ECON/372_wk3

An economy is employing 1 units of capital, 2 units of raw materials, and 2 units of labor to produce its total output of 200 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. The per-unit cost of production in this economy is

$0.12

Suppose that an economy produces 500 units of output. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this amount of output. The per unit cost of production is

$0.70

The table gives information about the relationship between input quantities and real domestic output in a hypothetical economy. If the price of each input is $2, the per-unit cost of production in the economy is

$1.00

Suppose that an economy produces 500 units of output. It takes 20 units of labor at $15 a unit and 6 units of capital at $50 a unit to produce this amount of output. The per unit cost of production is

$1.20

Suppose that an economy produces 1,400 units of output, employing 70 units of input, and the price of the input is $50 per unit. The per-unit cost of production is

$2.50

The table illustrates the multiplier process resulting from an autonomous increase in investment by $5. The total change in income resulting from the initial change in investment will be

$20

According to the table, when disposable income is $470 billion, what is the savings?

$20 billion

If the MPC is 0.9 and the equilibrium GDP is $200 billion below the full-employment GDP, then the size of the recessionary expenditure gap is

$20 billion

Suppose that technological advancements stimulate $80 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand?

$200 billion

Suppose that the level of GDP increased by $400 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by

$200 billion

If the MPC in an economy is 0.60, government could close a recessionary expenditure gap of $15 billion by cutting taxes by

$25 billion

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. At a(n) $500 level of disposable income, the level of saving is

$30

The marginal propensity to save is 0.4. Equilibrium GDP will decrease by $100 billion if the aggregate expenditures schedule decreases by

$40 billion

Refer to the accompanying consumption schedule in an economy. All figures are in billions of dollars. If gross investment is $34 billion, net exports are zero, and there is a lump-sum tax of $30 billion at all levels of GDP, then the after-tax equilibrium level of GDP will be

$540 billion

In a private closed economy where MPC = 0.8, if consumers reduce their spending by $10 billion and firms cut investments by $5 billion, then equilibrium GDP will decrease by

$75 billion

If the MPC in an economy is 0.75 and aggregate expenditures increase by $20 billion, then equilibrium GDP will increase by

$80 billion

Which of the following are determinants of aggregate demand?

- Change in investment spending - Change in consumer wealth

Which of the following are the four components or determinants of aggregate demand?

- Consumer spending - Net export spending - Government spending - Investment spending

During the 2007-2009 recession, which components of aggregate expenditures were significant contributors to the downturn?

- Consumption spending - Planned investment spending

Select all the choices that show what happens to inventory at equilibrium GDP.

- Firms may decide to increase inventory. - Firms may decide to decrease inventory.

Select all the following that were characteristic of economic conditions in the United States during the 1990s.

- Full employment - Very low inflation - Strong growth

Keynes proposed what two different policies that a government might pursue to close a recessionary expenditure gap and achieve full employment?

- Increase government spending - Decrease taxes

In a closed economy, what are two characteristics of equilibrium GDP?

- There are no unplanned changes in inventories. - Savings and planned investment are equal.

How does the economic success of trading partners affect the U.S.?

- Trade passes foreign success to the U.S. - If they prosper, they buy more U.S. goods.

What happened to the U.S. economy in the 1990s?

- Unemployment fell to 4%. - GDP grew by 4% annually.

To economists, the term "aggregate" means ______.

- combined - total

Spending on ______ drains off some of the additional consumption created by the increases in income.

- imports - taxes

When the United States' foreign trading partners experience higher incomes, it benefits the U.S. by _____.

- increasing U.S. GDP - increasing U.S. income - increasing U.S. exports

The direct relationship between MPC and the multiplier is shown in the following equation:

1/(1-MPC)

The owner of a manufacturing company is considering whether or not to invest in a new sanding machine that costs $1,000. Net expected revenue after installation of the machine is $1,100. What is the expected rate of return?

10%

Suppose that an economy produces 3,000 units of output, employing 30 units of input, and the price of the input is $30 per unit. The level of productivity in this economy is

100

If the inflation rate is 5 percent and the real interest rate is 6 percent, the nominal interest rate is

11 percent

If the marginal propensity to save is 0.2 in an economy, a $40 billion rise in investment spending will increase consumption by

160

Suppose that real domestic output in an economy is 240 units, the quantity of inputs is 12, and the price of each input is $4. The level of productivity is

20

The accompanying table shows the aggregate demand and aggregate supply schedules for a hypothetical economy. The equilibrium price and output levels will be

200 and $6,000

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,500. The expected rate of return on this machine is

25 percent

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $100,000. The expected rate of return on this tool is

25 percent

(Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is

4.

