ECON 201 Exam 4 Review

Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If the consumption function is C = $500 + 0.8Y, planned investment = $200, government purchase = $300, net exports = $100, and real GDP = $1,000, what is the amount of aggregate expenditures?

$1,100 Add all of it up and subtract consumption function

(GRAPH) An equation for the consumption function is:

C = 1 + 0.5Y

If Canada has a capital account deficit, it means that

Canadian residents purchase more foreign assets than foreigners purchase Canada's assets

Investments will generally lead to an increase in a nation's capacity to produce (T/F)

True

Net investment adds to the nation's capital stock (T/F)

True

New investment adds to the nation's capital stock (T/F)

True

The marginal propensity to consume is the change in consumption divided by the change in disposable personal income (T/F)

True

There is a negative relationship between the quantity of investment demanded and the interest rate (T/F)

True

In the long run, sustained inflation is due to

a continuous increase in the money growth rate

The international trade effect results in

a movement along the aggregate demand curve

The balance between spending flows into a country and spending flows out of that country is called a country's

balance of payments

The wealth effect is the tendency for

changes in the price level to change real wealth and consumption

A decrease in investment demand would most likely be caused by a

decrease in the expected demand for output

Changes in net exports caused by changes in the domestic price

do not shift the aggregate demand curve

In the long run, international trade

does not affect the natural level of employment or the real wage

A lower price level in the United States _____ U.S. exports and _____ U.S. imports

encourages, reduces

Net exports equal

exports - imports

In general, an increase in the income tax rate will make the aggregate expenditures curve

flatter and the multiplier smaller

(GRAPH) Consider point A where inflation is relatively high and unemployment is relatively low. In order to move down the curve toward point B, what fiscal policy measures should the policymakers undertake?

increase taxes and decrease government spending

An increase in net exports, all other things unchanged

increases aggregate demand

Frictional unemployment exists because

it takes time for people seeking jobs and employers seeking workers to find each other

An increase in the U.S. dollar exchange rate means foreigners must pay

more for dollars and more for U.S. exports

If gross private domestic investment exceeds depreciation then

net private domestic investment is positive

The Phillips phase of the inflation-unemployment cycle emerges because

of unanticipated increases in the price level produced by increases in aggregate demand

The recovery phase of the inflation-unemployment cycle emerges if

policymakers respond to a recessionary gap by increasing aggregate demand

A ceiling imposed by a country on the quantity of a good or service it will import is called a

quota

An increase in a country's exchange rate will

reduce its net exports

During an economic downturn, households respond to a decline in income by

reducing consumption

(GRAPH) Which of the following represents the stagflation phase?

the movement from B to C

The investment demand curve shows

the quantity of investment demanded at each interest rate, with all other determinants of investment unchanged

The lowest wage that a worker would accept, if offered a job is called

the reservation wage

In the graph that shows disposable income on the horizontal axis and consumption on the vertical axis, at every point on the 45-degree line,

the value of disposable income equals consumption

In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion

unplanned inventory depletion equals $200 billion

In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion,

unplanned inventory depletion equals $200 billion

Comparative advantage in production of a good occurs

when a country can produce that good at a lower opportunity cost than could other countries

Policies that deter investment such as an increase in the corporate profit tax rate

will reduce aggregate demand, and eventually shift the LRAS curve to the left

A reduction in the interest rate, while stimulating investment in the short run, has little or no effect on economic growth in the long run (T/F)

False

In the Phillips phase of inflation-unemployment cycle, real GDP rises and inflation falls (T/F)

False

Personal saving is real GDP not spent on consumption (T/F)

False

The Phillips phase of the inflation-unemployment cycle occurs when both inflation and unemployment increase (T/F)

False

A decision to produce more investment goods and fewer consumption goods - requires the sacrifice of current and future consumption - allows the production of more of both types of goods in the future - requires and increase in current savings

II and III only - allows the production of more of both types of goods in the future - requires and increase in current savings

A change in autonomous aggregate expenditures will shift aggregate demand by an amount equal to the change in autonomous aggregate expenditures times the multiplier (T/F)

True

Suppose the full-employment level of the real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?

7%

According the current income hypothesis:

A change in income regarded as temporary will not affect consumption much since it will have little effect on average lifetime income

(TABLE) If the market rate declines from 15% to 13%, what happens to the quantity of investment demanded?

It decreases by $1,000 because investment is now less profitable

A decrease in the money supply will shift the AD curve to the left (T/F)

True

Employment in the long run does not depend on the trade deficit (T/F)

True

The notion that there is a tradeoff between inflation and unemployment is expressed as

Phillips curve

Investment will generally lead to an increase in a nation's capacity to produce (T/F)

True

Consider the following two events: (i) an increase in the cost of new capital goods; and (ii) a decrease in corporate income tax rates. How will these events affect the demand for investment?

These events have an indeterminate effect on the demand for investment

The consumption function expresses the

relationship between consumption and disposable personal income

As the incomes in foreign nations rise, their imports from the United States will

rise

In the recovery phase of the inflation-unemployment cycle, a falling rate of inflation means that the price level is

rising by smaller and smaller percentages

A decrease in the level of economic activity will generally

shift the investment demand curve to the left

Aggregate expenditures are the

sum of planned levels of consumption, investment, government purchases, and net exports, at a given price level, as they relate to real GDP

The marginal propensity to save is given by

the change in saving divided by the change in disposable income

Which of the following will shift the investment demand curve to the left?

the government repeals investment tax credits