macroeconomic ch10, 11, 12 test- example problems

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand. 1. The price level does not change, but real output declines. 2. The price level rises rapidly and there is little change in real output. 3. The price level rises and real output decreases. 4. The price level increases somewhat, with a relatively large change in output. 5. The price level does not change, but real output increases.

2. The price level rises rapidly and there is little change in real output.

Suppose that an initial $40 billion increase in investment spending expands GDP by $40 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $32 billion in the second round of the process. MPC? Multiplier? If, instead, GDP and consumption both rose by $36 billion in the second round, what would have been the size of the multiplier?

MPC = .8 Multiplier = 5 rose by $36 instead = 10

Suppose that disposable income, consumption, and saving in some country are $400 billion, $350 billion, and $50 billion, respectively. Next, assume that disposable income increases by $40 billion, consumption rises by $36 billion, and saving goes up by $4 billion. MPC? MPS? APC before the increase in disposable income? APC after the increase?

MPC = 0.90 MPS = 0.10 APC before = 0.875 APC after = 0.877

d. A decrease in aggregate demand.

The price level does not change, but real output declines.

c. Equal increases in aggregate demand and aggregate supply.

The price level does not change, but real output increases.

e. An increase in aggregate demand that exceeds an increase in aggregate supply.

The price level increases somewhat, with a relatively large change in output.

b. A decrease in aggregate supply, with no change in aggregate demand.

The price level rises and real output decreases.

a. 1. If full employment in this economy is 150 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? 2. What will be the consequence of this gap? 3. By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? Aggregate expenditures would have to __________ by $ ______ billion 4. What is the multiplier in this example? b. 1. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $450 billion? 2. By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? Aggregate expenditures would have to ___________ by $ _____ billion 4. What is the multiplier in this example? c. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier?

a. 1. Recessionary expenditure gap 2. A shortfall in aggregate expenditures of $20 billion. 3. increase, 20 4. 5 b. 1. Inflationary expenditure gap 2. decrease, 20 3. 5 4. MPC = .8 MPS = .2 Multiplier = 5

Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.90. Aggregate expenditures must have increased by a. $10 billion. b. $100 billion. c. $90 billion. d. $200 billion.

a. $10 billion.

Answer the following questions, which relate to the aggregate expenditures model: a. If Ca is $100, Ig is $60, Xn is −$10, and G is $30, what is the economy's equilibrium GDP? b. If real GDP in an economy is currently $210, Ca is $100, Ig is $60, Xn is −$10, and G is $30, will the economy's real GDP rise, fall, or stay the same? c. Suppose that full-employment (and full-capacity) output in an economy is $210. If Ca is $150, Ig is $60, Xn is −$10, and G is $30, what will be the macroeconomic result? 1. There will be an inflationary expenditure gap and employment levels will be below the full-employment level. 2. There will be an inflationary expenditure gap and employment levels will be above the full-employment level

a. $180 b. fall c. 2.

Assume the MPC is 0.80. If government were to impose $10 billion of new taxes on household income, consumption spending would initially decrease by a. $8 billion. b. $10 billion. c. $20 billion. d. $2 billion.

a. $8 billion.

The disposable income (DI) and consumption (C) schedules are for a private, closed economy. All figures are in billions of dollars. At the $320 billion level of disposable income, the average propensity to save is: a. 0.075. b. 0.925. c. 0.015. d. 0.335.

a. 0.075.

The disposable income (DI) and consumption (C) schedules are for a private, closed economy. All figures are in billions of dollars. If plotted on a graph, the slope of the consumption schedule would be: a. 0.9. b. 0.7. c. 0.8. d. 0.6.

a. 0.9.

(Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is a. 4. b. 5. c. 3. d. 10.

a. 4.

b. A lower price level causes restaurants to become busier as more people purchase restaurant meals. a. Real-balances effect b. Foreign purchases effect c. Interest-rate effect

a. Real-balances effect

Refer to the diagram for a private closed economy. At the $300 level of GDP, a. aggregate expenditures and GDP are equal. b. consumption is $200 and planned investment is $50. c. saving exceeds planned investment. d. consumption plus saving is $400.

a. aggregate expenditures and GDP are equal.

