ECON 9

In Figure 9-5, if the second round effect of an increase in autonomous spending of $100,000 is $75,000, then the multiplier is

4

If the shift in the C + I + (X − IM) in Figure 9-5 was caused by a 80 dollar increase in investment, then the multiplier is

5

In Figure 9-3, investment plus net exports equals

800 (same as saving)

The basic idea behind the multiplier is that an ____ in spending will cause an even larger _____ in equilibrium GDP

increase/ increase

In Table 9-1, at output of 4,000, inventories are

increasing by 200

The expenditure schedule will shift upward when net exports decrease. net exports increase. total imports increase. total exports decrease.

net exports increase

In Table 9-1, inventories are being depleted as long as output is below

3000 (equilibrium output)

In Table 9-1, the equilibrium level of output is

3,000

In Table 9-1, inventories will be increasing as long as output is above

3000

An expenditure schedule model with no government sector shows the relationship between ____ and _____

C + I/ national income

A higher price level would mean ____ for a person who has a bank deposit of $2 million.

a decrease in real wealth

If total spending exceeds total output, then inventory levels will _____

fall

If an economy at the equilibrium level of GDP experiences an increase in the amount of investment spending, then inventories will be depleted, causing firms to cut production. accumulated, causing firms to cut production. depleted, causing firms to increase production. accumulated, causing firms to expand production.

accumulated, causing firms to cut production

From the demand side, the equilibrium level of GDP is one at which everyone who wants a job has one and firms are not looking for extra workers. the only unemployment is frictional. aggregate demand equals production. the only unemployment is cyclical.

aggregate demand equals production

John Maynard Keynes concluded that investment spending is determined by business confidence. economic expectations. psychological perceptions about the economy. All of the above are correct.

all the above

Total output equals total income only at equilibrium. always. only at non-equilibrium levels of income. never.

always

To avoid a coordination failure, the intentions of savers and investors must be both at their planned levels. more than full employment GDP. at levels set by the government.

at their planned levels

Economists before Keynes assumed that equilibrium GDP occurred automatically. only with the help of government stabilization. if spending was generally greater than output. only in socialist economies with central planning.

automatically

In Figure 9-3, at $3,000 billion GDP, a. inventories will be falling, signaling businesses to decrease production. b. inventories will be falling, signaling businesses to increase production. c. planned saving increases planned investment. d. inventories will be accumulating, signaling businesses to increase production.

b

In Figure 9-1, at $7,000 billion real GDP, inventories are increasing. spending falls short of output. spending exceeds output. Both a and b are correct.

both a and b are correct

In Figure 9-3, at $5,000 billion GDP, inventories will be a. falling, signaling businesses to increase production. b. accumulating, signaling businesses to increase production. c. accumulating, signaling businesses to cut production. d. falling, signaling businesses to cut production.

c

Government stabilization policy cannot influence investment spending. can stimulate aggregate demand and thereby induce businesses to invest, but the amount is not totally predictable. can stimulate aggregate demand, but investment spending will not be affected. can stimulate aggregate demand, but only in the long run.

can stimulate aggregate demand and thereby induce businesses to invest, but the amount is not totally predictable.

In a market economy, the decisions about what to produce and how much of each good or service to produce are made by

consumers and producers

In a simple macroeconomic model, only one component of expenditures is allowed to change:

consumption

One of the primary functions of markets could be labeled

coordination

Recessions and depressions are the principal examples of

coordination failure

Which of the following occurs when party A would like to change his behavior if party B would change hers, and vice versa, and yet the two changes do not take place because the decisions of A and B are made independently?

coordination failure

In Figure 9-1, a. the 45-degree line represents all points where spending equals output. b. to the left of equilibrium GDP, inventories will fall. c. to the right of equilibrium GDP, inventories will rise. d. All of the above are correct.

d

If saving exceeds investment, then the level of GDP will

decrease

If the price level rises, the effect on the expenditure schedule and equilibrium real GDP is to increase both. decrease both. shift the expenditure schedule upward and decrease equilibrium real GDP. shift the expenditure schedule downward and increase equilibrium real GDP.

