Econ Exam 2

An economic growth model explains

changes in real GDP per capita in the long run.

The level of aggregate supply in the long run is not affected by

changes in the price level.

The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.

positive; final goods and services; inputs

Full-employment GDP is also known as

potential GDP.

Potential GDP refers to the level of

real GDP in the long run.

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.

real GDP; the price level

The aggregate expenditure model focuses on the ________ relationship between real spending and ________.

short-run; real GDP

The basic aggregate demand and aggregate supply curve model helps explain

short-term fluctuations in real GDP and the price level

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.

total spending; real GDP; the price level

Refer to Figure 13-3. Which of the points in the above graph are possible long-run equilibria?

A and C

countries with high rates of economic growth tend to have

A labor force that is more productive`

Refer to Figure 11-1. Diminishing marginal returns is illustrated in the per-worker production function in the figure above by a movement from

A to C.

Refer to Figure 12-2. If the U.S. economy is currently at point K, which of the following could cause it to move to point N?

The price level in the United States falls relative to the price level in other countries.

According to the "Rule of 70," it will take 4 years for real GDP per capita to double when the growth rate of real GDP per capita is

17.5 percent.

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-run aggregate supply will shift to the right.

Refer to Figure 12-2. If the U.S. economy is currently at point N, which of the following could cause it to move to point K?

Household wealth falls.

Refer to Figure 12-1. If the economy is at point L, what will happen?

Inventories have risen above their desired level, and firms decrease production

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will rise, and GDP and employment will decline.

Refer to Figure 12-1. According to the figure above, at what point is aggregate expenditure greater than GDP?

J

If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita?

4.7%

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will decline.

Because of the slope of the aggregate demand curve, we can say that

a decrease in the price level leads to a higher level of real GDP demanded

The demand for durable goods

declines by a greater percentage than does GDP during a recession.

Investment spending ________ during a recession, and ________ during an expansion.

declines; increases

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending.

All of the following are components of aggregate expenditure except

actual investment spending.

An unplanned increase in inventories results from

actual investment that is greater than planned investment.

Higher personal income taxes

decrease aggregate demand

If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will

decrease consumption by $7,500.

A decrease in Social Security payments will

decrease consumption spending.

An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.

decrease; a higher price level reduces consumption, investment, and net exports.

) Suppose that in 2016, real GDP grew in Estonia by 3% and the population increased by 5%. Therefore, in 2016, Estonia experienced

economic growth, but not an increase in living standards.

An increase in aggregate demand results in a(n) ________ in the ________.

expansion; short run

Actual real GDP will be above potential GDP if

firms are producing above capacity.

Deflation will

increase the quantity of real GDP demanded.

Suppose there has been an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.

increase; decrease to its initial value

) An increase in the price level will

move the economy up along a stationary aggregate demand curve.

An increase in the price level will

move the economy up along a stationary short-run aggregate supply curve.

The long-run aggregate supply curve will shift to the right if

the economy experiences technological change.

Refer to Figure 12-1. If the economy is at a level of aggregate expenditure given by point K, A) the economy is in equilibrium.

the economy is in equilibrium.

Which of the following would you expect to result in faster economic growth?

the invention of new computers that increase labor productivity

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,

the long-run aggregate supply curve will shift to the right

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then

the multiplier is 8.

Consumption spending is $16 million, planned investment spending is $4 million, unplanned investment spending is $2 million, government purchases are $6 million, and net export spending is $1 million. What is aggregate expenditure?

$27 million

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP?

$27 million

If GDP grows at a rate of 3% per year, approximately how long will it take for GDP to double in size?

) 23 years

Refer to Figure 11-1. Using the per-worker production function in the figure above, the largest changes in an economy's standard of living would be achieved by a movement from

) B to C to D.

Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle.

) increase; decrease

Refer to Figure 12-2. Suppose that the level of GDP associated with point N is potential GDP. If the U.S. economy is currently at point K,

) the economy is in recession.

If national income increases by $20 million and consumption increases by $5 million, the marginal propensity to consume is

0.25.

If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from

23.3 years to 17.5 years

If real GDP in a small country in 2015 is 8 billion and real GDP in the same country in 2016 is 8.3 billion, the growth rate of real GDP between 2015 and 16 is

3.75%

If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money?

