ECON 141
---INCOME EXPENDITURE FUNCTION-----
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---mmmm graph from last test boiiiii-------;)
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In the circular flow model of national income and output, in a closed economy without a government sector, equilibrium output (Y ) equals (a) C+I. (b) C+I+S. (c) C+I+G. (d) C+I+X-M.
A. c+I
Suppose that the Fed Rule is r = 0.02Y + 0.012P + 0.01Z. With this rule (a) the Fed favours higher interest rates if house prices fall. (b) the Fed would increase interest rates if output went up, ceteris paribus. (c) the Fed would increase interest rates if both output the price level went down. (d) if a factor changed causing Z to rise from 100 to 102, the Fed would increase the interest rate by 0.01 percentage points.
B. The fed would increase interest rates if output went up, ceteris paribus
In the basic income-expenditure ("Keynes cross") model of the macroeconomy pre- sented in lectures, when gross income (Y ) increases (a) consumption expenditure increases. (b) investment expenditure increases. (c) the AE line shifts downwards. (d) the 45-degree rotates downwards (clockwise).
Consumption expenditure increases
In the IS-Fed Rule model in the textbook, the Fed Rule takes the form r = αY + βP + γZ. With this rule, (a) the Fed would increase interest rates if both output the price level went down. (b) Z stands for all other factors that affect the Fed's interest rate decision, other than output (Y ) and the price level (P ). (c) the Fed favours higher interest rates than lower interest rates. (d) the Fed would increase interest rates if output went up and the price level went down.
Z stands for all other factors that affect the Fed's interest rate decision, other than output (Y) and the price level (P)
Suppose the Consumer Price Index (CPI) rises by 1.7% in a year. This means that (a) the value of a specific basket of goods - forming the CPI - increases by 1.7%. (b) the value of any basket of goods increases by 1.7%. (c) all consumption goods increase in price by 1.7%. (d) most consumption goods increase in price by 1.7%.
a.
10. Which of these people is not unemployed according to official statistics? (a) A 13 year old who is trying to get a job handing out flyers at the mall. (b) A 19 year old former retail worker who has been handing out their CV at local supermarkets to find work. (c) A 54 year old former economist who has left their job to look for new work. (d) A 44 year old single mother of a 5 year old, who has started looking for work now that their child is at primary school.
a. A 13 year old who is trying to get a job handing out flyers at the mall
Let Y be a household's income (before taxes), Yd its disposable income, C its con- sumption expenditures, S its saving, MPC its marginal propensity to consume, and MPS its marginal propensity to save. Consider the following two equations: I. C + S = Yd II. MPC + MPS = Y d/Y Only one of the following statements is true. Which one? (a) I is always correct, II is not always correct. (b) I is always correct, II is always correct. (c) Neither I nor II is ever correct. (d) Both I and II are always correct.
a. I is always correct, II is not always correct
Consider a basic income-expenditure model for a closed economy with a govern- ment. Which of the following will cause equilibrium output to rise (with all other parameters constant)? (a) A decrease in taxes. (b) A decrease in government spending. (c) A decrease in investment. (d) A reduction in the marginal propensity to consume.
a. a decrease in taxes
In the basic income-expenditure ("Keynes cross") model, a decrease in the interest rate would be represented by (a) an upward shift of the aggregate expenditure curve. (b) a downward shift of the aggregate expenditure curve. (c) a decrease in the price level. (d) a rightward (upward) move along a given aggregate expenditure curve.
a. an upward shift of the aggregate expenditure curve
In the IS model, consumption (C) and investment (I) are (a) endogenous, as they are a function of the real interest rate (r), directly or indirectly. (b) excluded from the calculation of GDP. (c) exogenous, as their levels are determined by the government. (d) equal in equilibrium.
a. endogenous, as they are a function of the real interest rate (r) directly or indirectly
Nominal GDP (a) evaluates current production at current prices. (b) evaluates output using a base year set of prices. (c) is a measure of the value of goods only, so it excludes the value of services. (d) is likely to grow more slowly than real GDP if a country has inflation.