decrease both

The inflationary gap is the inflation rate that will occur from excess aggregate demand. budget deficit that caused the inflation to occur. distance between the equilibrium level of output and the full employment level of output. gap between expected and actual inflation.

distance between the equilibrium level of output and the full employment level of output

The recessionary gap is the amount of unemployment compensation required during a recession. budget deficit encountered during a recession. amount of government spending needed to end a recession. distance between the equilibrium level of output and the full employment level of output.

distance between the equilibrium level of output and the full employment level of output

The aggregate demand curve slopes _____

downward

A rising price level should shift the expenditure schedule ______ and ______ equilibrium real GDP

downward/ decrease

If net exports are reduced, the expenditure schedule will shift ___ and equilibrium real GDP will ____

downward/ fall

The federal government could stimulate investment spending by a. phasing out the depreciation allowance on corporate income taxes. b. enacting an investment tax credit. c. reinstating the windfall profits tax. d. reducing the tax rate on capital gains. e. Both b and d are correct.

e

When constructing a basic macroeconomic model, several assumptions (not realistic, but necessary to simplify the analysis) are made. Which of the following are assumed to be constant? a. the price level b. the rate of interest c. the foreign exchange rate d. the level of government spending e. All of the above are held constant.

e.

Which of the following questions are not answered by the process of demand side GDP determination? a. How large is equilibrium GDP? b. Does the economy have unemployment? c. Is demand side equilibrium consistent with supply side equilibrium? d. Does the economy have inflation? e. All of the above are not answered.

e.

In the income-expenditure model, at equilibrium GDP: either unemployment or inflation may occur. inflation can occur but unemployment cannot. unemployment can occur but inflation cannot. both unemployment and inflation are impossible.

either unemployment or inflation may occur

The economy will reach equilibrium in a simple economy only if saving is ____ investment

equal to

The equilibrium level of GDP is the level at which aggregate demand ____ output

equals

A recessionary gap exists when potential GDP ____ equilibrium GDP

exceeds (where the economy should be, as opposed to where it is which is behind potential line)

Which of the following shows the relationship between national income (GDP) and total spending?

expenditure schedule

45° line diagrams show how

expenditures rise with income

In Figure 9-1, the economy is a. experiencing an inflationary gap, shown by the horizontal distance EB. b. at full employment without inflation. c. experiencing a recessionary gap, shown by the horizontal distance EB. d. experiencing a recessionary gap, shown by the distance between EF.

experiencing a recessionary gap (EB) (the gap before potential GDP is recessionary)

According to Baumol and Blinder, from the demand side an increase in the price level causes aggregate expenditures to fall, resulting in a lower level of equilibrium income. fall, resulting in a higher level of equilibrium income. rise, resulting in a higher level of equilibrium income. rise, resulting in a lower level of equilibrium income.

fall, resulting in a lower level of equilibrium income

If total spending is less than total output, then price levels will _____ and output will______

fall/ decrease

When the price level in the United States rises, then net exports should____ and real GDP should ______

fall/ decrease

An expenditure schedule that lies below the full employment level of GDP will cause

falling prices

A recessionary gap exists when the equilibrium level of GDP ____ of potential GDP

falls short

Government stabilization policy would be unnecessary if the economy automatically gravitated toward

full employment

By definition, total production must always equal total

income

Assume a simple macroeconomic model. When inventories rise unexpectedly, income is above its equilibrium value. income will rise until it reaches its equilibrium value. total spending is higher than total output. All of the above.

income is above its equilibrium value

If inventory levels are decreasing, then we should expect business firms to_____ output

increase

Investment spending might be larger when GDP is higher. Such added investment as GDP rises is called a ______ investment

induced

If the expenditure schedule lies above the level of potential GDP, then there is a(n) _____ gap

inflationary

The amount by which equilibrium real GDP exceeds full-employment GDP is known as an

inflationary gap

If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that

inventory levels are decreasing

Which of the following would be associated with an inflationary gap?

inventory levels too low

A level of GDP cannot be at equilibrium when aggregate demand exceeds output because firms will notice that inventory stocks are building up. inventory stocks are being depleted. their profits are negative. many of their workers have little to do.

