Test 2 (Ch. 7-10): Missed Questions

Which of the following is not considered to be an important determinant of investment? A) Current disposable income. B) Expectations. C) Interest rates. D) Technological change.

A) Current disposable income.

Which of the following is eliminated when output equals full-employment GDP? A) Cyclical unemployment. B) Demand-pull inflation. C) The need for autonomous consumption. D) Net exports.

A) Cyclical unemployment.

The cost effect implies that A) Higher costs are reflected in higher average prices. B) The aggregate supply curve is linear. C) Lower average prices result in greater quantity supplied. D) The aggregate demand curve is downward-sloping.

A) Higher costs are reflected in higher average prices.

Which of the following is used to explain why the AD curve slopes downward? A) The interest rate effect. B) The cost effect. C) The profit effect. D) The laissez faire effect.

A) The interest rate effect.

Equilibrium is unique; it is the only price-output combination that is mutually compatible with aggregate supply and demand. A) True B) False

A) True

In the long run, shifts in the aggregate demand curve affect the price level but not the level of output. A) True B) False

A) True

2. When the consumption schedule lies below the 45-degree reference line, saving: A) is positive. B) must be negative. C) is negatively sloped. D) is zero.

A) is positive.

53. If the marginal propensity to save is 0.2 and income rises by $5,000, how much of this $5,000 will be consumed? A) $1,000 B) $4,000 C) $5,000 D) $625

B) $4,000

If wages and prices are flexible, then a recession is best eliminated when prices A) And wages both rise. B) And wages both fall. C) Rise and wages drop. D) Drop and wages rise.

B) And wages both fall.

If the level of prices and output are compatible with both buyers' and sellers' intentions, then the policy goals are satisfied. A) True B) False

B) False

Ceteris paribus, if average prices in the U.S. economy fall, then the A) Real balances effect will lead to a lower quantity of U.S. output demanded. B) Foreign trade effect will lead to a higher quantity of U.S. output demanded. C) Interest rate effect will lead to a lower quantity of U.S. output demanded. D) Profit effect will lead to a higher quantity of U.S. output demanded.

B) Foreign trade effect will lead to a higher quantity of U.S. output demanded.

3. Generally, which group of people has the highest marginal propensity to consume? A) wealthy people B) low-income people C) the richest 1% D) middle-class people

B) low-income people

Changes in real GDP are used to measure A) Inflation. B) Price level changes. C) Business cycles. D) Population growth.

C) Business cycles.

Ceteris paribus, if average prices in the U.S. economy fall, then the A) Real balances effect will lead to a lower quantity of U.S. output demanded. B) Foreign trade effect will lead to a lower quantity of U.S. output demanded. C) Interest rate effect will lead to a higher quantity of U.S. output demanded. D) Cost effect will lead to a higher quantity of U.S. output demanded.

C) Interest rate effect will lead to a higher quantity of U.S. output demanded.

Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person? A) It more than doubled. B) It increased, but it less than doubled. C) It was unchanged. D) It decreased.

C) It was unchanged. Explanation: Real GDP: $1000/200 = 5 Per Person: 5/100 = .05 Real GDP2: $3000/400 = 7.5 Per Person: 7.5/150 = .05

If tax policies become less favorable, then A) The AD curve will not be affected. B) There will be a movement to the right along the AD curve. C) The AD curve will shift to the left. D) The AD curve will shift to the right.

C) The AD curve will shift to the left.

5. Along the 45-degree line in the graph of consumption and disposable income: A) consumption is equal to total saving. B) the interest rate is zero. C) consumption is equal to disposable income. D) consumption is equal to marginal saving.

C) consumption is equal to disposable income.

Cost-push inflation occurs when: A) total spending expands so much that equilibrium output exceeds full-employment output. B) a supply shock shifts the short-run aggregate supply curve to the right. C) rising resource costs reduce short-run aggregate supply. D) subsidies to businesses are increased.

C) rising resource costs reduce short-run aggregate supply.

50. One implication of a straight-line aggregate expenditure curve is that: A) the average propensity to consume is constant. B) the average propensity to save is constant. C) the marginal propensity to consume is constant. D) All of the answers are correct.

C) the marginal propensity to consume is constant.

52. If your income is $35,000 and the average propensity to save is 0.46, what is consumption? A) $19,500 B) $15,500 C) $16,100 D) $18,900

D) $18,900

61. Which of the following marginal propensities to consume results in the flattest consumption line in an aggregate expenditures model? A) 0.5 B) 0.8 C) 1.0 D) 0.4

D) 0.4

State and local purchases of goods and services account for approximately _______ percent of total government purchases. A) 25 B) 50 C) 67 D) 75

D) 75

15. How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected? A) An increase in government spending has the same spending multiplier as an equivalent tax decrease. B) Neither an increase in government spending nor a decrease in taxes generates any multiplier at all. C) An increase in government spending has a smaller spending multiplier than an equivalent tax decrease. D) An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

D) An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

36. According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80? A) Income will increase by $50,000. B) Income will not change. C) Income will increase by $8,000. D) Income will increase by $10,000.

