ECO 1 Chapter 9

If a consumer receives an extra $100 of disposable income and spends $80 on final goods and services, then she must be setting the difference aside as saving. As a result, it must be true that ____

1 - MPC = MPS MPC + MPS = 1

disposable income (DI)

After-tax income of households; personal income less personal taxes.

Which of the following could cause macro failure? (Choose all that apply.) Multiple select question. Aggregate demand is too great. Aggregate demand is too little. Aggregate demand is too stable. Aggregate demand is too unstable.

Aggregate demand is too great. Aggregate demand is too little. Aggregate demand is too unstable.

Total consumption

Autonomous consumption + Income-dependent consumption

autonomous consumption

Consumer spending not dependent on current income.

Disposable income is after-tax income of consumers.

Disposable income

consumption

Expenditure by consumers on final goods and services.

investment

Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.

True or false: The Keynesian cross makes an explicit distinction between price levels and real output.

False

Investment spending consists of expenditures on new plants, capital equipment, machinery, business software, and inventories.

Investment spending

Which of the following are the four components or determinants of aggregate demand? Multiple select question. Resource prices Investment spending Productivity Net export spending Consumer spending Government spending

Investment spending Net export spending Consumer spending Government spending

The Leading Economic Index (LEI) is composed of ten gauges that are supposed to indicate in which direction the economy is moving.

Leading Economic Index (LEI)

Because the fraction of any change in income not consumed is saved, which of the following equations is true? Multiple choice question. MPC + MPS = 2 MPC = 1 + MPS MPC - MPS = 1 MPC + MPS = 1

MPC + MPS = 1

Marginal propensity to consume is the ratio of a change in consumption to a change in the income that caused that consumption.

Marginal propensity to consume

What do U.S. households primarily do with their disposable income? Multiple choice question. Spend most of it. Invest heavily in the stock market. Spend approximately half of it. Spend approximately two-thirds of it.

Spend most of it.

equilibrium (macro)

The combination of price level and real output that is compatible with both aggregate demand and aggregate supply.

marginal propensity to save (MPS)

The fraction of each additional (marginal) dollar of disposable income not spent on consumption; 1 − MPC.

marginal propensity to consume (MPC)

The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.

aggregate demand (AD)

The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.

aggregate supply (AS)

The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.

average propensity to consume (APC) =

Total consumption / Total disposable income (C/Yd)

average propensity to consume (APC)

Total consumption in a given period divided by total disposable income.

True or false: Macro self-adjustment requires that any shortfalls in one component of aggregate demand be offset by spending in another component.

True

A schedule or curve that shows the total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus is called ______. Multiple choice question. demand aggregate GDP aggregate supply aggregate demand

aggregate demand

A reduction in government spending will likely shift the: Multiple choice question. aggregate demand curve to the left aggregate demand curve to the right aggregate supply curve to the left aggregate supply curve to the right

aggregate demand curve to the left

The equilibrium price level and equilibrium output is determined by the intersection of the aggregate demand curve and the aggregate supply curve.

aggregate supply curve

A decrease in taxes will lead to: Multiple choice question. a decrease in aggregate demand an increase in aggregate demand a decrease in aggregate supply no change in the aggregate demand

an increase in aggregate demand

Consumer spending not dependent on current income is called: Multiple choice question. consumption function random consumption autonomous consumption income-dependent consumption

autonomous consumption

Consumer spending not dependent on current income is called: Multiple choice question. random consumption autonomous consumption consumption function income-dependent consumption

autonomous consumption

Consumer spending that is not dependent on current income is called autonomous autonomous consumption.

autonomous consumption

Which of the following are indicators included in the Leading Economic Index (LEI)? Multiple select question. government spending building permits interest rates transfer payments delivery times consumer confidence unemployment claims

building permits interest rates delivery times consumer confidence unemployment claims

Expenditures on _____ are considered economic investments. Multiple select question. stocks and bonds business software machinery inventories capital equipment savings accounts new plants public goods

business software machinery inventories capital equipment new plants

Expenditures by households on final goods and services refers to Multiple choice question. consumption. retail sales. consumables.

consumption

The average propensity to consume equals consumption divided by income.

consumption divided by income

Which of the following are the non-income determinants of household consumption and savings? Multiple select question. credit taxes firm revenue expectations wealth quantity of imports

credit taxes expectations wealth

Macro self-adjustment requires that any shortfalls in one component of aggregate (supply/demand) be offset by spending in another component.

demand

Consumption refers to expenditures by households on _____ goods and services. Multiple choice question. final intermediate

final

The value of total output produced at full employment is called: Multiple choice question. recessionary gap full-employment GDP cyclical unemployment inflationary gap

full-employment GDP

The value of total output produced at full employment is called full-employment GDP.

full-employment GDP.