a. evaluates current production at current prices
27. The marginal propensity to consume (MPC) is defined as the fraction of (a) extra disposable income that a household consumes rather than saves. (b) extra gross income that a household consumes plus the fraction that it saves. (c) gross income that a household pays as tax. (d) the fraction of total income that a household pays as tax.
a. extra disposable income that a household consumes rather than saves
In this model, the change in income in equilibrium (a) is the same whether an aggregate demand shock comes from a change in au- tonomous consumption or investment. (b) is smaller (in absolute terms) when investment increases than when investment decreases. (c) is smaller if an aggregate demand shock comes from a change in investment than a change in government spending. (d) is larger when the marginal propensity to consume decreases than when au- tonomous consumption increases.a.
a. is the same whether an aggregate demand shock comes from a change in autonomous consumption or investment
4. Suppose that nominal GDP equals real GDP in year t0, and that t0 is the base year for real GDP. If the inflation rate is negative between the base year (t0) and the subsequent year (t1) (a) nominal GDP would be less than real GDP (in year t1). (b) nominal GDP would be greater than real GDP (in year t1). (c) all consumer prices have increased by the same rate. (d) consumers' standard of living would decrease.
a. nominal GDP would be less than real GDP
Suppose the economy is closed and the government raises its budget deficit by increasing government spending. In the short run, the price level would (a) rise and GDP would rise. (b) rise and GDP would fall. (c) fall and GDP would rise. (d) fall and GDP would fall.
a. rise and GDP would rise
The ability of households to smooth consumption and firms to invest depends on (a) their ability to borrow, that is, on their ability to borrow or save. (b) their objective function. (c) whether share prices are rising. (d) whether the assumption of rationality holds.
a. their ability to borrow, that is, on their ability to borrow or save
37. . When a country's output grows (a) unemployment tends to decrease. (b) the consumer price index tends to decrease. (c) inflation decreases. (d) wellbeing decreases.
a. unemployment tends to decrease
When a country's output grows (a) unemployment tends to decrease. (b) inflation decreases. (c) wellbeing decreases. (d) the consumer price index tends to decrease.
a. unemployment tends to decrease
A vertical long-run Phillips curve implies that (a) unemployment tends toward a rate that can co-exist with any inflation rate. (b) inflation tends toward a rate that can co-exist with any unemployment rate. (c) the unemployment rate is constant. (d) the unemployment rate cannot be equal to zero.
a. unemployment tends toward a rate that can co-exist with any inflation rate
The unemployment rate is equal to (a) the number of people unemployed divided by the number of people who are of working age. (b) the number of people unemployed divided by the number of people participat- ing in the labour market. (c) 1 minus the employment rate. (d) the number of people unemployed divided by the number of people employed.
b. The unemployment rate is equal to the number of people unemployed divided by the number of people participating in the labor market
In the IS-Fed Rule model, an increase in consumer optimism will cause real GDP to increase. The increase in GDP is represented by (a) a leftward shift in the IS curve. (b) a rightward shift in the IS curve. (c) a leftward shift in the Fed Rule curve. (d) a rightward shift in the Fed Rule curve.
b. a rightward shift in the IS curve
39. Which of the following does not shift the long run Aggregate Supply Curve? (a) An unexpected baby boom. (b) An increase in government consumption expenditure. (c) A permanent reduction in the margins firm owners accept above the cost of production. (d) A natural disaster that destroys a quarter of the electricity generating capacity of a country.
b. an increase in government consumption expenditure
Real GDP (a) evaluates current production at current prices. (b) evaluates output using a base year set of prices. (c) is a measure of the value of goods only, so it excludes the value of services. (d) is likely to increase faster than nominal GDP if a country has inflation.
