Macroeconomics Exam 2: Chapter 6-10
Government Purchases
Federal, state, and local government purchases of goods and services and gross investment in highways, bridges, and so on.
NDP
GDP minus the capital consumption allowance.
b
Given a marginal propensity to save equal to 0.25, the simple Keynesian model leads to the conclusion that the autonomous spending multiplier is equal to _____, meaning that a $100 increase in autonomous investment spending could potentially lead to a(n) _____, increase in equilibrium income. a) 4; $100 b) 4; $400 c) 5; $500 d) 8; $800
Nominal GDP
(Current dollar GDP) A GDP figure that has not been adjusted for inflation.
Capital Consumption Allowance
(Depreciation) The estimated amount of capital goods used up in production through natural wear, obsolescence, and accidental destruction.
Purchasing power rises, less money needed to buy fixed bundle of goods, save more, supply of credit rises, interest rate falls, businesses and households borrow ,ore at lower interest rate, buy more goods
(Interest rate effect) What happens when the price level falls?
Purchasing power falls, borrow money in order to continue to buy fixed bundle of goods, demand for credit rises, interest rate rises, businesses and households borrow less at high interest rate, buy fewer goods
(Interest rate effect) What happens when the price level rises?
U.S. goods relatively less expensive than foreign goods, both Americans and foreigners buy more U.S. goods
(International trade effect) What happens when the price level in U.S. falls when relative to foreign price levels?
U.S. goods relatively more expensive than foreign goods, both Americans and foreigners buy fewer U.S. goods
(International trade effect) What happens when the price level in U.S. rises when relative to foreign price levels?
Long-Run Aggregate Supply Curve
(LRAS) This curve is a vertical line at the level of Natural Real GDP. It represents the output the economy produces when wages and prices have adjusted to their final equilibrium levels and then workers do not have any relevant misperceptions.
Purchasing power rises, monetary wealth rises, buy more goods
(Real balance effect) What happens when the price level falls?
Purchasing power falls, monetary wealth falls, buy fewer goods
(Real balance effect) What happens when the price level rises?
Short-Run Aggregate Supply Curve
(SRAS) A curve that shows the quantity supplied of all goods and services (Real GDP) a different price levels, ceteris paribus.
AD Curve
A curve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus.
Depreciation
A decrease in the value of one currency relative to other currencies.
Final Good
A good in the hands of its final user.
Intermediate Good
A good that is an input to the production of a final good.
Transfer Payment
A payment to a person that is not made in return for goods and services currently supplied.
Discouraged Workers
A person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment.
Laissez-Faire
A public policy of not interfering with market activities in the convoy.
raise; right
A rise in autonomous consumption(C0) will _____ consumption(C) and therefore shift the AD curve to the _____.
Underemployed
A situation in which a worker is employed, but not in the desired capacity, whether in terms of compensation, hours, or level of skill and experience. They are often competing for available jobs.
Price Level
A weighted average of the prices of all good and services.
decrease
According to Keynes, a decrease in consumption and subsequent increase in saving may not be matched by an equal increase in investment. Thus, a __________ in total expenditures may occur.
b
According to Keynes, equilibrium income and output are determined by: a) available resouces and technology in the short run. b) aggregate demand in the short run. c) the position of the long-run aggregate supply curve. d) the natural rate of unemployment,
Leftward, Rightward
Adverse supply shocks shift the SRAS curve ______. Beneficial supply shocks shift the SRAS curve ______.
Demand
Aggregate ______ is the buying side of the economy.
Supply
Aggregate ______ is the producing side of the economy.
More, Rise, Rise, Rise, Rise, Increases
As foreign real national income rises, foreigners buy ______ U.S. goods and services. Thus, EX ______. As exports ______, net exports ______, ceteris paribus. As net exports ______, aggregate demand ______.
Cheaper, Increase their purchases, Cut back, Decrease, Lowering
As the dollar appreciates, foreign goods become ______, Americans ______of imported goods, and foreigners (whose currency has depreciated) _____ on their purchases of U.S. exported goods. If exports fall and imports rise, net exports ______, thus ______ aggregate demand.
