Midterm 2 Macroeconomics

When actual output exceeds potential output, _____

prices tend to increase.

An increase in the market interest rate, other things equal, will _____

reduce the amount invested because the opportunity costs of investing will be higher.

A decrease in stock prices will _____ the net wealth of households and _____ consumption.

reduce; decrease

Historically, consumption spending in the United States has _____

remained approximately constant as a percentage of income.

Expectations that the price level will decrease in the future will _____

shift the current consumption function downward.

Expectations that the price level will increase in the future will _____

shift the current consumption function upward.

The real wage is equal to the _____

wage measured in terms of the quantity of goods and services it buys.

In the long run, an economy will produce its potential output if _____

wages and prices are sufficiently flexible.

Refer to Table 9.1, which shows the disposable income and consumption of a household. The level of saving at a disposable income of $1,200 is _____

$240

Movement along the aggregate demand curve may be caused by a change in autonomous investment spending.

False

The aggregate demand-aggregate supply model shows that closing an expansionary gap involves deflation and closing a recessionary gap involves inflation.

False

The slope of the consumption function is equal to the marginal propensity to save (MPS).

False

An increase in planned investment will shift the _____

aggregate demand curve rightward.

A beneficial supply shock such as a breakthrough in technology _____

lowers the price level and increases output.

The fraction of an increase in income that is saved is referred to as the _____

marginal propensity to save.

The nominal wage is _____

measured in current dollars rather than in constant dollars

In the long run, the price level is determined by aggregate supply.

False

Linda earned an income of $3,000 per month which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is her disposable income after the increase?

$3,500

Suppose an increase in disposable income from $3 trillion to $3.2 trillion increases consumption from $2.5 trillion to $2.6 trillion. The marginal propensity to consume (MPC) is _____

0.5.

Which of the following best describes aggregate expenditure?

C + I + G + (X − M)

A decrease in planned investment will shift the _____

aggregate demand curve leftward.

The potential output of an economy is _____

also referred to as the natural rate of output.

A decrease in disposable income will _____

cause a downward movement along the consumption function.

A technological change that positively affects business expectations will _____

cause a rightward shift of the investment demand curve.

As the U.S. price level rises relative to price levels in other countries, U.S. _____

consumption and net exports will both decrease.

Suppose the price level increases by 5 percent and the nominal wages of workers increase by 3 percent during a particular year. This implies that the real wage has _____

declined by 2 percent.

An increase in the market interest rate will _____

decrease investment for individual firms, so total investment in the economy decreases.

A decrease in net wealth will _____

increase saving and decrease consumption.

Fewer of an economy's resources will be channeled into building new factories and equipment when _____

interest rates are high.

In the income-expenditure framework, if planned aggregate expenditures are greater than real gross domestic product (GDP), _____

inventories will decrease.

The most important determinant of a household's consumption spending is _____

its disposable income.

A temporary adverse supply shock, such as a drought _____

temporarily shifts both the short-run and the long-run aggregate supply curves to the left.

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is the change in her saving per month after the increase in income?

$50

Refer to Table 10.1, which shows the aggregate demand and aggregate supply in an economy. The equilibrium output and price level for the economy are _____

$6.0 and 130, respectively.

Refer to Table 10.2, which shows the aggregate demand and aggregate supply in an economy. In schedule #1, the equilibrium output and price level for the economy are _____

$6.0 and 130, respectively.

Refer to Table 10.1, which shows the aggregate demand and aggregate supply in an economy. What is quantity supplied if the price level is at 150?

$7.0

How much is the output gap if short-run output is $18.0 trillion and potential output is $18.2 trillion?

+ $0.2 trillion.

How much is the output gap if short-run output is $21.0 trillion and potential output is $20.0 trillion?

+$1.0 trillion

Given a downward-sloping aggregate demand curve, if short-run aggregate supply increases, real GDP must increase and nominal GDP must fall.

False

Refer to Table 9.3, which shows the real gross domestic product (GDP), consumption, and planned investment in an economy. The marginal propensity to consume (MPC) in the economy is _____

0.8.

Which of the following is true of the relationship between disposable income and consumption?

Consumption is the dependent variable and disposable income is the independent variable.

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her marginal propensity to consume?

Her marginal propensity to consume is 0.90.

How does an expected change in car prices affect consumption?

Higher car prices in the future prompts some to buy a new car now.

