chapter 12 and 13

The sum of the MPC and the MPS equals

one

If we account for the impact of increasing GDP on imports, inflation, and interest rates, the simple multiplier formula would

overstate the true value of the multiplier

On the 45-degree line diagram, for points that lie above the 45-degree line,

planned aggregate expenditure is greater than GDP

If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then

the MPC is 0.75

which of the following factors will shift the short-run aggregate supply to the right?

the labor force increases

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure

The amount by which consumption spending increases when disposable income increases is called

the marginal propensity to consume

All of the following are true statements about the multiplier except

the multiplier is a value between zero and one

the aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded

which of the following is among the most important determinants of the level of net exports?

the price level in the US relative to the price levels in other countries

If oil prices rise unexpectedly,

the short-run aggregate supply curve will shift to the left

when the economy is in a recession, the shortfall in AE is exactly equal to

the unplanned increase in inventories that would occur if the economy were initially at potential GDP

The value of the multiplier is larger when

the value of the MPC is larger

When incomes rise faster in the United States than in other countries:

U.S. net exports will fall

macroeconomic equilibrium in the short run

Will occur at a point on the 45 degree line

Aggregate expenditure, or the total amount of spending in the economy, equals

consumption spending plus planned investment plus government purchases plus net exports

economists and business analysts usually explain fluctuations in GDP in terms of fluctuations in these four categories:

consumption, planned investment, government purchases, and net exports

when national income increases, there must be some combination of an increase in household

consumption, saving, and taxes

the most important determinant of consumption is

current disposable income

If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will

decrease consumption by $9 million

the interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment

Which of the following statements is correct?

if households become more optimistic about their future incomes, the aggregate demand curve will shift to the right

A decrease in the real interest rate will

most likely increase consumer's purchases of durable goods

Net exports have recently been ____ in most years between 1979. They tend to ___ when the US economy is in recession and ___ when the US economy is expanding

negative; increase; decrease

Actual investment spending includes spending by consumers on

new houses

If the MPC is 0.75, then a $100 increase in government expenditures will increase equilibrium GDP by

$400

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $80 billion of disposable income

$72 billion

Which of the following statements about investment spending is correct?

- The optimism or pessimism of business firms is an important determinant of investment spending - A higher real interest rate results in less investment spending - When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong (all of the above)

Refer to Figure 11-3. Suppose that investment spending decreases by $5 million, decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1. If the MPC is .8, then what is the change in GDP?

-$25 million

which of the following factors will cause the long-run aggregate supply curve to shift to the right?

-an increase in the number of workers in the economy -the accumulation of more machinery and equipment -technological change (all of the above)

Why does the failure of workers and firms to accurately predict the price level result in an​ upward-sloping aggregate supply​ curve?

-because contracts make some wages and prices "sticky" -because firms are often slow to adjust wages -because menu costs make some prices "sticky" (all of the above)

If income falls by $40 billion and consumption falls by $30 billion, then the slope of the consumption function is

0.75

If the consumption function is define as C = 7,250 + 0.8 Y, what is the multiplier?

5

at the points above the 45 degree line

AE>GDP

which of the following statements is correct?

Actual investment will equal planned investment only when there is no unplanned change in inventories

Macroeconomic equilibrium occurs when

Aggregate expenditure = GDP

Which of the following is correct concerning shifts in the aggregate demand (AD) curve?

An increase in corporate taxes will shift the AD curve to the left because there is an inverse relationship between corporate taxes and investment expenditure

Which of the following statements is correct?

An increase in the corporate income tax decreases the after-tax profitability of investment spending

What impact does an increase in the price level in the United States have on net exports and why?

An increase in the price level decreases net exports by increasing the relative cost of American goods

which of the following equalities is correct?

Disposable income is equal to national income minus net taxes.

In a small economy in 2009, aggregate expenditure was $850 million while GDP that year was $800 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was less than anticipated in 2009

The key idea of the aggregate expenditure model is that in any particular year, the level of _____ is determined mainly by the level of aggregate expenditure

GDP

If planned aggregate expenditure is greater than total production,

GDP will increase

which of the following statements is correct

autonomous expenditure depends on level of GDP

Which of the following is not correct?

