Macro Ch. 31

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by $1 billion. $0.75 billion. $4 billion. $3 billion.

$3 billion.

At the equilibrium GDP for a private open economy, imports will always exceed exports. exports will always exceed imports. net exports may be either positive or negative. exports and imports will be equal.

net exports may be either positive or negative.

At equilibrium real GDP in a private closed economy, planned saving and consumption are equal. the slope of the aggregate expenditures schedule equals the MPS. the MPC must equal the APC. aggregate expenditures and real GDP are equal.

aggregate expenditures and real GDP are equal.

Domestic Output or Income (GDP = DI) $540 560 580 600 620 640 660 Consumption $540 555 570 585 600 615 630 The table gives data for a private closed economy. All figures are in billions of dollars. The MPC and multiplier are, respectively, 0.75 and 4. 0.80 and 5. 0.75 and 1.33. 0.80 and 1.25.

0.75 and 4.

In the aggregate expenditures model, it is assumed that investment does not change when real GDP changes. does not respond to changes in interest rates. changes by less in percentage terms than changes in real GDP. automatically changes in response to changes in real GDP.

does not change when real GDP changes.

The multiplier effect demonstrates that equal increases in government spending and taxes reduce the equilibrium GDP. equal increases in government spending and taxes do not change the equilibrium GDP. taxes have a stronger effect upon equilibrium GDP than do government purchases. equal increases in government spending and taxes increase the equilibrium GDP.

equal increases in government spending and taxes increase the equilibrium GDP.

In an inflationary expenditure gap, the equilibrium level of real GDP is greater than planned investment. less than full-employment GDP. greater than full-employment GDP. equal to full-employment GDP.

greater than full-employment GDP.

Net exports are negative when imports exceed exports. net exports exceed imports. depreciation exceeds exports. exports exceed imports.

imports exceed exports

If the multiplier in an economy is 5, a $20 billion increase in net exports will decrease GDP by $100 billion. increase GDP by $100 billion. increase GDP by $20 billion. reduce GDP by $4 billion.

increase GDP by $100 billion.

In a private closed economy, when aggregate expenditures equal GDP, consumption equals investment. disposable income equals consumption minus saving. consumption equals aggregate expenditures. planned investment equals saving.

planned investment equals saving.

In 2008 during the Great Recession, the federal government provided tax rebate checks to taxpayers in the hope that G would shift up. C would shift down. G would shift down. C would shift up.

C would shift up

Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when GDP is $60 billion. GDP is $180 billion. C + Ig cuts the 45-degree line. GDP is also zero.

GDP is $60 billion.

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from the government's attempt to control hyperinflation. a major increase in personal and corporate taxes. a rapid decline in investment spending. a rapid increase in imports resulting from large tariff reductions.

a rapid decline in investment spending.

An inflationary expenditure gap is the amount by which aggregate expenditures exceed any given level of GDP. equilibrium GDP falls short of the full-employment GDP. aggregate expenditures exceed the full-employment level of GDP. saving exceeds investment at the full-employment GDP.

aggregate expenditures exceed the full-employment level of GDP.

The 45-degree line on a graph relating consumption and income shows the amounts households will plan to save at each possible level of income. all the points at which consumption and income are equal. The 45-degree line on a graph relating to consumption and income shows all the points at which saving and income are equal.

all the points at which consumption and income are equal.

The multiplier effect means that a decline in the MPC can cause GDP to rise by several times that amount. consumption is typically several times as large as saving. a change in consumption can cause a larger increase in investment. an increase in investment can cause GDP to change by a larger amount.

an increase in investment can cause GDP to change by a larger amount.

A private closed economy includes households, businesses, and international trade, but not the government. households, businesses, and government, but not international trade. households and businesses, but not government or international trade. households only.

households, businesses, and international trade, but not government or international trade.

If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will increase GDP by $20. increase GDP by $40. decrease GDP by $20. decrease GDP by $40.

increase GDP by $20.

Refer to the diagrams. Curve A and curve B are totally unrelated. is an investment schedule, and curve B is a consumption of fixed capital schedule. shifts to the left when curve B shifts upward. is an investment demand curve, and curve B is an investment schedule.

is an investment demand curve and curve B is an investment schedule.

If an unintended increase in business inventories occurs at some level of GDP, then GDP may be either above or below the equilibrium output. is too high for equilibrium. is too low for equilibrium. entails a rate of aggregate expenditures in excess of the rate of aggregate production.

is too high for equilibrium.

In the aggregate expenditures model, the equilibrium GDP is not necessarily equal to the full-employment GDP. assumed to be equal to the potential GDP level. always above the potential GDP level. always less than the full-employment GDP level.

not necessarily equal to the full-employment GDP.

Refer to the given figure. If the relevant saving schedule were constructed, it would slope downward and to the right. saving would be minus $20billion at the zero levels of income. its slope would be 1/2. aggregate saving would be $60 at the $60 billion levels of income.

saving would be minus $20 billion at the zero level of income.

Other things equal, a 10 percent decrease in corporate income taxes will have no effect on the location of the investment D curve. shift the investment demand curve to the right. shift the investment demand curve to the left. decrease the market price of real capital goods.

shift the investment demand curve to the right.

The investment demand curve portrays an inverse (negative) relationship between the real interest rate and investment. the price level and investment. investment and real GDP. the nominal interest rate and investment.

the real interest rate and investment.

When aggregate expenditure is greater than GDP, then there will be an unplanned decrease in inventories and GDP will decrease. unplanned increase in inventories and GDP will decrease. unplanned increase in inventories and GDP will increase. unplanned decrease in inventories and GDP will increase.

unplanned decrease in inventories and GDP will increase.

If the MPC is 0.6, the multiplier will be 6.0. 1.67. 4.0. 2.5.

2.5

The APC is calculated as income/consumption. consumption/income. change in consumption/change in income. change in income/change in consumption.

consumption/income.

A recessionary expenditure gap is the amount by which equilibrium GDP falls short of the full-employment GDP. the amount by which investment exceeds saving at the full-employment GDP. the amount by which aggregate expenditures exceed the full-employment level of GDP. the amount by which the full-employment GDP exceeds the level of aggregate expenditures.

the amount by which the full-employment GDP exceeds the level of aggregate expenditures.

The most important determinant of consumer spending is consumer expectations. the level of income. the level of household borrowing. the stock of wealth.

the level of income.

John Maynard Keynes expressed his ideas about the macroeconomy and attacked classical economics in his book, The Wealth of Nations. Affluent Society. General Theory of Employment, Interest, and Money. Theory and Practice of Economics in Capitalism.

General Theory of Employment, Interest, and Money.

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? bank panic of 1907 spectacular economic growth during World War II economic expansion of the 1920s Great Depression

Great Depression

The aggregate expenditures model is built upon which of the following assumptions? Government spending policy has no ability to affect the level of output. The economy is at full employment. Prices are fixed. Prices are fully flexible.

Prices are fixed.

In a mixed open economy, the equilibrium GDP is determined at that point where Sa + X + G = Ig + T. the 45-degree line and the saving schedule intersect. Sa + Ig + X = G + T. S a + M + T = I g + X + G.

S a + M + T = I g + X + G.

Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S. GDP, then U.S. real GDP will rise. unemployment will decrease domestically. U.S. real GDP will fall. inflation will occur domestically.

U.S. real GDP will fall.

Planned investment plus unintended increases in inventories equals actual investment. consumption minus saving. unintended saving. consumption.

actual investment.

Saving is always equal to planned investment less unintended increases in inventories. actual investment. planned investment. unintended changes in inventories.

actual investment.

In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________. increased by 21 percent; fell to 2 percent. declined by 27 percent; rose to 25 percent. declined by 40 percent; rose to 50 percent. declined by 21 percent; rose to 27 percent.

declined by 27 percent; rose to 25 percent.

To close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to decrease the aggregate expenditures schedule by $20 billion. decrease the aggregate expenditures schedule by $4 billion. increase the aggregate expenditures schedule by $20 billion. increase the aggregate expenditures schedule by $4 billion.

decrease the aggregate expenditures schedule by $20 billion.

Injections into the income-expenditure stream include government purchases and exports. taxes and transfer payments. transfer payments and imports. taxes and imports.

government purchases and exports.

In a recessionary expenditure gap, the equilibrium level of real GDP is greater than full-employment GDP. less than full-employment GDP. less than planned aggregate expenditures. greater than planned aggregate expenditures.

less than full-employment GDP.

The equilibrium level of GDP is associated with an unintended decrease in business inventories. an excess of planned investment over saving. an unintended increase in business inventories. no unintended changes in inventories.

no unintended changes in inventories.

A recessionary expenditure gap exists if planned investment exceeds saving at the full-employment GDP. the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP. the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP. the aggregate expenditures schedule intersects the 45-degree line at any level of GDP.

the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.

If the marginal propensity to consume in an economy is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be 0.2. 5. 0.8. 0.125.

0.8.