ECO 202 Chapter 12

Find equilibrium GDP using the following macroeconomic model ​(the ​numbers, with the exception of the​ MPC, represent billions of dollars​): C=750+0.80Y Consumption I=1,000 planned G=2,000 Government spending NX=200 Net export Y=C+I+G+NX equilibrium condition the equilibrium level of GDP is $( ) billion

Y=C+I+G+NX Y=(750+0.80Y)+1,000+2,000+200 Y=3,950+0.80Y 0.2Y=3,950 Y=3950/0.2 Y=19,750

Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a​ reason? a. The formula ignores the impact of an increase in GDP on consumption. b. The formula ignores the impact of an increase in GDP on the interest rate. c. The formula ignores the impact of an increase in GDP on imports. d. The formula ignores the impact of an increase in GDP on inflation.

a.

The behavior of consumption and investment over time can be described as​ follows: a. Consumption follows a​ smooth, upward​ trend, but investment is subject to significant fluctuations. b. Neither consumption nor investment fluctuates significantly over time. c. Investment follows a​ smooth, upward​ trend, but consumption is subject to significant fluctuations. d. Both consumption and investment fluctuate significantly over time.

a.

Which of the following does the aggregate expenditure macroeconomic model seek to explain? a. the business cycle b. cyclical unemployment c. long-run economic growth d. infaltion

a.

Which of the following statements is​ correct? a. An increase in the corporate income tax decreases the​ after-tax profitability of investment spending. b. Changes in tax laws have no effect on investment spending. c. During periods of​ recession, the ability of firms to finance spending on new factories or machinery and equipment increases. d. All of the above are correct.

a.

An economics student raises the following​ objection: ​"The textbook said that a higher interest rate lowers​ investment, but this​ doesn't make sense. I know that if I can get a higher interest​ rate, I am certainly going to invest more in my savings​ account." The problem with the​ student's argument is which of the​ following? a. Investment is not related to the interest rate. b. The student is confusing saving with investment. c. Higher interest rates are bad for savers. d. Savings accounts do not earn interest.

b.

How would an increase in interest rates affect investment? a. Real investment spending may​ increase, decrease or remain the same depending on the rate of inflation. b. Real investment spending declines. c. Real investment spending remains unchanged. d. Real investment spending increases.

b.

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals: a. zero b. one c. national income d. disposable income

b.

What is the effect on​ inventories, GDP, and employment when aggregate expenditure​ (total spending) exceeds​ GDP? a. Inventories​ increase, GDP​ increases, and employment decreases. b. Inventories​ decrease, GDP​ increases, and employment increases. c. Inventories​ increase, GDP​ increases, and employment increases. d. Inventories​ decrease, GDP​ decreases, and employment increases.

b.

Would a larger multiplier lead to more severe recessions or less severe​ recessions? a. A larger multiplier means that small changes in spending lead to large changes in​ GDP, and thus recessions would be less severe. b. A larger multiplier means that large changes in spending lead to small changes in​ GDP, and thus recessions would be more severe. c. A larger multiplier means that small changes in spending lead to large changes in​ GDP, and thus recessions would be more severe. d. a larger multiplier means that large changes in spending lead to small changes in​ GDP, and thus recessions would be less severe.

c

Macroeconomic equilibrium occurs where a. the unemployment is zero b. consumption equals investment and investment equals government expenditure c. total spending, or aggregate expenditure, equls total production, or GDP d. total production, or GDP, equals total planned investment

c.

When planned aggregate expenditure is less than real​ GDP, what happens to​ firms' inventories? a. Inventories accumulate as firms increase production. b. Inventories fall as firms increase output. c. Inventories accumulate if production is not scaled back. d. Inventories fall if production is not scaled back.

c.

in the aggregate expenditure model, when is planned investment greater than actual investment? a. When there is an unplanned increase in inventories. b. Planned investment always equals actual investment in the aggregate expenditure model. c. when there is an unplanned decrease in inventories. d. When there is no unplanned change in inventories.

c.

what are the four determinants of investment? a. Expectations of future​ profitability, interest​ rates, exchange rate and cash flow. b. Expectations of future​ profitability, interest​ rates, disposable income and cash flow. c. Expectations of future​ profitability, interest​ rates, taxes and cash flow. d. Disposable​ income, interest​ rates, taxes and cash flow.

c.

when is the economy in a recession? a. when the aggregate expenditure line does not intersect the 45° line anywhere b. when the aggregate expenditure line intersects the 45° line at a level of GDP equal to potential GDP c. when the aggregate expenditure line intersects the 45° line at a level of GDP below potential GDP d. when the aggregate expenditure line intersects the 45° line at a level of GDP above potential GDP

c.

which of the following is the formula for the multiplier? a. MPC b. 1-MPC c. 1/(1-MPC) d. 1/MPC

c.

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending​ categories? a. AE=C+I+G-NX b. AE=C-I-G-NX c. AE=C+I-G-NX d. AE=C+I+G+NX

d

In the aggregate expenditure​ model, why is it important to know the factors that determine consumption​ spending, investment​ spending, government​ purchases, and net​ exports? Because they help us understand a. the relationship between aggregate expenditure and real GDP. b. how macroeconomic equilibrium is determined in the aggregate expenditure model. c. how the level of aggregate expenditure and GDP are determined in the economy. d. All of the above.

d.