8 years and 9 months

Refer to Figure 13-3. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

A

Refer to Figure 13-3. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be?

A

Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria?

ABCD

Refer to Figure 12-1. At point L in the figure above, which of the following is true?

Actual inventories are greater than planned inventories.

Refer to Figure 12-1. At point J in the figure above, which of the following is true?

Actual inventories are less than planned inventories.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise

________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending.

An increase; an increase

Refer to Figure 13-3. Suppose the economy is at point A. If the economy experiences a supply shock, where will the eventual short-run equilibrium be?

B

Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP.

B and D

Refer to Figure 11-1. Many countries in Africa strongly discouraged and prohibited foreign direct investment in the 1950s and 1960s. By doing so, these countries were essentially preventing a moment from

B to C.

Refer to Figure 11-1. Suppose the per-worker production function in the figure above represents the production function for the U.S. economy. If the United States decided to double its support of university research, this would cause a movement from

B to C.

Refer to Figure 11-1. Technological change is illustrated in the per-worker production function in the figure above by a movement from

B to C.

Refer to Figure 13-3. Suppose the economy is at point A. If government spending increases in the economy, where will the eventual long-run equilibrium be?

C

Refer to Figure 13-3. Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?

C

Refer to Figure 11-1. Within a country, the impact of wars and revolutions and their subsequent destruction of capital is reflected in the per-worker production function in the figure above by a movement from

C to A.

Refer to Figure 12-2. If the U.S. economy is currently at point K, which of the following could cause it to move to point N?

Congress passes investment tax incentives.

Refer to Figure 12-2. If the U.S. economy is currently at point N, which of the following could cause it to move to point K?

Households expect future income to decline

which of the following increases labor productivity

Inventions of new machinery, equipment or software

Refer to Figure 12-1. If the economy is at point J, what will happen?

Inventories have fallen below their desired level, and firms increase production.

Refer to Figure 12-1. If the economy is in equilibrium, it is at a level of aggregate expenditure given by point

K

Refer to Figure 12-1. According to the figure above, at what point is aggregate expenditure less than GDP?

L

If government saving is negative, then

T - TR < G.

There is a government budget surplus if

T - TR > G.

What two factors are the keys to determining labor productivity?

Technology and the quantity of capital per hour worked

________ describes the relationship between consumption spending and disposable income.

The consumption function

Potential GDP refers to

The level of GDP attained when alll firms are producing at capacity

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

There was an unplanned increase in inventories equal to $2 million.

If the U.S. dollar increases in value relative to other currencies, how does this affect the aggregate demand curve?

This will shift the aggregate demand curve to the left.

The ________ shows the relationship between the price level and quantity of real GDP demanded.

aggregate demand curve

Long-run macroeconomic equilibrium occurs when

aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run aggregate supply curve.

Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that

aggregate expenditure that year was equal to GDP that year.

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies

aggregate expenditure that year was less than GDP that year.

During the expansion phase of the business cycle, which of the following eventually increases?

all of the above

Which of the following will cause a direct increase in consumption spending?

an increase in disposable income

An increase in the demand for loanable funds will occur if there is

an increase in expected profits from firm investment projects

Which of the following will shift the aggregate demand curve to the left, ceteris paribus?

an increase in interest rates

Which of the following would you expect to increase the equilibrium interest rate?

an increase in the budget deficit

Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds.

demanders; suppliers

As the economy nears the end of a recession, which of the following do we typically see?

increased spending on capital goods by firms

During the recession phase of the business cycle,

interest rates are usually falling.

When the government runs a budget deficit, we would expect to see that A) private saving will fall.

investment will fall.

In a closed economy, public saving plus private saving is equal to

investment.

The long-run aggregate supply curve

is vertical.

The demand for loanable funds is downward sloping because the ________ the interest rate, the ________ the number of profitable investment projects a firm can undertake, and the ________ the quantity demanded of loanable funds.

lower; greater; greater

When aggregate expenditure = GDP

macroeconomic equilibrium occurs.

As the economy nears the end of an expansion, which of the following do we typically see?

rising interest rates