APME Topics 3.1-3.3 Quiz

What are the shifters of AD?

-Consumer Spending -Change in Investment Spending -Change in Government Spending -Change in Net Exports

What is the foreign trade effect?

-When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods -Exports fall and imports rise causing real GDP demanded to fall. (XN Decreases)

What is the Interest rate effect?

-When the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. -Higher interest rates discourage consumer spending and business investment.

Shifters of Aggregate Supply

1. Resource Prices 2. Actions of the Government (ex: taxes, regulations) 3. Productivity

Why is AD downward sloping?

1. Wealth Effect 2. Interest Rate Effect 3. Foreign Trade Effect

spending multiplier formula

1/MPS

Suppose Sally earns $50,000 per year and she saves $2,000 for retirement, $3,000 more for a wedding, $4,000 for a down payment on a house and $1,000 for a rainy day savings account. The rest of her money was spent on everyday living. What is Sally's APC? A. 0.8 B. 0.86 C. 0.9 D. 0.92 E. 1

A. 0.8

If the marginal propensity to consume (MPC) increases what will happen to consumption? A. Increase for each income increase B. Increase for each income decrease C. Decrease for each income increase D. Decrease regardless of income E. Stay the same

A. Increase for each income increase

Technology improvements A. Increase the chances of a rightward shift in aggregate demand B. Will decrease consumer expectations C. Do not impact aggregate demand D. Explain why the aggregate demand curve slopes down to the right E. Usually cause decreased interest rates

A. Increase the chances of a rightward shift in aggregate demand

Aggregate demand on a standard macroeconomics graph normally A. Slopes down to the right B. Slopes up to the right C. Is vertical D. Is horizontal E. Has three sections, the first being horizontal then sloping upward to right then vertically

A. Slopes down to the right

What is the multiplier effect?

An initial change in spending will set off a spending chain that is magnified in the economy.

Which of the following would NOT shift the short-run aggregate supply curve to the right? A. An increase in worker productivity B. An increase in price of oil C. A decrease in nominal wages D. An increase in worker output due to human capital E. A decrease in commodity prices nationwide

B. An increase in price of oil

The key consideration when determining the difference between nominal and real wages is A. The unemployment rate B. Inflation C. Output D. Aggregate demand E. Aggregate supply

B. Inflation

Wages and salaries A. Do not impact price level B. Make up about 80% of all business costs C. Are not related to aggregate supply D. Decrease productivity E. Are not affected by immigration policy

B. Make up about 80% of all business costs

Generally AD is plotted on a graph of the economy where the x axis is labeled with a measure of output that factors out inflation. What is the proper x-axis label that reflects the above information? A. GDP B. Real gdp C. Nominal gdp D. Central gdp E. Money gdp

B. Real GDP

Suppose the US government decided to put tighter environmental regulations on automobiles and trucks and that such a move would add an average of an additional $1,000 cost per vehicle. What effect would that have on aggregate supply? A. The supply of vehicles will increase but only within the market so aggregate supply will not change B. Aggregate supply will shift right C. Aggregate supply will decrease D. The supply of vehicles will decrease but only within the market so aggregate supply will not change E. Aggregate supply will only change if aggregate demand changes

C. Aggregate supply will decrease

What does GDP measure? A. Inflation B. Business investments C. Final value of output in a given time period D. Fiscal policy decisions made by congress E. Monetary policy decisions made by the federal reserve

C. Final value of output in a given time period

Which of the following is the BEST description of the foreign purchases (aka net export) effect? A. Foreigners move more money to the US due to lower than expected returns in their home country B. Foreigners demand more us goods and services when us price level increase. C. Foreigners demand more us goods and services when us price level decreases D. Tourists are more likely to come and spend money in a country with increasing price levels E. Americans demand fewer foreign goods and services when us price level falls

C. Foreigners demand more Us goods and services when US price level decreases

If there is an increase in the spending multiplier which of the following has most likely occurred? I. Increase in the real interest rate II. Increase in the marginal propensity to save III. Increase in the marginal propensity to consume A. I only B. II only C. III only D. I and II only E. I and IIII only

C. III only (increase in MPC)

Which of the following most closely describes the Interest-Rate Effect at work in the economy? A. Government cuts back when price level increases. B. Investments increase when price level increases, driving up interest rates. C. Interest rate increases are caused by increased transactional demand due to higher price levels. D. Interest rates stagnate when price levels rise. E. Interest rates increase due to expected inflation causing aggregate demand to decrease across all available price levels.

C. Interest rate increases are caused by increased transactional demand due to higher price levels.

The relationship between the quantity of real output demanded and price level can be best described as A. Proportional B. Direct C. Inverse D. Variable E. Unrelated

C. Inverse

The determinant or aggregate demand considered the most sensitive to changes in interest rates is A. Exports B. Imports C. Investment D. Consumption E. Government spending

C. Investment

On a graph depicting aggregate demand, why is the x-axis labeled rGDP=Q=Y? A. It is shorthand way of showing that aggregate demand is influenced by price level B. It is a shorthand way of showing that inflation should be expected anywhere there is an equilibrium point C. It is a shorthand way of showing that the amount produced is equal to the value of income and quantity of goods and services produced D. It is a shorthand way of showing that classical economics is in okay, so the aggregate demand curve will have three parts consisting of horizontal slope, gradual upward slope then vertical slope E. It is shorthand way of showing that aggregate demand would have a positive slope

C. It is a shorthand way of showing that the amount produced is equal to the value of income and quantity of goods and services produced.

