Chapter 12 Revel HW

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Would a larger multiplier lead to more severe recessions or less severe recessions?

A larger multiplier means that small changes in spending lead to large changes in​ GDP, and thus recessions would be more severe.

Briefly explain why the aggregate expenditure line is upward​ sloping, while the aggregate demand curve is downward sloping.

Aggregate expenditure is the relationship between spending and​ income, while aggregate demand is a relationship between output and the price level.

The multiplier effect is the process in which

An increase in autonomous expenditure leads to a larger increase in real GDP.

In increase in real GDP that increases interest rates will cause the value of the multiplier to ________ A decrease in individual income tax rates will cause the value of the multiplier to _____________

Be smaller; Be larger.

The most important determinant of consumption spending is

Current personal disposable income.

Shedding inventories would lead to a decline in GDP because

Current production will decease as inventories are​ "shed," which reduces GDP.

Suppose a major U.S. appliance manufacturer is forecasting demand for its products during the next year. How will the forecast be affected by the​ following? An increase in the exchange rate value of the U.S. dollar.

Demand is expected to decline.

In a closed economy, aggregate expenditure is

Equal to consumption plus investment plus government spending.

What are the main four determinants of investment?

Expectations of future​ profitability, interest​ rates, taxes and cash flow.

Inventories are unwanted when

Expenditures are too low to keep pace with inventories.

When the price level rises from 104 to​ 124, real GDP falls from​ $5 trillion to​ $4 trillion. What is a possible explanation for this​ event?

Falling exports, less investment, and decreased consumption.

Suppose that exports become more sensitive to changes in the price level in the United States. That​ is, when the price level in the United States​ rises, exports decline by more than they previously did. This change makes the aggregate demand curve ____________

Flatter.

Inventories refer to

Goods that have been produced but have not yet been sold.

Zoltan Novak and Paul​ Smith, both residents of the country of East​ Paragon, are discussing whether the economy is operating at full employment.​ Zoltan, a market​ analyst, argues that with unemployment at 5.3​ percent, the economy cannot possibly be fully utilizing all its resources.​ Paul, who is a​ journalist, disagrees based on a recent newspaper article that shows industrial production in East Paragon is at its highest level.​ This, he​ claims, is likely to indicate that the economy is operating at full employment. ​Paul's argument is flawed​ because

He ignores the other components of aggregate expenditure.

An article in the Wall Street Journal on changes in​ Intel's sales​ noted, "Intel sells its chips to customers in U.S.​ dollars, but many PC makers that buy those chips sell their products in local​ currencies." In these​ circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to

Hurt​ Intel's sales because the cost of the chip is more expensive in terms of the foreign​ currency, but the selling price of the product is in the​ lower-valued foreign currency.

A rise in stock prices and housing prices

Increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

Into which category of aggregated expenditures would the following transaction fall? The Jones family buys a new house.

Investment expenditure

The​ "investment multiplier" referred to by the economist is the

Larger change in equilibrium real GDP resulting from a change in investment.

In reporting on real GDP growth in the second quarter of​ 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate​ "would have been stronger if it​ hadn't been for companies drawing down​ inventories." If companies are​ "drawing down​ inventories," aggregate expenditure is likely to have been If the reduction in inventories was​ unplanned, then future production would be expected to

Larger than GDP; Increase as inventories are replenished.

The relationship between the marginal propensity to consume​ (MPC) and the marginal propensity to save​ (MPS) can best be described as

MPC + MPS = 1, MPS = 1 - MPC, MPC = 1 - MPS.

How would an increase in interest rates affect​ investment?

Real investment spending declines.

Consider the table on the​ right, which shows the change in inventories for each quarter from​ 2007:I to​ 2010:IV measured in billions of 2009 dollars. Provide a macroeconomic explanation for this pattern.​ (Hint: When did the recession during this period begin and​ end?) The negative growth of inventories indicates a period of

Recession because demand was met by drawing down past inventories and production did not increase.

Usually at the beginning of a recession, inventories ________, but at the beginning of an expansion, inventories ___________.

Rise; fall.

