ECON 201 (EXAM 3)

disposable income

"Break-even income" is the income level at which consumption is equal to:

future

"No free lunch" means that while borrowing in the present allows for higher consumption in the present, it necessitates lower consumption in the ______________ when the debts that are incurred due to the borrowing must be repaid.

the multiplier

1/MPS is the formula for:

mixed

A __________ open economy includes both private and public (government) sectors.

They will invest since the expected rate of return is greater than the interest rate.

A business is considering an investment. The expected rate of return is 10% and the Interest rate is 8%. How does the business use this information to decide whether or not to make this investment?

$70

A business is considering investment in a new machine. The machine costs $1,000 and the real investment is 7%. What is the interest cost?

rate

A business is thinking about investing in a new piece of equipment. The expected ____________ of return helps the business make the decision about weather or not to invest.

marginal propensity to save

A change in saving divided by a change in income is equal to the:

decline by $50B

A decrease in the government spending by $10 billion with a multiplier of 5 will cause aggregate expenditures to:

fixed

A fundamental assumption behind the Keynesian aggregate expenditure model is that prices in the economy are ______________.

net export schedule

A list of the amount of net exports that will occur at each level of GDP is called the:

open

A mixed economy is a(n) ____________ economy that includes government spending and taxation.

GDP

A movement along the consumption schedule represents a change in the amount consumed and is solely caused by a change in real:

open

A private __________ economy is a private economy that includes international trade in its GDP.

government

A private closed economy is one without international trade or _______________ spending.

government

A private open economy is a private economy that includes international trade but not ____________ spending.

pessimistic

A shift of the investment demand curve from ID2 to ID0 is explained by ____________ business expectations.

inflationary gap

A(n) _____________ is the amount by which aggregate expenditures at the full-employment GDP exceed those required to achieve full-employment.

increase

A(n) ______________ in business taxes shifts the investment demand curve to the left.

recessionary gap

A(n) ___________________ is the amount by which aggregate expenditures at the full-employment GDP fall short of those required to achieve full-employment.

$20

According to the table, when disposable income is $470, what is saving when consumption is $450?

negative

Aggregate expenditures and GDP will be decreased beyond what they would be in a closed economy with the addition of ______________ net exports.

positive net exports

Aggregate expenditures and GDP will be increased beyond what they would be in a closed economy with the addition of:

a decrease

An increase in consumer purchases of automobiles and other goods bought on credit is likely to result after _____________ in the interest rate.

upward and increase

An increase in government spending will shift the aggregate expenditure schedule _____________ the equilibrium level of real GDP.

decreases

Any factor that leads businesses to collectively expect lower rates of return on their investments ____________ investment demands.

reduce production output to move the level of GDP back to equilibrium

At levels above equilibrium GDP, consumption underspending causes firms to:

consumption

Average propensity to consume equals total ______________ divided by total disposable income.

MPC + MPS = 1

Because the fraction of any change in income not consumed is saved, which of the following equations is true?

the formula for aggregate expenditures in a private closed economy

C+Ig=GDP is:

multiplier

Changes in investment, consumption, net exports and government purchases that ultimately change output and income by more than the initial change in the spendings is called __________ effect.

net exports, government spending, consumption and investment

Changes to which of the following lead to the multiplier effect? (net exports, growth in national savings, wage and income, government spending, consumption, investment)

income

Consumption is positively related to disposable:

$650B

Currently the country's GDP = $500B and the MPC = 0.90. If consumption spending increases by $15B, what is the country's new level of real GDP?

0.75

Disposable income rises by $20 billion to $40 billion. Households consume $15 billion of the increase and save $5 billion of that income. What is the marginal propensity to consume (MPC)?

consumption

Dissaving is when _____________ is greater than disposable income.

disposable income

Dissaving will occur at low __________ levels.

The saving schedule and the consumption schedule

Due to long-term decisions and non-income determinants working in opposite directions, which of the following are relatively stable? (the demand schedule, the saving schedule, the consumption schedule, the supply schedule)

planned investment spending, consumption spending

During the 2007-2009 recession, which components of aggregate expenditures were significant contributors to the downturn? (planned investment spending, consumption spending, government spending, net exports)

consumption

Each point on the 45 degree line is where household ___________ equals disposable income.

imports are greater than exports

Equilibrium real GDP will decline when:

the costs of producing the output are lower than the revenues from selling the output

Firms are willing and able to produce any level of output as long as:

inventory

Firms make planned changes in their __________ levels in anticipation of faster or slower sales.