inventory stocks are being depleted

Equilibrium GDP will not exist where output exceeds aggregate demand because businesses will notice that their profits are positive. inventory stocks are building up. inventory stocks are being depleted. their level of depreciation is rising.

inventory stocks are being depleted

Investment spending cannot be stimulated by decreasing the interest rate. is often the cause of business fluctuations in the United States. is a remarkably stable function of the level of real GDP. is the primary solution to recessions and inflations, according to John Maynard Keynes.

is often the cause of business fluctuation in the united states

Using the standard 45-degree line diagram, how does a decrease in investment spending effect the expenditure schedule? It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule. It shifts the expenditure schedule downward. It shifts the expenditure schedule upward.

it shifts the expenditure schedule downward

Using the standard 45-degree line diagram, how does a decrease in net exports effect the expenditure schedule? It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule. It shifts the expenditure schedule upward. It shifts the expenditure schedule downward.

it shifts the expenditure schedule downward

Using the standard 45-degree line diagram, how does an increase in autonomous consumption effect the expenditure schedule? It shifts the expenditure schedule downward. It shifts the expenditure schedule upward. It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule.

it shifts the expenditure schedule upward

Using the standard 45-degree line diagram, how does an increase in investment spending effect the expenditure schedule? It shifts the expenditure schedule downward. It shifts the expenditure schedule upward. It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule.

it shifts the expenditure schedule upward (increase investment spending shifts whole graph)

In the circular flow diagram saving is a ____ and investment is a _____

leakage/ injection

An inflationary gap will exist when the full employment level of GDP is ____ equilibrium GDP

less than

Inventory reductions are a signal indicating that the economy is close to disaster. the Dow Jones Industrial Average will fall. manufacturers need to increase production. All of the above are true.

manufacturers need to increase their production

If total spending is less than the value of total output, firms may decide to cut prices. may increase production levels. will tend to raise prices. will notice inventories falling.

may decide to cut prices

The concept that increases in spending cause larger increases in equilibrium GDP is known as the

multiplier

When aggregate demand exceeds current production: both output and the price level are in equilibrium. output is not in equilibrium, but the price level is. prices are not in equilibrium, but output is. neither output nor the price level is in equilibrium.

neither output nor the price level is in equilibrium

Why does an increase in the price level cause a decrease in real GDP demanded? Consumer wealth increases. Net exports will increase. Interest rates decrease and cause higher investment. Net exports will decrease.

net exports will decrease

If the economy is in equilibrium, it must be

on the 45 line

The reason for the multiplier effect is that businesses make decisions about investment projects based on anticipated profits. one person's additional expenditure creates a new source of income for another person, and this additional income leads to still more spending. changes in government spending typically deepen recessions and exacerbate inflationary conditions in the economy. additional spending lowers the rate of interest and leads to further borrowing and spending.

one person's additional expenditure creates a new source of income for another person, and this additional income leads to still more spending

In a simple economy (no government), the vertical distance between the consumption function and the expenditure schedule measures

planned investment

Each C + I + G + (X − IM) expenditure schedule is drawn assuming a specific _____ level

price

Which one of the following could cause a recessionary gap? Interest rates are too low. Consumers spend more than they earn. Price levels are too high. Businesses spend more than they save.

price levels are too high

The slope of the aggregate demand curve illustrates that as the price level rises, real GDP demanded decreases. real GDP demanded increases. the aggregate demand curve shifts rightward. the aggregate demand curve shifts leftward.

real GDP demanded decreases

When equilibrium real GDP falls short of potential GDP, there is a(n) ____ gap

recessionary

If the expenditure schedule must be shifted upward to reach potential GDP, then the economy is experiencing a(n)

recessionary gap

Economists are very good at explaining how individual markets work. Economists are less successful at explaining

recessions and inflation

The main examples of macroeconomic coordination failures are ____ and ____

recessions/ depressions

According to Baumol and Blinder, from the demand side a decrease in the price level causes aggregate expenditures to fall, resulting in a lower level of equilibrium income. fall, resulting in a higher level of equilibrium income. rise, resulting in a higher level of equilibrium income. rise, resulting in a lower level of equilibrium income.