More, Cut back, Increase, Increase, Increases
As the dollar depreciates, foreign goods become ______ expensive, Americans ______ on imported goods, and foreigners (whose currency has appreciated) ______ their purchase of U.S. exported goods. If exports rise and imports falls, net exports ______ and aggregate demand ______.
Falls, More, Increases
As the interest rate falls, the cost of an investment project ______ and businesses invest ______. Consequently, aggregate demand ______.
Rises, Less, Decreases
As the interest rates rises, the cost of an investment project ______ and businesses invest ______. As investment decreases, aggregate demand ______.
a
Ceteris paribus, a $100 increase in investment spending will generally: a) increase equilibrium income by more than $100. b) increase equilbrium income by less than $100. c) increase equilibrium income by exactly $100. d) have no effect on equilibrium income.
Multiplier x Change in Co
Change in total spending=?
Inventory Investment
Changes in the stock of unsold goods.
Double Counting
Counting a good more than once when computing GDP.
Fall, Fall, Left
Decreases in wealth lead to a ______ in consumption, which leads to a ______ in aggregate demand. Consequently, the AD curve shifts to the ______.
Rise, Rise
Expecting higher future income causes C to ______, and AD to ______.
Rise, Rise
Expecting higher future prices causes C to ______, and AD to ______.
Falls, Fall
Expecting lower future income causes C to ______, and AD to ______.
Fall, Fall
Expecting lower future prices causes C to ______, and AD to ______.
Net Exports
Exports minus imports.
A change in C, I, G, or net exports can change aggregate demand and therefore shift the AD curve.
How do changes in G and T affect aggregate demand?
Grow, Increases
If businesses become optimistic about future sales, investment spending ______ and aggregate demand ______.
Contracts, Decreases
If businesses become pessimistic about future sales, investment spending ______ and aggregate demand ______.
Falls
If real wages fall, quantified supplied of labor ______.
Rises
If real wages fall, quantity demanded of labor ______.
Falls
If real wages rise, quantity demanded of labor ______.
Rises
If real wages rises, quantity supplied of labor ______.
Fall
If the AD curve shifted rightward by less than the SRAS curve shifted leftward, then Real GDP would ______.
Remain unchanged
If the AD curve shifted rightward by the same amount as the SRAS curve shifted leftward, then Real GDP would _______.
Rise
If the AD curve shifted rightward more than the SRAS curve shifted leftward, then Real GDP will ______.
d
If the MPC = 0.8, the MPS = _____, and the autonomous spending multiplier = _____. a) 0.1; 10 b) 0.1; 5 c) 0.2; 10 d) 0.2; 5
c
If the marginal propensity to save is 0.05, then the marginal propensity to consume is: a) 0.97 b) 1.05 c) 0.95 d) 0.50
Fall
If, at a given price level, C falls, I falls, G falls, NX falls, then AD ______.
Rise
If, at a given price level, C rises, I rises, G rises, NX rises, then AD ______.
a
In The General Theory of Employment, Interest, and Money, Keynes disagreed with the Classical notion that: a) a market economy is self-regulating and always automatically moves to macroeconomic equilibrium at the full-employment level of real GDP. b) a market economy is self-regulating and can never achieve macroeconomic equilibrium at the full-employment level of real GDP in the long run. c) a decrease in aggregate demand causes the rate of unemployment to rise. d) an increase in aggregate demand causes the rate of unemployment to fall.
b
In the short run, macroeconomic equilibrium occurs: a) only if the actual rate of unemployment is equal to the natural rate of unemployment. b) when aggregate ependiture equals total production in the economy. c) when government adheres to a balanced budget. d) only if the rate of inflation is zero.
d
In the simple Keynesian model with an MPC equal to 0.90, a $50 billion increase in investment spending leads to a maximum: a) $50 billion increase in equilibrium income. b) $90 billion increase in equilibrium income. c) $250 billion increase in equilibrium income. d) $500 billion increase in equilibrium income.
a
In the simple Keynesian model with government spending (G) and lump-sum taxes (T), the tax multiplier is equal to _____. a) -MPC/MPS b) -MPS/MPC c) 1/MPC d) 1/MPS
d
In the simple Keynesian model, consumption spending demands on __________ and saving depands on __________. a) the interest rate; disposable income b) the interest rate; the interest rate c) disposable income; the interest rate d) disposable income; disposable income
Economic Growth
Increases in Real GDP.