liquidating wealth and borrowing from a bank

Households can consume more than their current incomes by: (earning a raise, liquidating wealth, borrowing from a bank, adding to their savings)

multiplier is 5

If a $10 billion change in investment leads to a $50 billion change in output and income, then the:

0.25

If disposable income increases from $450 to $470 billion and savings increases from $15 to $20 billion, what is the marginal propensity to save (MPS)?

increase

If households save $10 billion and firms invest $20 billion then the level of real GDP will:

decrease

If households save $40 billion and firms invest $30 billion, then the level of real GDP will:

GDP increases by $40B

If the MPS=0.25 and business investment spending increases by $10B, what is the change to the country's GDP?

an increase in net exports and aggregate expenditures and an expansion of real GDP

If the economy is operating below its full-employment level, the depreciation of the dollar will likely lead to:

above-equilibrium level of GDP

If the leakage of saving is greater than the injection of investment then there will be a(n):

equals planned investment by businesses

If the private closed economy is at equilibrium real GDP, then savings:

multiplier effect

If the rate of return on a firm's potential project or the real interest rate increases or decreases, the size of the effect they will have on the equilibrium GDP is based on the:

declining real estate values and falling stock market prices

In 2008, a "reverse wealth effect" occurred due to: (increased borrowing, declining real estate values, falling stock market prices, rising real estate values)

saving and planned investment are equal (S=Ig) and there are no unplanned changes in inventories

In a closed economy, two characteristics of equilibrium GDP are:

Sa+T+M=Ig+G+X

In a mixed open economy, equilibrium GDP is identified where:

$650B

In a private closed economy equilibrium, GDP is $600B with an MPS of 0.20. When the country begins to trade, exports are $90B and imports are $40. The equilibrium GDP for this new private open economy is equal to:

marginal

In economic terms _________ means "extra" or "a change in".

rightward, leftward

In terms of the investment demand curve, an increase in demand is represented by a(n) __________ shift and a decrease in demand is represented by a(n) __________ shift.

leakage of savings

In the income-expenditure circular flow, investment is a replacement for the:

wealth

In the late 1990s, skyrocketing US stock values expanded the value of household assets. This is an example of the ____________ effect.

greater rates of return on their investments

Increases in investment demand occur when businesses collectively expect:

investment spending

Innovations induce a large wave of __________ that in time recedes.

money

Interest is the financial cost of __________ capital to purchase real capital.

marginal-benefit, marginal-cost

Investment decisions are what kind of decisions?

decline in output, jobs, and total income

It is undesirable for GDP to be greater than the equilibrium level because it will lead to a(n):

unplanned decline in business inventories

It is undesirable for actual GDP to be less than the equilibrium level because there will be a(n):

decrease taxes; increase government spending

Keynes proposed what two policies that a government might pursue to close a recessionary expenditure gap and achieve full employment? (decrease taxes, decrease government spending, increase taxes, increase government spending)

diminish

Lower interest rates ___________ the incentive to save.

investment

Most of the fluctuations in output and employment over time are due to demand shocks relating to changes in:

exports; imports

Net exports are calculated as total ___________ minus total ____________.

inflation

Real interest rates are rates adjusted for:

consumption

Saving equals disposable income minus:

leakage

Saving is a(n) _______________ or withdrawal of spending from the economy's circular flow of income and expenditures.

savings, imports, paying taxes

Select all the choices that are leakages in an expanded economy. (savings, imports, paying taxes, investments)

real GDP was significantly below potential output, surplus of productive resources, the unemployment rate was at double digits

Select the statements that best summarize the conditions present during the Great Depression. (Real GDP was significantly below potential output, surplus of productive resources, shortage of productive resources, the unemployment rate was at double digits, real GDP was significantly above potential output)

equal to 1

Since disposable income is either consumed or saved, the fraction of any disposable income consumed plus the fraction saved must be:

taxes and imports

Spending on _________ drains off some of the additional consumption created by the increases in income. (capital goods, taxes, imports, exports)

retaliation by country B

Suppose country A and country B are trading partners. The imposition of tariffs by country A on goods from country B may not be a sound economic idea because it would likely lead to:

increased tariffs on imports

The Great Depression was worsened because of the imposition of a trade policy by the United States government that:

aggregate expenditures fall by $7B

The MPC = 0.7 and the government imposes a tax of $10B. What is the impact on aggregate expenditures?

one

The MPC plus the MPS equals:

real, nominal

The _________ interest rate is the percentage increase in purchasing power that the borrower pays the lender, while the __________ interest rate is the percentage increase in money that the borrower pays the lender.

