Econ Exam 2 - Questions from HW

An improvement in the business outlook of firms is a type of _________ and therefore shifts the _________ to the _________.

positive demand shock; aggregate demand curve; right

When future disposable income rises, then current consumption:

rises

Income-expenditure equilibrium GDP is:

the level of GDP at which GDP equals planned aggregate spending (Y=AE)

A decrease in the supply of money shifts the aggregate:

demand curve to the left

A downward shift in the consumption function can be caused by:

a decline in consumer wealth

(Figure: Inflationary and Recessionary Gaps) In Panel (a), the intersection of SRAS with AD indicates:

an economy experiencing a recessionary gap

Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is rising. Which of the following most likely caused these changes?

an increase in aggregate demand

GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. (Scenario: Income-Expenditure Equilibrium) Given this situation, firms will tend to:

decrease output

Whenever GDP exceeds planned aggregate expenditure, unplanned investment is _______; whenever GDP falls short of planned aggregate expenditure, unplanned investment is _________.

positive; negative

(Figure: Aggregate Supply) At point F, potential output is:

greater than actual output and unemployment is high

(Figure: Consumption and Real GDP) The slope of the consumption function is called the:

marginal propensity to consume

If the stock market crashes:

the aggregate consumption function will shift down

Suppose that the U.S. government doubles its spending on health care. Which of the following is most likely to occur?

The aggregate demand curve shifts right, output increases, and prices increase

(Figure: Consumption and Real GDP) If real GDP is $8 trillion, consumption is _______ trillion and saving is _______ trillion.

$5, $3

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income. (Scenario: Consumption Spending) Autonomous consumption is:

$500

If the marginal propensity to save is 0.3, the size of the multiplier is:

3.3

When David has no income, he spends $500. If his income increases to $2,000, he spends $1,900. Which of the following represents his consumption function?

C=$500+0.7 x YD

(Figure: Consumption and Real GDP) If real GDP is $4 trillion, consumption is _______ trillion.

$3

GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. (Scenario: Income-Expenditure Equilibrium) If GDP is $3,000, planned aggregate spending is:

$3,100

(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned). At what level of real GDP will the economy find its income-expenditure equilibrium?

$3,500

GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8 (Scenario: Income-Expenditure Equilibrium) Income-expenditure equilibrium is achieved when GDP is:

$3,500

(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned). The income-expenditure equilibrium real GDP is found at _____ and if planned investment fell to $300, the new income-expenditure equilibrium real GDP would fall to _____.

$3,500; $2,000

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income.(Scenario: Consumption Spending) The marginal propensity to save is:

0.2

(Figure: Aggregate Expenditures Curve I) The slope of the aggregate expenditures curve in the aggregate expenditures model shown in this figure is:

0.5

(Figure: Consumption and Real GDP) The marginal propensity to consume in this example is:

0.5

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is:

0.6

David receives a tax refund of $800. He spends $600 and saves $200. David's marginal propensity to consume is:

0.75

You and a co-worker have been trying to develop a linear equation that describes the local household consumption function. Your co-worker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + .75(YD). Your job is to explain this result to your supervisor. According to this consumption function, what is the marginal propensity to consume?

0.75

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income.(Scenario: Consumption Spending) The marginal propensity to consume is:

0.8

If the multiplier equals 4, then the marginal propensity to save must be equal to:

1/4

If MPC =.9, the multiplier is:

10

If the MPS = .1, then the value of the multiplier equals:

10

If the slope of the aggregate expenditures curve = 0.9, the multiplier is equal to:

10

(Figure: Aggregate Expenditures Curve I) The multiplier in the aggregate expenditures model shown in this figure is:

2

(Figure: AD-AS Model I) If the economy is at point X, which of the following describes the likely adjustment to long-run equilibrium?

Nominal wages decrease, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium

(Figure: Aggregate Supply) If the economy is at point E, which of the following describes the likely adjustment process?

