chapter 12 economic 2301
Which of the following equalities is correct?
Disposable income is equal to national income minus net taxes.
A consumer in Japan orders a computer online from Dell
Net Exports
The article states that: "Though the inventory drawdown weighed on GDP growth, that is likely to provide a boost to output in the coming quarters." Why would an inventory drawdown boost output in the coming quarters?
Once inventories reach desired levels, firms will increase production to match expected planned aggregate expenditures.
Prudential Insurance Company purchases 250 new computers from Dell
Planned Investment
What relevance does your answer have to how the Bureau of Economic Analysis calculates data on U.S. imports?
Producers increasingly rely on global supply chains, so there are flaws in accounting for imports and exports.
How would an increase in interest rates affect investment?
Real investment spending declines.
Consider the following four statements. i. The iPhone is made in China, using Chinese-made parts. ii. The iPhone is made in the United States, using U.S.-made parts. iii. The iPhone is made in the United States, using Chinese-made parts. iv. The iPhone is made China, using parts that are all made outside of China. Which of the statements above is correct?
Statement iv is correct. The iPhone is assembled in China using parts shipped to China from many countries.
Which one of the following is not a determinant of consumption spending?
The growth rate in the United States relative to the growth rates in other countries.
An economics student raises the following objection: "The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following?
The student is confusing saving with investment.
When incomes rise faster in the United States than in other countries,
U.S. net exports will fall.
Which of the following causes saving to increase?
an increase in the interest rate
Aggregate expenditure, or the total amount of spending in the economy, equals
consumption spending plus planned investment spending plus government purchases plus net exports.
The diagram shows the relationship betwen consumption and income for the years 1960 through 2016. Which of the following statements is true? The line that represents the relationship between consumption and disposable income is called the __________. The slope of the this line is the __________.
consumption function; marginal propensity to consume
The most important determinant of consumption is
current disposable income.
Assume that Intel sells $1 billion of computer chips to Dell, Inc., for use in Dell's personal computers. This transaction
does not affect aggregate expenditure because computer chips are an intermediate good, and including the value of the computer chip would be double counting.
Inventories refer to
goods that have been produced but have not yet been sold
Business spending on information processing equipment, particularly computers, has
grown only slowly since the end of the recession of 2007-2009, due in part to a shift toward software and away from equipment.
In a speech to a conference of government trade officials, Angel Gurría, secretary general of the Organization for Economic Cooperation and Development, made the following observation: "As goods and services cross borders several times at different stages of processing, conventional trade statistics may not tell the whole story." Source: Angel Gurra', "Understanding Global Value Chains," speech delivered at the G20 trade ministers conference in Puerto Vallarta, Mexico, 19 April 2012, www.oecd.org/about/secretary-general/g20understandingglobalvaluechains.htm. When Gurría refers to "conventional trade statistics," he means statistics that have
historically been publically available and commonly used.
The trend toward delaying marriage and childbearing could be connected with the slow recovery from the 2007-2009 recession because the recovery
left millions of young people unemployed, and unable to afford to marry and have children.
Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment insurance? The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle
less likely
Which of the following is not correct?
mps=1-(c/yd)
Conventional trade statistics may no longer be as reliable as they once were because
once goods and services cross borders several times, double counting may occur.
A decline in demand does not always lead to an increase in firms' holdings of inventories because
sometimes the decline is anticipated and inventories can be adjusted.
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP.
The primary explanation for this is because:
with unemployment insurance, current disposable income fluctuates less over the business cycle.
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will
fall; increase
U.S. real net exports are typically
negative, and usually rise in recessions and fall in expansions.
Which of the following statements is correct?
Actual investment will equal planned investment only when there is no unplanned change in inventories.
Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need? increased by $13 billion
Aggregate expenditure was less than GDP in this quarter
*Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need? decreased by $1934 billion
Aggregate expenditure was less than GDP in this quarter
Which of the following statements about investment spending is correct?
All of the above are correct.
In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports? Because they help us understand
All of the above.
Which of the following statements is correct?
An increase in the corporate income tax decreases the after-tax profitability of investment spending.
How are these automakers likely to react to the increase in inventories?
Automakers will likely produce fewer trucks than they otherwise would have.
The Jones family buys a new car
Consumption expenditure
The behavior of consumption and investment over time can be described as follows:
Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations.
We can use the diagram to compare movements in real consumption between 1979 and 2017. Which of the following statements is true?
Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions.
Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the first quarter of 2017?
Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007minus2009 recession.
Which of the following is not a main determinant of net exports?
Expectations of future profitability in the United States.
What are the four main determinants of investment?
Expectations of future profitability, interest rates, taxes and cash flow
The San Diego Unified School District buys 12 new school buse
Government Purchases
The San Diego Public School Disrict buys 12 new school buses
Government expenditure
An article in the Wall Street Journal stated that at the beginning of May 2017, inventories of pickup trucks were "touching 97 days' supply as of the beginning of May, or a 12% increase in actual vehicles on dealer lots compared with the prior year... That number is far above the industry norm for inventory..." Source: John D. Stoll and Adrienne Roberts, "As GM Adjusts to Changing Auto Market, Its Sales Slide Behind Ford's," Wall Street Journal, June 1, 2017. Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly rising?
