Macro Econ Chapter 11, 12, 14, 15 Quiz

The purchasing power of money and the price level vary A) inversely. B) directly during recessions but inversely during inflations. C) directly and proportionately. D) directly but not proportionately.

A

According to the "real-balances effect," if prices A) decline, the purchasing power of assets will decrease, so spending at each income level should rise. B) decline, the purchasing power of assets will rise, so spending at each income level should rise. C) increase, the purchasing power of assets will decrease, so spending at each income level should rise. D) increase, the purchasing power of assets will rise, so spending at each income level should rise.

B

Coins held in commercial bank vaults are A) included in M1 but not in M2. B) not part of the nation's money supply. C) included in M2 but not in M1. D) included both in M1 and in M2.

B

If you place a part of your summer earnings in a savings account, you are using money primarily as a A) medium of exchange. B) store of value. C) unit of account. D) standard of value.

B

A positive GDP gap is associated with A) a recessionary expenditure gap. B) a production expenditure gap. C) a consumption expenditure gap. D) an inflationary expenditure gap.

D

When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule A) exceeds the MPC. B) equals the MPS. C) is less than the MPC. D) equals the MPC.

D

Which of the following would increase GDP by the greatest amount? A) $20 billion increases in both government spending and taxes B)$20 billion decreases in both government spending and taxes C) a $20 billion reduction in taxes D) a $20 billion increase in government spending

D

the level of aggregate expenditures in a mixed open economy consists of A) Ca + Ig + Xn. B) Ca + G. C) Ca + Ig + G + T + Xn. D) Ca + Ig + Xn + G.

D

An increase in taxes will have a greater effect on the equilibrium GDP A) the larger the MPC. B) the smaller the MPC. C) if the tax revenues are redistributed through transfer payments. D) the larger the MPS.

A

An inflationary expenditure gap is the amount by which A) aggregate expenditures exceed the full-employment level of GDP. B) aggregate expenditures exceed any given level of GDP. C) equilibrium GDP falls short of the full-employment GDP. D) saving exceeds investment at the full-employment GDP.

A

An inflationary expenditure gap is the amount by which aggregate expenditures at the full-employment level of GDP A) exceed those required to achieve the full-employment level of GDP. B) divided by the multiplier equal those required to achieve the full-employment level of GDP. C) equal those required to achieve the full-employment level of GDP. D) fall short of those required to achieve the full-employment level of GDP.

A

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is: A) above equilibrium. B) at equilibrium. C) below equilibrium. D) more information is needed.

A

Ca = 25 + 0.75 (Y − T) Ig = 50 Xn = 10 G = 70 T = 30 The accompanying equations are for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. The multiplier for this economy is A) 4 B) 2.33 C) 2. D) 3.

A

If the dollar appreciates relative to foreign currencies, we would expect the A) country's net exports to fall. B) country's exports and imports to both fall. C) multiplier to decrease. D) country's net exports to rise.

A

If unintended increases in business inventories occur, we can expect A) a decline in GDP and rising unemployment. B) inflation. C) an increase in consumption. D) an offsetting increase in planned investment.

A

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by A) a down sloping line or curve from left to right. B) an upsloping line or curve from left to right. C) a line parallel to the horizontal axis. D) a vertical line.

A

Saving is called a leakage because A) it is a removal from the flow of aggregate consumption. B) it is put into the banking system. C) it goes directly to investment. D) it is less than consumption.

A

Use AD-AS analysis to explain the impacts of the following events on real GDP. In early 2001 investment spending sharply declined in the United States. This caused a A) leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply. B) leftward shift in aggregate demand, and less investment would have caused a rightward shift in aggregate supply. C) rightward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply. D) rightward shift in aggregate demand, and more investment would have caused a rightward shift in aggregate supply.

A

Use AD-AS analysis to explain the impacts of the following events on real GDP. In the two months following the September 11, 2001, attacks on the United States, consumption also declined. This caused a A) leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply. B) rightward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply. C) rightward shift in aggregate demand, and more investment would have caused a rightward shift in aggregate supply. D) leftward shift in aggregate demand, and less investment would have caused a rightward shift in aggregate supply.

