Macro Test 3 chapter 8

What are aggregate expenditures (AE) if consumer spending is $2 trillion, business investment is $3 trillion, government spending is $1 trillion, exports are $1 trillion, and imports are $2 trillion?

$5 trillion (Aggregate expenditures are $5 trillion. The equation is AE= C + I + G + (X − M) = $2 trillion + $3 trillion + $1 trillion + ($1 trillion − $2 trillion) = $5 trillion.)

Consumption spending has increased every year since 1980 except

2009

Which of the following is NOT a spending withdrawal from the economy?

exports (Exports are injections of spending into the economy. Spending injections increase aggregate income.)

Which of the following appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?

exports (The full aggregate expenditures model adds government spending, taxes, and the foreign sector to the simple aggregate expenditures model.)

The inflationary gap is the reduction in _____ that will move the economy back to full employment.

aggregate spending (The inflationary gap is the reduction in aggregate spending that will move the economy back to full employment.)

Before the Great Depression, the government was NOT expected to:

stimulate economic growth.

If Belinda's marginal propensity to save is 0.2, what is her marginal propensity to consume?

0.8 (Belinda's marginal propensity to consume is 0.8 because MPC + MPS always equals 1.)

Which of the following appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?

imports

According to Keynes's model of the macroeconomy, _____ is a key component of short-term equilibrium employment, output, and income.

consumer spending

If the multiplier is 3 and $200 of new money is spent, how much will equilibrium income increase?

$600 (This is determined by multiplying the multiplier by the amount of new money spent: 3 × $200 = $600.)

If the spending multiplier is 5, then the marginal propensity to _____ is 0.2.

save (A spending multiplier of 5 means that one person's spending is another's income; the other person spends a portion of that income and so on until the sum of increased spending in the economy is 5 times the original amount.)

How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.8?

$1,000 (This is determined by multiplying the amount of new spending by the multiplier, which is 1/(1 − MPC), or 1/MPS = 1/(1 − 0.8)= 5; 5 × $200 = $1,000.)

If the multiplier is 1.5 and $200 of new money is spent, how much will equilibrium income increase?

$300 (This is determined by multiplying the multiplier by the amount of new money spent: 1.5 × $200 = $300.)

Which of the following is true of the paradox of thrift?

The paradox of thrift causes consumers to save less. (When investment is positively related to income and households intend to save more, they reduce consumption, income, and output, reducing investment so that the result is that consumers actually end up saving less.)

Because Susom received a raise in pay from $30,000 to $50,000, his consumption increased from $29,000 to $45,000. What is Susom's marginal propensity to save?

0.2 (First, calculate Susom's saving. When income was $30,000, his consumption was $29,000, so his saving was $1,000. When his income increased, his consumption increased, and his new level of saving was $50,000 − $45,000, or $5,000. Susom's marginal propensity to save is 0.2, which is determined by dividing the change in saving by the change in income. The equation is MPS = ($5,000 − $1,000)/($50,000 − $30,000) = $4,000/$20,000 = 0.2.)

Because Mayara received a raise in pay from $90,000 to $100,000, her consumption increased from $50,000 to $55,000. What is Mayara's marginal propensity to consume?

0.5 (Mayara's marginal propensity to consume is determined by dividing the change in consumption by the change in income. The equation is MPC = ∆C/∆Y = ($55,000 − $50,000)/($100,000 − $90,000) = $5,000/$10,000 = 0.5.)

What is the average propensity to consume if consumption spending is $40,000 and income is $50,000?

0.8 (The average propensity to consume is 0.8. It is determined by dividing consumption spending by income. The equation is APC = $40,000/$50,000 = 0.8.)

At his second press conference, in June 2011, Federal Reserve Chairman Ben Bernanke was asked if his views on the recessionary gap had changed. The recessionary gap is the increase in _____ needed to bring a depressed economy back to full employment.

aggregate spending (The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment. This is easily confused with the GDP gap, the difference between full employment GDP and real GDP.)

In the summer of 2011 the economic recovery seemed to be stalled, and the government's budget deficit was rising. Some politicians were calling for higher taxes; others said that was a bad idea because an increase in taxes would result in:

decreased consumption and decreased saving. (An increase in taxes will result in decreased consumption and decreased saving, not what you want when you are trying to stimulate an economy.)

In the simple aggregate expenditures model with no government and no international trade, at the equilibrium level of income, business investment:

equals saving. (At macroeconomic equilibrium in the simple aggregate expenditures model, business investment equals saving. When desired saving exceeds desired investment, income will decline until equilibrium is reached. When desired investment exceeds desired saving, income will increase until equilibrium is reached.)

Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to save is 0.5?

−$600 (This is determined by multiplying the amount of reduced spending by the multiplier, which is 1/(1 − MPC), or 1/MPS. 1/(0.5) = 2; 2 × −$300 = −$600.)