Other things equal, if the U.S. dollar were to depreciate, the a. aggregate supply curve would shift to the left. b. aggregate demand curve would shift to the left. c. aggregate demand curve would remain fixed in place. d. aggregate supply curve would shift to the right.

a. aggregate supply curve would shift to the left.

The immediate-short-run aggregate supply curve represents circumstances where a. both input and output prices are fixed. b. both input and output prices are flexible. c. input prices are fixed, but output prices are flexible. d. input prices are flexible, but output prices are fixed.

a. both input and output prices are fixed.

Suppose the economy's multiplier is 2. Other things equal, a $20 billion decrease in government expenditures on national defense will cause equilibrium GDP to a. decrease by $40 billion. b. decrease by $160 billion. c. increase by $40 billion. d. decrease by $20 billion. e. remain unchanged.

a. decrease by $40 billion.

If a lump-sum income tax of $40 billion is levied and the MPS is 0.20, the consumption schedule will shift a. downward by $32 billion. b. upward by $32 billion. c. downward by $40 billion. d. downward by $8 billion.

a. downward by $32 billion.

Changes in which of the following would not shift the aggregate demand curve? a. real interest rates b. productivity rates c. foreign-exchange rates d. income tax rates

b. productivity rates

A private closed economy includes a. households and businesses, but not government or international trade. b. households only. c. households, businesses, and government, but not international trade. d. households, businesses, and international trade, but not government.

a. households and businesses, but not government or international trade.

If the multiplier in an economy is 10, a $20 billion increase in net exports will a. increase GDP by $200 billion. b. reduce GDP by $2 billion. c. decrease GDP by $200 billion. d. increase GDP by $20 billion.

a. increase GDP by $200 billion.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. The marginal propensity to consume: a. is highest in economy (3). b. is highest in economy (2). c. cannot be calculated from the data given. d. is highest in economy (1).

a. is highest in economy (3).

When the marginal propensity to consume is less than 1, the: a. marginal propensity to save is positive. b. marginal propensity to save is negative. c. average propensity to consume is greater than 1. d. average propensity to save is greater than 1.

a. marginal propensity to save is positive.

Refer to the given graph. A shift of the consumption schedule from C2 to C1 might be caused by a(n): a. reverse wealth effect, caused by a decrease in stock market prices. b. decrease in saving. c. decrease in income tax rates. d. increase in real GDP.

a. reverse wealth effect, caused by a decrease in stock market prices.

Graphically, demand-pull inflation is shown as a a. rightward shift of the AD curve along an upsloping AS curve. b. leftward shift of the AS curve along a downsloping AD curve. c. leftward shift of the AS curve along an upsloping AD curve. d. rightward shift of the AD curve along a downsloping AS curve.

a. rightward shift of the AD curve along an upsloping AS curve.

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that: a. the price level is inflexible downward and a recession has occurred. b. productivity has declined. c. the money supply has declined. d. cost-push inflation has occurred.

a. the price level is inflexible downward and a recession has occurred.

Classical economists held the view that in the economy, a. unemployment is temporary and is soon eliminated. b. it is difficult for an economy to adjust because wages and prices are inflexible. c. there is an imbalance between saving and investment. d. demand creates its own supply.

a. unemployment is temporary and is soon eliminated.

Refer to the diagram for a private closed economy. The equilibrium level of GDP is a. $200. b. $300. c. $400. d. $100.

b. $300.

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines a. 4 and 1 b. 4 and 3 c. 2 and 3 d. 2 and 4

b. 4 and 3

When the U.S. price level rises, Canadian consumers are more likely to buy cars made in Mexico than cars made in the United States. a. Real-balances effect b. Foreign purchases effect c. Interest-rate effect

b. Foreign purchases effect

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion, a. the price level will increase. b. GDP will remain at $400 billion unless aggregate expenditures change. b. real and nominal GDP will both increase. c. real GDP will increase, but nominal GDP will decrease.

b. GDP will remain at $400 billion unless aggregate expenditures change.