D) Income will increase by $10,000.

Keynes was concerned that at macroeconomic equilibrium the economy would experience A) Full employment and price stability. B) Full employment but not price stability. C) Price stability but not full employment. D) Neither full employment nor price stability.

D) Neither full employment nor price stability.

The real balances effect says that an increase in the price level A) Increases the price of U.S. produced goods, causing Americans to buy more imported goods. B) Increases the price of U.S. produced goods, causing foreign consumers to buy fewer U.S. goods. C) Increases the need to borrow, which drives up interest rates and reduces loan-financed purchases. D) Reduces the real value of a fixed amount of savings, which reduces the purchase of goods and services.

D) Reduces the real value of a fixed amount of savings, which reduces the purchase of goods and services.

If the availability of credit increases, then A) There will be a movement to the left along the AD curve. B) There will be a movement to the right along the AD curve. C) The AD curve will shift to the left. D) The AD curve will shift to the right.

D) The AD curve will shift to the right.

If wealth rises, A) There will be a movement to the left along the AD curve. B) There will be a movement to the right along the AD curve. C) The AD curve will shift to the left. D) The AD curve will shift to the right.

D) The AD curve will shift to the right.

14. If aggregate expenditures equals $6,200 and aggregate income equals $5,800, businesses will produce: A) more, raising employment and lowering income. B) less, lowering employment and raising income. C) less, lowering both employment and income. D) more, raising both employment and income.

D) more, raising both employment and income.

In the Keynesian aggregate expenditure model, prices are assumed to be fixed because: A) the government heavily intervenes in the economy. B) consumption and disposable income are closely related. C) unemployment is low. D) resources are underutilized.

D) resources are underutilized.

45. Aggregate expenditures are equal to: A) the total of consumption plus investment plus government expenditures. B) the total of consumption plus investment plus government expenditures plus imports minus exports. C) consumption alone in a simplified Keynesian model. D) the total of consumption plus investment plus government expenditures plus exports minus imports.

D) the total of consumption plus investment plus government expenditures plus exports minus imports.

The capital-to-labor ratio is: a) high in rich countries. b) the ratio of managers to workers. c) a key element in decreasing real wages. d) high in poor countries.

a) high in rich countries.

A change from an inefficient mix to an efficient mix of output would BEST be represented with a production possibilities frontier (PPF) as a: a) movement from inside the PPF onto the PPF. b) shift inward of the PPF. c) movement from a point on the PPF to a point inside the PPF. d) shift outward of the PPF.

a) movement from inside the PPF onto the PPF.

In the context of the production possibilities frontier, opportunity cost can be measured by the: a) slope of the frontier. b) ratio of the costs of the two goods being produced. c) amount of labor needed to produce the goods and services. d) ratio of the amounts of the two goods being produced.

a) slope of the frontier.

Every point on the frontier of the production possibilities frontier represents: a) X-efficiency. b) allocative efficiency. c) production efficiency d) production and allocative efficiency.

c) production efficiency

The World Bank defines extreme poverty as a person living on less than: a) $2 per day. b) $16 per day c) $5,763 per year. d) $1.25 per day.

d) $1.25 per day.

Developed nations tend to have: a) limited amounts of both labor and capital. b) low capital-to-labor ratios. c) large amounts of both labor and capital. d) limited labor supplies but lots of capital.

d) limited labor supplies but lots of capital.

If technology is held constant, an increase in capital concurrent with a decrease in labor input causes output to: a) fall. b) rise. c) stay the same. d) rise, fall, or stay the same.

d) rise, fall, or stay the same.

Assume you have $2,000 in a savings account at the beginning of the year and the price level is equal to 100. If the price level is equal to 120 at the end of the year, the real value of your savings is closest to A) $1,667. B) $1,880. C) $2,120. D) $2,400.

A) $1,667.

12. If the marginal propensity to save is 0.2, the value of the spending multiplier will be: A) 5. B) 8. C) 1.25. D) 0.8.

A) 5.

Which of the following most likely occurs when an inflationary gap exists? A) A bidding war for available goods and services. B) More layoffs. C) Rising inventories. D) Excessive saving.

A) A bidding war for available goods and services.

Which of the following will cause an increase in U.S. imports? A) An increase in U.S. consumer confidence. B) An increase in foreign consumer income. C) An increase in foreign business investment. D) A decrease in U.S. wealth.

A) An increase in U.S. consumer confidence.

Keynes was concerned that at macroeconomic equilibrium in a laissez faire free market economy, full employment A) And price stability might not continue simultaneously. B) Would continue but price stability might not. C) Might not continue but price stability would. D) None of the choices are correct.

A) And price stability might not continue simultaneously.