Econ 161 Midterm 2

An MPC value of less than 1.0 indicates that as income increases,

consumption also increase, though not as much as income.

In a private closed economy, the two components of aggregate expenditures are

consumption and investment.

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The per-unit cost of production in the economy described is

$2.

The accompanying schedule contains data for a private closed economy. All figures are in billions. If gross investment is $10 at all levels of GDP, the equilibrium GDP will be

$220.

According to the given cumulative investment table, if the real interest rate falls from 20 percent 16 percent, then

$30 billion of additional investments will be undertaken.

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be

$38 billion.

(Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). The equilibrium GDP will be

$400

Assume that the marginal propensity to consume in an economy is 0.9. If the economy's full-employment real GDP is $500 billion and its equilibrium real GDP is $550 billion, there is an inflationary expenditure gap of

$5 billion.

The table shows a private open economy. All figures are in billions of dollars. If the investment Ig in this economy is independent of income GDP, then a $10 increase in its net exports would increase its equilibrium real GDP by

$50.

All figures in the table are in billions of dollars. If this economy were an open economy, the equilibrium GDP would be

$550 billion.

The table gives data for a private (no government) closed economy. All figures are in billions of dollars. If planned investment is $25 billion, then aggregate expenditures at the income level of $560 billion will be

$580 billion.

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by

$6 billion.

Assumed for the entire business sector of the private closed economy, there are $0 worth of investment projects that will yield and expected rate of return of 25 percent or more. But there are $15 worth of investments that would yield an expected rate of return 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. If the real interest is 5 percent, what amount of investment will be undertaken?

$60

The table shows a private open economy. All figures are in billions of dollars. If net exports increased by $10 billion at each level of GDP, the equilibrium real GDP would be

$650.

The table shows a consumption schedule. All figures are in billions of dollars. If planned investment was $20 billion, government purchases of goods and services were $20 billion, and taxes and net exports were zero, then the equilibrium level of GDP would be

$680 billion.

Refer to the given data for a hypothetical economy. At the $100 level of income, the average propensity to save is

.10

Based on OECD data for 2014, the average propensity to consume (APC) in the United States is about

.95

If aggregate expenditures increase by $12 billion and equilibrium GDP consequently increases by $48 billion, then the marginal propensity to save in the economy must be

0.25.

The table illustrates the multiplier process resulting from an autonomous increase in investment by $5. The marginal propensity to consume is

0.75.

If, in economy, a $200 billion increase and consumption spending create $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, of the marginal propensity to consume and the multiplier are, respectively,

0.8 and 5.0

Refer to the given data for hypothetical economy. The marginal propensity to consume is

0.80.

What is the slope of the consumption schedule or consumption line for a given economy?

1 - MPS

The multiplier can be calculated as

1/(1-MPC).

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is

12 percent.

If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is

2

Refer to the table. The multiplier is

3.

If the MPC is 0.75, multiplier will be

4.

1. Real-Balances Effect 2. Household Expectations 3. Interest-Rate Effect 4. Personal Income Tax Rates 5. Profit Expectations 6. National Incomes Abroad 7. Government Spending 8. Foreign Purchases Effect 9. Exchange Rates 10. Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Investment spending would most likely be influenced by changes in

5 and 10.

Which of the diagrams for the U.S. economy best portrays the effects of an increase in resource productivity?

A

Which of the following is incorrect?

APC + APS = 1

Which of thew following will cause a movement up along an economy's saving schedule?

An increase in disposable income.

Which of the following would shift the consumption schedule downward?

An increase in the probability of a recession

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to

decrease by $50 billion.

In the aggregate expenditures model, the consumption schedule is shown to be

directly related to real income GDP.

Refer to the diagram. Consumption equals disposable income when

disposable income is B

In the aggregate expenditures model, it is assumed that investment

does not change when real GDP changes.

As the consumption and saving schedules relate to real GDP, an increase in taxes will shift

downward both the consumption and saving schedules.

Refer to the diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE2, the

economy is in equilibrium, at full employment.

Which of the following statements about investment spending is false?

During the Great Recession in 2007-2009, when interest rates essentially declined to zero, investment spending rose sharply.

Refer to the accompanying consumption schedule. The average propensity to save at income level B is represented by

EF/BF.

The immediate determinantes of investment spending are the

Expected rate of return on capital goods and the real interest rate.

Refer to the consumption schedule shown in the graph. At income level 3, the amount of savings is represented by the line segment

FG

Refer to the consumption schedule shown in the graph. At income level 3, the amount of consumption is repented by the line segment.

GH.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because

a portion of a tax cut will be saved.

Refer to the diagram for a private closed economy. At the equilibrium level of GDP, the APC and APS

are 5/6 and 1/6, respectively.

In the graph, it is assumed that investment, net exports, and government expenditures

are independent of GDP.

Actual investment equals saving

at all levels of GDP.

Refer to the accompanying information for a closed economy. If government spends $80 billion at each level of GDP, and imposes a lumpsum tax of $100

equilibrium GDP will now be $350.

f the dollar appreciates relative to foreign currencies, then

foreign buyers will find U.S. goods become more expensive.

An economy characterized by high unemployment is likely to be

having a recessionary expenditure gap.

A private closed economy includes

households and businesses, but not government or international trade.

If a government raises its expenditures by $50 billion and at the same time levies a lump-sum tax of $50 billion, the net effect on the economy will be to

increase GDP by $50 billion.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

increase aggregate demand.