rise, resulting in a higher level of equilibrium income

When the expenditure level is above the full employment level of GDP, a possible consequence is

rising prices

A major reason for the existence of inflationary and deflationary gaps is that corporations do most of the nation's saving. saving and investing are done by people with no social conscience. consumers do most of the nation's saving. saving and investing are done by different groups.

saving and investing are done by different groups

In a simple economy (no government sector), the equilibrium level of GDP will be less than the full employment level of income if, at the full employment level of income, the: saving that consumers want to do is less than investing that businesses want to do. saving that consumers want to do is greater than investing that businesses want to do. saving that consumers want to do is less than spending that consumers want to do. inventories are being depleted.

saving that consumers want to do is greater than investing that businesses want to do

If net exports decrease, the expenditure schedule will

shift downward

An increase in the U.S. price level will

shift the expenditure schedule downward

If the U.S. economy is experiencing falling price levels, the expenditure schedule will

shift upward

To eliminate a recessionary gap, the expenditure schedule should be

shifted upward

At the equilibrium level of income it must be true that total income equals total ___

spending

In Figure 9-1, at $3,000 billion real GDP, spending exceeds total output and inventories will fall. inventories are constant. aggregate demand equals aggregate supply. spending falls short of output and inventories will rise.

spending exceeds total output and inventories will fall

Two variables that affect the slope of the aggregate demand curve are ____ and ____

tax rates/ interest rates

If total spending is greater than the value of output, firms will cut prices. decrease production levels. tend to raise prices. see inventories rise.

tend to raise prices

In Figure 9-4, if the economy faces an inflationary gap, what must happen to reach potential GDP? The expenditure level must rise and/or the price level must rise. The expenditure level must rise and/or the price level must fall. The expenditure level must fall and/or the price level must fall. The expenditure level must fall and/or the price level must rise.

the expenditure level must fall and/ or the price level must rise

In Figure 9-4, if the economy is in a recessionary gap, what must happen to reach potential GDP? The expenditure level must fall and/or the price level must rise. The expenditure level must rise and/or the price level must fall. The expenditure level must rise and/or the price level must rise. The expenditure level must fall and /or the price level must fall.

the expenditure level must rise and/ or the price level must fall

In the basic 45-degree line model, what is the effect of an increase in the price level?

the expenditure line will shift downward

In the basic 45-degree line model, what is the effect of a decrease in the price level?

the expenditure line will shift upward

The slope of the aggregate demand curve illustrates that real GDP demanded will increase when the price level rises. the price level falls. real income rises. real income falls.

the price level falls

Given the slope of the aggregate demand curve, real GDP demanded will decrease when real income rises. real income falls. the price level falls. the price level rises.

the price level rises

If the amount that consumers wish to save at the full employment level of income is greater than the amount that businesses plan to invest, then there will be an inflationary gap. there will be a recessionary gap. total demand will exceed potential GDP. the economy will move to a higher level of output.

there will be a recessionary gap

If, at the full employment level of income, the amount that businesses plan to invest is greater than the amount that consumers plan to save, then

there will be an inflationary gap

Equilibrium GDP on the demand side occurs when total spending equals _____ and inventories ______

total production/ remain at desired levels

When businesses are cutting back production, then it probably true that

total spending is less than total output

One of the possible consequences of the expenditure schedule lying below the level of full employment GDP is

unemployment

Recessionary gaps are most likely to be accompanied by

unemployment

Writing during the Great Depression, Keynes naturally focused on problems of

unemployment

In the 2007-2009 period, the expenditure level in the United States intersected the 45-degree line below potential GDP, causing

unemployment (when GDP is below potential GDP line, the gap is recessionary and recessionary gaps are associated with unemployment)

The price level effects consumer spending through changes in real

wealth

One of the main conclusions of Keynes in The General Theory of Employment, Interest, and Money is that the economy will usually be at full employment. will not automatically gravitate to full employment. will automatically move quickly toward full employment without inflation. is usually on the verge of a major depression or hyperinflation.

will not automatically gravitate to full employment

If the economy automatically tends toward full employment, then government stabilization policy

will not be necessary