ECON 104 Exam 3 Multiple Choice

Holding all else constant, an increase in the growth rate in the US relative to other countries will make the aggregate demand curve:

Shift to the left

Holding all else constant, decreases in the value of the dollar relative to foreign currencies will make the aggregate demand curve:

Shift to the right

Which of the following would cause a movement along the per-worker production function?

a decrease in the capital per hour worked

If the economy is currently in equilibrium at a level of GDP that is above potential GDP, which of the following would move the economy back to potential GDP?

a decrease in wealth

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

An unplanned increase in inventories results from

actual investment that is greater than planned investment.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.

an increase; an increase

Which of the following is considered a negative supply shock?

an unexpected decrease in the refining capacity for oil

When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.

imports; exports; net exports

According to new growth theory:

knowledge capital is subject to increasing returns

Potential GDP refers to:

the level of GDP attained when all firms are producing at capacity.

If stricter immigration laws are imposed and many foreign workers in the US are forced back to their home countries

the long-run aggregate supply curve will shift to the left.

If the economy receives an influx of new workers from immigration

the long-run aggregate supply curve will shift to the right.

Economic growth models predict that:

the level of real GDP per capita in poor countries will grow faster than in rich countries.

When the economy is in a recession, economists say _____________________, putting ________ pressure on wages.

there is slack in the labor market; downward

In the long run,

unemployment is at its natural rate.

Suppose Ford plans to produce 150,000 cars this year. The company expects to sell 135,000 cars this year. Suppose that at the end of the year, Ford has sold 140,000 cars. What do you expect to happen going forward?

Ford will produce more cars going forward and hire more people because there was an unplanned decrease in inventories.

Autonomous expenditure is a type of expenditure that does not depend on

GDP.

Increases in the price level will

lower consumption because real wealth decreases.

If the aggregate expenditure shifts upward, the aggregate demand curve:

may stay the same or shift to the right

Usually at the beginning of a recession, inventories _______ and at the beginning of an expansion, inventories ________.

rise; fall

An "automatic mechanism" in the economy brings the AD/AS model back to equilibrium by always shifting the _____________ back to equilibrium.

short-run aggregate supply curve.

The aggregate expenditure model focuses on the ________ relationship between real spending and ________.

short-run; real GDP

The basic aggregate demand and aggregate supply curve model helps explain

short-term fluctuations in real GDP and the price level.

The long-run adjustment to a negative supply shock results in

the short-run aggregate supply curve shifting to the right.

The slope of the aggregate expenditure line equals

the slope of the consumption function.

Which of the following is usually the cause of stagflation?

a supply shock as a result of an unexpected increase in the price of a natural resource

Which of the following would cause the short-run aggregate supply curve to shift to the right?

a technological advance

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

a. Because contracts between workers and firms make some wages and prices "sticky" b. Because menu costs make some prices "sticky" c. Because firms are often slow to adjust wages, making them "sticky" d. All of the above

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

a. Contracts keep wages "sticky". b. Prices of final goods rise more quickly than the prices of inputs. c. Firms and workers fail to predict changes in the price level.

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?

a. Less investment b. Decreased consumption c. Falling Exports d. All of the above

Holding all else constant, if current disposable income increases, the consumption function will:

a. Shift upwards. b. Shift downwards. c. Become steeper. d. Become flatter. e. None of the above

If there are less inventories at the end of the year than expected:

a. total production was less than total spending. b. GDP < AE. c. inventories decrease. d. All of the above

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending.

The difference between aggregate expenditure and aggregate demand is that:

aggregate demand shows the relationship between the price level and the level of aggregate expenditure when all other factors that affect aggregate expenditure are held constant; aggregate expenditure is a point on the aggregate demand curve at a specific price.

Holding all else constant, increases in firms' expectations of their future profitability and investment spending will make the ______________ shift to the_________?

aggregate demand; right

When the government runs a budget deficit, we would expect to see that

investment will fall

The marginal propensity to consume is:

a. The slope of the consumption function. b. The slope of the aggregate expenditure line.