Increases, Increases, Rises, Right
Increases in wealth lead to ______ in consumption. If consumption ______, aggregate demand ______ and the AD curve shifts to the ______.
Real Income
Nominal income adjusted for price changes.
Nominal wage / Price level
Real wage formula
Business Cycle
Recurrent swings (up and down) in Real GDP.
Disposable income - Consumptions
Savings formula
International Trade Effect
The change in foreign sector spending as the price level changes.
Real Balance Effect
The change in the purchasing power of dollar-denominated assets that results from a change in the price level.
Interest Rate Effect
The changes in the household and business buying as the interest rate changes (In turn,ma reflection of a change in the demand for or supply of credit brought on by price level changes).
Short-Run Equilibrium
The condition in the economy when the quantity demanded of Real GDP equals the (short-run) quantity supplied of Real GDP. The condition is met where the aggregate demand curve intersects the short-run aggregate supply curve.
Inflationary Gap
The condition in which the Real GDP that the economy is producing is greater than the Natural Real GDP and the unemployment rate is less than the natural unemployment rate.
Recessionary Gap
The condition in which the Real GDP that the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate.
Long-Run Equilibrium
The condition that exists in the economy when wages and prices have adjusted to their (final) equilibrium levels and when workers do not have any relevant misperceptions. Graphically, long-run equilibrium occurs at the intersection of the AD and LRAS curves.
Full Employment
The condition that exists when the unemployment rate is equal to the natural unemployment rate.
Nominal Income
The current dollar amount of a person's income.
Cyclical Unemployment Rate
The difference between the unemployment rate in the natural unemployment rate.
True
True or False. Prices and wages are flexible.
False, aggregate demand rises only if total spending rises at a given price level.
True or false? The price level falls and total spending rises. As a result of total spending rising, aggregate demand in the economy rises, and the AD curve shifts rightward.
Natural Unemployment
Unemployment caused by frictional and structural factors in the economy.
Structural Unemployment
Unemployment due to structural changes in the economy that eliminate some jobs and create others for which the unemployed are unqualified.
Frictional Unemployment
Unemployment that is due to the natural frictions in the economy and that is caused by changing market conditions and represented by qualified individuals with transferable skills who change jobs.
Price per unit - Cost per unit
Wage rates formula for profits per unit
Wealth, Expectations about future prices and income, interest rate, income taxes
What 4 factors can affect consumption?
Certain nonmarket goods and services, Underground activities, both legal and illegal, Sales of used goods, Financial transactions, Government transfer payments, Leisure
What 6 exchanges does GDP omit?
Job loser, Job leaver, Reentrant, New entrant
What are 4 reasons for unemployment?
All the income earned by the stockholders of corporations.
What are corporate profits composed of?
Price level is assumed to be constant until the economy reaches full-employment. There is no foreign sector. Monetary side is excluded.
What are the 3 assumptions of the simple Keynesian model?
Keynesian cross Income expenditure Total expenditure-Total production
What are the 3 names AD-AS frameworks are called?
Individual income tax Corporate income tax Social Security taxes
What are the three taxes that contribute to a bulk of government tax revenues?
More output may be produced than will be demanded.
What did Keynes think in regard to Say's Law?
If expectations are pessimistic, a lower interest rate may not stimulate additional investment.
What did Keynes think in regard to investment?
Firms cut back production to reduce inventories to their optimum levels.
What does TE<TP mean in regards to firms?
Inventories rise above optimum levels.
What does TE<TP mean in regards to inventories?
As the price level falls, the quantity supplied of goods and services declines. Decline in price level and constant nominal wage causes real wage to rise, firms hire fewer workers, decline in quantity supplied of Real GDP Worker misperceptions
What does an upward-sloping SRAS curve represnt?
Wages fall and SRAS curve shifts to the right until Real GDP=Natural Real GDP
What happens if the economy is self-regulating and has a recessionary gap?