The greater is the likelihood that market participants may abruptly change their spending behavior, the _____ is the likelihood that macro equilibria will be unstable. Multiple choice question. lesser greater

greater

U.S. households spend most of their disposable ______

income

If firms are optimistic about the business outlook, investment will ______ and the investment demand curve shifts _____. Multiple choice question. increase, rightward decrease, leftward increase, leftward decrease, rightward

increase, rightward

If consumers expect their future real incomes to rise, current consumption spending Blank______ and the aggregate demand curve shifts to the Blank______. Multiple choice question. increases, left increases, right decreases, left decreases, right

increases, right

The four determinants of aggregate demand are consumer spending, investment spending, government spending and net export spending.

investment spending

The aggregate demand curve will shift to the (right/left) when U.S. net exports decline.

left

The aggregate demand curve will shift to the (right/left) when there is a reduction in government purchases.

left

Higher taxes and more stringent regulations on businesses will shift the investment demand curve ______. Multiple choice question. rightward leftward upward

leftward

State and local governments are often unable (by law) to engage in deficit spending. This obligation and the fact that these governments account for two-thirds of all government spending suggests that possibility of macro stability may be Multiple choice question. strengthened. lessened.

lessened.

Because market participants may abruptly change their spending behavior, AD is _____ to shift, with the result being that macro equilibria tend to be _____. Multiple choice question. likely; stable likely; unstable unlikely; stable unlikely; unstable

likely; unstable

The slope of the consumption function equals the: Multiple choice question. average propensity to consume autonomous consumption marginal propensity to consume

marginal propensity to consume

The ratio of a change in consumption to a change in the income that caused the consumption change is called the Multiple choice question. average propensity to consume. average propensity to save. marginal propensity to consume. marginal propensity to save.

marginal propensity to consume.

The short-run equilibrium in the economy _____. Multiple choice question. always occurs at the full-employment level of output only occurs at the full-employment level of output. may occur at any level of output occurs where the aggregate demand (AD) curve intersects the vertical aggregate supply curve (AS)

may occur at any level of output

In a diagram depicting an economy's macro equilibrium, suppose the AD and AS curves are intersecting at the economy's potential real output. In this case, ______. Multiple choice question. either AD or AS (or both) should shift rightward either AD or AS (or both) should shift leftward no adjustment is desired

no adjustment is desired

The MPC plus the MPS equals: Multiple choice question. 0.5 two 1.5 one

one

Disposable income is equal to: Multiple select question. personal income less personal taxes. the after-tax income of consumers. the before-tax income of consumers. personal income plus personal taxes.

personal income less personal taxes. the after-tax income of consumers.

If aggregate demand is too little, too great, or too unstable, the economy will not reach and maintain the goals of full employment and ______. Multiple choice question. a government budget surplus economic contraction price stability a trade surplus

price stability

Because state and local governments have difficulty when it comes to deficit spending, their spending tends to be _____-cyclical. Multiple choice question. pro counter

pro

The aggregate demand (AD) curve will shift to the right when consumers expect their future incomes to (rise/fall).

rise

A decrease in U.S. net exports will ______. Multiple choice question. shift the aggregate demand curve leftward shift the aggregate supply curve rightward shift the aggregate demand curve rightward shift the aggregate supply curve leftward

shift the aggregate demand curve leftward

A rise in net exports will ______. Multiple choice question. shift the aggregate demand curve to the left shift the aggregate demand curve to the right shift the aggregate supply to the right shift the aggregate supply curve to the left

shift the aggregate demand curve to the right

The increase in consumer spending that results from an increase in consumer wealth will shift the aggregate demand curve to the right.

shift the aggregate demand curve to the right

The aggregate demand curve will shift to the left if ______. Multiple choice question. the cost of energy decreases government spending increases the money supply increases taxes increase

taxes increase

Which one of the following in not counted as a part of investment spending? Multiple choice question. taxpayer-funded infrastructure inventory expenditures residential construction business software

taxpayer-funded infrastructure

The intersection of the aggregate demand and aggregate supply curves determines: Multiple choice question. the equilibrium price level and equilibrium real interest rate the equilibrium price level and equilibrium real GDP the equilibrium real interest rate and equilibrium real GDP the long-run equilibrium price level and real GDP

the equilibrium price level and equilibrium real GDP

The Keynesian cross focuses on the relationship of total spending to the total value of _______. Multiple choice question. the money supply inventory investment government spending total output

total output

Suppose an economy's macro equilibrium is such that a shift in either AD or AS (or both) to the right is desired. From this we can conclude that the economy may be experiencing ______. Multiple choice question. wartime production excess demand economic growth unemployment

unemployment