Refer to the graph. Which of the following factors will shift AD1 to AD3? a. an increase in expected returns on investment b. a decrease in consumer wealth c. an increase in productivity d. a decrease in real interest rates

b. a decrease in consumer wealth

For a private closed economy, an unintended decline in inventories suggests that a. actual investment exceeds saving. b. aggregate expenditures exceed production. c. aggregate expenditures are less than the business sector expected them to be. d. planned investment is greater than consumption.

b. aggregate expenditures exceed production.

Refer to the diagram for a private closed economy. The upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects a. an increase in the MPC. b. an increase in investment expenditures. c. a decrease in consumption expenditures. d. an increase in the APS.

b. an increase in investment expenditures.

In the diagram, a shift from AS2 to AS3 might be caused by a(n) a. decrease in interest rates. b. increase in business taxes and costly government regulation. c. decrease in the price level. d. decrease in the prices of domestic resources.

b. increase in business taxes and costly government regulation.

Changes in which of the following would not shift the aggregate demand curve? a. real interest rates b. productivity rate c. foreign-exchange rates f. income tax rates

b. productivity rate

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift a. rightward by $10 billion at each price level. b. rightward by $50 billion at each price level. c. leftward by $40 billion at each price level. d. leftward by $50 billion at each price level.

b. rightward by $50 billion at each price level.

Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n) a. recession. b. wealth effect of an increase in stock market prices. c. increase in income tax rates. d. increase in saving.

b. wealth effect of an increase in stock market prices.

Refer to the table. All figures are in billions of dollars. If gross investment is $12 billion, the equilibrium level of GDP will be a. $260 billion. b. $290 billion. c. $280 billion. d. $270 billion.

c. $280 billion.

According to the given cumulative investment table, if the real interest rate falls from 20 percent to 16 percent, then: a. $180 billion of additional investments will be undertaken. b. $330 billion of total investments will be undertaken. c. $30 billion of additional investments will be undertaken. d. $440 billion of total investments will be undertaken.

c. $30 billion of additional investments will be undertaken.

If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is: a. 5 b. 10 c. 2 d. 3.33

c. 2

The accompanying table shows the aggregate demand and aggregate supply schedules for a hypothetical economy. The equilibrium price and output levels will be a. 200 and $5000. b. 300 and $8,000. c. 200 and $6,000. d. 250 and $7,000.

c. 200 and $6,000.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by a. B b. A c. A and B d. C

c. A and B

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in a. A b. C c. A and C d. B

c. A and C

(Advanced analysis) Which of the following equations correctly represents the given data? a. Yd = 40 + 0.6C. b. C = 60 + 0.4Yd. c. C = 40 + 0.6Yd. d. C = 0.6Yd.

c. C = 40 + 0.6Yd.

A higher price level increases the cost of borrowing, which causes people to buy fewer cars. a. Real-balances effect b. Foreign purchases effect c. Interest-rate effect

c. Interest-rate effect

With cost-push inflation, there will be a. an increase in real GDP. b. a decrease in unemployment. c. a decrease in real GDP. d. a leftward shift in the aggregate demand curve.

c. a decrease in real GDP.

The long-run aggregate supply analysis assumes that a. both input and product prices are fixed. b. input prices are fixed, while product prices are variable. c. both input and product prices are variable. d. input prices are variable, while product prices are fixed.

c. both input and product prices are variable.

Dissaving occurs where: a. income exceeds consumption. b. saving exceeds income. c. consumption exceeds income. d. saving exceeds consumption.

c. consumption exceeds income.

Refer to the diagram for a private closed economy. At the $400 level of GDP, a. consumption is $350 and planned investment is zero, so aggregate expenditures are $350. b. consumption is $300 and actual investment is $100, so aggregate expenditures are $400. c. consumption is $300 and planned investment is $50, so aggregate expenditures are $350. d. aggregate expenditures exceed GDP, with the result that GDP will rise.

c. consumption is $300 and planned investment is $50, so aggregate expenditures are $350.

The multiplier effect: a. intensifies the effect of a decrease, but not an increase, in spending. b. diminishes the effect of a spending change, whether it is an increase or a decrease. c. intensifies the effect of a spending change, whether it is an increase or a decrease. d.intensifies the effect of an increase, but not a decrease, in spending.

c. intensifies the effect of a spending change, whether it is an increase or a decrease.

