Econ ch 5/6 exam

According to the graph, the point Y1 represents the point at which

consumption exceeds income.

Changes in the price level affect

consumption, investment, and foreign spending.

Which of the following is a component of GDP?

consumption, investment, government spending

Adaptive expectations will speed up the adjustment process that takes place when an economy operates above or below full employment.

false

An economy that operates faster than its natural level of full employment will experience high unemployment and unused resources.

false

When prices increase in the short run,

firms will increase production.

A tax cut would cause the equilibrium to move from

from point A to B

In the graph shown, an increase in the money supply will cause the equilibrium to move from

from point A to B

When graphing the investment demand curve, we place _________ on the horizontal axis and _________ on the vertical axis.

investment, interest rate

Macroeconomic equilibrium can be expressed as

leakages = injections.

According to Keynes, consumption is a function of

real GDP.

When graphing Keynes's consumption function, we place __________ on the horizontal axis and __________ on the vertical axis.

real GDP; consumption

If an economy is experiencing a(n) __________, Keynes would propose to __________ consumer demand by implementing ___________ fiscal policy.

recession; stimulate; expansionary

when prices rise,

the demand for money increases

In the classical view, the outward shift of the demand curve for labor as illustrated in the graph below causes

the equilibrium wage rate to adjust to w*'.

The Phillips curve illustrates

the short-run tradeoff between inflation and unemployment.

If autonomous spending = $10,

the y-intercept of the savings function will be −$10.

When income is above equilibrium,

unintended inventory accumulation causes businesses to cut back production.

According to Keynes, sticky wages cause the short-run aggregate supply curve to be

upward sloping.

Suppose that investment spending increases by $4.5 billion, and the slope of the aggregate expenditures (AE) line is .75. What is the change in the equilibrium level of real GDP?

$18 billion

If the slope of the aggregate expenditures line (AE) is .8 and taxes increase by $5, what is the change in equilibrium income? Assume government spending equals 0.

$20 decrease in equilibrium income

By how much does output increase if government spending and taxes rise by $20 million and the marginal propensity to consume is 0.75?

$20 million

Which of the following would cause output to rise if the economy were operating below the full-employment level of output?

An increase in the marginal propensity to consume

The graph below shows an increase in aggregate demand. Classical economists would agree that the new equilibrium price level is at point ____.

C

According to the graph, what will happen to C(Y) when autonomous consumption increases to $30?

C(Y) will shift upward with no change in the slope.

How is it possible for the United States to import more than it exports?

Foreigners lend the U.S. the money to pay for the imports.

If the value of the U.S. dollar rises relative to the French france,

French imports into the U.S. rise.

Which of the following is most likely to occur in an economy that is operating below its level of full employment?

Inflation will be low.

The fraction of each additional dollar of income spent defines which of the following terms?

Marginal propensity to consume (MPC)

Classical economists argue that inflationary and recessionary gaps

are eliminated by automatic adjustments of internal mechanisms in the economy.

An increase in consumer income will cause the consumption function to shift outward.

false

Assume taxes = $0. According to the chart, Steve is able to contribute $4 to his savings.

false

If businesses predict an upcoming recession, they will increase their investments.

false

In the long run, inflation and unemployment are closely related.

false

In the long run, the aggregate supply curve slopes upward, but in the short run the aggregate supply curve is vertical.

false

Increasing prices will cause the short-run aggregate supply curve and the long-run aggregate supply curve to shift to the left.

false

Keynes believed government could do nothing to stimulate the economy during recessionary times or to slow down the economy during inflationary times.

false

The Phillips curve's downward slope depends on rational expectations.

false

The classical view of economics states that because all prices adjust immediately, firms can increase production and profit in the short run.

false

The short-run aggregate supply (SRAS) curve is based on the premise that because all prices will change at the same rate, businesses can alter their production to take advantage of profit opportunities.

false

The vertical Phillips curve implies that expansionary monetary policy can raise the rate of inflation.

false

When prices and wages did not adjust to equilibrium during the Great Depression as classical economists predicted, John Maynard Keynes proposed increasing the supply of loanable funds to remedy the Depression.

false

In the graph shown, an increase in government spending will cause the equilibrium to move from

from point A to B

Which of the following is not a source of savings in an economy?

government spending

The supply shocks of the 1970s

led to both high inflation and unemployment.

The classical view of economics describes how

prices and wages adjust immediately to clear markets.

The vertical long-run aggregate supply curve indicates that

prices do not affect overall output.

