Econ 101 Sullivan Exam 3

Cost-push inflation is characterized by a(n) __.

decrease in aggregate supply and no change in aggregate demand

Assuming that MPC is .75, equal increases in government spending and tax collections by $10 billion will

increase the equilibrium real GDP by $10 billion.

A decrease in expected returns on investment will most likely shift the AD curve to the _____.

left because Ig will decrease

As disposable income decreases, consumption

decreases.

The slope of the consumption function

equals the MPC.

Generally speaking, the greater the MPS, the

smaller would be the increase in income that results from an increase in consumption spending.

Use the aggregate expenditures model and the following values to answer the next question. A MPC I G T $750 0.5 $1,000 $1,000 $500 Determine equilibrium consumption for this economy.

$3,000

Which of the following factors will shift AD1 to AD3?

A decrease in consumer wealth

Which of the following factors does not explain the inverse relationship between the price level and the total demand for output?

A substitution effect

Which combination of factors would most likely increase aggregate demand?

An increase in consumer wealth and a decrease in interest rates.

With cost-push inflation in the short run, there will be a(n) _____.

decrease real GDP

Use the following table with data for a private closed economy (an economy with only a private sector and no international trade) to answer the next question. All figures are in billions of dollars. Expected Rate of Return Investment Consumption GDP 10% $0 $400 $400 8 100 500 600 6 200 600 800 4 300 700 1,000 2 400 800 1,200 0 500 900 1,400 An increase in the real interest rate from 2% to 6% will

decrease the equilibrium level of real GDP by $400 billion.

Changes in government expenditures affect planned spending

directly, by changing autonomous expenditures.

The expenditure multiplier arises because one person's additional expenditure becomes another person's additional income that will generate additional

expenditure.

The graph above shows the relationship between consumption and income. The ratio LM/PL would be a measure of the

marginal propensity to consume.

A tax cut will have a greater effect on equilibrium real GDP if the

marginal propensity to save is smaller.

An increase in net exports will have a greater effect on equilibrium real GDP if the

marginal propensity to save is smaller.

Use the following consumption schedule to answer the next question. Disposable income equals consumption at

point D(equilibrium)

The disposable income (DI) and consumption (C) schedules are for a private, closed economy (an economy with no government and no international trade). All figures are in billions of dollars. Disposable Income Consumption $300 $310 350 340 400 370 450 400 500 430 If disposable income is $550, we would expect consumption to be

$460.

If investments were fixed at $16, taxes were zero, government purchases of goods and services were zero, and net exports were zero, then equilibrium real GDP would be $630 initially. If government purchases were then raised from $0 to $10 and lump-sum taxes also increased from $0 to $10, other things constant, the equilibrium real GDP would become

$640.

If disposable income increases from $912 to $927 billion and MPC = 0.6, then consumption will increase by

$9 billion.

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The slope of the aggregate expenditures model line is

0.80.

Data on after-tax income and consumption spending for the Smith family are given in the table below. After-tax Income Consumption Spending $9,000 $18,100 14,000 22,600 19,000 27,100 24,000 31,600 Based on these data, the Smith family has a marginal propensity to consume of

0.9.

The economy experiences an increase in the price level and an increase in real domestic output. Which is a likely explanation?

Net exports have increased.

An economy characterized by high unemployment is likely to be

having a recessionary expenditure gap.

If the price level decreases, then the aggregate expenditures schedule will shift and this translates into a _____.

movement down along the aggregate demand curve

The labels for the axes of the aggregate demand graph should be _____.

real domestic output on the horizontal axis and the price level on the vertical axis

Use the following table with data for a private closed economy (an economy with only a private sector and no international trade) to answer the next question. All figures are in billions of dollars. Expected Rate of Return Investment Consumption GDP 10% $0 $400 $400 8 100 500 600 6 200 600 800 4 300 700 1,000 2 400 800 1,200 0 500 900 1,400 If the real rate of interest is 2%, then the equilibrium level of real GDP will be

$1,200 billion.

What is the slope of the consumption schedule or consumption line for a given economy?

1 − MPS

1) Real-Balances Effect 2) Household Expectations 3) Interest-Rate Effect 4) Personal Income Tax Rates 5) Profit Expectations 6) National Income Abroad 7) Government Spending 8) Foreign Purchases Effect 9) Exchange Rates 10) Degree of Excess Capacity Changes in which two of the factors would most likely cause a shift in aggregate demand due to a change in consumer spending?

2 and 4