Macro Economics Modules 24-29

In a closed economy with no government, planned aggregate spending is the sum of:

consumption and planned investment. In a closed economy with no government, planned aggregate spending is the sum of consumption and planned investment.

Between 1979 and 1980, the short run aggregate supply curve shifted to the _____ because oil prices ________.

left; rose When commodity prices, such as oil, increase, the costs of production increase, which causes a decrease in aggregate supply, shown by a shift of the curve to the left.

The aggregate demand curve shows a __________ between the aggregate price level and the quantity of aggregate output demanded.

negative relationship The relationship between the aggregate price level and the quantity of aggregate output demanded is negative; as the price level increases, the quantity of aggregate output demanded decreases and when the price level decreases, the quantity of aggregate output demanded increases.

The ________ is the dollar amount of the wage paid.

nominal wage The nominal wage is the dollar amount of the wage, not adjusted for inflation.

If the costs of health insurance paid by employers falls, the economy will experience a(n) _____ supply shock.

positive A decrease in the costs of production cause a positive supply shock, which shifts the short-run aggregate supply curve to the right.

In the short run, aggregate supply and the price level are:

positively related. In the short run, aggregate supply and the price level are positively related.

If aggregate planned expenditures in the economy increase by 100 million, then:

real GDP will increase by more than $100 million. Real GDP will increase by more than $100 million because of the multiplier effect.

If potential output is $10 trillion and actual output is $9 trillion, there is a _________ gap.

recessionary If actual output is below potential output, there is a recessionary gap.

If the economy is allowed to self-correct after a recessionary gap, we depict this graphically as a:

rightward shift in short-run aggregate supply. SRAS will shift to the right.

If the existing stock of physical capital is relatively small, the aggregate demand curve will likely:

shift to the right. If the existing stock of physical capital is relatively small, investment spending will likely increase, and the aggregate demand curve will shift to the right.

If the government increases taxes, the aggregate demand curve:

shifts to the left. If taxes increase, consumption decreases, which causes aggregate demand to decrease, which is represented by a shift of the aggregate demand curve to the left.

An event that shifts the aggregate demand curve is a demand:

shock. Demand shocks are events that shift the aggregate demand curve.

An event that shifts the short-run aggregate supply curve is a supply:

shock. Events that shift the short-run aggregate supply curve are called supply shocks.

In the short run, the short-run equilibrium price level and output occur at the intersection of:

short-run aggregate supply and aggregate demand. Short-run equilibrium is where short-run aggregate supply and aggregate demand intersect.

When consumers feel less optimistic:

the aggregate demand curve shifts to the left. When consumers feel less optimistic, consumption will decrease, and the aggregate demand curve will shift to the left.

Suppose that SRAS = AD and that the GDP that occurs at this point is also potential GDP. We can assume that:

the economy is in long-run equilibrium. If equilibrium GDP = potential GDP, there is no gap and the economy is in long-run equilibrium.

When the aggregate expenditures curve shifts up because the price level decreases:

the economy slides down the aggregate demand curve. When the price level decreases, the economy slides down the aggregate demand curve.

If the price level rises, then

the quantity of real GDP demanded decreases. An increase in the price level causes a movement up the demand curve and the quantity of real GDP demanded decreases.

If actual output is above potential output:

unemployment is low. If actual output is above potential output, unemployment is low.

The ______ effect is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' assets.

wealth When the price level changes, the purchasing power of consumers' assets changes. The effect of this change on consumer spending is the wealth effect.

If potential output is $10 trillion and actual output is $9 trillion, there is an output gap of:

−10 percent. If potential output is $10 trillion and actual output is $9 trillion, the output gap is −1 divided by 10, which is −10 percent.

If real GDP is $1200 and planned investment is $100, income-expenditure equilibrium is:

$1000. At income-expenditure equilibrium, planned spending equals output. At an output of $1000 planned spending, consumption of $900 plus planned investment of $100 equals the output of $1000.

If real GDP is $1500 and planned investment is $100, income-expenditure equilibrium is:

$1500. At income-expenditure equilibrium, planned spending equals output. At an output of $1500 planned spending, consumption of $1400 plus planned investment of $100 equals the output of $1500.

If the multiplier is 5, the marginal propensity to consume must be:

0.8. The multiplier is 1 divided by 1 less the MPC. If the MPC is 0.8, the multiplier is 1 divided by 0.2, which is 5.

If the multiplier is 10, the marginal propensity to consume must be:

0.9. The multiplier is 1 divided by 1 less the MPC. If the MPC is 0.9, the multiplier is 1 divided by 0.1, which is 10.

True or False? If the price level goes up the long-run aggregate supply curve shifts to the right.

False If the price level goes up, there is a movement up the aggregate supply curve, but no shift of the curve.

True or False? If the economy is experiencing an inflationary gap, unemployment is the primary problem.

False In an inflationary gap, the problem is inflation.

Suppose the housing sector of the economy recovers and housing prices begin to rise consistently. How does this affect the consumption function?

The consumption function will shift up. This reflects the impact of an increase in aggregate wealth.