Wages rise and SRAS Curve shifts to the left until Real GDP=Natural Real GDP
What happens if the economy is self-regulating and has an inflationary gap?
Total dollar expenditure on market basket in current year / Total dollar expenditure on market basket in base year x 100
What is the CPI formula?
GDP + NR (net income inflow from assets abroad) - NP (net payment outflow to foreign assets)
What is the GNP formula?
Base year prices x Current year quantities
What is the Real GDP formula?
(Real GDP in later year - Real GDP in earlier year / Real GDP in earlier year) x 100
What is the Real GDP percent change formula?
S=Yd-[C0-(MPCxYd)]
What is the Savings equation?
Employed persons + Unemployed persons
What is the civilian labor force formula?
The total of wages and salaries paid to employees, employers' contributions to Social Security and employee benefit plans, and the monetary value of fringe benefits, tips, and paid vacations.
What is the compensation of employees equal to?
Represents a decline in Real GDP
What is the contraction of a business cycle?
Unemployment rate - Natural unemployment rate
What is the cyclical unemployment rate formula?
Personal income - Personal taxes
What is the disposable income formula?
Number of employed persons / Civilian noninstitutional population
What is the employment rate formula?
Refers to increases in Real GDP beyond the recovery.
What is the expansion of a business cycle?
C + I + G + NX
What is the formula for calculating GDP? (Expenditure approach)
National income - Income earned from the rest of the world + Income earned by the rest of the world + Indirect business taxes + Capital consumption allowance + Statical discrepancy
What is the formula for calculating GDP? (Income approach)
Compensation of employees, proprietors' income, corporate profits, rental income, net interest
What is the national income formula?
The interest income received by US households in government minus the interest they paid out.
What is the net interest composed of?
Real GDP is at a temporary high
What is the peak of a business cycle?
National income - Undistributed corporate profits - Social insurance taxes - Corporate profits taxes + Transfer payments
What is the personal income formula?
All forms of income earned by self-employed individuals and the owners of unincorporated businesses, including unincorporated farmers.
What is the proprietors' income composed of?
The period when Real GDP is rising. It begins at the trough and ends at the initial peak.
What is the recovery of a business cycle?
The income received by individuals for the use of their nonmonetary assets (lands, houses, offices).
What is the rental income composed of?
The low point in Real GDP, just before it begins to turn up
What is the trough of a business cycle?
Job losers + Job leavers + Reentrants + New entrants
What is the unemployment persons formula?
A decline in prices and leads to a movement along a given AD curve. A change in some factor other than prices and leads to a shift in the AD curve.
What two reasons can cause total spending to rise?
C falls, I falls, G falls, NX falls
What will cause spending on U.S. goods to go down?
C rises, I rises, G rises, NX rises
What will cause spending on U.S. goods to go up?
Changes in C, I, or G
What will shift the TE-TP curve?
Lowers, Less, Less, Declines
An increase in business taxes ______ expected profitability. With ______ profit expected, businesses invent ______. As investment spending ______, so does aggregate demand.
Rightward, Leftward
An increase in labor productivity means businesses will produce more output with the same amount of labor, causing the SRAS curve to shift ______. A decrease in labor productivity means businesses will produce less output with the same amount of labor, causing the SRAS curve to shift ______.
Inflation
An increase in the price level.
Leftward, Rightward
An increase in the price of a nonlabor input shifts the SRAS curve ______; a decrease in their price shifts the SRAS curve ______.
Appreciation
An increase in the value of one currency relative to other currencies.
Fewer, Fall, Lowers, Reducing
As foreign real national income falls, foreigners buy ______ U.S. goods and exports ______. This ______ net exports, ______ aggregate demand.
Fixed Investment
Business purchases of capital goods, such as machinery and factories, and purchases of new residential housing.
Surplus
Does a recessionary gap cause a surplus or shortage?
Shortage
Does an inflationary gap cause a surplus or a shortage?
Government Transfer Payments
Payments to persons that are not made in return for currently supplied goods and services.
Say's Law
Supply creates its own demand. Production creates enough demand to purchase all the goods and services produced.