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 (Advanced analysis) The accompanying equations are for a mixed open economy. The lettersY,Ca,Ig,Xn,G, andTstand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. The multiplier for this economy is

4.

1. Government Spending 2. Consumer Expectations 3. Degree of Excess Capacity 4. Personal Income Tax Rates 5. Productivity 6. National Income Abroad 7. Business Taxes 8. Domestic Resource Availability 9. Prices of Imported Products 10. Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which combination of factors best explain why the aggregate supply curve would shift?

7 and 8

How is the real-balances effect defined?

A higher price level reduces the purchasing power of the public's accumulated savings balances.

What is a lump-sum tax?

A tax that yields the same amount of tax revenue at each level of GDP regardless of the level of government purchases

Which of the following is not true when there is an unplanned decrease in inventories?

Actual investment is greater than planned investment.

Economists use what term to mean "total" or "combined"?

Aggregate

Which of the following reflects the total amount that will be spent at each possible output or income level?

Aggregate expenditures schedule

What is shown by a schedule or curve showing the total quantity of goods and services that would be supplied at various price levels?

Aggregate supply

Why does a $5B increase or decrease in investment spending by firms cause the real GDP to increase or decrease by $20B?

Because of the multiplier effect.

The level of aggregate expenditures in a mixed open economy consists of

Ca + Ig + Xn + G.

The formula for equilibrium GDP in a mixed, open economy is ______.

Ca+Ig+G+Xn

Investment spending refers to purchases of which of the following?

Capital goods

Which of the diagrams for the U.S. economy best portrays the effects of a substantial reduction in government spending?

D

The relationship between spending and GDP is?

Direct

_____ are included as part of U.S. GDP because they create jobs and income when purchased by foreigners.

Exports

True or false: Equilibrium GDP always occurs at the full-employment GDP.

False

How did Keynes describe the relationship between labor, capital, and inventory during the Great Depression?

Firms acted predictably to unexpected inventory levels.

In reaction to the recession of 2007-2009, the government issued $100 billion in tax rebate checks. How did government expect that this policy would impact aggregate expenditures?

Increase consumption thereby increasing aggregate expenditures

Real interest rates are rates adjusted for what?

Inflation

Most of the fluctuations in output and employment over time are due to changes in what?

Investment

Which of the following has historically had the greatest swings in spending?

Investment

_____ spending consists of expenditures on new plants, capital equipment, machinery, and inventories.

Investment or Capital

Refer to the given diagram, which shows consumption schedules for economies A and B. We can say that the

MPC is greater in A than in B.

The consumption and saving schedules reveal that the

MPC is greater than zero but less than one.

Consumption and disposable income have what kind of relationship?

Positive

Which of the following is the most fundamental assumption behind the Keynesian aggregate expenditure model?

Prices in the economy are fixed.

What is one result of a decrease in aggregate demand?

Recession

An increase in exports relative to imports will shift the aggregate demand (AD) curve to the _____.

Right

What will a rise in net exports do?

Shift the aggregate demand curve to the right

What is an inflationary expenditure gap?

The amount by which aggregate expenditures at the full-employment GDP exceed those required to achieve full-employment GDP

1/(1-MPC) is what formula?

The multiplier formula

The nominal interest rate minus the rate of inflation equals what?

The real interest rate

Which aggregate supply curve is used in order to understand business cycles and macroeconomic policy?

The short-run curve

Which statement is true about inventories at equilibrium GDP?

There are no unplanned changes in inventories.

What is the relationship between equilibrium GDP and full-employment GDP?

They do not have to be equal.

True or false: Changes in taxes, subsidies, and the extent of regulations may alter per-unit production costs and shift the aggregate supply curve.

True

What did Keynes think was responsible for the large amount of idle labor and capital during the Great Depression?

Unplanned inventory increases

A change in one of the determinants of aggregate supply causes ______ the aggregate supply curve.

a shift of

The table gives aggregate demand and supply schedules for a hypothetical economy. If the price level is 250 and producers supply $450 of real output,

a surplus of real output of $150 will occur.

If GDP is below equilibrium, the aggregate expenditure schedule is located on the graph in a position ______.

above the 45° line

Investment spending refers to ______.

adding to physical capital

A schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level is called

aggregate demand.

The ______ helps to explain the situation of massive unemployment, as well as to better understand how an economy will react to such economic shocks as changes in tax rates as well as government and household spending.

aggregate expenditure model

When planned investment exceeds saving in a private closed economy,

aggregate expenditures will exceed GDP.

Which one of the following would increase per-unit production cost and therefore shift the aggregate supply curve to the left?

an increase in the price of imported resources

Consumer wealth is defined as the total value of ______.

assets minus the total value of liabilities

The net export schedule lists the amount of net exports that will occur ______.

at each level of GDP

The _____ propensity to consume is the fraction or percentage of total income that is consumed.

average

The fraction or percentage of total income that is consumed is called the:

average propensity to consume

As disposable income goes up, the

average propensity to consume falls.

If GDP is above equilibrium, the aggregate expenditure schedule is located on the graph in a position ______.

below the 45° line

The long-run aggregate supply analysis assumes that

both input and product prices are variable.

Unintended changes in inventories

bring actual investment and saving into equality at all levels of GDP.

In a private closed economy, when aggregate expenditures exceed GDP,

business inventories will fall.

The determinants of aggregate supply are variables that ______.

cause the aggregate supply curve to shift

The _____ schedule shows the various amounts that households would plan to spend at each of the various levels of disposable income.

consumption

The two components of aggregate expenditures in a private closed economy are ______,

consumption and gross investment

In a private closed economy, the two components of aggregate expenditures are

consumption and investment.

Dissaving occurs where

consumption exceeds income.

The aggregate expenditure schedule in a private closed economy is the sum of ______ plus planned ______.

consumption; investment

The formula for aggregate expenditures in an open mixed economy is ______ + ______ + ______ + ______ =GDP.

consumption; investment; government purchases; net exports

A decrease in aggregate supply, assuming constant aggregate demand, will result in _______ inflation

cost-push

Suppose the economy's multiplier is 4. Other things equal, a $20 billion decrease in government expenditures on national defense will cause equilibrium GDP to

decrease by $80 billion

When real interest rates _____ , households tend to borrow more, consume more, and save less.

decrease, fall, decline, drop, lower or lessen

Cyclical unemployment and recession often arise from _____ in aggregate demand.

decreases, declines, drops or falls

Aggregate _____ is a schedule or curve that shows the amount of real GDP that buyers collectively desire to purchase at each possible price level.

demand

An increase in aggregate demand, assuming constant aggregate supply, will result in ______ inflation.

demand-pull

There is a(n) _____ relationship between spending and GDP.

direct or positive

When developing macroeconomic models, economists change their focus from the relationship between consumption and _____ income to the relationship between consumption and real GDP.

disposable

The consumption schedule shows the various amounts that households plan to consume at each level of:

disposable income

If the private closed economy is at equilibrium real GDP, then savings ______.

equals planned investment by businesses

In a private closed economy, consumption and gross private investment are the components of aggregate ______.

expenditures

A fundamental assumption behind the Keynesian aggregate expenditure model is that prices in the economy are ______.

fixed

In the short run, output prices are ______ and ______ prices are ______.

flexible; input; sticky

The long run aggregate supply curve is vertical at ______.

full employment output

A private open economy is a private economy that includes international trade but not ________ spending.

government

Increases in investment demand occur when businesses collectively expect:

greater rates of return on their investments

Suppose an economy is operating at its full-employment output. An increase in aggregate demand with constant aggregate supply will result in actual GDP being _____ than potential GDP.

greater, higher, larger, more or bigger

Equilibrium real GDP will decline when ______.

imports are greater than exports

Consumption is positively related to disposable _____.

income

The paying of taxes drains off some of the additional consumption spending created by the increases in ______.

income

If the multiplier in an economy is 3, a $40 billion increase in net exports will

increase GDP by $120 billion.

Equal increases in government purchases and taxes will

increase the equilibrium GDP, and the size of that increase is independent of the size of the MPC.

Any factor that leads businesses collectively to expect greater rates of return on their investments ______ investment demand.

increases

A(n) ______ is the amount by which aggregate expenditures at the full-employment GDP exceed those required to achieve full-employment.

inflationary gap

What is a major factor in per-unit production costs and therefore a key determinant of aggregate supply?

input prices

In the immediate short run ______.

input prices and output prices are fixed

Investment spending depends on the real _____ rate and the expected return from _____ .

interest ; investment

The equilibrium price level and equilibrium output is determined by the ______.

intersection of the aggregate demand curve and the aggregate supply curve

The _____ relationship between interest rates and quantity of investment conforms to the law of demand.

inverse, negative indirect downward, sloping, or down-sloping

A firm's spending on new plants, capital equipment, machinery, and inventory is all considered ______.

investment

Refer to the diagram for a private closed economy. In this economy, investment

is $40 billion at all levels of GDP.

Refer to the diagram. The average propensity to consume

is greater than 1 at all levels of disposable income below $100.

Saving is a(n) ______ of spending from the economy's circular flow of income and expenditures.

leakage

The aggregate demand curve will shift to the _____ when there is a reduction in government purchases.

left

When a consumption schedule is plotted as a straight line, the slope of the consumption line is

less than the slope of the 45° line.

