Macro HW chapters 10, 11, 12

If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:

$15 billion

Consumption Schedule

-(y) axis: consumption -(x) axis: disposable income -these variables are DIRECTLY related

Saving Schedule

-(y) axis: saving -(x) axis: disposable income -these variables are DIRECTLY related

A large decrease in real estate values, including private homes

-Consumption schedule will shift: downward -Saving schedule will shift: upward

A sharp, sustained increase in stock prices

-Consumption schedule will shift: upward -Saving schedule will shift: downward

The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level, increasing profits and output.

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources.

A substantial increase in household borrowing to finance auto purchases

-Consumption schedule will shift: upward -Saving schedule will shift: downward

An economy-wide expectation that a recession is over and that a robust expansion will occur.

-Consumption schedule will shift: upward -Saving schedule will shift: downward

A new computer chip is developed that is faster and cheaper than previous chips

Supple increases

A hurricane destroys manufacturing plants.

Supply decreases

A revolution in Iran results in a significant reduction in the world's supply of oil

Supply decreases

Employers are required to provide paid sick leave to part-time as well as full-time employees

Supply decreases

The difference between the MPC and the APC is that the MPC is the

change in consumption divided by the change in income, whereas the APC is total consumption divided by total income

The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level.

The investment schedule shows

the level of investment spending for a given level of GDP.

A widespread fear by consumers of an impending economic depression

Aggregate DEMAND will DECREASE

A 10 percent across-the-board reduction in personal income tax rates.

Aggregate DEMAND will INCREASE

A major increase in spending for health care by the federal government.

Aggregate DEMAND will INCREASE

A reduction in interest rates at each price level.

Aggregate DEMAND will INCREASE

An increase in exports that exceeds an increase in imports (not due to tariffs).

Aggregate DEMAND will INCREASE

The general expectation of coming rapid inflation.

Aggregate DEMAND will INCREASE

A 12 percent increase in nominal wages (with no change in productivity).

Aggregate SUPPLY will DECREASE

A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output

Aggregate SUPPLY will DECREASE

A sizable increase in labor productivity (with no change in nominal wages)

Aggregate SUPPLY will INCREASE

The complete disintegration of OPEC, causing oil prices to fall by one-half.

Aggregate SUPPLY will INCREASE

A stock market crash reduces people's wealth

Demand decreases

Consumers become more pessimistic about the economy

Demand decreases

Government spending increases

Demand increases

The United States enters into an arms race with China, resulting in a significant increase in military spending

Demand increases

The spread of democracy around the world increases consumer confidence in the United States

Demand increases

What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?

Real GDP and disposable income are higher

Manufacturing firms expect steel prices to decrease significantly

Supply increases

Technological changes enable workers to be more productive

Supply increases

Which of the following explains why the aggregate demand curve slopes downward?

The interest-rate effect, the real-balances effect, and the foreign purchases effect

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

YES

Equilibrium real GDP occurs where C + Ig = GDP in a private closed economy because

at this level of output, production creates sufficient total spending to purchase that output

other things equal, private closed company: An overall decrease in the expected rate of return on investment will cause GDP to...

decrease

Saving is called a leakage because it

is a removal from the flow of aggregate consumption

Planned investment is called an injection because it

is an addition to the flow of aggregate spending

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because a downsloping

single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

The sum of the MPC and the MPS must equal 1 because

all additional income must be spent or saved

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule except when there is

an increase in personal taxes; then they both shift downward

If C + Ig exceeds GDP, the economy will

draw down inventories faster than planned, ordering will increase, and real GDP will rise.

If inventories unexpectedly rise, then production __________ sales and firms will respond by __________ output.

exceeds; reducing

If the MPS rises, then the MPC will:

fall

A reduction in the real interest rate will increase investment spending, other things equal, because firms will make an investment purchase if the expected return is

greater than or equal to the real interest rate at which it can borrow

If total spending is just sufficient to purchase an economy's output, then the economy is:

in equilibrium

other things equal, private closed company: A decline in the real interest rate will cause GDP to...

increase

other things equal, private closed company: A sizable, sustained increase in stock prices will cause GDP to...

increase

If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by _________ taxes or __________ government expenditures.

increasing; decreasing

The multiplier effect

intensifies the effect of a spending change, whether it is an increase or a decrease

The multiplier is

larger, the larger the MPC and the smaller the MPS is.

The two expenditure components of real GDP purposely excluded in a private closed economy are

net exports and the government sector.

At equilibrium GDP, there will be

no unplanned inventories and no unplanned investment.

Saving must equal planned investment at equilibrium GDP in the private closed economy because when this is so,

spending and production will be the same, and there will be no unplanned inventory or GDP changes.