ECON EXAM 2 QUESTIONS

Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is

$0.1 trillion.

If $1,000 of additional spending occurs and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.

$5,000

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

$900

Which of the equations represents the macroeconomic equilibrium condition in the aggregate expenditure (AE) model? -Y=C+I+G+NXY=C+I+G+NX -S=Sprivate+Spublic -ATC=AFC+AVCATC=AFC+AVC -Spublic=T−G−TRSpublic=T−G−TR -MPC+MPS=1

-Y=C+I+G+NXY=C+I+G+NX

If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume?

0.6

The slope of the saving schedule is

1 minus the marginal propensity to consume.

If the marginal propensity to consume is 0.9, then the spending multiplier is

10

If the marginal propensity to consume is 0.85, the value of the spending multiplier will be

6.67

If the MPC=0.80MPC=0.80 and disposable income increases by $1000$1000, then consumption will increase by what amount? Assume that there is no multiplier effect

800

The 45-degree line in the Keynesian model represents

AE = Y

One explanation for the negative slope of the aggregate demand curve is the "wealth effect" (aka the "real‑balances" effect). What is this effect?

As inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines.

Which of these illustrates the paradox of thrift? -Consumer uncertainty causes people to save less; consumption rises; equilibrium income and production falls; savings decrease because income is lower. -Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decrease because income is lower. -The government encourages saving by raising interest rates; higher interest rates reduce investment spending, which lowers equilibrium income and causes production to fall; savings decrease because income is lower. -As businesses save more, interest rates fall, thus reducing household savings.

Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decrease because income is lower.

According to the wealth effect, what happens as the price level falls?

Consumption spending increases.

_____ inflation occurs when a supply shock reduces aggregate supply.

Cost-push

Which of these did classical economists believe would happen if the economy experienced a downturn? -The government would fix any inefficiencies. -Prices would rise. -Interest rates would rise. -The economy would self-correct.

The economy would self-correct

Choose the answer that best defines the marginal propensity to save (MPS). -The slope of the consumption function -The share of all income earned that is not devoted to consumption -The share of all income earned that is devoted to saving rather than consumption -The change in saving when workers become unemployed -The share of each additional dollar of income earned that is devoted to saving rather than consumption -The sum of all saving from all people in the economy

The share of each additional dollar of income earned that is devoted to saving rather than consumption

Demand‑pull inflation is caused by

an increase in aggregate demand to an equilibrium point beyond full employment.

Which of these will shift the aggregate supply curve to the right?

an increase in the investment of human capital

Businesses become increasingly pessimistic about the economy. Investment demand will

decrease

Congress increases business taxes to avoid the much discussed "fiscal cliff." Investment demand will

decrease

The U.S. government increases the minimum wage.

decrease

Therefore, the net effect of an increase in the price level in the United States is that the amount of U.S. goods and services that are purchased will

decrease

A dramatic decline in the average price of houses will

decrease AD

A recession occurring in a trading partner's economy will

decrease AD

A reduction in government spending will

decrease AD

An increase in income tax rates on individuals earning more than $450,000$450,000 per year will

decrease AD

Increased concern that a recession is looming will

decrease AD

A(n) _____ in government spending, a _____ domestic currency, and _____ interest rates will shift the aggregate demand curve to the left.

decrease; stronger; higher

If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income

decreases by $10 billion

The consumption function shows the relationship between consumption spending and

disposable income

Changes in consumption can be predicted by multiplying the change in _______ by the _________

disposable income / marginal propensity to consume

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

disposable income; consumption

A person's _______ regarding how much income he or she will earn in the future as well as future prices could shape how much he or she spends and saves today.

expectations

During cost-push inflation, aggregate output _____ and the aggregate price level _____.

falls; rises

Investment spending typically fluctuates less than consumption spending

false

Predictable levels of profit cause investment spending to be relatively volatile.

false

The predictable lifespan of many capital goods explains why investment spending is so stable.

false

If the price level in the United States increases relative to other countries, then the United States will export

fewer goods and services

Household behavior with respect to changes in income can be described by the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). These variables can be used to predict the eventual changes in equilibrium output after the change in income has occurred. The ________ the larger the resulting change in output for a given change in expenditure.

greater the MPC

The more ______ a person has, the less current consumption he or she undertakes.

household debt

In the Keynesian model, the principal determinant of saving is

income

Keynesian economists believe that ______ is the key determinant of consumption and spending

income

After a major hurricane, the resulting floods destroy much of the existing capital stock in many parts of the eastern United States. Investment demand will

increase

The government decreases the payroll tax paid by employers.

increase

The practice of fracking, which is a technique used to extract oil and natural gas, increases, causing the costs of using many types of machinery to fall. Investment demand will

increase

The tech industry develops the personal computer, which has a significant impact on productivity. Investment demand will

increase

Widespread adoption of the Internet by businesses increases productivity and efficiency.

increase

A dramatic improvement in the stock market, causing investors' wealth to rise, will

increase AD

An increase in incomes of the countries that purchase U.S.-made products will cause a(n) _____ in the _____ U.S.-made products.

increase; aggregate demand for

Classical economists believe that the higher the _______, the more people will save, which means that they will consume less.

interest rate

Firms decide how much to invest by comparing the rate of return on their projects with the

interest rate

If an economy is on the vertical portion of the aggregate supply curve, then it

is at full employment.

The interest rate effect

is the change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level.

If the amount of regulation in an economy increases, the aggregate supply curve shifts _____ and output supplied will _____.

left; decrease

If aggregate expenditures equal $7,600 and aggregate income equals $8,000, businesses will produce

less, lowering both employment and income.

The _____ curve is vertical at full employment.

long-run aggregate supply

The _____ is the change in consumption associated with a change in income.

marginal propensity to consume

The slope of the consumption function is the

marginal propensity to consume

and the United States will import

more goods and services

The U.S. government decreases the personal income tax rate paid by households.

no change

An announcement by the central bank to maintain its existing monetary policy will

not change AD

High taxes and/or heavy regulation

raise costs of production so that the aggregate supply curve shifts to the left.

Decreased interest rates will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

Cost‑push inflation occurs when ________ decreases until equilibrium output falls below the full employment level.

short-run aggregate supply

Real GDP that firms produce at various price levels

short-run aggregate supply

Shifts when productivity changes

short-run aggregate supply

Shifts when the cost of oil changes significantly

short-run aggregate supply

Upward‑sloping

short-run aggregate supply

Changes in the healthcare market cause employers to pay significantly more for health insurance they provide employees.

short-run aggregate supply decreases

The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world's lumber is grown.

short-run aggregate supply decreases

The production of a new type of blade for their combine harvesters, a tractor used to harvest crops, has allowed wheat farmers, like Herbert, to increase productivity by 40%.

short-run aggregate supply increases

The aggregate demand curve

shows the amount of real GDP that will be demanded at each possible price level.

A person's total income can be divided into three components: consumption, savings, and _______

taxes

One possible cause of cost‑push inflation is an increase in ______

the costs of inputs

The long-run aggregate supply curve is vertical because

the economy will gravitate to the position of full employment when all variables are flexible.

If the government always balances its budget

the effect of an increase in government spending on aggregate expenditures is weakened.

As prices rise in the United States, foreigners purchase fewer U.S. goods

the export effect

As prices rise, the cost for businesses to finance new equipment increases, causing a drop in quantity demanded of real GDP

the interest rate effect

The purchasing power of money held in savings accounts falls as prices rise

the wealth effect

After the acceptance of Keynesian analysis, the government

took actions toward macroeconomic policy that grew significantly.

Investment spending is more volatile when firms have changing views about how promising the business climate appears.

true

Investment spending rises and falls as the pattern of innovation changes.

true

One reason the amount of real output demanded declines when the aggregate price level rises is the result of a reduction in household wealth called the _____ effect.

wealth

Savings, which is total income minus consumption and taxes, can be used to create ______

wealth

Downward‑sloping

aggregate demand

Shifts when consumer wealth changes

aggregate demand

Which best describes why the multiplier exists? -When people see the government spending more money, they realize that the government thinks that prices are low; thus, they believe it is a good time to buy things. -The multiplier exists because money spent today is always more valuable than money spent in the future, due to inflation and interest rates. -When people see other people spending money, they know that the economy is about to improve, leading them to spend more money. -When people spend money, that money ends up in the pockets or bank accounts of other people or organizations, who then use that money in some way.

When people spend money, that money ends up in the pockets or bank accounts of other people or organizations, who then use that money in some way.

Cost‑push inflation is caused by

a decrease in short‑run aggregate supply to an equilibrium point below full employment.

Which event will shift the aggregate demand curve to the right?

a new government program implemented to eliminate poverty

What would cause inflation and employment to increase?

a rightward shift of the aggregate demand curve

Demand-pull inflation occurs when ________ increases until equilibrium output exceeds the full employment level.

aggregate demand

Desired purchases of goods and services at different price levels

aggregate demand