Suppose Jack's salary increased from $100,000 to $200,000 per year between 2004 and 2014 and the price index increased from 100 to 300 during the same period. Which of the following statements best describes Jack's situation?

His real income has decreased and money income has increased.

What is true of an expansionary gap?

In the long run, this gap will close when resource suppliers negotiate higher resource payments.

Which of the following is true of an expansionary gap?

In the long run, this gap will close when resource suppliers negotiate higher resource payments.

_____ is the reward savers earn for deferring consumption.

Interest

Which of the following is true of a beneficial supply shock?

It can lead to a temporarily lower price level.

If costs decrease, what happens to the aggregate supply curve?

It shifts rightward.

Which of these is an advantage of long-term contracts in resource markets?

Long-term contracts reduce the average cost of negotiation.

Which of the following is generally true of nominal wages?

Nominal wages tend to adjust slowly in the downward direction.

Which of the following occurs when an expansionary gap is closed in the long run by the action of firms?

Output decreases, and the price level increases.

Which of the following is true in the short run?

Per-unit costs do not increase as much as output prices when the price level rises.

Suppose at a particular level of real gross domestic product (GDP), there are no unintended inventory adjustments. In this context, which of the following is true?

Real GDP equals the equilibrium level of real GDP demanded.

Refer to Exhibit 9.1, which shows the income-expenditure model. Which of the following best describes the situation at point B?

Real GDP exceeds aggregate expenditure.

Which of the following is correct if real GDP is $20 trillion and spending is $20 trillion?

Spending and GDP are in equilibrium.

Which of the following is correct if real GDP is $20 trillion and spending is $20.5 trillion?

Spending is greater than output by $0.5 trillion

When an economy is not producing at its potential output, which of the following is likely?

The actual price level is unexpected.

When an economy is producing its potential output, which of the following is true?

The economy is producing its maximum sustainable output.

What is the relationship between wages and the supply of labor?

The higher the wage, other things constant, the more labor supplied.

Fluctuations in investment _____

account for more of the variability in gross domestic product (GDP) than consumption.

Suppose an economy is initially in long-run equilibrium, and it then experiences a supply shock in the form of exceptionally high energy prices. Which of these will be true in this economy?

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

Refer to Exhibit 10.4, which shows an aggregate demand-aggregate supply model. Which of the following will be true of an economy in the long run that is at point M in the short run?

The short-run aggregate supply curve will shift to SRAS109.

Suppose the actual and expected price levels in an economy are initially equal. However, the actual price level falls eventually due to a change in economic conditions. Which of the following will occur in the long run?

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

Which of the following is true of government purchases?

They are decided by public officials.

A change in consumers' expectations about the future will shift both the aggregate expenditure curve and the aggregate demand curve.

True

An increase in the marginal propensity to consume (MPC) will cause the consumption function to become steeper.

True

An increase in the price level in an economy will decrease the real GDP demanded along the aggregate demand curve.

True

If consumption is greater than income, saving must be negative.

True

Movement along the aggregate expenditure line is caused by a change in the level of income.

True

The international oil price hike by OPEC was an adverse supply shock faced by the United States in the 1970s.

True

The slope of the consumption function equals the marginal propensity to consume.

True

An upward shift of the consumption function might be caused by _____

a decrease in the price level.

Refer to Exhibit 10.7, which shows the equilibrium price level and real GDP in an aggregate demand-aggregate supply model. If prices are as expected at 130, then point Z is _____

a short-run and a long-run equilibrium.

Refer to Exhibit 10.7, which shows the equilibrium price level and real GDP in an aggregate demand-aggregate supply model. If prices are as expected at 160, then point W is _____

a short-run and a long-run equilibrium.

Refer to Exhibit 10.2, which shows the short-run aggregate supply curve of an economy. In this Exhibit, the distance between Y1 and Y2 represents _____

an expansionary gap.

Refer to Exhibit 10.5, which shows the short-run equilibrium in an aggregate demand-aggregate supply model. The distance between Y1 and Y2 represents _____

an expansionary gap.

Which of the following is most likely to cause a rightward shift of the investment demand curve?

an improvement in business expectations

If the price level in an economy turns out to be higher than that expected by workers and firms, firms _____

an increase in long-run aggregate supply

Which of these changes is observed in an economy when a recessionary gap is closed in the long run?

an increase in the level of output and a decrease in the price level

If global pollution causes climatic changes that permanently harm crop production worldwide, aggregate supply and demand analysis would lead us to expect _____

an increase in the price level.