​"Shedding of unwanted​ inventories" means that firms are

Selling their unplanned increases in inventories from previous time periods.

suang Pey and Chang Jiang are debating economic growth in their country. Inventory in this closed agricultural economy is increasing and Tsuang thinks that this is a sure sign of declining demand and troubled times ahead.​ Chang, however, claims that the country has been through similar situations before but growth has never been too low for too long. He thinks that even if demand is currently​ low, things should improve in the medium term. Which of the​ following, if​ true, will weaken​ Chang's claim that things should improve in the medium​ term?

The central bank of this country recently increased their interest rates.

The GDP and employment growth rates in the developing country of Tinseltown have been steadily falling in the past few years. In order to bolster domestic​ employment, the government substantially increased spending and also placed restrictions on imports. On a TV​ show, a panel of experts discusses the effectiveness of increased government spending. Sam​ Perotti, Tinseltown's finance​ minister, claims that the​ government's actions have been highly effective. The recent increase in consumer​ spending, he​ claims, is proof that aggregate demand in the economy has increased. Ethan​ Bernstein, who is a research​ analyst, does not agree with Sam. He argues that the amount the government spent is too low to have had any effect on the economy. Laura​ Xacuti, an​ economist, also disagrees with Sam. She feels that the government should instead encourage individuals to​ save, which will increase the funds available for investment. According to​ Laura, the investment level in the economy is much lower than it should be and increasing that would address the real problem.​ This, she​ feels, is the fastest route to reviving the economy in the short term. Which of the​ following, if​ true, would weaken​ Ethan's view?

The fiscal multiplier in developing countries, including Tinseltown, is estimated to be very large.

Which one of the following is not a determinant of consumption​ spending?

The growth rate in the United States relative to the growth rates in other countries.

By saying that the investment multiplier would​ "give a further kick to the U.S.​ economy," the economist means

The multiplied effect of the increased infrastructure spending will increase real GDP and employment.

Indicate which of the following is correct about the multiplier effect.

The multiplier ignores the effect on real GDP of​ imports, inflation, and interest rates, the larger the​ MPC, the more additional consumption that occurs, and a decrease in autonomous spending decreases real GDP by a multiple of the change.

Country X is a growing economy located in southeast Asia. Although it has a large​ population, it also has a disproportionately high number of​ working-age people. A large​ English-speaking workforce and low labor costs make it a competitive outsourcing destination.​ However, as is the case with most growing​ economies, inflation is quite high in Country X. As a country that is poised to be an economic​ superpower, Country​ X's stock markets are booming. Real estate prices have been increasing by 20 percent every year. Salim Habib is a guest speaker at a talk organized by one of the leading universities in the country. He states that with high​ inflation, interest rates are bound to increase.​ Consequently, consumption and investment will fall. Ricky​ Cafrall, a​ student, is not convinced. He claims that the rally in housing and stock prices will actually increase household wealth and consumption. In claiming that household wealth and consumption will​ increase, Ricky is​ ignoring:

The real value of household wealth.

"The textbook said that a higher interest rate lowers​ investment, but this​ doesn't make sense. I know that if I can get a higher interest​ rate, I am certainly going to invest more in my savings​ account." The problem with the​ student's argument is which of the​ following?

The student is confusing saving with investment.

Aggregate expenditure is

The sum total of​ consumption, planned​ investment, government​ purchases, and net exports.

The Republic of Oakland is recovering from a financial crisis that resulted in a fall in the GDP growth rate and widespread unemployment. The prime minister has set up a Crisis Recovery Taskforce to discuss measures that will revive the economy. Katie​ Scherbatsky, who was appointed to the taskforce by the prime​ minister, claims that Oakland should focus on boosting aggregate demand by increasing net exports. She suggests that the government should do this by providing tax sops and incentives to export companies. Eric​ Paulo, who is also part of the​ taskforce, does not agree with Katie. He argues that in order to increase​ GDP, stagnant domestic consumption should be revived. He proposes tax cuts as the best measure to achieve this. Which of the​ following, if​ true, will weaken​ Katie's claim that net exports will increase aggregate demand in​ Oakland?

The value of​ Oakland's currency has been increasing because​ globally-traded commodities are priced in terms of the Oaklandian dollar.

Carmakers in China might find that their inventories are rising unexpectedly because These carmakers are likely to react to the increase in inventories by

Their sales are lower than expected; Producing fewer cars in the future.

When aggregate expenditure is greater than real GDP, then

inventories fall, and GDP and employment increases.


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