Chapter 12 Macro Review Questions

Actual investment spending does not include

spending on consumer durable goods.

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

total spending; real GDP; the price level

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?

Aggregate expenditure is equal to GDP.

If the consumption function is defined asC = 5,500 + 0.9Y, what is the value of the multiplier?

10

How does a decrease in government spending affect the aggregate expenditure line?

It shifts the aggregate expenditure line downward.

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

actual investment spending was less than planned investment spending.

An unplanned decrease in inventories results in

actual investment that is less than planned investment.

Equilibrium GDP is equal to

autonomous expenditure times the multiplier.

In the aggregate expenditure model, ________ has both an autonomous component and an induced component

consumption spending

The ratio of the increase in ________ to the increase in ________ is called the multiplier.

equilibrium real GDP; autonomous expenditure

Consumer spending ________ and investment spending ________.

follows a smooth trend; is more volatile and subject to fluctuations

Refer to the Article Summary. The increase in consumer spending discussed in the article summary was due in part to an improving housing market. This reason for the increase in consumer spending is most closely related to which of the following variables that determine the level of consumption?

household wealth

Refer to the Article Summary. The increase in consumer spending discussed in the article summary was due in part to lower debt payments which have resulted in an increase in disposable income. The increase in consumption resulting from

movement up along

Disposable income is defined as

national income + transfers - taxes.

On the 45 -degree line diagram, for points that lie below the 45-degree line,

planned aggregate expenditure is less than GDP.

If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

the economy is in a recession.

U.S. net export spending falls when

the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.

If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then

the multiplier is 10.

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

the multiplier is 8.

All of the following are true statements about the multiplier except

the multiplier is a value between zero and one.

Which of the following leads to an increase in real GDP?

a decrease in interest rates

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 aggregate expenditure?

$25 million

If the consumption function is defined asC = 5,500 + 0.9Y, what is the autonomous level of consumption expenditure?

$5,500

Given the equations forC,I, G, andNX below, what is the equilibrium level of GDP?

$79,000

Table 12-3 Consumption (dollars) *Disposable Income (dollars)* $1,200 *$3,000* 2,100 *4,000* 3,000 *5,000* Refer to Table 12-3. Given the consumption schedule in the table above, the marginal propensity to save is

0.1.

Equations forC,I, G, andNX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume?

0.8

If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is

0.9.

MPC +MPS =

1.

A general formula for the multiplier is

1/MPS

The National Restaurant Association states that the restaurant industry has economic effect of more than $1.7 trillion annually in the United States, with every dollar spent in restaurants generating an estimated total of $2.05 in spending in the economy. This indicates that the spending multiplier for the restaurant industry is equal to

2.05

________ consumption is consumption that does not depend upon the level of GDP.

Autonomous

National income =

Consumption + Saving +Taxes

In a small economy in 2013, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was greater than anticipated in 2013.

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

GDP

Which of the following is a true statement about the multiplier?

The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate.

Which of the following is a true statement about the multiplier?

The multiplier rises as the MPC rises

Which of the following will decrease aggregate expenditure in the United States?

a decrease in government purchases

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 that

aggregate expenditure that year was less than GDP that year.

If firms sell exactly what they expected to sell, all of the following will be trueexcept

aggregate expenditure will be greater than GDP.

A decrease in consumer confidence can put your job at risk if

aggregate expenditures fall.

When aggregate expenditure = GDP,

macroeconomic equilibrium occurs.

If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then

the MPC is 0.75.

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending

they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession.