ECN 101 Ch 10 & 11 Connect Practice

The sum of the MPC and the MPS must equal 1 because

all additional income must be spent or saved.

True or False. If spending exceeds output, real GDP will decline as firms cut back on production.

False

True or False. Real GDP is more volatile (variable) than gross investment.

False

What is the fundamental reason that the levels of consumption and saving in the United States are each higher today than they were a decade ago?

Real GDP and disposable income are higher.

A downshift of the consumption schedule typically involves an equal upshift of the saving schedule. The exception to this relationship occurs when

there is an increase in personal taxes, then consumption and saving both shift downward.

The multiplier effect

intensifies the effect of a spending change, whether it is an increase or a decrease.

The difference between the MPC and the APC is that

the MPC is the change in consumption divided by the change in income, whereas the APC is total consumption divided by total income.

A decrease in the aggregate expenditures schedule will cause a decline in real GDP that is greater than the decline in the aggregate expenditures schedule because

the decrease in the aggregate expenditures schedule is multiplied into a larger change in real GDP.

Investment spending may increase even in a period when real interest rate rise if _________

the expected rates of return are rising faster than real interest rates

An investment schedule shows

the level of investment spending for a given level of GDP.

The central economic idea humorously illustrated in the Last Word "Toppling Dominoes" is _________.

the multiplier effect

The magnitude of the drop in real GDP that occurs when aggregate expenditures fall depends on

the size of the marginal propensity to consume.

A positive GDP gap is associated with

an inflationary expenditure gap.

If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:

15 billion

Suppose that a certain country has an MPC of 0.9 and a real GDP of $500 billion. If its investment spending decreases by $12 billion, what will be its new level of real GDP?

380 billion

By how much will GDP change if firms increase their investment by $9 billion and the MPC is 0.80? If the MPC is 0.5?

45 billion, 18 billion

If the slope of the aggregate expenditures schedule is 0.8, the multiplier will be

5

The multiplier will be _________ the ________ the MPC and the ________ the MPS; larger or smaller

Larger, smaller, smaller

In what direction will each of the following occurrences shift the investment demand curve, other things equal?; An increase in unused production capacity.

Shifts to the left

In what direction will each of the following occurrences shift the investment demand curve, other things equal?; Widespread pessimism arises about future business conditions and sales revenues.

Shifts to the left

In what direction will each of the following occurrences shift the investment demand curve, other things equal?; A major new technological breakthrough creates prospects for a wide range of profitable new products.

Shifts to the right

In what direction will each of the following occurrences shift the investment demand curve, other things equal?; Business taxes decline

Shifts to the right

In what direction will each of the following occurrences shift the investment demand curve, other things equal?; The cost of acquiring equipment falls.

Shifts to the right

What is on the Y axis and X axis for the saving schedule? Are they inversly or directly related?

Y axis: Saving X axis: Disposable income Directly related

What is on the Y and X axis for the consumption schedule? Are they inversely or directly related?

Y axis: consumption X axis: disposable income Directly related

Irving owns several frozen yogurt shops. He is considering whether he should build a new location downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

Yes

Suppose that the linear equation for consumption in a hypothetical economy is C = 50 + 0.8Y. Also suppose that income (Y) is $500. Determine the values for the following: a. The marginal propensity to consume = b. The marginal propensity to save = c. The level of consumption = $ d. The average propensity to consume = e. The level of saving = $ f. The average propensity to save =

a. 0.8 b. 0.2 c. 450 d. 0.9 e. 50 f. 0.1

Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in a private closed economy? (Increase/decrease) a. A decline in the real interest rate will cause GDP to ____________ b. An overall decrease in the expected rate of return on investment will cause GDP to ____________ c. A sizable, sustained increase in stock prices will cause GDP to ____________

a. Increase b. Decrease c. Increase

Equilibrium real GDP occurs where C + Ig = GDP in a private closed economy because

at this level of output, production creates sufficient total spending to purchase that output.

Saving is called a leakage because

it is a removal from the flow of aggregate consumption.

Planned investment is called an injection because

it is an addition to the flow of aggregate spending.

The actual multiplier in the U.S. economy is _________ than the multiple in this chapter's example.

smaller

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

5.0

True or False. Larger MPCs imply larger multipliers.

True

A negative GDP gap is associated with

a recessionary expenditure gap.

The economy's current level of equilibrium GDP is $780 billion. The full-employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that the economy faces __________ expenditure gap of __________ . (recessionary or inflationary)

a recessionary, 5 billion

If C + Ig exceeds GDP, the economy will

accumulate unplanned inventories, ordering will slow down, and real GDP will fall.

This multiplier effect is a key driving force behind _________

business cycles

A 5-year increase in the minimum age for collecting Social Security benefits. The consumption schedule will shift _________. The saving schedule will shift ________.

downward, upward

A large decrease in real estate values, including private homes. The consumption schedule will shift ___________ The saving schedule will shift __________

downward, upward

If inventories unexpectedly rise, then production __________ sales and firms will respond by __________output. (exceeds, expanding, trails, expanding)

exceeds, reducing

If the MPS rises, then the MPC will:

fall

If the slope of the aggregate expenditures schedule is 0.8, and aggregate expenditures decline by $4 billion, real GDP will

fall by 20 billion

A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment level of GDP

fall short of those required to achieve the full-employment level of GDP.

A reduction in the real interest rate will increase investment spending, other things equal, because firms will make an investment purchase only if the expected return is

greater than or equal to the real interest rate at which it can borrow.

If total spending is just sufficient to purchase an economy's output, then the economy is:

in equilibrium

Assuming the economy is operating below its potential output, an increase in net exports will

increase aggregate expenditures and real GDP.

If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by ________ taxes or ________ government expenditures.

increasing, decreasing

The two expenditure components of real GDP purposely excluded in a private closed economy are

net exports and the government sector

A depression abroad will tend to __________ our exports, which in turn will __________ net exports, which in turn will __________ equilibrium real GDP. (increase, reduce, decrease)

reduce, reduce, reduce

Saving must equal planned investment at equilibrium GDP in a private closed economy because

spending and production will be the same, and there will be no unplanned inventory or GDP changes.

A sharp, sustained increase in stock prices. The consumption schedule will shift _________. The saving schedule will shift ________.

upward, downward

A substantial increase in household borrowing to finance auto purchases. The consumption schedule will shift _________. The saving schedule will shift ________.

upward, downward

An economywide expectation that a recession is over and that a robust expansion will occur. The consumption schedule will shift _________. The saving schedule will shift ________.

upward, downward