When is the economy in a recession?

when the aggregate expenditure line intersects the 45-degree line at a level of GDP below potential GDP

Consumption spending is $16 million, planned investment spending is $4 million, unplanned investment spending is $2 million, government purchases are $6 million, and net export spending is $1 million. What is aggregate expenditure?

$27 million

Suppose booming economies in the BRIC nations (Brazil, Russia, India, and China) causes net exports (NX) to rise by $25 billion in the United States. If the change in equilibrium GDP for the US ends up being $250 billion, what was the value of the marginal propensity to save (MPS)?

0.1

Assume a $100 billion increase in planned investment results in an $400 billion increase in equilibrium real GDP. What is the value of the marginal propensity to consume in this economy?

0.75

Suppose booming economies in the BRIC nations (Brazil, Russia, India, and China) causes net exports (NX) to rise by $25 billion in the United States. If the change in equilibrium GDP for the US ends up being $250 billion, what was the value of the marginal propensity to consume (MPC)?

0.9

Turkmenistan, a country in Central Asia bordered by Kazakhstan, Uzbekistan, Afghanistan, Iran, and the Caspian Sea, witnessed a 6.20% real growth rate over the past year. If this growth rate were to keep up, approximately how many years would it take for Turkmenistan's Real GDP to double?

11.29

Suppose that autonomous consumption is 1,500, government purchases are 1,000, planned investment pending is 1,250, net exports are -25, and the marginal propensity to consume is 0.75. The equilibrium level of GDP would then be:

14,000

If a $250 increase in autonomous consumption causes a $1000 increase in GDP, what is the multiplier?

4

If prices become more 'sticky' due to longer contracts or more strict no-compete clauses, we would expect the short-run aggregate supply curve to:

Become flatter

Holding all else constant, if the economy's marginal propensity to consume increases, the aggregate expenditure function will:

Become steeper

How can government policies, holding all else constant, shift the aggregate demand curve to the right?

By increasing government purchases.

Another name for the New Growth theory we discussed in class is:

Endogenous Growth Theory

________ of unemployment during ________ make it easier for workers to ________ wages.

High levels; a recession; accept lower

Which of the following statements is correct if real GDP in the United States declined by more during the 2007−2009 recession than did real GDP in Canada, China, and other trading partners of the United States?

Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?

Inventories decrease, GDP increases, and employment increases.

If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will decline, and GDP and employment will rise.

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

Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.

How would an increase in interest rates affect investment?

Real investment spending declines.

Holding all else constant, an increase in the price level will:

Shift the aggregate-expenditure line down.

Holding all else constant, if future disposable income increases, the consumption function will:

Shift upwards.

Holding all else constant, which of the following statements regarding the relationship between panned investment and another economic variable is NOT true?

Taxes on business and planned investment have a positive relationship.

Holding all else constant, which of the following statements regarding the relationship between consumption and another economic variable is NOT true?

The price level and consumption have a positive relationship.

In the aggregate expenditure model, when is planned investment greater than actual investment?

When there is an unplanned decrease in inventories.

Which of the following would cause a decrease in aggregate demand?

a decrease in government spending

Which of the following leads to a decrease in real GDP?

an increase in interest rates.

Suppose a recession occurs as a result of a supply shock, and instead of the economy naturally working its way back to equilibrium, the government uses policy to shift the aggregate demand curve to fight the recession. Using policy this way would

bring real GDP back to potential GDP more quickly but would result in a permanently higher price level.

Labor productivity:

can increase when the level of capital per hour worked decreases.

Lack of investment in strong education and health care systems:

causes a deterioration in human capital and a decline in labor productivity.

The long-run aggregate supply curve is vertical because in the long run,

changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.

If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________.

demand; right; increase

Inventories refer to

goods that have been produced but have not yet been sold.