Natural Real GDP
The Real GDP that is produced at the natural unemployment rate. The Real GDP that is produced when the economy is in this equilibrium.
Personal Income
The amount of income that individuals actually receive.
Velocity
The average number of times a dollar is spent to buy final goods and services in a year.
Potential (full-employment) GDP
The level of output that an economy can produce at a constant inflation rate.
Purchasing Power
The quantity of goods and services that can be purchased with a unit of money. ______ and the price level or inversely related: As the price level goes up, it goes down.
Aggregate Supply
The quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus.
Employment Rate
The percentage o the civilian noninstitutional population that is employed.
Disposable Income
The portion of personal income that can be used for consumption or saving.
Exchange Rate
The price of one currency in terms of another currency.
Aggregate Demand
The quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus.
Investment
The sum of all purchases of newly purchased capital goods, changes in business inventories, and purchases of new residential housing.
Consumption
The sum of spending on durable goods, nondurable goods, and services.
GDP
The total market value of all final goods and services produced in annualy with in a country's borders.
GNP
The total of all business production and service sector industry in a country plus it's gain on overseas investments.
Monetary Wealth
The value of a person's monetary assets. Wealth, as distinguished from monetary wealth, refers to the value of all assets owned, both monetary and nonmonetary. In short, a person's wealth equals his or her monetary wealth plus nonmonetary wealth.
Wealth
The value of all assets owned, both monetary and nonmonetary.
Real GDP
The value of the entire output produced annually within a country's borders, adjusted for price changes.
Base Year
The year chosen as a point of reference or basis or comparison for prices in other years; a benchmark year. Usually 100.
Phantom Unemployed
Those who are collecting welfare benefits of unemployment insurance must register with the Employment Service which attempts to find jobs for such persons.
Imports
Total domestic (U.S.) spending on foreign goods.
C+I+G
Total expenditures=?
Exports
Total foreign spending on domestic (U.S.) goods.
National Income
Total income earned by US citizens and businesses, no matter where they reside or are located; the sum of the payments to resources (land, labor, capital, and entrepreneurship).
Rise, Rise
When income taxes fall, C will ______, and AD will ______.
Fall, Fall
When income taxes rise, C will ______, and AD will ______.
Rise, Rise
When interest rates fall, C will ______, and AD will ______.
Fall, Fall
When interest rates rise, C will ______, and AD will ______.
Falls
When spending decreases at a given price level, AD ______.
Rises
When spending increases at a given price level, AD ______.
d
When the marginal propensity to consume (MPC) is 0.80, the autonomous spending mulitplier is _____. a) 2 b) 3 c) 4 d) 5
Real balance effect, Interest rate effect, International trade effect
Why does the aggregate demand curve slope downward?
Discouraged workers are not considered unemployed
Why may the unemployment rate be biased downward?
Long
____-run aggregate supply is the production in the long run. (LRAS)
Short
____-run aggregate supply is the production in the short run. (SRAS)
increases; increase; right
A decrease in income taxes __________ disposable (after-tax) income, permitting individuals to __________ their consumption. As consumption rises, the AD curve shifts to the _____.
Price Index
A measure of the price level.
c
All of the following equations are correct except: a) MPC + MPS = 1. b) 1 - MPC = MPS. c) MPC = C/Yd d) MPS = Change in S/ Change in Yd
d
An $8 billion decrease in investment spending when the MPC is 0.75 may potentially lead to: a) an increase in equilibrium income of up to $40 billion. b) a decrease in equilibrium income of up to $40 billion. c) an increase in equilibrium income of up to $32 billion. d) a decrease in equilibrium income of up to $32 billion.
decreases; lowers; left
An increase in taxes __________ disposable income, __________ consumption, and shifts the AD curve to the _____.
a
Assume the government cuts taxes by $125 billion. If the MPC = 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model> a) Real GDP increases by $500 billion. b) Real GDP increases by $625 billion. c) Real GDP decreases by $500 billion. d) Real GDP decreases by $625 billion.