Refer to the diagram for a private closed economy. In this economy, aggregate expenditures

increase by $2 for every $3 increase in GDP.

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to

increase by $45 billion.

Assuming that MPC is 0.75, equal increases in government spending and tax collections by $10 billion will

increase the equilibrium GDP by $10 billion.

As disposable income decreases, consumption

and saving both decrease.

The table shows a consumption schedule. At the $300 level of disposable income,

There is a dissaving $10.

If the real interest rate increases,

There will be a movement upward along the investment demand curve.

(Advanced analysis) The tables gives data for a private closed economy. The letters Y, C, S, and I are used to represent real GDP, consumption, saving, and investment, respectively. The equation representing the consumption schedule for the economy is

C = 60 + 0.6Y.

Refer to the given diagram. At income level F, the volume of saving is

CD

(Last Word) In response to the Great Recession, the federal government engaged in significant deficit-funded spending, but it did not fully achieve the desired result. Which of the following best explains why the fiscal policy actions fell short of their objective?

Consumers did not respond to the fiscal stimulus as well as hoped, as they put more income into saving and repaying debt.

Which statement about the multiplier is correct?

If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4.

An increase in disposable income

Increases consumption by moving upward along a given consumption schedule

Which of the following would increase GDP by the greatest amount?

a $20 billion increase in government spending

The consumption and savings schedules reveal that the

MPC is greater than the zero but less than one.

If the savings schedule is a straight line, the

MPS must be constant.

The simple multiplier 1/MPS

Over states the actual multiplier because it excludes leakages in domestic spending from the purchase of imports for the paying of taxes.

Refer to the figure. If the aggregate demand curve shifts from AD2 to AD1 , the multiplier effect on real GDP will be a decrease from

Q2 to Q4.

(Advanced analysis) If the equation C = 20 + 0.6Y, where C is consumption and Y is disposable income, were graphed,

The vertical intercept would be +20 and the slope would be +0.6

Refer the figure. The consumption schedule indicates that,

Up to a point, consumption exceeds income but then falls below income.

If the consumption schedule shift upward and the shift was not caused by a tax change, the savings schedule

Will shift downward.

If some reason households become increasingly thrifty, we could show this by

an upward shift of the saving schedule.

If net exports are positive,

aggregate expenditures are greater at each level of GDP than when net exports are zero or negative.

For a private closed economy, an unintended decline in inventories suggests that

aggregate expenditures exceed production.

Refer to the diagram. The change in aggregate expenditures as shown from (C + Ig + Xn1 ) to (C + Ig + Xn2) will produce

an inflationary expenditure gap if 0B is this nation's full-employment level of GDP.

A decrease in aggregate demand in the short run will reduce

both real output and the price level.

The multiplier effect relates

changes in spending to changes in real GDP.

A constitutional amendment is passed that requires the government to have an annually balanced budget in the sense that changes in spending should be matched by equivalent changes in taxes. Should the government desire to increase GDP by $25 billion and meet the provisions of the law, it

could increase spending by $25 billion and increase taxes by $25 billion.

In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________.

declined by 27 percent; rose to 25 percent

Suppose the GDP is in equilibrium at full employment and the MPC is 0.80. If government wants to increase its purchase of goods and services by $16 billion without changing equilibrium GDP, taxes should be

increased by $20 billion.

Refer to the given graph. A movement from a to b along C1 might be caused by a(n)

increases in real GDP.

In the Great Recession of 2007-2009, the aggregate expenditures schedule in the U.S. economy dropped, mostly due to a fall in

investment expenditures.

Exports have the same effect on the current size of GDP as

investment.

Refer to the diagram. The impact of the public sector on the equilibrium GDP

is expansionary.

The real-balances effect on aggregate demand suggests that a

lower price level will increase the real value of many financial assets and therefore cause an increase in spending.

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. If this nation's equilibrium price level is 125, its net exports will be

minus $2 billion.

The change in real GDP resulting from an initial change in spending can be calculated by

multiplying the multiplier by the initial change in spending.

Refer to the consumption schedule shown in the graph. At income level 1, the amount of saving is

negative.

Refer to the diagram. If (C + Ig) are the private expenditures in the closed economy and Xn2 are the net exports in the open economy, we can conclude that

net exports are positive.

In the aggregate-expenditures model, the average price level is

not shown on the AE graphs.

Refer to the table. If the full-employment real GDP is $70, the

recessionary and inflationary expenditure gaps are both $0.

Refer to the table. If the full-employment real GDP is $100, the

recessionary expenditure gap is $10

In contrast to investment, consumption is

relatively stable.

The accompanying graph depicts an economy in the

short run.

A fall in the prices of inputs will shift the aggregate

supply curve rightward.

In a mixed closed economy,

taxes and savings are leakages, while investment and government purchases are injections.

When the price level decreases

the demand for money falls and the interest rate falls.

Which of the following will not tend to shift the consumption schedule upward?

the expectation of a future decline in the consumer price index

Refer to the graph. Which of the following factors does not explain a movement along the AD curve?

the expenditure multiplier effect

The slope of the consumption schedule between two points on the schedule is

the ratio of the change in consumption to the change in disposable income between those two points.

A lump-sum tax causes the after-tax consumption schedule

to be parallel to the before-tax consumption schedule.

If the consumption schedule shifts downward, and the shift was not caused by a tax change, then the saving schedule

will shift upward.