b. evaluates output using a based year set of prices
policy shifts the IS curve to the . (a) Contractionary monetary; left (b) Expansionary fiscal; right (c) Contractionary fiscal; right (d) Expansionary monetary; right
b. expansionary fiscal policy shifts the IS curve to the right
What happens if the price and output set by firms is below the AD curve? (a) Firm inventories will be run down, and so they will consider reducing the amount they produce and/or cut prices. (b) Firm inventories will be run down, and so they will consider increasing the amount they produce and/or increase prices. (c) Firm inventories will increase, and so they will consider reducing the amount they produce and/or cut prices. (d) Firm inventories will increase, and so they will consider increasing the amount they produce and/or increase prices.
b. firm inventories will be run down, and so they will consider increasing the amount they produce and/or increase prices
To stimulate the economy during a recession, the government might (a) use contractionary fiscal policy. (b) implement an expansionary fiscal policy. (c) change an automatic stabiliser to decrease the multiplier, for example decreas- ing the unemployment benefit rate. (d) decrease in spending on roading infrastructure.
b. implement an expansionary fiscal policy
When the real interest rate increases following an increase exogenous expenditure (a) consumption expenditure decreases. (b) investment expenditure decreases. (c) the IS curve shifts left. (d) the Fed Rule curve shifts right.
b. investment expenditure decreases
31. A change to a policy parameter (α, β or γ) that tightens monetary policy will cause the textbook's Fed Rule curve to (a) shift right (for any level of real GDP, the interest rate will fall). (b) shift left. (c) remain unchanged. (d) None of the above.
b. shift left
A change to a policy parameter (α, β or γ) that tightens monetary policy will cause the textbook's Fed Rule curve to (a) shift right (for any level of real GDP, the interest rate will fall). (b) shift left. (c) remain unchanged. (d) None of the above.
b. shift left
The unemployment rate is equal to (a) the number of people unemployed divided by the number of people who are of working age. (b) the number of people unemployed divided by the number of people participat- ing in the labour market. (c) 1 minus the employment rate. (d) the number of people unemployed divided by the number of people employed.
b. the number of people employed divided by the number of people participating in the labor market
Thevariablesontheverticalandhorizontalaxesoftheaggregatesupplyanddemand curve are (a) the value of money and the price level. (b) the price level and real output. (c) real output and employment. (d) employment and the inflation rate.
b. the price level and real output
If accurate measurement in the economy as a whole were possible, (a) an increase in planned expenditure would increase output by an equivalent amount. (b) the total of expenditure, output and incomes in a year would be the same. (c) the value added by a producer would be greater than the income received by the producer when the product is sold. (d) spending by households, firms, government and residents of other countries on the home economys products would be less than GDP.
b. the total of expenditure, out and incomes in a year would be the same
An announcement by the Reserve Bank of New Zealand that the Official Cash Rate has been increased indicates a (a) tightening of monetary policy and a tightening of fiscal policy. (b) tightening of monetary policy and no change in fiscal policy. (c) loosening of monetary policy and a loosening of fiscal policy. (d) loosening of monetary policy and no change in fiscal policy.
b. tightening of monetary policy and no change in fiscal policy
Consider a basic income-expenditure model for a closed economy with a govern- ment. Which of the following will cause equilibrium output to fall (with all other parameters constant)? (a) An increase in government spending. (b) An increase in the marginal propensity to consume. (c) A decrease in investment. (d) A decrease in the marginal tax rate.
c. A decrease in investment
2. This question uses the following notation: NGDPt nominal GDP in year t, RGDPt real GDP in year t. The GDP deflator in year t (Dt) may be calculated as (a) Dt = NGDPt/NGDPt−1 - 1. (b) Dt = NGDPt/RGDPt−1. (c) Dt = NGDPt/RGDPt. (d) Dt = RGDPt/RGDPt−1 - 1.
c. Dt = NGDPt/RGDPt.
