Exam 3 (Practice Questions)

In a private Close economy, investment is

The amount between the line C + Ig and the line C on the y axis

Recessionary expenditure gap

Space between bottom two lines

The interest rate effect suggest that:

An increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?

A rise in the real GDP

Aggregate expenditure on graph

Aggregate expenditure line is the C + Ig

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:

Determinants of aggregate demand

There is equilibrium GDP when...

Domestic output = aggregate expenditures

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions May:

Reduce worker morale and work effort, and that's lower productivity

The foreign purchases of fact suggest that a decrease in the US price level relative to other countries will:

Increase US exports and decrease US imports

If the price of crude oil decreases, Then this event would most likely:

Increase aggregate supply in the US

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by:

Increasing government spending by $80 billion .8*100=80

For a private close economy, the equilibrium GDP is:

The point at which the 45° angle crosses the C+Ig line

For a private closed economy. In this economy aggregate expenditures.. (slope)

Y2-Y1/X2-X1

Recessionary expenditure gap

recessionary gap = The real GDP - (C + I + X + G)

An increase in net exports will shift the aggregate demand curve to the:

Right by a multiple of the change in investment

If investment increases by $10 billion in the economy's MPC is 0.8, the aggregate demand curve will shift:

Rightward by $50 billion at each price level 1 - MPC = MPS Multiplier = 1/MPS 1-(.8)= .2 1/(.2)=5 (5)* $10billion = $50bill

The intersection of the aggregate demand and the aggregate supply curves determine the:

Equilibrium level of real domestic output (real GDP) and prices

The economy's long run aggregate supply curve assumes that wages and other resource prices:

Eventually rise and fall to match upward or downward changes in the price level

When aggregate demand declines, the price level may remain constant, at least for a time, because:

Firms individually may fear that their price cut may set off a price war

And increase and expected future income will:

Increase aggregate demand

Inflationary expenditure gap

Space between top two lines

If investment decreases by 20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

Leftward by $40 billion at each price level 1-(.5)=.5 1/(.5)=2 2* -$20bill= -$40bill

For a private closed economy. Aggregate saving in this economy will be zero when:

Point where AE or (C+Ig Line) crosses Y axis. So whatever point it crosses Y axis, the GDP equals it