moves toward full employment in the long run. c. markets for specific goods and services will not be plagued by shortages and surpluses. d. markets are likely to be guided as if by "an invisible hand" to lead to outcomes that are efficient for sellers but inefficient for buyers.

markets are likely to be guided as if by "an invisible hand" to lead to outcomes that are efficient for sellers but inefficient for buyers.

The vertical long-run aggregate supply implies that: a. changes in aggregate demand will have no effect on the price level in the long run. b. the short-run aggregate supply curve is also vertical. c. natural or full-employment real GDP does not depend on the price level in the long run. d. natural or full-employment real GDP is the same as equilibrium real GDP in the short run.

natural or full-employment real GDP does not depend on the price level in the long run.

If the unemployment rate is greater than the natural rate of unemployment, a(n): a. recessionary gap exists and equilibrium real GDP is less than natural real GDP. b. recessionary gap exists and equilibrium real GDP is greater than natural real GDP. c. inflationary gap exists and equilibrium real GDP is less than natural real GDP. d. inflationary gap exists and equilibrium real GDP is greater than natural real GDP.

recessionary gap exists and equilibrium real GDP is less than natural real GDP.

If Say's Law is true, then: a. aggregate demand determines equilibrium income and output. b. supply creates own demand. c. government must actively manage the economy. d. the economy cannot self-correct.

supply creates own demand.

The Classical model concludes that government should: a. take a laissez-faire approach to macroeconomic policy only when the economy will not correct itself. b. take a laissez-faire approach to macroeconomic policy because a market economy is self-regulating. c. take active steps to decrease the price level to close an inflationary gap. d. take active steps to increase the price level to close a recessionary gap.

take a laissez-faire approach to macroeconomic policy because a market economy is self-regulating.

If the price level is fixed, or constant, over a relatively large range of output: a. the SRAS curve is horizontal, and an increase in AD leads to an increase in output with no change in the price level. b. the SRAS curve is horizontal, and an increase in AD leads to an increase in output with no change in the unemployment rate. c. the LRAS curve is horizontal, and an increase in AD leads to an increase in output with no change in the price level. d. the LRAS curve is horizontal, and an increase in AD leads to an increase in output with no change in the unemployment rate.

the SRAS curve is horizontal, and an increase in AD leads to an increase in output with no change in the price level.

The additional spending by households that occurs as a result of an increase in current disposable income is determined by what Keynes calls: a. the marginal propensity to consume. b. break-even disposable income. c. the interest rate on savings. d. consumer equilibrium.

the marginal propensity to consume.

If the quantity supplied of real GDP increases as the price level increases, then: a. the short-run aggregate supply curve is horizontal. b. the short-run aggregate supply curve is vertical. c. the short-run aggregate supply curve is upward sloping. d. the short-run aggregate supply curve is downward sloping.

the short-run aggregate supply curve is upward sloping.

When a country has a trade surplus:

the value of exports exceeds the value of imports, and net exports are positive.

In the classical credit market (market for loanable funds), if the interest rate is above the equilibrium interest rate: a. there is a surplus of loanable funds and the interest rate will fall. b. there is a surplus of loanable funds and the interest rate will rise. c. there is a shortage of loanable funds and the interest rate will fall. d. there is a shortage of loanable funds and the interest rate will rise.

there is a surplus of loanable funds and the interest rate will fall.

When aggregate expenditures are less than aggregate output, businesses experience: a. higher sales and higher profits than anticipated. b. an increase in prices which leads to an increase in the quantity supplied of aggregate output. c. unplanned increases in inventories and respond by decreasing production. Your answer d. optimism regarding future economic conditions.

unplanned increases in inventories and respond by decreasing production.

When aggregate expenditures are less than aggregate output, businesses experience: a. higher sales and higher profits than anticipated. b. an increase in prices which leads to an increase in the quantity supplied of aggregate output. c. unplanned increases in inventories and respond by decreasing production. d. optimism regarding future economic conditions.

unplanned increases in inventories and respond by decreasing production.

When the wage rate is below the equilibrium wage rate, the classical model argues that: a. downward pressure on wages will eliminate the shortage in the labor market. b. downward pressure on wages will eliminate the surplus in the labor market. c. upward pressure on wages will eliminate the shortage in the labor market. d. upward pressure on wages will eliminate the surplus in the labor market.

upward pressure on wages will eliminate the shortage in the labor market.

The long-run aggregate supply curve (LRAS) curve is: a. vertical at the economy's natural (full employment) level of real GDP. b. vertical at the short-run equilibrium level of real GDP. c. upward-sloping because firms respond to higher prices by producing more output. d. upward-sloping because resources and technology are assumed to be fixed.

vertical at the economy's natural (full employment) level of real GDP.