A

Enter your answers rounded to the nearest whole number. A) By how much will GDP change if firms increase their investment by $11 billion and the MPC is 0.90? $ ______ billion B) If the MPC is 0.75? $ ______ billion

A) 110 B) 44 Explanation: First, we need to find the expenditure multiplier. The expenditure multiplier can be found by dividing 1 by 1 minus the marginal propensity to consume. The expenditure multiplier is 1/(1 − MPC). To find the change in GDP, we take the expenditure multiplier and multiply this value by the change in investment. a. We have an expenditure multiplier of 10 [= 1/(1 − 0.90)]. For our MPC value, the change in GDP equals $110 billion [= 10 × $11 billion]. b. Now we have an expenditure multiplier of 4 [= 1/(1 − 0.75)]. For our new MPC value, the change in GDP equals $44 billion (= 4 × $11 billion).

Answer the following questions, which relate to the aggregate expenditures model: A) If Ca is $100, Ig is $50, Xn is −$10, and G is $30, what is the economy's equilibrium GDP? $______ B) If real GDP in an economy is currently $200, Ca is $100, Ig is $50, Xn is −$10, and G is $30, will the economy's real GDP rise, fall, or stay the same? _______ C) Suppose that full-employment (and full-capacity) output in an economy is $200. If Ca is $150, Ig is $50, Xn is −$10, and G is $30, what will be the macroeconomic result? The inflationary expenditure gap and employment levels will be ______ the full-employment level.

A) 170 B) Fall C) Above Explanation a. Equilibrium occurs where real output (Y) equals aggregate expenditures (AE), where AE = Ca + Ig + Xn + G. Using this relationship, we have the equilibrium value: Y = AE = Ca + Ig + Xn + G = $100 + $50 + (−$10) + $30 = $170. b. If real GDP is $200, aggregate expenditures of $170 will result in positive unplanned inventory investment. GDP will fall as firms respond to the inventory build-up by reducing output. c. Here we can use the same approach as in part a: AE = Ca + Ig + Xn + G = $150 + $50 + (−$10) + $30 = $220. Since full-employment (and full-capacity) output in the economy is $200, there is an inflationary expenditure gap. Employment levels will be higher than the full-employment level.

A negative GDP gap is associated with A) an inflationary expenditure gap. B) a recessionary expenditure gap. C) a consumption expenditure gap. D) a production expenditure gap.

B

A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment level of GDP A) divided by the multiplier equal those required to achieve the full-employment level of GDP. B) fall short of those required to achieve the full-employment level of GDP. C) equal those required to achieve the full-employment level of GDP and net exports. D) exceed those required to achieve the full-employment level of GDP.

B

At equilibrium GDP, there will be A) unplanned inventories, but no unplanned investment. B) no unplanned inventories and no unplanned investment. C) unplanned inventories equal to unplanned investment. D) no unplanned inventories, but unplanned investment.

B

At equilibrium real GDP in a private closed economy, A) the MPC must equal the APC. B) aggregate expenditures and real GDP are equal. C) planned saving and consumption are equal. D) the slope of the aggregate expenditures schedule equals the MPS.

B

In the United States, the money supply (M1) includes A) currency, checkable deposits, and Series E bonds. B) coins, paper currency, and checkable deposits. C) coins, paper currency, checkable deposits, and credit balances with brokers. D) paper currency, coins, gold certificates, and time deposits.

B

It is difficult, perhaps even impossible, for the United States to boost its net exports by increasing its tariffs during a global recession. This is because other countries will respond in-kind by A) decreasing tariffs on U.S. goods, causing U.S. exports and thus net exports to decline. B) increasing tariffs on U.S. goods, causing U.S. exports and thus net exports to decline. C) decreasing tariffs on U.S. goods, causing U.S. exports and thus net exports to increase. D) increasing tariffs on U.S. goods, causing U.S. exports and thus net exports to increase.