Suppose a supply shock causes an inward shift of the short-run aggregate supply curve. In the short run,

prices rise, and output falls.

Which of the following does not represent a leakage from household consumption?

purchases

Unemployment _______________ when real GDP declines.

rises

From the microeconomic perspective, the income effect occurs when

rising prices decrease consumer wealth and demand.

Assume that consumers are the only players in the economy. When income equals consumption, we can conclude that

savings is equal to zero

When a factor, other than the price level, that affects the aggregate quantity supplied changes, we would expect the short-run aggregate supply curve to

shift inward or outward

An increase in taxes reduces aggregate expenditures by an amount equal to

the change in taxes multiplied by −b.

When investment is added to the consumption function,

the y-intercept shifts upward.

How do households react to an increase in taxes?

they reduce both consumption and savings

A downward movement along the Phillips curve will cause an inward shift in the aggregate demand curve.

true

According to Say's Law, supply creates demand.

true

An increase in autonomous spending will shift the aggregate expenditures (AE) line upward.

true

An increase in the price level will increase the demand for money.

true

Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.

true

Assuming taxes equal zero, if the average propensity to consume = .9, we can conclude that consumers typically save 10% of their total income.

true

Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment.

true

Business spending, or investment, is an injection into the circular flow model.

true

Businesses cut back spending when the price level rises, because the resulting increased demand for money drives the interest rate upward.

true

Classical economists argued that the Great Depression would eventually end when output returned to the full employment level with no help from the government.

true

Government policy can shift the aggregate demand curve either inward or outward.

true

If the marginal propensity to consume = .85 and taxes = 0, we know that consumers typically save $.15 of each additional dollar of income they receive.

true

Improvements in technology or resource endowments will shift the classical supply curve outward.

true

In the short run, there is a positive relationship between the aggregate price level and the quantity of goods and services supplied.

true

Keynes's circular flow model illustrates the flow real variables while holding nominal variables constant.

true

Rising production costs will shift the short-run aggregate supply curve inward.

true

The aggregate demand/aggregate supply model relates the effects of changing prices on the components of the Keynesian model.

true

The minimum wage law can prevent immediate wage increases and allows firms to profit from lower labor costs and high revenue.

true

There are no profit opportunities in the long run.

true

When an economy is operating above full employment, we expect prices to adjust upwards.

true

Which of the following is the correct expression of the tax multiplier?

−b / (1 − b)

If the marginal propensity to consume is 0.5, to how much will GDP increase if autonomous spending increases by $5 million?

$10 million

What is the effect on output of an increase in spending of $50 if the marginal propensity to consume is 0.8?

$250

Assume taxes = $0. According to the chart, Steve's consumption is equal to

$34

What is the effect on output of an increase in government spending of $1 million, if the marginal propensity to consume is 0.8?

$5 million

Assume taxes = $0. According to the chart, Dean's consumption is equal to

$50

Assume taxes = $0. According to the chart, Bruce's consumption is equal to

$66

If a $6 billion increase in investment spending causes a $30 billion increase in equilibrium real GDP, the slope of the aggregate expenditures (AE) line equals ______.

.8

Suppose your total consumption = $800, and your total income = $1,000, your average propensity to consume is _____.

.8

Given the linear consumption function C = 20 + 0.9Y, the slope of the line is ______.

0.9

Assume taxes = 0 and imports = 0. If the marginal propensity to consume = .5, the value of the multiplier is

2

Given the linear consumption function C = 20 + 0.9Y, the y-intercept is ______.

20

Suppose the U.S. dollar strengthens relative to the German deutsche mark. Which of the following is most likely to occur?

German imports into the U.S. will increase.

If income increases by $250 million as a result of a $50 million autonomous increase in investment spending, how large is the multiplier?

5

What is the most likely short-run result of an inward shift of the aggregate demand curve?

A lower equilibrium price and output

Which of the following events most likely caused the aggregate demand curve to shift inward?

A tax increase reduced consumers' disposable income.

According to the graph below, a change in the spending plans of consumers, businesses, government, or foreigners is illustrated by the movement from point ______ to point ______.

A;B

The Keynesian model of aggregate expenditures

ALL OF THE ABOVE is driven by demand. represents macroeconomic equilibrium. can be illustrated by the circular flow model.

Which of the following would cause output to fall as a result of an increase in the price level?

ALL THE ABOVE Investment spending declines. Consumer spending falls. Exports decline

Which of the following factors affects the demand for imports and exports?