Refer to the diagram for a private closed economy. In this economy, investment a. decreases as GDP increases. b. increases as GDP increases. c. is $40 billion at all levels of GDP. d. is $60 billion at all levels of GDP.

c. is $40 billion at all levels of GDP.

A decline in investment will shift the AD curve to the a. right by a multiple of the change in investment. b. left by the same amount as the change in investment. c. left by a multiple of the change in investment. d. right by the same amount as the change in investment.

c. left by a multiple of the change in investment.

Refer to the diagram for a private closed economy. The equilibrium GDP is a. $60 billion. b. between $60 and $180 billion. c. $60 billion at all levels of GDP. d. $180 billion.

d. $180 billion.

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. The MPC is: a. 0.45. b. 0.20. c. 0.50. d. 0.90.

d. 0.90.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by a. C b. B and C c. B d. A

d. A

Refer to the diagram, which applies to a private closed economy. If gross investment is Ig1, the equilibrium GDP and the level of consumption will be a. H and HB, respectively. b. J and JI, respectively. c. J and JK, respectively. d. H and HF, respectively.

d. H and HF, respectively.

Refer to the given diagram, which shows consumption schedules for economies A and B. We can say that the a. MPC is greater in B than in A. b. APC at any given income level is greater in B than in A. c. MPS is smaller in B than in A. d. MPC is greater in A than in B.Correct

d. MPC is greater in A than in B.Correct

Which of the following would shift the saving schedule upward? a. consumer expectations of rising prices of products b. a decrease in real interest rates c. increased optimism about future incomes d. a decrease in wealth

d. a decrease in wealth

The amount by which aggregate expenditures exceed those associated with the full-employment level of domestic output can best be described as a. a recessionary expenditure gap. b. the multiplier. c. the average propensity to save. d. an inflationary expenditure gap.

d. an inflationary expenditure gap.

Refer to the diagram. Consumption equals disposable income when: a. CD equals A. b. B equals CD. c. disposable income is D. d. disposable income is B.

d. disposable income is B.

Refer to the diagram. Which of the following would shift the investment demand curve from ID1 to ID2?: a. a higher interest rate b. a lower interest rate c. lower expected rates of return on investment d. higher expected rates of return on investment

d. higher expected rates of return on investment

The multiplier will be: a.larger, the smaller the MPC and the larger the MPS. b. smaller, the larger the MPC and the smaller the MPS. c. smaller, the smaller the MPC and the smaller the MPS. d. larger, the larger the MPC and the smaller the MPS.

d. larger, the larger the MPC and the smaller the MPS.

Refer to the table. The economy shown is a a. private economy. b. private open economy. c. mixed closed economy. d. mixed open economy.

d. mixed open economy.

Other things equal, a 10 percent decrease in corporate income taxes will: a. shift the investment demand curve to the left. b. decrease the market price of real capital goods. c. have no effect on the location of the investment demand curve. d. shift the investment demand curve to the right.

d. shift the investment demand curve to the right.

The greater is the marginal propensity to consume, the: a. higher is the interest rate. b. smaller is the average propensity to consume. c. lower is the price level. d. smaller is the marginal propensity to save.

d. smaller is the marginal propensity to save.

A recessionary expenditure gap exists if a. the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP. b. the aggregate expenditures schedule intersects the 45-degree line at any level of GDP. c. planned investment exceeds saving at the full-employment GDP. d. the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.

d. the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.

A 5-year increase in the minimum age for collecting Social Security benefits. The consumption schedule will shift _________________ The saving schedule will shift _________________

downward upward

A large decrease in real estate values, including private homes. The consumption schedule will shift _________________. The saving schedule will shift _________________

downward upward

A sharp, sustained increase in stock prices. The consumption schedule will shift _________________ The saving schedule will shift _________________

upward downward

A substantial increase in household borrowing to finance auto purchases. The consumption schedule will shift _________________ The saving schedule will shift _________________

upward downward

An economywide expectation that a recession is over and that a robust expansion will occur. The consumption schedule will shift _________________ The saving schedule will shift _________________

upward downward