TE>TP TE<TP
Disequilibrium examples involving TE-TP
TE=TP
Equilibrium example involving TE-TP
b
If disposable income is $1,000 billion and consumption spending is $1,200, then personal saving __________. a) is $200 billion b) is -$200 billion c) is $1,800 d) cannot be determined from the information given.
d
If equilibrium income falls by $1,000 when investment spending falls by $250, the autonomous spending multiplier is equal to: a) 1/4 b) 1/2 c) 2 d) 4
c
If equilibrium income is $8,000 billion, full-employment income (natual real GDP) is $8,500 billion, and the MPS = 0.10, the simple Keynesian model predicts that a(n): a) $500 billion increase in government spending will close the recessionary gap. b) $10 billion increase in government spending will close the recessionary gap. c) $50 billion increase in government spending will close the recessionary gap. d) change in government spending cannot help close the recessionary gap.
d
If equilibrium real GDP falls short of full-employment (natural) real GDP by $60 million when the MPC = 0.75, which of the following would eliminate the recessionary gap that exists according to the Keynesian model? a) Increase G by $15 million. b) Decrease T by $20 million. c) Increase both G and T by $60 million. d) Any of the above.
c
If households have a tendency to save $3 of every $100 increase in income, then: a) the household saving rate is negative. b) household spending must increase by $103 when income increases by $100. c) the MPS is 0.03 and the MPC is 0.97. d) the saving multiplier is 3.
b
If the marginal propensity to consume is 0.925, then a $100 increase in disposable income leads to a: a) $7.50 decrease in consumption. b) $92.50 increase in consumption. c) $7.50 decrease in saving. d) $92.50 increase in saving.
c
If the short-run aggregate supply curve (SRAS) is horizontal, then an increase in aggregate demand leads to: a) an increase in real ouput, an increase in the price level, and a decrease in unemployment. b) an increase in real output, a decrease in the price level, and a decrease in unemployment. c) an increase in real output, no change in the price level, and a decrease in unemployment. d) a decrease in real output, no change in the price level, and an increase in unemployment.
a
In the Keynesian model, the primary determinant of consumer spending is: a) disposable income. b) tax incentives for saving. c) the interest rate. d) a person's age.
d
In the Keynesian model, when aggregate expenditure is less than aggregate output, firms are most likely to react by: a) reducing product prices and remaining output at full employment. b) increasing production and employing more workers. c) raising product prices and maintaining output at full employment. d) reducing production and laying off some workers.
c
In the Keynesian view, a decrease in aggregate demand will most likely cause: a) output and unemployment to rise. b) output and unemplyment to fall. c) output to fall and unemploymen to rise. d) output to rise and unemployment to fall.
c
In the basic Keynesian model, ceteris paribus, an increase in disposable income leads to: a) an increase in consumption spending and a decrease in saving. b) a decrease in consumption spending and an increase in saving. c) an increase in both consumption spending and saving. d) a decrease in both consumption spending and saving.
d
In the simple Keynesian model, when the MPC is 0.8, the autonomous spending multiplier is _____ and the tax multiplier is _____. a) 5;4 b) 5;5 c) 4;-4 d) 5;-4
b
In the simple, two-sector model, if C=$110 billion + 0.75(Y) and I=$35 billion, then break-even disposable income (Yd=Y) is equal to: a) $120 billion. b) $440 billion. c) $480 billion. d) $580 billion.
c
In the simple, two-sector model, if C=$110 billion + 0.75(Y) and I=$35 billion, then equilibrium income (Y) is equal to: a) $145 billion. b) $440 billion. c) $580 billion. d) $600 billion.
d
Keynes argued that: a) Say's Law is true b) prices and wages are perfectly flexible c) a government policy of "hands-off" is the best approach d) prices and wages are not perfectly flexible in the short run
a
Keynes believed that an economy may achieve equilibrium at a level of real GDP below the full-employment level: a) because of insufficient aggregate demand. b) when prices and wages are perfectly flexible. c) only if supply creates its own demand. d) if the long-run aggregate supply curve is vertical.
a
Keynesian economists suggests that the most effective way to eliminate a recessionary gap is for government to: a) increase its spending in order to increase aggregate demand. b) decrease its spending in order to balance the budget. c) increase taxes in order to increase tax revenues. d) decrease taxes and decrease government spending by the same amount.
