chp 12
The formula for the multiplier is
1/(1-MPC)
If the consumption function is defined as C = 5,500 + 0.9Y, what is the value of the multiplier?
10
The National Restaurant Association states that the restaurant industry has an economic effect of more than $1.7 trillion annually in the United States, with every dollar spent in restaurants generating an estimated total of $2.05 in spending in the economy. This indicates that the spending multiplier for the restaurant industry is equal to
2.05.
What impact does a decrease in the price level in the United States have on net exports and why?
A decrease in the U.S. price level increases net exports by reducing the relative cost of American goods.
The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?
AE = C + I + G + NX
From July 2019 to October 2019, business inventories decreased by $4 billion. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need?
Aggregate expenditure was greater than GDP in this quarter.
Aggregate expenditure, or the total amount of spending in the economy, equals
Aggregate expenditure, or the total amount of spending in the economy, equals
Tsuang 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 Tsuang's claim that higher inventory is a definite indicator of declining aggregate demand?
Bumper production of many crops due to favorable weather conditions accounted for a substantial portion of the inventory.
,The general algebraic version of the aggregate expenditure modelLOADING... can be written as follows, where letters with "bars" represent fixed or autonomousLOADING... values. C = C + MPC (Y) I = I G = G NX = NX If you think of the aggregate expenditure function as a line on the 45°-line diagram, the intercept would be If you think of the aggregate expenditure function as a line on the 45°-line diagram, the slope would be
C+I+G+NX MPC
We can use the diagram to compare movements in real consumption between 1979 and 2019. Which of the following statements is true?
Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions.
The country of Cubania was adversely affected by the global recession of 2008. David Oster, a sociology professor at the University of Cubania, is of the opinion that tax rates on wealthy individuals should be lowered. Since the wealthy have a higher level of income, a tax cut would significantly increase consumption and aggregate demand. Which of the following would weaken David's argument that tax cuts for the wealthy would increase consumption and aggregate demand?
Economic research shows that wealthy individuals have a high marginal propensity to save.
If firms sell exactly what they expected to sell, all of the following will be true except
If firms sell exactly what they expected to sell, all of the following will be true except
Which of the following will increase planned investment spending on the part of firms?
Increased optimism about future demand for its product A lower real interest rate
What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?
Inventories decrease, GDP increases, and employment increases.
The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as
MPS = 1−MPC. MPC + MPS = 1. MPC = 1−MPS.
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 Sam's argument?
Since the government funded most of its spending through borrowing, interest rates in Tinseltown increased sharply.
In the graph to the right, the economy is initially in equilibrium at point A. Aggregate expenditure and real GDP both equal $10.0 trillion. Suppose there is an increase in investment spending of $200 billion that increases aggregate expenditure to $10.2 trillion. Which of the following best describes the initial impact of the increase in investment? All of the following are true as the economy adjusts to a new equilibrium except that
The aggregate expenditure line shifts up by $200 billion. The economy is no longer in equilibrium. Initially, real GDP rises by $200 billion. the initial increase in income or GDP leads to a further increase in investment and aggregate expenditure.
In the figure, a $20 trillion increase in planned investment increased the AE line from AE1 to AE2. However, real GDP increased by $40 trillion. Why?
The multiplier effect
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. A decrease in autonomous spending decreases real GDP by a multiple of the change.
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. Which of the following, if true, would support Zoltan's claim?
The natural rate of unemployment in East Paragon is estimated to be 1 percent.
Which of the following is NOT included in the calculation of total government purchases?
Unemployment insurance benefits paid for by the federal government
In the aggregate expenditure model, when is planned investment greater than actual investment?
When there is an unplanned decrease in inventories.
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. Which of the following, if true, will weaken Salim's claim that domestic consumption and investment will most likely decline in the near future?
With a recent increase in government spending on road construction projects across the country, unemployment is expected to decline by 3 percent.
We say that the economy as a whole is in macroeconomic equilibrium if
aggregate expenditure equals GDP. total spending equals total production. aggregate expenditure equals total production. total spending equals GDP.
The most important determinant of consumption is Which of the following causes saving to increase?
current disposable income. an increase in the interest rate
Complete the following table. an increase the us price level relative to other countries' price levels will ________ net exports an increase the growth rate of us gdp relative to other countries' will ________ net exports an increase the exchange rate between the dollar and other currencies
decreasedecreasedecrease
Complete the following table to indicate what effect a decrease in each of the consumption components will have on consumption.a decrease in .... will (increase/decrease) consumption the price level household wealth expected future income current disposable income the interest rate
increase decrease decrease decrease increase
U.S. real net exports are typically
negative, and usually rise in recessions and fall in expansions.
On the graph of the consumption function, the horizontal axis measures _______, while the vertical axis measures_______.
real national income or real GDP; real consumption spending
The growth in U.S. real government purchases
tends to be positive, but has fallen in recessions and in response to concerns about the size of budget deficits.
A curve showing 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
the aggregate demand curve.
Refer to the diagram. Suppose that the level of GDP associated with point N is potential GDP. If the U.S. economy is currently at point K, then
the economy is in recession.
When is the economy in a recession?
when the aggregate expenditure line intersects the 45o line at a level of GDP below potential GDP