15. In the basic income-expenditure ("Keynes cross") model, an increase in the price level would be represented by (a) an increase in planned aggregate expenditure. (b) a rightward (upward) move along a given aggregate expenditure curve. (c) a downward shift of the aggregate expenditure curve. (d) an upward shift of the aggregate expenditure curve.
c. a downward shift of the aggregate expenditure curve
In the basic income-expenditure ("Keynes cross") model, an increase in the interest rate would be represented by (a) a reduction in the slope of the aggregate expenditure curve (i.e. a flattening). (b) an upward shift of the aggregate expenditure curve. (c) a downward shift of the aggregate expenditure curve. (d) an increase in the price level.
c. a downward shift of the aggregate expenditure curve
In the basic income-expenditure ("Keynes cross") model, a decrease in the interest rate would be represented by (a) a decrease in the price level. (b) a rightward (upward) move along a given aggregate expenditure curve. (c) an upward shift of the aggregate expenditure curve. (d) a downward shift of the aggregate expenditure curve.
c. an upward shift of the aggregate expenditure curve
policy shifts the IS curve to the . (a) Contractionary monetary; left (b) Expansionary fiscal; left (c) Contractionary fiscal; left (d) Expansionary monetary; right
c. contractionary fiscal policy shifts the IS curve to the left
26. In economic models, the marginal propensity to consume is assumed to be positive but less than one. This is necessarily the case (a) as consumption and GDP are positively correlated. (b) if disposable income increases by $1 and consumption increases by $1. (c) if disposable income increases by $1 and households increase both their con- sumption and their saving. (d) as government expenditure and tax revenue are positively correlated.
c. in economic models, the marginal propensity to consume is assume to be positive but less than one. this is necessarily the case if disposable income increases by $1 and households increase both their consumption and their saving
Other things equal, suppose that the general level of prices decreases. The real value of incomes (a) decreases. (b) remains constant. (c) increases. (d) may either increase or decrease, depending on the percentage fall in prices.
c. increase
Consider a point (an interest rate-GDP pair) to the right of an IS curve. At this point, (a) planned expenditure is greater than output. (b) the goods market is in equilibrium. (c) planned expenditure is less than output. (d) None of the above.
c. planned expenditure is less than output
If the demand for exports were to rise, (a) the new equilibrium level of output would be shown as a move down (left) along the IS curve (b) Fed Rule curve would move to the left (c) the IS curve would move to the right (d) Fed Rule curve would move to the right
c. the IS curve would move to the right
The typical Aggregate Demand (AD) curve is downward-sloping. The explanation for this in the underlying IS − MPR model is that (a) planned consumption (C) is an increasing function of income. (b) the IS curve is upward-sloping. (c) the interest rate determined by the MPR is increasing in the price level. (d) the interest rate determined by the MPR is decreasing in the price level.
c. the interest rate determined by the MPR is increasing in the price level
The typical Aggregate Demand (AD) curve is downward-sloping. The explanation for this in the underlying IS − MPR model is that (a) planned consumption (C) is an increasing function of income. (b) the IS curve is upward-sloping. (c) the interest rate determined by the Fed Rule is increasing in the price level. (d) the interest rate determined by the Fed Rule is decreasing in the price level.
c. the interest rate determined by the fed rule is increasing in the price level
Suppose the economy is closed and the government reduces its budget deficit by cutting government spending. The real interest rate would (a) fall and private investment would fall. (b) rise and private investment would rise. (c) fall and private investment would rise. (d) rise and private investment would fall.
c. the real interest rate would fall and private investment would rise
The production measure of GDP is calculated as (a) the sum of expenditure on final goods in the economy. (b) the sum of incomes paid to the factors of production. (c) the sum of value added output produced by each industry in the economy. (d) the value of all the products and services produced in one year by the residents of a country.
c. the sum of value added output produced by each industry in the economy
Suppose the Consumer Price Index (CPI) rises by 2% in a year. This means that (a) all consumption goods increase in price by 2%. (b) most consumption goods increase in price by 2%. (c) the value of any basket of goods increases by 2%. (d) the value of a specific basket of goods - forming the CPI - increases by 2%.
d.
