Chapter 11

The multiplier effect suggests that

A ripple effect occurs from one person's initial spending, government spending $1 will create more than $1 increase in GDP, a tax cut will increase GDP by more than the amount of the initial tax cut

AN inflationary output gap is defined to be when the current level of output is

Above full employment GDP

Planned investment is the

Amount that firms decide to allocate the new capital resources and inventory accumulation

Actual investment is the

Amount that firms really allocated to new capital resources and inventory accumulation

One of reasons the government may choose to spend would be the

Beliefs about what citizens may need

The four components of aggregate expenditure (AE) are

Consumption, investment, government, and net export spending

How would the real exchange rate need to change to get aggregate expenditure to increase

Decrease

If tastes for foreign goods and services go up, then we would expect aggregate expenditure to

Decrease

If the foreign income decrease, then we might expect net export spending to

Decrease

A main reason the federal government may choose to spend would be the

Desire to achieve full-employment GDP

A recessionary output gap is defined to be when

Equilibrium aggregate expenditure is below full employment GDP

One of the major insights by the economist John Maynard Keynes about production was that

Firms may not produce all they can at a given price, but what they can sell

When PAE increases we expect that economy will be at ___ levels of equilibrium GDP

Higher

Which of the following conveys the correct relationship between production and inventories

If planned inventories > actual inventories then increase production

Economist John Maynard Keynes noted one of the main contributors to the Great Depression in the 1930s was

Insufficient spending causing below natural rate output

Which of the following is not a direct determinant of net export spending

Interest Rates

Which of the following could be a cause of consumption decreasing?

Interest rates increase

When we compare PAE and actual output (Y) if PAE is greater than Y we expect that

Inventories to decrease

We define autonomous expenditure to be expenditure that

Is unaffected by the current level of income in the economy

The economist in the 1930s who credited with key insights into causes of economic downturns was

John Maynard Keynes

The effect of government spending or tax cuts on national income is measured by the

Multiplier

Domestic income has a ___ relationship with net export spending

Negative

What type of relationship does the real interest rate have wit respect to Investment spending

Negative relationship

Transfer payments are payments that are

Payments to households that can then be spent by the households

When we say investment in economics we are talking about

Physical capital

Which of the following is not a primary determinant of consumption spending

Rate of return on capital

Which of the following not a determinant of Investment spending

Real income

The multiplier effect suggests that

Spending $1 increases GDP by more than $1

The multiplier effect occurs when

Spending by one person generate income for others and cause others to spend more too, increasing the impact of the initial spending on the economy

If we consider the equation PAE = A + bY the independent part of the equation that depends on income is

b