Nominal wages increase, and the short-run aggregate supply curve shifts left until actual and potential output are equal

(Figure: Shifts of the AD-AS Curves) In the short run, an increase in net exports is illustrated by:

Panel (a)

(Figure: Shifts of the AD-AS Curves) In the short run, a decrease in investment is illustrated by:

Panel (b)

Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect:

a short-run increase in real GDP and price level, and a long-run decrease in real GDP and an increase in price level

Stagflation may result from:

an increase in the price of imported oil

Suppose the economy is in a short-run equilibrium, where the actual output is greater than potential output, then the economy is in:

an inflationary gap, nominal wages will increase and SRAS will shift to the left until the actual GDP is equal to the potential GDP in the long run

An increase in the wealth of households, all other things unchanged, may be expected to result in _______ the aggregate consumption function.

an upward shift in

(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If current disposable income decreases in this economy, then the:

economy will move downward along the AE

In the aggregate expenditures model, if aggregate expenditures exceed real GDP, the economy will:

expand, causing an increase in employment

Whenever GDP exceeds planned aggregate spending:

firms reduce production, thereby reducing GDP

(Figure: Consumption Functions) Curve C' compared with curve C, would most likely result from a(n):

increase in wealth

In the long run (as the economy self-corrects), an increase in aggregate demand will cause the price level to _______ and potential output to _______ .

increase; remain stable

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income.(Scenario: Consumption Spending) If income increases by $2,000, consumption will increase by:

$1,600

(Table: Income and Consumption) When disposable personal income is $400, the level of personal saving is:

$20

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80. Assuming no taxes and no trade, by how much will real GDP change?

$500 billion decrease

Suppose the marginal propensity to consume is equal to 0.90 and investment spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change?

$500 billion increase

You and a co-worker have been trying to develop a linear equation that describes the local household consumption function. Your co-worker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + .75(YD). Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would occur if a household had disposable income of $1000?

$850

(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned). If real GDP is $2500, what is the level of unplanned inventory investment?

-$200

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income.(Scenario: Consumption Spending) If disposable income is $1000, saving is:

-$300

(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If expected future disposable income increases in this economy, then the:

AE will shift up

(Figure: Income-Expenditure Equilibrium) If investment spending increases in this economy, then the:

AE will shift up, increasing the income-expenditure equilibrium

(Figure: Shifts of the AD-AS Curves) In the short run, a decrease in wages is illustrated by:

Panel (c)

Suppose that political instability in the Middle East temporarily interrupts the supply of oil to the United States. Which of the following is most likely to occur?

The short-run aggregate supply curve shifts left, output decreases, and prices increase

Suppose the marginal propensity to consume changes from 0.75 to 0.90. How will this affect the consumption function?

The slope will get steeper

A negative demand shock can cause:

a recessionary gap

An increase in investment leads to _______ in the price level and _______ in real GDP in the short run.

an increase; an increase

The MPC is the:

change in consumption / the change in disposable income

The short-run aggregate supply curve will decrease if:

commodity prices rise

As a recessionary gap is eliminated through self-correcting adjustment, the equilibrium price level _______ and the equilibrium real output _______.

decreases; increases

The most important determinant of consumer spending is:

disposable income

The consumption function will shift up if:

households expect an increase in the minimum wage in the future

(Figure: Aggregate Expenditures Curve I) Suppose that the government's purchases of goods and services in this economy rise by $100. Real GDP would:

increase by $200

(Figure: Income-Expenditure Equilibrium) If planned investment spending increases autonomously by $100, GDP will:

increase by $250

Suppose the government increases its spending by $100 billion as a stimulus package. If the MPC is 0.6, then equilibrium income will:

increase by $250 billion

As an inflationary gap is eliminated through self-correcting adjustment, the equilibrium price level ________ and the equilibrium real output ________.

increases; decreases

An increase in the price of imported oil leads to a:

negative supply shock

A natural disaster that destroys part of a country's infrastructure is a type of _________ and therefore shifts the _________ to the _________.

negative supply shock; short-run aggregate supply curve; left

If the economy is in a recessionary gap, then:

nominal wages will fall and SRAS will shift to the right until the economy is at full employment

If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then in the long run, one will find:

nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP

(Figure: Aggregate Expenditures and Real GDP) At a real GDP of $9,000 billion:

planned investment is less than investment

(Figure: An Increase in Aggregate Demand) Because of the pressures existing at the short-run equilibrium at Y2 and P2:

the SRAS curve will shift to the left

If the marginal propensity to save decreases from 0.6 to 0.5:

the slope of the consumption function increases from 0.4 to 0.5

In the aggregate expenditures model, if real GDP equals $700 billion and aggregate expenditures equal $400 billion:

unplanned inventory accumulation equals $300 billion

In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion:

unplanned inventory accumulation equals -$200 billion