True or False? A $100 million increase in investment spending leads to a larger change in GDP because the initial round of spending leads to an increase in aggregate income, which is spent and increases GDP again.

True

True or False? A larger MPC results in a larger change in real GDP when investment spending changes.

True

True or False? If the economy is at an output less than potential, there is high unemployment that will drive down nominal wages.

True

True or False? Output and prices will both increase in the short run as a result of a positive demand shock.

True

True or False? Profit per unit is the difference between the price per unit and the cost per unit.

True

True or False? The interest rate effect is the impact of a change in the aggregate price level on interest rates, which then affect investment and consumption.

True

True or False? The marginal propensity to consume is the proportion of a change in disposable income that is consumed.

True

True or False? The economy cannot remain at a point on the short-run aggregate supply but not on the long-run aggregate supply curve.

True If the economy is not on the long-run aggregate supply curve, the inflationary or recessionary gap places pressure to move to the long-run supply curve.

True or False? In the long run, the price level has no effect on aggregate supply.

True In the long run, changes in the price level have no effect on aggregate supply because they will be accompanied by equal proportional changes in all input prices, so that the long-run aggregate supply curve is vertical.

_____ occurs when actual sales are more or less than businesses expected, leading to unplanned changes in inventories.

Unplanned inventory investment When actual sales are different from what businesses expected, that is unplanned inventory investment.

The ___________ curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, government, and the rest of the world.

aggregate demand The relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, government, and the rest of the world is shown by the aggregate demand curve.

If planned investment spending is $200, and real GDP is $3000, unplanned inventory investment is:

$200. If real GDP, output is $3000, planned spending is consumption ($2,600) plus planned investment ($200), which is $2800. Unplanned inventory investment then is $200.

If consumption is $1,800 and if disposable income is $2000, savings is:

$200. Saving is the amount of disposable income left after consumption, which is $2000 less $1800 = $200.

In a closed economy with no government, if the consumption function is C = 250 + 0.75 ˟ YD and real GDP is $4000 and planned investment spending is $500, then planned aggregate spending is:

$3750. Planned aggregate spending is the sum of consumption, $3250, plus planned investment spending, $500, which is $3750.

If the marginal propensity to save is 0.25, a decrease in investment spending of $100 will result in a decrease in real GDP of:

$400. If the MPS is 0.25, the multiplier is 4, and a decrease in investment spending of $100 will result in a decrease in real GDP of 4 ˟ $100, which is $400.

If the marginal propensity to save is 0.1, the multiplier is:

10. Since the multiplier is 1 divided by 1 minus the MPC, which is the MPS, the multiplier is 1 divided by 0.1, which is 10.

If the marginal propensity to save is 0.25, the multiplier is:

4. Since the multiplier is 1 divided by 1 minus the MPC, which is the MPS, the multiplier is 1 divided by 0.25, which is 4.

If the marginal propensity to save is 0.2, the multiplier is:

5. Since the multiplier is 1 divided by 1 minus the MPC, which is the MPS, the multiplier is 1 divided by 0.2, which is 5.

What is the multiplier if the marginal propensity to consume (MPC) is 0.85?

6.67 The multiplier is equal to 1/(1 − MPC) = 1/(1 − 0.85) = 1/0.15 = 6.67.

________ is the sum of planned investment spending and unplanned inventory investment.

Actual inventory investment Planned investment spending plus unplanned inventory investment equals actual investment spending.

Which will cause a positive demand shock?

An increase in stock values occurs because of optimism in the stock market. An increase in stock values will increase wealth and increase consumption and aggregate demand.

True or False? At the income-expenditure equilibrium, unplanned inventory investment is positive.

False

True or False? Changes in the aggregate price level will shift the short-run aggregate supply curve.

False

True or False? If the economy experiences a negative supply shock, stabilization policy to decrease aggregate demand will make inflation worse.

False

True or False? The aggregate demand curve is downward sloping because as the price level rises, consumers reduce expenditures because of the law of demand.

False

True or False? The interest rate effect causes the aggregate demand curve to slope downward because the assets households hold are now worth less.

False

True or False? When the economy suffers a negative demand shock, the aggregate demand curve shifts to the right.

False

True or False? A negative demand shock is represented by a movement up a stationary aggregate demand curve.

False A negative demand shock is represented by a shift in the aggregate demand curve to the left.

True or False? If the existing stock of capital is large, the aggregate demand curve is likely to shift to the right.

False If the existing stock of physical capital is relatively large, investment spending will likely decrease, and the aggregate demand curve will shift to the left.

According to the wealth effect, if the aggregate price level increases, the value of consumers' assets will _______, and consumption will ________.

decrease; decrease The wealth effect predicts that an increase in the price level will decrease the value of consumers' assets and consumption.

If the Federal Reserve increases the money supply, interest rates ______, and investment _______, shifting the aggregate demand curve to the _____.

fall; increases; right If the Federal Reserve increases the money supply, interest rates fall and investment increases, shifting the aggregate demand curve to the right.

The appropriate policy to pursue in the case of a recessionary gap is best described by using:

fiscal policy to shift aggregate demand to the right. Expansionary fiscal policy should be used to close a recessionary gap.

In the long run, all prices are:

flexible