ALL THE ABOVE The exchange rate Income Preferences

In the short run, the unemployment rate depends on

ALL THE ABOVE monetary policy. the level of aggregate demand. the rate of inflation.

The microeconomic demand curve

ALL THE ABOVE shows how the substitution effect causes a decrease in quantity demanded as a result of increasing prices. shows how the income effect causes a decrease in quantity demanded as a result of increasing prices. measures the effect of nominal variables on other nominal variables.

the aggregate demand curve measures

ALL THE ABOVE the real value of nominal variables. aggregate expenditures as a function of the price level. the aggregate price level across the economy and real GDP, or income.

What happens if the government increases taxes without increasing spending?

Aggregate demand falls, and output declines.

This graph shows a shift in the aggregate expenditures (AE) line. Which of the following statements regarding the causes of the shift are true?

An autonomous spending component increased.

Which of the following policy measures would help close a recessionary gap?

An increase in government spending

Which of the following factors would increase the size of the multiplier?

An increase in the marginal propensity to consume

Which of the following statements regarding the marginal propensity to consume (MPC) is correct?

Assuming taxes = 0, MPC = 1 − the marginal propensity to save (MPS).

If the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system?

Autonomous spending increases by $2,000, and GDP rises by $20,000.

What is the effect of technological progress on prices and output?

Both the long-run and the short-run aggregate supply curves shift outward.

Which of the following could cause aggregate demand to decrease?

Consumers decide to increase their savings.

Which of the following is not a reason why wages might be sticky?

Employees work more when wages rise.

Which of the following correctly expresses how savings equals investment?

I = S + (T − G) − NX

How does the household savings rate affect the impact on output of an increase in government spending?

If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been.

Which of the following will shift the classical aggregate supply curve outward?

Improvements in technology

What effect does a depreciation in the dollar have on net exports by the United States?

It increases net exports, increasing output.

Which of the following does not directly influence investment expenditures?

Marginal propensity to consume

Which of the following statements regarding output in the long run is correct?

Output is determined by the quantity and productivity of resources.

If the level of imports remains constant and the marginal propensity to consume is 0.75, what happens to output when exports increase from $550 to $750 million?

Output rises by $800 million.

Which of the following statements regarding Keynes's aggregate expenditures (AE) model is correct?

Taxes are leakages out of the circular flow model and reduce disposable income.

Which of the following statements regarding the aggregate demand (AD) curve is correct?

The AD curve represents the inverse relationship between the expenditures of households, businesses, government, and foreigners and the aggregate price level.

Government spending depends on

POLICYMAKERS

In the short run, what is the effect of an outward shift in the aggregate demand curve?

Prices and output rise.

What happens when the economy is operating beyond the full-employment level of output?

Prices and wages begin to rise, causing firms to cut back on production until the full-employment level of output is reached.

What happens in the short run to prices and output if the price of oil rises temporarily?

Prices rise, and output falls below the short-run equilibrium level.

In the long run, what happens to the levels of prices and output as a result of an outward shift in the short-run aggregate supply curve?

Prices rise, and output returns to the full-employment level.

Which of the following will occur when the economy operates above full employment?

Prices will adjust upward.

Which of the following events will most likely cause an inward shift of the short-run aggregate supply curve?

The economy experiences a supply shock.

Which of the following events will most likely cause an outward shift in the aggregate demand curve?

The government increases spending.

Which of the following statements about the multiplier is true?

The higher the marginal propensity to consume, the larger the multiplier.

What would happen if the government increased its spending in response to an increase in consumer savings?

The increase in government spending would offset (fully or partially) the decline in consumer spending.

Suppose an economy experiences a surge in immigration. Which of the following is the most likely result?

The long-run aggregate supply curve and the short-run aggregate supply curve will shift to the right.

Which of the following will occur if the natural rate of unemployment falls?

The long-run aggregate supply curve shifts to the right.

What determines the slope of the aggregate expenditures line?

The marginal propensity to consume

Which of the following must be true if output rises by $400 million following an increase in government spending of $100 million?

The marginal propensity to consume must be 0.75.

Which of the following identifies a problem with the Keynesian model?

The model ignores the effects of price changes on income, or real GDP.

According to the graph, what will happen to C(Y) when the marginal propensity to consume increases?

The slope of C(Y) will steepen.

Suppose the government provides an extra incentive for consumers to save. What do you predict will happen?

The slope of the AE line will flatten.

Which of the following provides the savings with which businesses finance their investments?

The trade deficit

Which of the following describes the macroeconomic equilibrium?