If inventories are unexpectedly rising, this would indicate that sales of pickup trucks were lower than expected.
Into which category of aggregate expenditures LOADING... would the following transaction fall? Prudential insurance company purchases 250 new computers from Dell
Investment expenditure
In reporting on real GDP growth in the second quarter of 2016, an article on Reuters news noted that: "U.S. economic growth unexpectedly remained tepid in the second quarter as inventories fell" and also that the "inventory drawdown was almost across the board." Source: Lucia Matikani, "Inventory Reduction Curbs U.S. Economic Growth; Rebound Expected," reuters.com, July 20, 2016. If companies are drawing down inventories is aggregate expenditure likely to have been larger or smaller than GDP?
Larger than GDP, because more is being bought than produced.
The Jones family buys a newly constructed house from the Garcia Construction
Planned Investment
What component of aggregate expenditure does purchases of new houses fall under?
Planned investment
Usually at the beginning of a recession, inventories rise, but at the beginning of an expansion, inventories fall
Rise,Fall
Tsuang Pey and Chang Jiang are debating economic growth in their country. Inventory in this closed agricultural economy is increasing and Tsuang thinks that this is a sure sign of declining demand and troubled times ahead. Chang, however, claims that the country has been through similar situations before but growth has never been too low for too long. He thinks that even if demand is currently low, things should improve in the medium term. Which of the following, if true, will weaken Chang's claim that things should improve in the medium term?
The central bank of this country recently increased interest rates.
An article in the Wall Street Journal on the housing market states that "Steady job growth, rising wages and low interest rates have helped prop up housing demand." Source: Steven Russolillo, "Why the Housing Market is Getting Stronger," Wall Street Journal, May 22, 2016. Why do low interest rates increase the demand for housing?
The lower the interest rate, the less expensive it is for households to borrow money.
The chief economist at UniCredit Research is quoted in the article as stating that: "The U.S. economy just went through a meaningful inventory correction cycle." What would an "inventory correction cycle" be?
The process of companies decreasing or increasing actual inventories to match planned inventories.
An economics student raises the following objection: "The textbook said that a higherinterest rate lowers investment, but this doesn't make sense. I know that if I can get ahigher interest rate, I am certainly going to invest more in my savings account." Do youagree with this reasoning?
This thinking is wrong because he is not thinking about investment in the correct terms. Investment spending decreases with high interest rate because of the cost of borrowing for the investment is higher.
The most important determinant of consumption spending is
current personal disposable income.
A decrease in consumer spending in the economy Demand is expected to
decline
The growth in real investment spending
declines significantly during recessions, and is subject to larger changes than is real consumption.
According to an article in the Wall Street Journal, in late 2014, the Japanese economy experienced a large increase in business inventories. The article noted, "The large buildup of inventories is a reflection that the ... drop in demand was bigger than expected." Source: Eleanor Warnock, "Rising Inventories Hamper Japan Recovery," Wall Street Journal, September 30, 2014. Because the Japanese firms didn't expect the drop in demand, they
did not reduce their inventories.
An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many PC makers that buy those chips sell their products in local currencies." Source: Tess Stynes, "Intel Earnings: What To Watch," Wall Street Journal, July 15, 2015. In these circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to
hurt Intel's sales because the cost of the chip is more expensive in terms of the foreign currency, but the selling price of the product is in the lower-valued foreign currency.
What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that
in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
Suppose Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by the following? Upper A decrease in real interest rates. Demand is expected to
increase
How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports? An increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) will
increase U.S. net exports by increasing exports to these countries.
If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports.
increase; decrease; increases
A rise in stock prices and housing prices
increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.
From an economic point of view, the trend toward delaying marriage and childbearing is not helpful because
it reduces investment spending on new houses and weakens economic growth.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals
one.
On the graph of the consumption function, the horizontal axis measures _______, while the vertical axis measures _______.
real national income or real GDP; real consumption spending
Inaccurate trade statistics cause problems because they
reduce the accuracy of export and import information.
For most of the 1979-2010 period, real government purchases
rose steadily.
The growth in U.S. real government purchases
tends to be positive, but has fallen in recessions and in response to concerns about the size of budget deficits.
Which of the following does the aggregate expenditure macroeconomic model seek to explain?
the business cycle
In an opinion column in the Wall Street Journal, Purdue University President Mitchell Daniels wrote that "today's 20- and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint." Source: Mitchell E, Daniels, "How Student Debt Harms the Economy," Wall Street Journal, January 27, 2015. From an economic point of view, young people might be delaying marriage and childbearing because
their student debt levels are so high they cannot afford to marry and have children.
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion of disposable income?
$90 billion