One reason why wages remain fixed in the short run is because A. The demand for workers changes constantly B. Of illegal business activity C. Of fixed-wage contracts D. Of excess worker capacity E. Of the lack of news for workers

C. Of fixed-wage contracts

When the economy is booming we can expect? A. An increase in interest rate B. Impending stagflation C. Increasing input costs D. A and C are correct answers E. A, B, and C are correct answers.

D. A and C and correct answers (an increase in interest rate and increasing input costs)

Which of the following events would cause short-run aggregate supply to shift to the left? A. An increase in the price level B. A decrease in nominal wages C. An increase in productivity D. An increase in the price of steel and other commodities E. A decrease in the price level

D. An increase in the price of steel and other commodities

If net investment rises then A. Wages are probably declining B. Tax rates will probably increase C. GDP will decline D. Capital stock increases E. Exports will decline

D. Capital stock increases

Which of the following statements are valid for explaining why the price level starts to increase with output in the intermediate range? I. Resources are abundant II. Firms may have to use outdated equipment III. Workers become more scarce A. I only B I and II only C. I, II, and III only D. II and III only E. I and III only

D. II and III only

Which of the following is NOT one of the factors of the aggregate supply curve? A. Change in input price B. Price of imported resources C. Change in productivity D. Price level E. Change in legal regulations/ business environment

D. Price level

Which of the following is the best example of the wealth effect theory in macroeconomics? A. The price level increases, so suppliers feel wealthier and therefore increase hiring with the result of increased aggregate demand. B. The price level decreases, therefore real wages decrease for demanders thereby triggering a decrease in aggregate demand. C. The price level decreases, so demanders increase consumption thereby increasing aggregate supply. D. The price level increases, thereby making demanders feel poorer so they decrease demand for output. E. The price level decreases, thereby allowing suppliers to increase employment because labor is more prepared to accept lower wages and salaries due to the lower cost of living.

D. The price level increases, thereby making demands feel poorer so they decrease demand for output.

Given a marginal propensity to save (MPS) of 0.25; a government tax increase of $500 million would be expected to provide a A. $2 billion contractionary effect B. $2 billion stimulus effect C. $3.75 billion contractionary effect D. $1.5 billion stimulus effect E. $1.5 billion contractionary effect

E. $1.5 billion contractionary effect

Suppose Sally earns $50,000 per year. If Sally gets an additional $1,000 of bonus money and buys an $800 flat panel tv and saves the rest, then her marginal propensity to consume is A. $1000 B. $800 C. $49,000 D. 0.2 E. 0.8

E. 0.8

Suppose economists found that in 2006 factories were at 80% capacity, in 2007 they were at 70% capacity and in 2008 they were at 60% capacity. When this information becomes publicly available A. Aggregate demand would not be affected B. The slope of the aggregate demand curve would increase C. The slope of the aggregate demand curve would decrease D. Aggregate demand would shift right E. Aggregate demand would shift left

E. Aggregate demand would shift left

Which of these statements best explains the shape of the aggregate demand curve? A. The prices of output goods increase slightly faster than those of inputs, which are sticky so aggregate demand is upward sloping. B. At lower prices, the quantity demanded increases because of the Law of Demand so aggregate demand is downward sloping. C. At higher price levels people have more money so aggregate demand is upward sloping D. At higher prices people are willing and able to purchase fewer goods so aggregate demand is downward sloping. E. At lower price levels people's money is worth more and they can purchase more goods so aggregate demand is downward sloping.

E. At lower price levels people's money is worth more and they can purchase more so aggregate demand is downward sloping.

In Macroeconomics APC usually refers to A. Annual percentage change B. Aggregate percentage of consumers C. Alternate payment coupon D. Angular property of consumption E. Average propensity to consume

E. Average Propensity to Consume

Which of the following is NOT part of the sub components of Consumer Spending, an aggregate demand component? A. Consumer Wealth B. Taxes C. Household debt D. Consumer Expectations E. Health and welfare of the people

E. Health and welfare of the people

Which of the following does not explain the inverse relationship between the average price level and real gross domestic product? A. The wealth effect B. The interest rate effect C. The net exports effect D. The real balances effect E. The deflationary effect

E. The deflationary effect

If the price level increases (inflation) then

GDP falls

If the price level decreases (deflation) then

GDP rises

What is the wealth effect?

Higher price levels reduces purchasing power which decreases quantity of expenditures while lower price levels increase purchasing power which increases quantity of expenditures

Simple tax multiplier formula

MPC/MPS

What does aggregate mean?

added all together

What does aggregate demand mean?

all goods and services (real GDP) that buyers are willing and able to purchase at different price levels

MPC formula

change in consumption/change in disposable income

MPS formula

change in saving/change in disposable income

Aggregate demand is the demand for ______ by ________ in the U.S.

everything; everyone

What is MPC?

how much people consumer rather than spend when there is a change in disposal income

What is marginal propensity to save?

how much people save rather than consumer when there is a change in disposable income

What type of relationship does inflation and deflation have?

inverse

Total change in GDP formula

spending multiplier x initial change in spending or tax multiplier x initial change in spending

What is aggregate supply?

the amount of goods and services (real GDP) that firms will produce in an economy at different price levels

What is foreign trade effect also called?

the net exports effect and the real balances effect

What is long run aggregate supply?

wages and resource prices WILL change as price levels change

What is short-run aggregate supply?

wages and resource prices are sticky and WILL NOT change as price levels change