Chapter 12 Revel HW
Would a larger multiplier lead to more severe recessions or less severe recessions?
A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.
Briefly explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.
Aggregate expenditure is the relationship between spending and income, while aggregate demand is a relationship between output and the price level.
The multiplier effect is the process in which
An increase in autonomous expenditure leads to a larger increase in real GDP.
In increase in real GDP that increases interest rates will cause the value of the multiplier to ________ A decrease in individual income tax rates will cause the value of the multiplier to _____________
Be smaller; Be larger.
The most important determinant of consumption spending is
Current personal disposable income.
Shedding inventories would lead to a decline in GDP because
Current production will decease as inventories are "shed," which reduces GDP.
Suppose a major U.S. appliance manufacturer is forecasting demand for its products during the next year. How will the forecast be affected by the following? An increase in the exchange rate value of the U.S. dollar.
Demand is expected to decline.
In a closed economy, aggregate expenditure is
Equal to consumption plus investment plus government spending.
What are the main four determinants of investment?
Expectations of future profitability, interest rates, taxes and cash flow.
Inventories are unwanted when
Expenditures are too low to keep pace with inventories.
When the price level rises from 104 to 124, real GDP falls from $5 trillion to $4 trillion. What is a possible explanation for this event?
Falling exports, less investment, and decreased consumption.
Suppose that exports become more sensitive to changes in the price level in the United States. That is, when the price level in the United States rises, exports decline by more than they previously did. This change makes the aggregate demand curve ____________
Flatter.
Inventories refer to
Goods that have been produced but have not yet been sold.
Zoltan Novak and Paul Smith, both residents of the country of East Paragon, are discussing whether the economy is operating at full employment. Zoltan, a market analyst, argues that with unemployment at 5.3 percent, the economy cannot possibly be fully utilizing all its resources. Paul, who is a journalist, disagrees based on a recent newspaper article that shows industrial production in East Paragon is at its highest level. This, he claims, is likely to indicate that the economy is operating at full employment. Paul's argument is flawed because
He ignores the other components of aggregate expenditure.
An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many PC makers that buy those chips sell their products in local currencies." In these circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to
Hurt Intel's sales because the cost of the chip is more expensive in terms of the foreign currency, but the selling price of the product is in the lower-valued foreign currency.
A rise in stock prices and housing prices
Increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.
Into which category of aggregated expenditures would the following transaction fall? The Jones family buys a new house.
Investment expenditure
The "investment multiplier" referred to by the economist is the
Larger change in equilibrium real GDP resulting from a change in investment.
In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate "would have been stronger if it hadn't been for companies drawing down inventories." If companies are "drawing down inventories," aggregate expenditure is likely to have been If the reduction in inventories was unplanned, then future production would be expected to
Larger than GDP; Increase as inventories are replenished.
The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as
MPC + MPS = 1, MPS = 1 - MPC, MPC = 1 - MPS.
How would an increase in interest rates affect investment?
Real investment spending declines.
Consider the table on the right, which shows the change in inventories for each quarter from 2007:I to 2010:IV measured in billions of 2009 dollars. Provide a macroeconomic explanation for this pattern. (Hint: When did the recession during this period begin and end?) The negative growth of inventories indicates a period of
Recession because demand was met by drawing down past inventories and production did not increase.
Usually at the beginning of a recession, inventories ________, but at the beginning of an expansion, inventories ___________.
Rise; fall.
"Shedding of unwanted inventories" means that firms are
Selling their unplanned increases in inventories from previous time periods.
suang Pey and Chang Jiang are debating economic growth in their country. Inventory in this closed agricultural economy is increasing and Tsuang thinks that this is a sure sign of declining demand and troubled times ahead. Chang, however, claims that the country has been through similar situations before but growth has never been too low for too long. He thinks that even if demand is currently low, things should improve in the medium term. Which of the following, if true, will weaken Chang's claim that things should improve in the medium term?
The central bank of this country recently increased their interest rates.
The GDP and employment growth rates in the developing country of Tinseltown have been steadily falling in the past few years. In order to bolster domestic employment, the government substantially increased spending and also placed restrictions on imports. On a TV show, a panel of experts discusses the effectiveness of increased government spending. Sam Perotti, Tinseltown's finance minister, claims that the government's actions have been highly effective. The recent increase in consumer spending, he claims, is proof that aggregate demand in the economy has increased. Ethan Bernstein, who is a research analyst, does not agree with Sam. He argues that the amount the government spent is too low to have had any effect on the economy. Laura Xacuti, an economist, also disagrees with Sam. She feels that the government should instead encourage individuals to save, which will increase the funds available for investment. According to Laura, the investment level in the economy is much lower than it should be and increasing that would address the real problem. This, she feels, is the fastest route to reviving the economy in the short term. Which of the following, if true, would weaken Ethan's view?
The fiscal multiplier in developing countries, including Tinseltown, is estimated to be very large.
Which one of the following is not a determinant of consumption spending?
The growth rate in the United States relative to the growth rates in other countries.
By saying that the investment multiplier would "give a further kick to the U.S. economy," the economist means
The multiplied effect of the increased infrastructure spending will increase real GDP and employment.
Indicate which of the following is correct about the multiplier effect.
The multiplier ignores the effect on real GDP of imports, inflation, and interest rates, the larger the MPC, the more additional consumption that occurs, and a decrease in autonomous spending decreases real GDP by a multiple of the change.
Country X is a growing economy located in southeast Asia. Although it has a large population, it also has a disproportionately high number of working-age people. A large English-speaking workforce and low labor costs make it a competitive outsourcing destination. However, as is the case with most growing economies, inflation is quite high in Country X. As a country that is poised to be an economic superpower, Country X's stock markets are booming. Real estate prices have been increasing by 20 percent every year. Salim Habib is a guest speaker at a talk organized by one of the leading universities in the country. He states that with high inflation, interest rates are bound to increase. Consequently, consumption and investment will fall. Ricky Cafrall, a student, is not convinced. He claims that the rally in housing and stock prices will actually increase household wealth and consumption. In claiming that household wealth and consumption will increase, Ricky is ignoring:
The real value of household wealth.
"The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following?
The student is confusing saving with investment.
Aggregate expenditure is
The sum total of consumption, planned investment, government purchases, and net exports.
The Republic of Oakland is recovering from a financial crisis that resulted in a fall in the GDP growth rate and widespread unemployment. The prime minister has set up a Crisis Recovery Taskforce to discuss measures that will revive the economy. Katie Scherbatsky, who was appointed to the taskforce by the prime minister, claims that Oakland should focus on boosting aggregate demand by increasing net exports. She suggests that the government should do this by providing tax sops and incentives to export companies. Eric Paulo, who is also part of the taskforce, does not agree with Katie. He argues that in order to increase GDP, stagnant domestic consumption should be revived. He proposes tax cuts as the best measure to achieve this. Which of the following, if true, will weaken Katie's claim that net exports will increase aggregate demand in Oakland?
The value of Oakland's currency has been increasing because globally-traded commodities are priced in terms of the Oaklandian dollar.
Carmakers in China might find that their inventories are rising unexpectedly because These carmakers are likely to react to the increase in inventories by
Their sales are lower than expected; Producing fewer cars in the future.
When aggregate expenditure is greater than real GDP, then
inventories fall, and GDP and employment increases.