In a closed-economy model with a government (with c = marginal propensity to consume and t = income tax rate), the multiplier for the economy is given by (a) (1 − t)c. (b) 1−(1−t)c. (c) 1/[(1 − t)c]. (d) 1/[1 − (1 − t)c].
d. 1/[1 − (1 − t)c].
26. In the IS-Fed Rule model in the textbook, the Fed Rule takes the form r = αY + βP + γZ. With this rule, (a) the Fed favours higher interest rates than lower interest rates. (b) the Fed would increase interest rates if output went up and the price level went down. (c) the Fed would increase interest rates if both output the price level went down. (d) Z stands for all other factors that affect the Fed's interest rate decision, other than output (Y ) and the price level (P ).
d. Z stands for all other factors that affect the Fed's interest rate decision, other than output (Y) and the price level (P)
Which of the following is a part of New Zealand's Consumption? (a) A New Zealander buying a haircut while working (for a week) in Australia. (b) A person from Japan buying a new computer that is made in New Zealand. (c) A New Zealander buying food while on holiday in Japan. (d) A citizen from the North Island buying food while traveling to the South Island as a tourist.
d. a citizen tourist
Identify the decision that necessarily tightens fiscal policy. (a) An increase in government expenditure and a decrease in taxation. (b) An increase in government expenditure and an increase in taxation. (c) A decrease in government expenditure and a decrease in taxation. (d) A decrease in government expenditure and an increase in taxation.
d. a decrease in government expenditure and an increase in taxation
A shift of the MPR curve represents policy. (a) leftward; an expansionary fiscal (b) rightward; a contractionary fiscal (c) rightward; a contractionary monetary (d) rightward; an expansionary monetary
d. a rightward shift of the MPR curve represents an expansionary monetary policy
Which of the following does not shift the short run Aggregate Supply Curve? (a) A temporary cut in oil prices. (b) A permanent reduction in the margins firm owners accept above the cost of production. (c) A nuclear accident that destroys a quarter of the electricity generating capacity of a country. (d) An increase in government expenditure.
d. an increase in government expenditure
Suppose that a local economy is comprised of two firms. Now, Firm A hires workers to install some additional machinery, which is purchased from Firm B. (a) Both firms and workers would spend more. (b) Demand for both firms' products would rise. (c) Aggregate investment would fall. (d) Both a and b.
d. both a and b
A decrease in consumer expenditure on domestically produced goods would (a) be an example of fiscal policy. (b) be an example of monetary policy. (c) increase aggregate demand in the short run. (d) decrease output by firms in equilibrium.
d. decrease output by firms in equilibrium
In economics, the term "investment" refers to (a) the purchase of a financial asset such as shares in a company or a government bond. (b) gross income minus depreciation. (c) money received - such as wages, salaries, or other income - in return for the provision of labour. (d) expenditure on capital goods, that is on goods such as machinery or buildings or research that increases productive capacity.
d. expenditure on capital goods, that is on goods such as machinery of buildings or research that increases productive capacity
In macroeconomics, the term "investment" refers to (a) the purchase of a financial asset such as shares in a company or a government bond. (b) gross income minus depreciation. (c) money received - such as wages, salaries, or other income - in return for the provision of labour. (d) expenditure on capital goods, that is on goods such as machinery or buildings or research that increases productive capacity.
d. expenditure on capital goods, that is on goods such as machinery or buildings or research that increases productive capacity
hen calculating GDP in an open economy model, exports are and imports are . (a) subtracted; added. (b) subtracted; subtracted. (c) added; added. (d) added; subtracted.
d. exports are added while imports are subtracted
Consider a basic income-expenditure model for a closed economy with a government. Equilibrium output would rise (with all other factors constant) if (a) the marginal propensity to consume decreases. (b) government spending increases. (c) the marginal tax rate decreases. (d) Both (b) and (c) are correct.