MPS = 1- (C/YD)

If inflation in the United States is lower than inflation in other countries, what will be the effect on net exports for the United States?

Net exports will decrease as U.S. imports decrease

Assume that steel is the only good produced in the economy. Which of the following would explain why the short-run aggregate supply curve for steel would be upward sloping?

Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the production of steel—remains fixed by contract.

what is the multiplier?

The multiplier is the ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

There was an unplanned decrease in inventories equal to $2 million

When aggregate expenditure is less than GDP, which of the following is true?

There was an unplanned increase in inventories.

which of the following factors does not cause the aggregate demand curve to shift

a change in the price level

which of the following will reduce consumer expenditures?

a decrease in expected future income

the international-trade effect refers to the fact that an increase in the price level will result in

a decrease in exports nd an increase in imports

which of the following will not shift the aggregate demand curve to the right

a fall in the price level

what is the impact of an increase in the price level on the short-run aggregate supply curve?

a movement up and to the right along a stationary curve

which of the following will cause the short-run aggregate supply curve to shift to the right?

a technological change

An unplanned decrease in inventories results in

actual investment that is less than planned investment

a curve showning the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called

aggregate demand

an unexpected increase in the price of oil would be called ___ by economists

an adverse supply shock

which of the following causes saving to increase

an increase in the interest rate

Why does the short-run aggregate supply curve slope upward?

because profits rise when the price of the goods and services firms sell rise more rapidly than the price they pay for inputs

Fluctuations in total spending in the economy may affect:

both employment and production in the short run

How can government policies shift the aggregate demand curve to the right?

by increasing government purchases

which of the following makes up the largest fraction of GDP

consumption

The behavior of consumption and investment over time can be described as follows:

consumption follows a smooth, upward trend, but investment is subject to significant fluctuations

An increase in the value of the dollar will ___ exports and ____ imports, so net exports will _____

decrease; increase; fall

When aggregate expenditure is greater than GDP, inventories will ____ and GDP and total employment will ____

fall; increase

If the MPC is 0.95, then a $10 million increase in disposable income will

increase consumption by $9.5 million

an increase in stock prices will

increase the consumption component of aggregate expenditure

if real GDP in the US increases faster than real GDP in other countries, US imports will ___ faster than US exports, and net exports will ____

increase; fall

If inflation in the United States is lower than inflation in other countries, then U.S. exports ____ and US imports _____, which ____ net exports

increases; decrease: increases

As long as the AE line is above the 45o line,

inventories will decline and firms will expand production

When aggregate expenditure is greater than GDP

inventories will fall

If firms are more pessimistic and believe that future profits will fall and remain weak for a few years, then

investment spending will fall

Which of the following happens if the price level rises?

investment, consumption and net exports will all fall

according to the paradox of thrift, a simultaneous increase in saving and decrease in consumption lead to

lower real GDP in the short run but higher real GDP in the long run

An increase in the price level ______ real wealth, which causes consumption to ______

lowers; decrease

which of the following government policies affects the economy through intended changes in the money supply and interest rates?

monetary policy

the aggregate expenditure model focuses on the relationship between total spending and

real GDP in the short run

if the exchange rate between the dollar and foreign currencies rises, the price in foreign currency of US products will ___ and the US aggregate demand curve will shift to the ____

rise; left

For most of the 1979-2008 period, real government purchases

rose steadily

The long-run aggregate supply curve

shifts to the right as technological change occurs

what are menu costs?

the costs to firms of changing prices

if aggregate expenditure is equal to GDP, then

the economy is in macroeconomic equilibrium.

if the price level increases, then

the economy will move up and to the left along a stationary aggregate demand curve.

U.S. net export spending falls when

the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1 change in consumption/change in Y

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending,

they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession

Macroeconomic equilibrium occurs where

total spending, or aggregate expenditure, equals total production, or GDP

When is the economy in a recession?

when the AE line intersects the 45o line at a level of GDP below potential real GDP

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption

an increase in net exports that results from a change in the price level in the US

will not cause the aggregate demand curve to shift