average

The _________ propensity to consume is the fraction or percentage of total income that is consumed.

slope

The __________ of a line is the ratio of the vertical change to the horizontal change taking place by moving from one point to another on that line.

average

The ___________ propensity to save (APS) equals saving divided by income.

multiplier

The _____________ influences the degree to which the GDP changes if there is a change in the rate of return on a firm's potential project or the real interest rate.

consumption

The ______________ schedule shows the various amounts that households would plan to spend at each of the various levels of disposable income.

inverse

The _______________ relationship between interest rates and quantity of investment conforms to the law of demand.

consumption, investment

The aggregate expenditure schedule in a private closed economy is the sum of ____________ plus planned ____________.

marginal

The change in consumption divided by the change in income is equal to the ___________ propensity to consume.

direct

The consumption schedule reflects the ____________ relationship between consumption and disposable income.

1/(1-MPC)

The direct relationship between MPC and the multiplier is shown in the following equation:

wealth

The dollar amount of all the assets that a household owns minus the dollar amount of its liabilities is called:

is not guaranteed and the investment involves risk

The expected rate of return:

consumption; investment; government purchases; net exports

The formula for aggregate expenditures in an open mixed economy is _______________ + _______________ + ______________ + ________________ = GDP.

marginal propensity to save

The fraction of any change in income not consumed is, by definition, the __________ ___________ to _____________. This explains why the marginal propensity to consume plus this fraction of any change equals one.

average

The fraction of total income that is saved equals the ____________ propensity to save.

average propensity to consume

The fraction or percentage of total income that is consumed is called the:

investment

The interest cost, converted to percentage terms, needs to be weighed against the expected rate of return when making __________ decisions.

schedule

The investment ______________ shows the amount of investment forthcoming at each level of GDP.

curve; schedule

The investment demand ____________ and the real interest rate together determine the amount of investment spending while the investment ____________ shows the amount of investment forthcoming at each level of GDP.

interest rates

The investment demand curve shows the relationship between quantity of investment demanded and ___________.

equilibrium

The level of GDP at which the total quantity of goods produced equals the total quantity of goods purchased is the ______________ level of output.

real; demand

The level of investment spending by firms is based upon the ____________ interest rate together with the investment ____________ curve.

benefit

The marginal _____________ of investment is the expected rate of return.

slope

The marginal propensity is the _________ of the consumption schedule.

consumption, savings

The most significant factor for determining a nation's level of _____________ and ______________ is disposable income.

there is a bigger change in equilibrium GDP than the change in aggregate expenditures

The multiplier effect means that:

.25

The multiplier is 4 when the marginal propensity to save (MPS) is:

the percentage increase in purchasing power that the borrower pays the lender

The nominal interest rate is the percentage increase in money that the borrower pays the lender, while the real interest rate is:

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:

nominal

The real rate of interest is the _________ rate of interest minus the rate of inflation.

marginal

The slope of the savings schedule is the __________ propensity to save.

investment

The two components of aggregate expenditures in a private closed economy are consumption and gross private _____________.

investment

The variability of profits contributes to the volatility of ____________ spending.

an upward, downward

The wealth effect occurs when events suddenly boost the value of existing wealth. This causes __________ shift in the consumption schedule and _________ shift in the saving schedule.

direct

There is a(n) __________ relationship between spending and GDP.

private; mixed

To completely construct the aggregate expenditures model we must move from a ______________ (no government) open economy to a _____________ economy that also includes the public sector (government).

combined or total

To economists, the term "aggregate" means:

such spending generates production and income abroad

To prevent overstating the value of domestic production, the amount spent on imported goods in the U.S. must be subtracted from exports or total spending because:

net

Total tax revenues minus transfer payments is called __________ tax revenues.

false (real)

True or false: The investment demand curve shows the amount of investment forthcoming at each nominal interest rate.

income

U.S. households spend most of their disposable:

changes in investment schedule, changes in consumption schedule

What are the two ways that equilibrium GDP will change in a private closed economy? (changes in net export schedule, changes in government spending schedule, changes in investment schedule, changes in consumption schedule)

an increase or decrease in GDP

What does the multiplier explain?

the amount by which aggregate expenditures at full-employment GDP fall short of those required to achieve full-employment GDP

What is a recessionary expenditure gap?

the amounts that business firms collectively intend to invest at each level of GDP

What is planned investment?

marginal cost

What is the interest rate paid for borrowing funds?

cell phones, railroads, and electricity

What represents innovations that created a "wave" of investment spending? (running shoes, cell phones, televisions, railroads, electricity)

more spending and less saving today

What will happen to household spending if households expect prices to rise in the future?