The adjacent figure shows the effect of a reduction in equilibrium GDP when government purchases decline. Which of the following is not true about the multiplier effect of such a change in government purchases​ ? a. As government purchases​ decline, the aggregate expenditure function shifts down from AE1 to AE2. b. The value of the multiplier is 2.5. c. Real GDP falls by​ $5 billion in response to a​ $2 billion reduction in government purchases. d. The value of the multiplier is minus​$5 billion.

d.

Which of the following statements about investment spending is​ correct? a. A higher real interest rate results in less investment spending. b. When the economy moves into a​ recession, many firms will postpone buying investment goods even if the demand for their own product is strong. c. The optimism or pessimism of firms is an important determinant of investment spending. d. All of the above are correct.

d.

aggregate expenditure is a. the same as consumption. b. the sum total of​ consumption, planned​ investment, and net exports. c. the sum total of​ consumption, planned​ investment, and government purchases. d. the sum total of​ consumption, planned​ investment, government​ purchases, and net exports.

d.

the multiplier effect is the process by which: a. an increase in aggregate expenditure leads to an increase in inflation. b. an increase in real GDP or income leads to an increase in consumption. c. an increase in real GDP leads to a larger increase in autonomous expenditure. d. an increase in autonomous expenditure leads to a larger increase in real GDP.

d.

which of the following is not correct? a. MPS + MPC=1 b. MPS=1-(▲C/▲YD) c. 0<MPS<1 d. MPS=1-(c/YD)

d.

An increase in the U.S. price level relative to other countries' price levels will (increase/decrease) net exports an increase in the growth rate of U.S. GDP relative to other countries' will (increase/ decrease) net exports an increase in the exchange rate between the dollar and other currencies will (increase/ decrease) net exports

decrease decrease decrease

what effect an increase in each of the consumption components will have on consumption: an increase in price level will (increase/decrease) consumption an increase in household wealth will (increase/decrease) consumption an increase in expected future income will (increase/decrease) consumption an increase in current disposable income will (increase/decrease) consumption an increase in the interest rate will (increase/decrease) consumption

decrease increase increase increase decrease

We say that the economy as a whole is in macroeconomic equilibrium if a. total spending equals total production. b. aggregate expenditure equals GDP. c. aggregate expenditure equals total production. d. total spending equals GDP. e. all of the above

e.

What is the effect on real GDP of a ​$100 billion change in planned investment if the MPC is 0.50​? $( ) billion

effect on real GDP = change in planned investment (1/1-MPC) 100*(1/1-0.50)=$200 billion

At the beginning of a​ recession, aggregate expenditure ( ) GDP. As a​ result, firms ( ) large amounts of unplanned inventory and GDP and employment (increase/decrease)

falls short of accumulate decrease

on a 45° line diagram, the horizontal axis measures ( ), while teh vertical axis measures ( )

real GDP real aggregate expenditure

Which of the following is not included in the calculation of total government spending? a. unemployment insurance benefits paid for by the federal government b. a new interstate highway purchased by the federal government c. a local government installs a new stop sign d. the salaries of high school teachers paid for by state government

A.

C​ = 500 ​+ 0.75Y I​ = 1,500 G​ = 1,500 NX​ = 500 Y​ = C​ + I​ + G​ + NX GDP=$12,000 GDP=$20,000 what is AE?

AE=(500+0.75(12,000)+1500+1500+500) =9500+1500+1500+500 =13000 AE=(500+0.75(20000)+1500+1500+500 =15500+1500+1500+500 =19000

Suppose that autonomous consumption is 1,500​, government purchases are 1,250​, planned investment spending is 2,000​, net exports are -250​, and the MPC is 0.75. Equilibrium GDP is $( )

AE=C+I+G+NX eqilibrium GDP=AE*(1/1-MPC) AE=1500+1250+2000-250 AE=4500 Equilibrium GDP= 4500*(1/1-0.75) =18000

If a $20 trillion increase in planned investment increased the AE line. however the real GDP increased by $40 trillion. why? a. the investment effect b. the government purchases effect c. the expenditure effect d. the multiplier effect

D.

Indicate which of the following is correct about the multiplier effect a. the multiplier ignores the effect on real GDP of imports, inflation, and interest rates b. the larger the MPC, the more additional consumption that occurs c. a decrease in autonomous spending decreases real GDP by a multiple of the change d. all of the above

D.

Which of the following will increase planed investment spending on the part of firms? a. increased optimism about future demand for its products b. a lower real interest rate c. increases in the corporate income tax d. all of the above e. A and B only

E.

Suppose booming economies in the BRIC nations​ (Brazil, Russia,​ India, and​ China) causes net exports​ (NX) to rise by ​$25 billion in the United States. if the MPC is 0.9, the change in equilibrium GDP will be $( ) billion

Equilibrium GDP= AE* 1/(1-MPC) = 25*(1/(1-0.9) =25/.1 =250

Use points to calculate marginal propensity to consume(MPC): point A(3000, 2250) Point B (5000,3750) MPC= ?

MPC is slope MPC=(y1-y2)/(x1/x2) MPC =(3750-2250)/(5000-3000) =1500/2000 =.75