Macro Midterm Module 9

The decision about whether to change prices frequently or infrequently is an application of the:

Cost-benefit principle

All of the following would be included in planned aggregate expenditure EXCEPT: A) Purchases of services provided by government employees B) Planned changes in inventory C) Sales to foreigners of domestically-produced goods D) Social security payments

D

For an economy starting from potential output, a decrease in planned investment in the short run results in a(n):

Recessionary output gap

If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ____ gap that can be closed by ____.

Recessionary; increasing government purchases

A recession in the United States ____ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ____ output gap in Canada.

Reduces; recessionary

In the short-run Keynesian model, if the mpc equals 0.8, then to increase planned aggregate spending by $20 billion at any output level, government spending must be increased by ____ or net taxes must be decreased by ____.

$20 billion; more than $20 billion

Dave's Mirror Company produces $1,250,000 worth of mirrors this year. They expect to sell $1,000,000 worth of mirrors over the year. The company purchases $300,000 of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals _ and planned investment equals ___.

$650,000; $550,000

Data on after-tax income and consumption spending for the Adam Smith family are given below. Based on these data the Adam Smith family has a marginal propensity to consume of:

.9

Refer to the accompanying figure. Based on the figure, the income-expenditure multiplier equals:

2

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals .75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Planned Aggregate Expenditure equals ___ and the short run equilibrium output equals ___

290 + .75Y; $1160.

When PAE = 200 + 0.5Y, short-run equilibrium output equals:

400

Data on output and planned aggregate expenditure in Macroland are given below. Based on these data, the short-run equilibrium level of output is:

5,000

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ____ in PAE and a __ in the short-run equilibrium output.

A $1 billion increase; a greater than $1 billion increase

If planned aggregate expenditure (PAE) in an economy equals 2,000 + .8Y and potential output (Y*) equals 11,000, then this economy has:

A recessionary gap

One drawback in using fiscal policy as a stabilization tool is that fiscal policy:

Affects potential output as well as planned aggregate expenditure.

In the Keynesian cross diagram, the vertical intercept of the expenditure line equals _ and the slope of the expenditure line equals _.

Autonomous expenditures; the mpc.

The two parts of planned aggregate expenditure are ____ expenditures and ____ expenditures.

Autonomous; induced

Planned aggregate expenditure (PAE ) equals:

C + I p + G + NX, where Ip is planned investment.

Changes in taxes and transfers affect planned spending:

Indirectly, by changing disposable income and, consequently, consumption

In the Keynesian model deviations of output from potential are caused by:

Fluctuations in aggregate spending.

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ____ to eliminate any output gap.

Decrease by 100

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

Decreased by less than $10 billion

A decrease in stock prices alters the consumption function by:

Decreasing the vertical intercept

The two parts of the Keynesian consumption function are the induced part of consumption that depends on ____ and the autonomous part of consumption that depends on ____.

Disposable income; factors other than disposable income

The basic Keynesian model is built on the key assumption that:

Firms meet the demand for their products at preset prices.

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be:

Increased by $1.33 billion

The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, disruptions in the financial market made it difficult:

For businesses and consumers to borrow money

Automatic stabilizers are provisions in the law that create automatic ____ in government spending or ____ in taxes when real output declines.

Increases; decreases

In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:

Increased by $1 billion

If firms sell more output than expected, planned investment:

Is greater than actual investment

The larger the mpc, the ____ the income-expenditure multiplier and the ____ the effect of a change in autonomous spending on short-run equilibrium output.

Larger; larger

Refer to the figure below. Based on the Keynesian cross diagram, if output equals 5,000 planned aggregate expenditure is _ output and firms will ____ production.

Less than; decrease

In the Keynesian cross diagram, the ____ line shows the relationship between planned aggregate expenditure and output, and the ____ line represents the condition that planned aggregate expenditure and output are equal.

Planned aggregate expenditure; 45-degree

In the short run, with predetermined prices, when output is less than planned aggregate expenditure:

Planned investment is greater than actual investment

Planned aggregate expenditure is total:

Planned spending on final goods and services

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then taxes must ____ to eliminate any output gap.

Ride by $111.11

Refer to the accompanying figure. Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will ___.

Rises by 400

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ____ policies.

Stabilization

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

The direct changes in spending change the income of producers which leads to additional changes in spending.

Refer to the figure above. Based on the Keynesian cross diagram, at short-run equilibrium output,

There is an expansionary gap

The tendency of changes in asset prices to affect spending on consumption goods is called the ____ effect.

Wealth