An adverse supply shock would shift _____

both the long-run and the short-run aggregate supply curves inward.

In aggregate spending, investment does not include _____

buying stocks and bonds.

If the price level in an economy increases, other things constant, consumption spending is likely to _____

decrease because the real value of wealth decreases

If nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per year, real wages will _____

decrease by 3 percent per year.

Refer to Exhibit 10.9, which shows the long-run equilibrium in the aggregate demand-aggregate supply model. The movement from Y1 to Y2 in this exhibit could have been caused by a(n) _____

decrease in the size of the labor force.

A household that expects a decrease in disposable income in the future will _____

decrease its current consumption spending.

Refer to Table 9.1, which shows the disposable income and consumption of a household. Saving _____

decreases as disposable income decreases.

Refer to Exhibit 10.8, which shows the long-run equilibrium in an aggregate demand-aggregate supply model. Which of the following is indicated by the arrow given?

direct relationship between the actual price level and real GDP supplied.

The short-run aggregate supply curve shows a(n) _____

direct relationship between the actual price level and real GDP supplied.

The difference between consumption spending and disposable income _____

equals saving.

The potential output of an economy is the level of output produced when the _____

expected price level equals the actual price level.

The consumption function assumes that _____

factors other than disposable income affect consumption, but those are held constant along the consumption function.

If the price level in an economy turns out to be higher than that expected by workers and firms, _____.

firms increase production.

The rate at which aggregate supply changes to restore equilibrium at potential output depends crucially on _____

how quickly real wages adjust to restore full employment in the labor market.

If incomes in the United States increase, other things equal, then U.S. _____

imports increase and exports remain constant.

An increase in income in other countries, other things equal, would cause U.S. _____

imports to remain unchanged and exports to increase.

Consumption reflects _____

income

If the marginal propensity to consume (MPC) is less than 1 and a household's disposable income increases by $2,000, the household's consumption will _____

increase by less than $2,000.

A decrease in the price level in an economy is likely to cause a(n) _____

increase in consumption spending.

The fact that some resource prices are fixed by contracts helps explain why firms _____

increase output in the short run when the price level increases.

Given the aggregate demand curve, a beneficial supply shock will _____

increase potential output and decrease the price level.

If resource prices are "sticky" downward and a recessionary gap develops in an economy, the short-run aggregate supply curve will _____

not shift rightward to return the economy to its potential output.

Refer to Exhibit 10.1, which shows the short-run aggregate supply (SRAS) curve of an economy. To the right of Y1, _____

output levels are more than the economy's potential.

If resource suppliers and demanders find out that the actual price level exceeds the expected price level, they will take corrective actions that will _____

shift the short-run aggregate supply curve of an economy.

Refer to Exhibit 10.1, which shows the short-run aggregate supply (SRAS) curve of an economy. At a price of P2, firms will _____

supply less than potential output.

Refer to Exhibit 10.1, which shows the short-run aggregate supply curve of an economy. In this Exhibit, if P1 is the price level prevailing in the economy, it implies that _____

the actual unemployment rate is equal to the natural unemployment rate.

The relationship in the economy between consumption and income is called _____

the consumption function.

The slope of the short-run aggregate supply curve depends on how sharply _____

the marginal cost of production rises as real GDP expands.

The fraction of a change in disposable income that is consumed is called _____

the marginal propensity to consume.

When the economy's actual price level exceeds the expected price level in the short run, _____

the nominal wages of workers decline.

The aggregate demand curve of an economy illustrates the relationship between _____

the price level and real gross domestic product (GDP).

The nominal wage represents _____

the wage measured in terms of the dollar value of the goods and services a worker can purchase with it.

Refer to Exhibit 10.1, which shows the short-run aggregate supply (SRAS) curve of an economy. At Y2, _____

unemployment is higher than the natural rate.

Refer to Exhibit 10.1, which shows the short-run aggregate supply (SRAS) curve of an economy. At Y3, _____

unemployment is lower than the natural rate.

If planned spending exceeds planned output in an economy, the result is a(n) _____

unintended decrease in inventories.

Which of the following is illustrated by the distance between the aggregate expenditure line and the 45-degree line at each level of real GDP?

unplanned inventory change