In order to close a recessionary gap, Keynes suggested ______ taxes and ______ government expenditures.

lowering; raising

The graph shows the relationship between consumption and income. The ratio LM/PL would be a measure of the

marginal propensity to consume.

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. If this nation's equilibrium price level is 125, its net exports will be

minus $2 billion

An economy that includes consumption spending, investment spending, government spending, taxes and international trade is called a ______ economy.

mixed

When real interest rates fall, households tend to borrow ______, consume ______ and save _______.

more, more, less

A business purchases a new piece of equipment. Another firm earns income from this sale and with this income builds a new factory. The contractor that built the factory earns income and uses the income to take a vacation. The resort earns income from the contractor. This scenario describes the:

multiplier effect

A list of the amount of net exports that will occur at each level of GDP is called the ______.

net export schedule

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. A $2 billion increase in consumption at each level of DI could be caused by

new expectations of higher future income.

A private _____ economy is a private economy that includes international trade in its GDP.

open

A mixed economy is a(n) _____ economy that includes government spending and taxation.

open or public

The short-run is the period in which ______.

output prices are flexible but input prices are fixed or highly inflexible

The simple multiplier 1/MPS

overstates the actual multiplier because it excludes leakages in domestic spending from the purchase of imports or the paying of taxes.

In a private closed economy, two characteristics of GDP at equilibrium are that saving and _____ investment are equal and there are no _____ changes in inventories.

planned ; unplanned or unexpected

Aggregate expenditures and GDP will be increased beyond what they would be in a closed economy with the addition of ______.

positive net exports

Aggregate supply is represented as a schedule or curve showing the relationship between a nation's _____ level (index) and the amount of real domestic output that firms in the economy produce.

price

The aggregate expenditure model can be used to explain short-run adjustments in ______.

private and public spending

Total output divided by total inputs is the formula for _____.

productivity

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should

purchase the machine because the expected rate of return exceeds the interest rate.

The $787 billion stimulus package enacted by the Federal government in 2009 to try to deal with the Great Recession was intended to

push the aggregate expenditures schedule upward.

A business is thinking about investing in a new piece of equipment. The expected _____ of return helps the business make the decision about whether or not to invest.

rate

When developing macroeconomic models, economists change their focus from the relationship between consumption and disposable income to the relationship between consumption and ______.

real GDP

If actual investment exceeds planned investment in a private closed economy, then

real GDP will decrease.

The ______ is when a higher price level reduces the purchasing power of the public's accumulated savings balances.

real-balances effect

Refer to the table. If the full-employment real GDP is $100, the

recessionary expenditure gap is $10.

The size of the multiplier is equal to the

reciprocal of the slope of the saving schedule.

In the immediate short run for aggregate supply, both input and output prices ____.

remain fixed

An input price is a(n) ______ price while an output price makes up the price level.

resources

A withdrawal of spending from the economy's circular flow of income and expenditures is also called ______.

saving

According to the table, _____ is $30 billion when disposable income is $510 billion.

saving / savings

If GDP exceeds aggregate expenditures in a private closed economy,

saving will exceed planned investment.

Changes in consumer spending, investment, government spending and net export spending will:

shift the aggregate demand curve

An increase in government spending is likely to _____.

shift the aggregate demand curve to the right

The economy supports repetitive, continuous flows of ______ and income through which dollars spent by Smith are received as income by Chin and then spent by Chin and received as income by Gonzales, and so on.

spending

A leftward shift in the aggregate _____ curve leads to cost-push inflation.

supply

The two changes of the legal-institutional environment that will shift the aggregate supply curve are ______.

taxes and government regulations

In the accompanying figure, a shift from AD2 to AD1 would be consistent with what economic event in U.S. history?

the Great Recession of 2007-2009

The consumption schedule is such that

the MPC is constant and the APC declines as income rises.

The intersection of the aggregate demand and aggregate supply curves determines ______.

the equilibrium price level and equilibrium real GDP

The inverse relationship between interest rates and quantity of investment conforms to ______.

the law of demand

The multiplier effect means that ______.

there is a bigger change in equilibrium GDP than the change in aggregate expenditures

Exports are included as a component of US aggregate expenditures because ______.

these are goods and services that created income in the US

Productivity can be illustrated in the formula ______.

total output divided by total inputs

The short-run aggregate supply curve is more useful than the curves for other time horizons because real-world economies ______.

typically change price levels and output levels simultaneously

In the long run the economy will produce at full-employment output levels no matter what the price is, so the long-run aggregate supply curve is ______.

vertical

The total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities is called consumer _____.

wealth