Total spending = total output

Which of the following statements regarding aggregate expenditures is correct?

When the interest rate is low, investment spending increases.

Which of the following equations accurately represents the macroeconomic equilibrium in an open economy?

Y = C + I + G + NX

A shift in the aggregate expenditures (AE) line causes

a change in equilibrium GDP larger than the shift of the AE line.

An increasing price level will cause

a reduction in the overall quantity of goods and services demanded.

Policymakers can expand aggregate demand and lower unemployment, but the cost is

a temporary increase in inflation.

In a simple model where aggregate expenditures (AE) are comprised only of consumption and investment, the intersection of the AE line and the 45-degree line is

above the point where savings equals zero.

In the aggregate expenditure identity, the equilibrium condition is that

aggregate expenditure equals output.

The aggregate demand (AD) curve graphically illustrates the inverse relationship between

aggregate expenditures and the price level.

According to Keynes's aggregate expenditures model, macroeconomic equilibrium occurs when

aggregate expenditures equal income.

According to Keynes, which of the following could have helped pull the United States out of the Great Depression?

an increase in government spending

The aggregate demand curve slopes downward because

an increase in the aggregate price level reduces the quantity of goods and services demanded.

When the equilibrium level of output in the economy is greater than the full-employment level, the economy is said to have

an inflationary gap

According to the graph, if real GDP is below $500, inventories will be

below the planned level, and firms will increase their production.

According to the graph below, at point A

businesses are not producing enough and must increase production.

When the price level is above the equilibrium price,

businesses recognize increasing profits.

According to the aggregate demand/aggregate supply curve, when prices rise,

businesses will cut back spending.

When the U.S. price level rises, we expect foreigners to

buy less U.S. goods and services.

Which of the following would not shift the aggregate demand curve?

changes in the price level

The belief that the economy adjusts immediately to its long-run equilibrium is consistent with the

classical view.

The short-run aggregate supply (SRAS) curve slopes upward, because

confusion, sticky wages, and sticky prices provide businesses with profit opportunities in the short run.

The short-run aggregate supply curve slopes upward because of

confusion, sticky wages, and sticky prices.

According to the aggregate demand/aggregate supply model, when prices rise,

consumers will decrease their spending.

taxes

decrease disposable income

When interest rates rise, we can predict that businesses will

decrease their quantity invested.

When businesses decide to increase their investments,

equilibrium income rises.

Which of the following is not a result of an outward shift of the aggregate demand curve?

higher unemployment

Expected inflation is

how much people expect the aggregate price level to change.

An increase in autonomous spending raises GDP by more than the original increase in spending, because

individuals spend part of the money, increasing incomes of other individuals, who then spend part of their extra money.

According to the graph, point Y2 represents the point at which

income exceeds consumption.

John Maynard Keynes, during the Great Depression in the 1930s, wrote that economies experiencing high unemployment should follow policies that

increase aggregate demand.

Over time, the long-run aggregate supply curve can shift outward as a result of

increases in productivity.

Keynes's model of a demand-driven economy ignores the effects of

inflation and supply shocks.

The change in savings that results from a change in income represents the

marginal propensity to save

Suppose the government decides to cut taxes. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.

outward; decrease; increase

Suppose the government increases its spending. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.

outward; decrease; increase

Adaptive expectation formation means that

people base their expectations of the future on what has occurred in the past.

Point A on the graph represents the

point where consumption equals income.

If a household's disposable income increases from $80,000 to $87,500 and their consumption increases from $60,000 to $66,000, the

slope of the savings function is .2.

When the wage rate falls below equilibrium, excess demand for labor is alleviated through which of the following processes according to the classical theory?

slope w arrows upward

Which of the following is not a component of aggregate expenditures?

taxes

___________ are leakages out of the circular flow model.

taxes

A kink in the short-run aggregate supply curve reflects the fact that

wages rise when the economy operates beyond full employment but tend not to fall when the economy's resources are underemployed.

Keynes's sticky wage theory holds that

wages will not immediately adjust to higher levels, and firms are able to profit from increased production.

An increase in an economy's resource pool will

will shift both the long-run and short-run aggregate supply curves outward.

Suppose that, as a producer, your production costs have increased at the same rate as your revenue. You can conclude that

your profit will remain unchanged.

If households saved each additional dollar of income they received, the slope of the consumption function would equal

zero

Suppose the linear consumption funtion is C = 15 + 0.8Y. Using the savings approach, what is the y-intercept of the savings function?

−15