d. if government spending increases and if the marginal tax rate decreases
In the income-expenditure ("Keynes cross") model of the macroeconomy presented in lectures, equilibrium output is determined when (a) interest rates were fixed, but prices could vary. (b) prices were fixed, but interest rates could vary. (c) investment was endogenous. (d) None of the above.
d. none of the above
In the IS − MPR model, following a decrease in autonomous expenditure, the equilibrium level of income is likely to be (a) chosen by the government. (b) at or near full employment. (c) reached without a change in interest rates. (d) reached with a change in interest rates.
d. reached with a change in interest rate
A shock that increases autonomous consumption expenditure would shift the Ag- gregate Demand (AD) curve , and equilibrium will be restored at a aggregate income. (a) left; higher (b) left; lower (c) right; lower (d) right; higher
d. right, higher
A shift of the MPR curve represents policy. (a) leftward; an expansionary fiscal (b) rightward; a contractionary fiscal (c) rightward; a contractionary monetary (d) rightward; an expansionary monetary
d. rightward, an expansionary monetary
Suppose the economy is closed and the government increases its budget deficit by increasing government spending. The real interest rate would (a) fall and private investment would fall. (b) rise and private investment would rise. (c) fall and private investment would rise. (d) rise and private investment would fall.
d. rise and private investment would fall
If the government implements a contractionary monetary policy, the Aggregate De- mand (AD) curve will , and equilibrium will be restored at a aggregate income. (a) shift right; lower (b) shift left; higher (c) shift right; higher (d) shift left; lower
d. shift left, lower
32. Suppose that the Fed Rule is r = 0.02Y + 0.012P + 0.01Z. With this rule (a) if a factor changed causing Z to rise from 100 to 102, the Fed would increase the (b) the (c) the (d) the interest rate by 0.01 percentage points. Fed favours higher interest rates if house prices fall. Fed would increase interest rates if both output the price level went down. Fed would increase interest rates if output went up, ceteris paribus.
d. the fed would increase interest rates if output went up, ceteris paribus
Suppose that the monetary policy rule is given by r = 0.02Y + 0.012P + 0.01Z. Note, r is in percentage points, e.g. r = 2 means the interest rate is 2%. With this rule (a) if a factor changed causing Z to rise from 100 to 102, the Fed would increase the interest rate by 0.01 percentage points. (b) the Fed favours higher interest rates if house prices fall. (c) the Fed would increase interest rates if both output the price level went down. (d) the Fed would increase interest rates if output went up, ceteris paribus.
d. the fed would increase interest rates if output went up, ceteris paribus
The typical Aggregate Demand (AD) curve is downward-sloping. The explanation for this in the underlying IS − MPR model is that (a) the IS curve is upward-sloping. (b) the IS curve is downward-sloping. (c) the interest rate determined by the Fed Rule is decreasing in the price level. (d) the interest rate determined by the Fed Rule is increasing in the price level.
d. the interest rate determined by the fed rule is increasing in the price level
If the price level increases, (a) the real money supply will increase. (b) the nominal money supply will increase. (c) the nominal money demand will increase. (d) Any of (a), (b), or (c) could be true.
d. the nominal money demand will increase
39. The short-run Phillips curve represents (a) the relationship between inflation and unemployment when prices are fixed. (b) the relationship between prices and gdp when the capital stock is fixed. (c) the relationship between prices and inflation expectations when unemployment is fixed. (d) the relationship between inflation and unemployment when inflation expecta- tions are fixed.
d. the relationship between inflation and unemployment when inflation expectations are fixed
In the basic income-expenditure model, when the real interest rate (r) increases (a) consumption expenditure increases. (b) investment expenditure decreases. (c) the AE line shifts upwards. (d) the 45-degree rotates upwards (anti-clockwise).
investment expenditure decreases
--MERINO WOOL PROBLEM---
slick