B

Saving must equal planned investment at equilibrium GDP in a private closed economy because A) consumption and production will be the same, and there will be no unplanned inventory or investment changes. B) spending and production will be the same, and there will be no unplanned inventory or GDP changes. C) spending and consumption will be the same, and there will be no unplanned inventory or GDP changes. D) GDP and production will be the same, and there will be no unplanned inventory or investment changes.

B

The U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s can be explained by A) a leftward shift of aggregate demand and a rightward shift of aggregate supply. B) a rightward shift of aggregate demand and a rightward shift of aggregate supply. C) a leftward shift of aggregate demand and a leftward shift of aggregate supply. D) a rightward shift of aggregate demand and a leftward shift of aggregate supply.

B

The aggregate demand curve is A) vertical under conditions of full employment. B) downsloping because of the interest-rate, real-balances, and foreign purchases effects. C) horizontal when there is considerable unemployment in the economy. D) downsloping because production costs decrease as real output rises.

B

The asset demand for money A) varies directly with the level of nominal GDP. B) varies inversely with the rate of interest. C) is unrelated to both the interest rate and the level of GDP. D) varies inversely with the level of real GDP.

B

The long-run aggregate supply curve is vertical because the economy's potential output is determined by A) changes in wages, and these are unchanged in the long run. B) the availability and productivity of real resources, not by the price level. C) the availability and productivity of real resources, not by the output level. D) changes in prices and output that occur in the long run.

B

The shape of the short-run aggregate supply curve is A) horizontal, because wages adjust at the same rate as the price level. B) upsloping, because wages adjust more slowly than the price level. C) upsloping, because wages adjust more rapidly than the price level. D) vertical, because wages adjust at the same rate as the price level.

B

To say that coins are "token money" means that A) they are not legal tender. B) their face value is greater than their intrinsic value. C) their face value is equal to their intrinsic value. D) their face value is less than their intrinsic value.

B

A strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging if A) aggregate demand shifts right while aggregate supply shifts left. B) aggregate demand and aggregate supply both shift right. C) aggregate demand shifts left while aggregate supply shifts right. D) aggregate demand and aggregate supply both shift left.

C

Assuming the economy is operating below its potential output, an increase in net exports will A) decrease aggregate expenditures, but increase real GDP. B) decrease aggregate expenditures and real GDP. C) increase aggregate expenditures and real GDP. D) increase aggregate expenditures, but decrease real GDP.

C

Coins in people's pockets and purses are A) excluded from M1 and M2 because people can exchange them for Federal Reserve notes. B) included in M1 but not in M2. C) included both in M1 and in M2. D) included in M2 but not in M1.

C

If the price index rises from 100 to 120, the purchasing power value of the dollar A) may either rise or fall. B) will rise by one-sixth. C) will fall by one-sixth. D) will rise by 20 percent.

C

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as A) a unit of account. B) an economic investment. C) a medium of exchange. D) a store of value.

C

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. The M1 money supply is composed of items A) 5 and 6. B) 6 and 7. C) 4 and 6. D) 1 and 4.

C

Planned investment is called an injection because A) it is greater than consumption. B) it goes directly to profit levels. C) it is an addition to the flow of aggregate spending. D) it comes from the banking system.

C

Suppose that the table presented below shows an economy's relationship between real output and the inputs needed to produce that output: Input Quantity Real GDP 75 $400 56.25 300 37.5 200 What effect would this shift of aggregate supply have on the price level and the level of real output? A) Both the price level and real output would remain the same. B) The price level would decrease and real output would increase. C) The price level would increase and real output would decrease. D) The price level would decrease and real output would remain the same.

C

The basic requirement for an item to function as money is that it be A) backed by precious metals—gold or silver. B) authorized as legal tender by the central government. C) generally accepted as a medium of exchange. D) some form of debt or credit.

C

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because A) there are shortages of labor. B) there are shortages of capital. C) there are large amounts of unused capacity and idle human resources. D) resources are difficult to bring into production.

