Econ 201 - Study Questions (Ch. 10-13)

How will the situation affect the investment demand curve? to lessen the fiscal deficit, Congress increases corporate taxes

investment demand decreases

How will the situation affect the investment demand curve? A new type of engine is developed that is more fuel-efficient

investment demand increases

How will the situation affect the investment demand curve? a firm decides to increase its current inventory levels

investment demand increases

a contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve

what is a private closed economy

no government and no net exports (international trade)

How will the situation affect the investment demand curve? unplanned inventories rise to new highs

not going to shift investment demand

the three reasons gives for a the downward slope of the aggregate demand curve

real balances effect, real interest rate effect, foreign purchases effect

the aggregate demand curve is downsloping because of the

real interest-rate effect, real-balances effect, and foreign purchases effects

A major advantage of the built-in or automatic stabilizers is that they

require no legislative action by Congress to be made effective

the multiplier process suggests that any initial increase in....

aggregate expenditures will cause a larger increase in GDP

The 45-degree line on a graph relating consumption and income shows

all the points in which consumption and income are equal

As disposable income increases, consumption:

and saving both increase

if investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift

rightward by $50 billion at each price level 1/1-0.8 = 1/0.2 = 5 → 5*10 = 50

The aggregate supply curve shifts to the left as the price of inputs _____, causing _____ output, ____ unemployment, and _____ inflation possible.

rises, lower, higher, higher

if aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, we can assume that

the price level is inflexible downward and a recession has occured

in the short run, input prices are ____ and output prices are ____

fixed, flexible

calculate the multiplier when the MPS is (a) 0.5 (b) 0.25

(a) 1/0.5 = 2 (b) 1/0.25 = 4

If the MPS is 0.25 and the economy has a expenditure recessionary gap of $5 billion, then the equilibrium GDP is

$20 billion below the full-employment GDP 1/0.25 = 4 → 4 (multiplier) * $5 = 20

with an MPS of 0.4, the MPC will be

1.0 minus 0.4 = 0.6

multiplier

1/(1-MPC)

if the MPC is 0.63, the multiplier is

1/0.37

if the equation for the consumption schedule is C=20+0.8Y, where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is:

100 y=20+0.8y → .2y=20 → 20/.2 = 100 → y = 100

at equalibrium real GDP in a private closed economy

aggregate expenditure and real GDP are equal

if the interest rate rises

Investment spending will decrease

cost-push inflation

When prices rise due to an increase in the cost of production.

an appropriate fiscal policy for a severe recession is

a decrease in tax rates

which one of the following would not shift the aggregate demand curve a. a change in the prive level b. depreciation of the international value of the dollar c. a decline in the interest rate at each possible price level d. an increase in personal income tax rates

a. a change in the price level wages causes shifts not the change in the price level

saving is always equal to

actual investment

the determines of aggregate demand

explain shifts in the aggregate demand curve

list four things that could cause a shift in the investment demand curve

change in acquisition, change in taxes, change in technology., change in planned inventories.

MPC =

change in consumption/change in income

MPS =

change in saving/change in income

List four factors that could shift the consumption schedule

change in wealth, change in borrowing, change in interest rates, expectations

discretionary fiscal policy refers to

changes in taxes and government expenditures made by Congress to stabilize the economy

what will be the effect on the consumption and saving schedules? congress officially approves the President's plan for tax cuts

consumption and saving increases

what will be the effect on the consumption and saving schedules? A weakening of the housing market lowers home values

consumption decreases, saving increases

what will be the effect on the consumption and saving schedules? concern grows over rising prices

consumption decreases, saving increases

what will be the effect on the consumption and saving schedules? credit card companies increase the interst-free periods on their cards to compete for customers

consumption increase, saving decrease

what will be the effect on the consumption and saving schedules? real interest rates fall

consumption increases, saving decreases

APC =

consumption/income

Three factors which can shift the Aggregate Demand curve to the left.

decrease in government expenditures, decrease in money supply, increase in tax rates

the greatest expansionary impact of a budget deficit will occur when the

economy is operating in the intermediate range of its aggregate supply curve

How will a decrease in the real interest rate affect the AD curve and investment

expand investment and shift the AD curve to the right

the greatest anti-inflationary impact of a budget surplus will occur when the federal government

impounds the surplus funds and lets them stand idle

Three factors which can shift the Aggregate Demand curve to the right.

increase in government expenditure, increase in money supply, decrease in tax rates

a decline in the real interest rate will

increase the amount of investment spending

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

the aggregate supply curve shifts to the right as productivity ___ and the price of input _____. Causing _____ inflation, ______ output, and ______ unemployment.

increases, falls. lower, higher, lower

APS =

saving/income

income falls in several countries that trade heavily with the U.S

shift left

the wealth effect is shown graphically as a

shift of the consumption schedule.

What effect would the following have on the aggregate demand curve a boost in research and development by computer companies produces more powerful and efficient computers and equipment

shift right

after a budget surplus, Congress moves to cut persoanl income taxes

shift right

in an aggregate expenditures diagram, a lump-sum tax (T) will

shift the C+Ig+Xn line downward by an amount equal to T * MPC

other things equal, an improvement in productivity will

shift the aggregate supply curve to the right

If Margy's MPC is 0.9, this means that she will

spend 90 cents out of every additional dollar of disposable income

When an economy experiences stagnant growth and high inflation at the same time it is referred to as

stagflation

the consumption scheduele shows

the amount households plan or intend to consume at various possible levels of aggregate income.

what is the investment-demand curve?

the inverse relationship between interest rates and quantity of investment

the larger the MPC

the larger the multiplier

the most important determinant of consumer spending is

the level of income