c
Keynesian theory asserts that a free market economy with no government invervention: a) can never achieve equilibrium at full employment in the short run. b) will always achieve equilibrium at full employment in the short run. c) may experience economic fluctuations in the short run. d) will not ecperience economic fluctuations in the short run.
d
The essence of the Keynesian theory of unemployment is that: a) the unemployment rate is always equal to the natural rate due to structural and frictional types of unemployment. b) short-run unemployment problems are self-correcting in a market economy. c) government must provide public sector jobs to the unemployed. d) unemployment results from inadequate demand for goods and services throughout the economy.
c
The event that brought Keynesian economics to the forefront was the: a) Civil War b) supply stock resulting from OPEC c) Great Depression d) collapse of communism
b
The largest source of revenue for the federal government in the U.S. is the: a) sale of military equipment to foreign countries. b) personal income tax. c) payroll tax. d) U.S. Postal Service.
b
The marginal propensity to consume (MPC) is defined as the: a) fraction of disposable income that is spent by households. b) change in consumer spending divided by the change in disposable income. c) difference between disposable income and consumer spending. d) fraction of disposable income that is saved by households.
d
The part of consumption spending that is independent of disposable income is called: a) the marginal propensity to consume. b) the marginal propensity to save. c) disposable consumption. d) autonomous consumption.
Unemployment Rate
The percentage of the civilian labor force that is unemployed.
Labor Force Participation Rate
The percentage of the civilian noninstitutional population that is in the civilian labor force.
Consumer Price Index (CPI)
The weighted average of prices of a specific set of goods and services purchased by a typical household; a widely cited index number for the price level.
Food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, other goods and services
What are the 8 major categories of goods and services in a market basket?
When full-employment is reached
What causes a horiztonal AS curve to become vertical?
Changes in C, I, or G
What causes a shift the AD curve?
May be inflexible downward.
What did Keynes think about wage rates?
May be inflexible downward.
What did Keynes think in regard to prices?
Savers may not save more at higher interest rates or save less at lower interest rates.
What did Keynes think in regard to savings?
Individuals are buying less output then firms produce.
What does TE<TP mean in regards to the state of the economy?
Firms neither increase nr decrease production.
What does TE=TP mean in regards to firms?
Inventories are at their optimum levels.
What does TE=TP mean in regards to inventories?
Firms increase production to raise inventories to their optimum levels.
What does TE>TP mean in regards to firms?
Inventories fall below optimum levels.
What does TE>TP mean in regards to inventories?
Individuals are buying more output than firms produce.
What does TE>TP mean in regards to the state of the economy?
Households and businesses
What does the private sector consist of?
Persons not in the labor force + Civilian labor force
What is the civilian noninstitutional population formula?
Number of frictionally unemployed persons / Civilian labor force
What is the frictional unemployment formula?
Civilian labor force / Civilian noninstitutional population
What is the labor force participation rate (LFPR) formula?
Frictional unemployment rate + Structural unemployment rate
What is the natural unemployment formula?
(CPI of the later year - CPI of earlier year / CPI of earlier hear) x 100
What is the percentage change in prices formula?
Explain changes in Real GDP
What is the purpose of the simple Keynesian model?
(Nominal income / CPI) x 100
What is the real income formula?
Salary of earlier year x (CPI of current year / CPI of earlier year)
What is the salary formula?
Number of structurally unemployed persons / Civilian labor force
What is the structurally unemployment formula?
Number of unemployed persons / Civilian labor force
What is the unemployment rate formula?
Closed
What kind of economy does the simply Keynesian model show: closed or open?
d
When a $2,000 increase in income causes a $1,600 increase in consumption spending: a) the marginal propensity to consume (MPC) is 0.8. b) the marginal propensity to save (MPS) is 0.20. c) the increase in saving is $400. d) all of the above are true.
c
When the economy is operating where total production is less than total expenditures, all of the following are true except: a) businesses experience an unplanned decrease in inventories. b) the economy is in a state of disequilibrium. c) the level of output produced is greater than what people want to buy. d) businesses will increase production to increase inventories.