C

Which of the following statements is true concerning the real-balances effect and the wealth effect? A) The real-balances effect and the wealth effect explain the shape of the aggregate demand curve. B) The real-balances effect causes shifts of the aggregate demand curve, whereas the wealth effect explains the shape of the aggregate demand curve. C) The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve. D) The real-balances effect and the wealth effect cause shifts of the aggregate demand curve.

C

According to the "wealth effect," a change in consumer wealth causes A) a shift in consumer spending and a movement along the aggregate demand curve. B) a change in the price level and a movement along the aggregate demand curve. C) a change in the price level and a shift of the aggregate demand curve. D) a shift in consumer spending and a shift of the aggregate demand curve.

D

An aggregate supply curve represents the relationship between the A) price level that producers are willing to accept and the price level buyers are willing to pay. B) price level and the buying of real domestic output. C) real domestic output bought and the real domestic output sold. D) price level and the production of real domestic output.

D

Debit card balances are part of money supply M1, but credit card balances are not. T/F

True

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A) A widespread fear by consumers of an impending economic depression. Aggregate ________ will ________

demand, decrease

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A) A major increase in spending for health care by the federal government. Aggregate _______ will ________

demand, increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A) A reduction in interest rates. Aggregate ________ will ________

demand, increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A) The general expectation of coming rapid inflation. Aggregate ________ will _________

demand, increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A) A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output. Aggregate ________ will ________

supply, decrease

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A) The complete disintegration of OPEC, causing oil prices to fall by one-half. Aggregate ________ will _________

supply, increase

The equilibrium level of real GDP in a country is $480 billion. Suppose that planned investment decreases by $4 billion. The decrease in planned investment causes real GDP to shift to a new equilibrium level of $470 billion. A) What will be the size of the spending multiplier for this country? _____ B) What will be its marginal propensity to save? _____

A) 2.5 B) 0.4 Explanation In our example, the change in investment is −$4 billion and the change in real GDP = $470 billion − $480 billion = −$10 billion, so the multiplier = −10/−4 = 2.5. Another formula for the spending multiplier is: Multiplier = 1/MPS. We can use algebra to rearrange this equation to find MPS. Thus, MPS = 1/multiplier. Using the multiplier we calculated in part a, we get MPS = 1/2.5 = 0.4.

Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30, G = 0, and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + G + Xn. A) Calculate the equilibrium level of income or real GDP for this economy. $ _______ B) What happens to equilibrium Y if Ig changes to 10? $ _______ C) What does this outcome reveal about the size of the multiplier? Multiplier = ______

A) 450 B) 350 C) 5 Explanation a. In equilibrium we have the following relationship: Y = C + Ig + Xn = (50 + 0.8Y) + 30 + 10 = 90 + 0.8Y. Solving for Y: Y − 0.8Y = 90 (1 − 0.8)Y = 90 0.2Y = 90 Y = 90/0.2 Y = 450. b. If investment falls from 30 to 10, we follow the same procedure (except let Ig = 10). In equilibrium, we have the following relationship: Y = C + Ig + Xn = (50 + 0.8Y) + 10 + 10 = 70 + 0.8Y. Solving for Y: Y − 0.8Y = 70 (1 − 0.8)Y = 70 0.2Y = 70 Y = 70/0.2 Y = 350. The multiplier can be found by dividing the change in output (Y) by the change in investment (Ig), or (450 − 350)/(30 − 10) = 100/20 = 5.

Suppose that the table presented below shows an economy's relationship between real output and the inputs needed to produce that output: Input Quantity Real GDP 75 $400 56.25 300 37.5 200 A) What is the level of productivity in this economy? ________ B) What is the per-unit cost of production if the price of each input unit is $3? $ ________ C) Assume that the input price increases from $3 to $4 with no accompanying change in productivity. What is the new per-unit cost of production? $ ________ D) In what direction would the $1 increase in input price push the economy's aggregate supply curve? Right or left? ________ E) Suppose that the increase in input price does not occur but, instead, that productivity increases by 75 percent. What would be the new per-unit cost of production? $ ________

A) 5.33 B) $0.56 C) $0.75 D) to the left E) $0.32