Macroeconomics Exam #3 Study Guide
Assume there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, and an additional $2 billion for every drop of interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is...
$10 billion
The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?
$10 billion
An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?
$12 billion
If the MPC is 0.8, what change in investment spending is required to effect a total change in income by $60 billion?
$12 billion
If the MPC of an economy is 0.8, government could close a recessionary expenditure gap of $100 billion by cutting taxes by...
$125 billion
If the MPC in an economy is 0.75 and aggregate expenditures increase by $5 billion, then equilibrium GDP will increase by...
$20 billion
Assume that the marginal propensity to consume in an economy is 0.75. The economy's full-employment real GDP is $900 billion and its equilibrium real GDP is $800 billion, there is a recessionary expenditure gap of...
$25 billion
Ig = 80 S = -80 + 0.4Y (Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). In equilibrium, consumption will be...
$320
(Advanced analysis) If S = -60 + 0.25Y and Ig = 60 where S is saving, Ig is gross investment, and Y is gross domestic product (GDP), then the equilibrium level of GDP is...
$360
C = 40 + 0.8Y Ig = 60 - 2i i = 10 (Advanced analysis) The equations are for a private closed economy, where C is consumption, Y is the gross domestic product, Ig is gross investment, and i is the interest rate. The equilibrium level of GDP in the this economy is...
$400
(Advanced analysis) If S = -60 + 0.25Y and Ig = 60, where S is saving, Ig is gross investment, and Y is gross domestic product (GDP), then the equilibrium level of GDP is...
$480
Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 (Advanced analysis) 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 equilibrium level of GDP for this economy is...
$530
(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. At an $800 level of disposable income, the level of saving is...
$60
If the marginal propensity to save in a closed economy is 0.25 and a lump-sum tax is imposed, the slope of the economy's aggregate expenditures will be...
0.75
If the nominal interest rate is 18% and the real interest rate is 6%, the inflation rate is...
12% (nominal interest rate = real interest rate + inflation rate)
Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return is...
15%
(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of consumption spending will be...
195
Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is...
2
An $18 billion increase in spending creates $18 billion of new income in the first round of the multiplier process and $13.5 billion in the second round. The multiplier in the economy is...
4
(Advanced analysis) Assume the saving schedule for a private closed economy is S = -20 + 0.2Y, where S is saving and Y is gross domestic product. The multiplier for the economy is...
5
If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is...
5
What percentage of the average U.S. firm's costs is accounted for by wages and salaries?
75%
Interest rate effect
A decline in price level means lower interest rates that can increase levels of certain types of spending
Aggregate demand
A schedule or curve that shows the various amounts of real domestic output that domestic and foreign buyers desire to purchase at each possible price level
In 2008 during the Great Recession, the Federal government provided tax rebate checks to taxpayers in the hope that...
C would shift up
In a mixed open economy, the equilibrium GDP exists where...
Ca + Ig + Xn + G = GDP
Multiplier effect equation
Change in real GDP/Initial change in spending (1/(1-MPC))
Say's Law
Claims that the production of a product creates demand for another product by providing something of value which can be exchanged for another product
What are the determinants of aggregate demand?
Consumer spending, investment spending, government spending, and net export spending
Discretionary fiscal policy is often initiated on the advice of the...
Council of Economic Advisors
Other things constant, if domestic consumers purchase fewer foreign goods at each level of GDP in the short run,
GDP will rise
Which combination of fiscal policy actions would most likely offset each other?
Increasing both taxes and government spending
Short run
Input prices are fixed but output prices are variable
If the saving schedule is a straight line, the...
MPS must be constant
Long run
Prices of inputs and outputs are flexible
In a mixed open economy, the equilibrium GDP is determined at the point where...
Sa + M + T = Ig + X + G
Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that...
T + Sa > Ig + G
If the real interest rate increases...
There will be a movement upward along the investment demand curve
Real balances effect
When price level falls, the purchasing power of existing financial balances rises, which can increase spending
GDP equation
Y = C + I + G + X - M
The following factors explain the inverse relationship between the price level and the total demand for output, except... a. a substitution effect b. a real-balances effect c. an interest-rate effect d. a foreign-purchases effect
a
The relationship between the aggregate demand curve and the aggregate expenditures model is derived from the fact that...
a decrease in price level shifts the aggregate expenditures schedule upward and increases equilibrium GDP
With cost-push inflation, there will be...
a decrease in real GDP
The saving schedule would be shifted upward by...
a decrease in taxes.
The consumption schedule shows...
a direct relationship between aggregate consumption and aggregate income
The real-balances effect indicates that...
a higher price level will decrease the real value of many financial assets and therefore reduce spending
What will be the effect of an excess of planned investment over saving in a private closed economy with with unemployed resources?
a rise in real GDP
An appropriate fiscal policy for severe demand-pull inflation is...
a tax rate increase
C = 40 + 0.8Y Ig = 40 X = 20 M = 30 (Advanced analysis) The equations give information for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in billions of dollars. This nation is experiencing..
a trade deficit
Which combination of factors would most likely increase aggregate demand? a. an increase in household indebtedness and a decrease in net exports b. an increase in consumer wealth and a decrease in interest rates c. an increase in personal taxes and a decrease in government spending d. an increase in business taxes and a decrease in profit expectations
b
Which of the following fiscal policy changes would be the most contractionary? a. a $40 billion increase in taxes b. a $10 billion increase in taxes and a $30 billion cut in government spending c. a $20 billion increase in taxes and a $20 billion cut in government spending d. a $30 billion increase in taxes and a $10 billion cut in government spending
b
Which of the following will not tend to shift the consumption schedule up? a. A currently small stock of durable goods in the possession of consumers. b. The expectation of a future decline in the consumer price index c. A currently low level of household debt d. The expectation of future shortages of essential consumer goods
b
The short-run aggregate supply curve...
becomes steep at output levels above the full-employment output
Unintended changes in inventories...
bring actual investment and saving into equality at all levels of GDP
The economy starts out with a balanced federal budget. If the government then implements expansionary fiscal policy, then there will be a...
budget deficit
In a private closed economy, when aggregate expenditures exceed GDP,
business inventories will fall
In a private closed economy, when aggregate expenditures exceed GDP...
business inventories will fall
A rightward shift of the investment demand curve might be caused by...
businesses planning to increase their stock of inventories
In which of the following sets of circumstances can we confidently expect inflation? a. Aggregate supply and aggregate demand both increase b. Aggregate supply and aggregate demand both decrease c. Aggregate supply decreases and aggregate demand increases d. Aggregate supply increases and aggregate demand decreases
c
Which of the following is not true when there is an unplanned decrease in inventories? a. GDP is less than aggregate expenditures b. Saving is less than planned investment c. Actual investment is greater than planned investment d. Real GDP will be rising
c
Which of the following would shift the consumption schedule downward? a. a decrease in real interests rates b. an increase in the value of financial assets c. an increase in the probability of a recession d. a decrease in disposable income
c
MPC formula
change in consumption/change in income
MPS formula
change in saving/change in income
The multiplier effect relates...
changes in spending to changes in real GDP
If Matt's disposable income increases from $4,000 to $4,500 and his level of saving increases from $200 to $325, it may be concluded that his marginal propensity to...
consume is 0.75
If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to...
consume is three-fifths
An increase in household wealth that creates a wealth effect would shift the...
consumption schedule upward and the saving schedule downward
An increase in the price level, other things equal, will shift the...
consumption, investment, and net exports schedules of the aggregate expenditures model downward
APC formula
consumption/income
Which of the following would most likely reduce aggregate demand? a. a reduction in the amount of existing capital stock b. a reduction in business and personal tax rates c. an increase in expected returns on investment d. an increase in real interest rates
d
A decrease in government spending will cause a(n)...
decrease in aggregate demand
The interest rate effect on aggregate demand indicates that a(n)...
decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending
To close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to...
decrease the aggregate expenditures schedule by $20 billion
If the MPC of an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by...
decreasing taxes by $25 billion
Discretionary fiscal policy will likely cause budget...
deficits during recessions and surpluses during periods of demand-pull inflation
Demand-pull inflation is illustrated in the short run aggregate supply-aggregate demand model as a shift of aggregate...
demand to the right
When the excess capacity of business expands unintentionally, aggregate...
demand will decrease
The size of the multiplier associated with an initial increase in spending will be...
diminished if inflation occurs
If at some level of GDP the economy is experiencing an unintended decrease in inventories...
domestic output will increase
A movement upward along a given aggregate demand curve is equivalent to a(n)...
downward shift in the aggregate expenditures schedule
The purchase of capital goods, like _____ consumer goods, can be postponed; it tends to contribute to _____ in investment spending.
durable; instability
A give reduction in government spending will dampen demand-pull inflation by a greater amount when the...
economy's aggregate supply curve is steep
A given reduction in government spending will dampen demand-pull inflation by a greater amount when the...
economy's aggregate supply curve is steep
The intersection of the aggregate demand and aggregate supply curve determines the...
equilibrium GDP
Injections into the income-expenditure stream include...
government purchases and exports.
C = 40 + 0.8Y Ig = 40 X = 20 M = 30 (Advanced analysis) The equations give information for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively. Figures are in billions of dollars. International trade in this case...
has a contractionary effect on GDP
The variability of business profits...
helps explain the instability of investments over time
The immediate short-run aggregate supply curve is...
horizontal
If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will...
increase GDP by $20 billion
Over time, an increase in the real output and incomes of the trading partners of the United States will...
increase U.S. exports
The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will...
increase U.S. imports and decrease U.S. exports
An increase in productivity will...
increase aggregate supply
If the price of crude oil decreased, then this would most likely...
increase aggregate supply in the U.S.
A decrease in interest rates caused by a change in the price level would cause a(n)...
increase in the quantity of real output demanded (or movement down along AD)
In the aggregate expenditures model, an increase in government spending may...
increase output and employment
In the aggregate expenditures model, a reduction in taxes may...
increase saving
Discretionary fiscal policy refers to...
intentional changes in taxes and government expenditures made by Congress to stabilize the economy
When deriving the aggregate demand (AD) curve from the aggregate expenditure model, an increase in U.S. product prices would cause an increase in...
interest rates and lower investment expenditures
The relationship between the real interest rate and investment is shown by the...
investment demand schedule
During the Great Recession of 2007 - 2009, the investment curve shifted...
left because of declines in expected returns
Refer to the consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the...
marginal propensity to consume will remain unchanged in each of the three countries.
In annual percentage terms, investment spending in the United States is...
more variable than real GDP
In moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes...
must be added to saving
When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy
nondiscretionary
If consumers respond to a tax-cut by saving a large portion of the extra disposable income (or using it to reduce their debts), then the tax-cut policy would...
not have much effect on the aggregate expenditures curve
The real-balance effect pertains to the effect of...
price changes on aggregate demand, while the wealth effect refers to the impact of changes in wealth on aggregate demand
The aggregate demand curve or schedule shows the relationship between the total demand for output and the...
price level
The aggregate demand curve or schedule shows the relationship between the total demand for the output and the...
price level
Immediate short run
prices of inputs and output are fixed
The short-run version of aggregate supply assumes that...
product prices are flexible, while resource prices are are fixed
Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should...
purchase the machine because the expected rate of return exceeds the interest rate.
Productivity measures...
real output per unit of input
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should...
reduce tax rates and/or increase government spending
Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should...
reduce taxes by $80 billion
The effect of imposing a lump-sum tax is to...
reduce the absolute levels of consumption and saving at each level of GDP, but to not change the size of the multiplier
If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by...
reducing government expenditures by $20 billion
If the MPS of an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by...
reducing government expenditures by $20 billion
What would most likely shift the aggregate supply curve? A change in the prices of...
resources
If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift...
rightward by $50 billion at each price level
The effect of expansionary fiscal policy is shown as a...
rightward shift in the economy's aggregate demand curve
Leakages from the income-expenditure stream are...
saving, taxes, and imports
APS formula
savings/income
The aggregate supply curve...
shows the various amounts of real output that businesses will produce at each price level.
A specific reduction in government spending will dampen demand-pull inflation by a greater amount the...
smaller is the economy's MPS
If the government wishes to increase the level of real GDP, it might reduce...
taxes
(Last word) Classical macroeconomics was dealt severe blows by...
the Great Depression and Keynes's macroeconomic theory
The value of the multiplier is likely to fall if there is a fall in...
the marginal propensity of consume
Deflation refers to a situation where...
the price level falls; it could be caused by a shift of AD to the left
When government spending is increased, the amount of the increase in aggregate demand primarily depends on...
the size of the multiplier
If the real interest rate increases,
there will be a movement upward along the investment demand curve.
Per-unit production cost equation
total input cost/total output
Productivity equation
total output/total inputs
Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus...
unplanned decreases in inventories of $10 billion will occur
The upward slope of the short-run aggregate supply curve is based on the assumption that...
wages and other resource prices do not respond to price level changes
Foreign purchases effect
when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor of US products that compete with imports
The real-balances, interest-rate, and foreign purchases effects all help explain...
why the aggregate demand curve is downsloping
If aggregate demand increases and aggregate supply decreases, the price level...
will increase, but real output may increase, decrease, or remain unchanged.
If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule...
will shift downward
Saving is always equal to...
actual investment
If the national incomes of our trading partners increase, then our...
aggregate demand increases will because net exports increase
An increase in net exports will shift the...
aggregate expenditures curve upward and the aggregate demand curve rightward
For a private closed economy, an unintended decline in inventories suggests that...
aggregate expenditures exceed production
When planned investment exceeds saving in a private closed economy,
aggregate expenditures will exceed GDP.
Say's law in classical economics suggests that, over a period of time...
aggregate spending would tend to equal total output and income.
If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause...
an $8 billion downshift in the consumption schedule
Closed economy
an economy that does not interact with other economies in the world
Open economy
an economy that interacts freely with other economies around the world
In deriving the aggregate demand curve from the aggregate expenditures model, we note that...
an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward)
The investment curve will shift to the left as a result of...
an increase in the excess production capacity available in the industry
If for some reason households become increasingly thrifty, we could show this by...
an upward shift of the saving schedule