less

When GDP is _____________ than its equilibrium level, businesses will raise the rate of production, leading to more unemployment and consequently raising the levels of consumption and income.

decrease

When GDP is above equilibrium, firms will ____________ the rate of production.

inventory levels to fall, and informs businesses to increase production levels toward equilibrium output

When GDP is below equilibrium, higher levels of spending cause:

real GDP

When developing macroeconomic models, economists change their focus from the relationship between consumption and disposable income to the relationship between consumption and:

reduces; lowers

When exports decrease or imports increase, this ___________ aggregate expenditures and ______________ the nation's GDP.

aggregate expenditures are impacted by only a fraction of the tax, T*MPC; part of the tax is paid out of income that would otherwise have been saved

When government spending and taxes are equal, government spending will have a greater impact on aggregate expenditures and GDP because: (aggregate expenditures are impacted by only a fraction of the tax, T*MPC; part of the tax is paid out of income that would otherwise have been saved; the multiplier is larger for government spending than taxes; the MPC for taxes is smaller than it is for government spending)

$80 billion

When government spending increases by $20 billion and the multiplier is 4, there will be an increase in equilibrium real GDP of:

it shifts down

When households' expect rising prices in the near future, the effect on the saving schedule is that:

nominal

When making an investment decision, the inflation rate should be subtracted from the ____________ interest rate to find the real rate of interest.

inflationary gap and current employment is above full employment

When potential output is $510B and the aggregate expenditures curve intersects the 45 degree line above $510B implying that equilibrium real GDP is greater than potential output, then there is a(n):

fall

When real interest rates __________, households tend to borrow more, consume more, or save less

unplanned; actual

When sales fall short of planned production output, the unsold output is known as _____________ changes in inventory and is included in ____________ investment.

imports

When the U.S. ____________, part of U.S. Income must be subtracted from aggregate expenditures in order to avoid overstating the value of domestic production and domestic spending.

increasing U.S. exports, GDP, income

When the United States' foreign trading partners experience higher incomes, it benefits the U.S. by: (increasing U.S. exports, increases U.S. GDP, increasing U.S. income, decreasing U.S. imports)

a reduction of goods in inventory and too low a production rate

When the current production level of goods and services leads to output levels below equilibrium GDP, this results in:

depreciates

When the dollar ____________ relative to other currencies it enables people abroad to obtain more dollars with each unit of their own currency.

reducing, saving

When the government imposes a lump-sum tax on its citizens, this has the effect of ______________ equilibrium real GDP by reducing both consumption and ____________.

increase; multiplier

When the government spends money on goods and services, it affects aggregate expenditures in a public open economy by causing total aggregate expenditures to ______________. To find the new equilibrium real GDP, we multiply the full amount injected into the economy and the ____________.

rise; multiplier

When the government spends money on goods and services, it affects aggregate expenditures in a public open economy by causing total aggregate expenditures to ________________. To find new equilibrium real GDP, we multiply the full amount injected into the economy and the ____________.

4

When the initial change in spending is $20 billion and the resulting change in GDP is $80 billion, the multiplier is:

below-equilibrium level of GDP

When the leakages of savings are less than the injections of investment in the income-expenditure circular flow, then there will be a(n):

increasing output and employment

When the level of GDP is below the equilibrium level, businesses will respond to the unplanned decline in business inventories by:

C+Ig+Xn; C+Ig+(X-M)

Which formulas represent the aggregate expenditures in a private open economy? (C+I+Xn, C+Ig, C+Ig+G, C+Ig+(X-M))

capital equipment, new plants, inventories, machinery

Which of the following are considered economic investment? (capital equipment, stocks and bonds, new plants, inventories, machinery, savings accounts)

wealth, borrowing, interest rates

Which of the following are determinants of household consumption and savings? (wealth, borrowing, trade balance, interest rates, investment)

there is no unplanned increase in inventories of goods, there is no excess of total spending, the total quantity of goods produced equals the total quantity of goods purchased

Which of the following are true at equilibrium GDP? (the unemployment rate is 0%, there is no unplanned increase in inventories of goods, there is no excess of total spending, the total quantity of goods produced equals the total quantity of goods purchased)

nominal GDP is likely to increase, but real GDP is not likely to increase; the economy is likely to experience demand-pull inflation; the economy is likely to produce either at potential or just above potential output

Which of the following is likely to occur when aggregate expenditures are so high that the equilibrium level of GDP is beyond the potential output? (the economy is likely to produce at or below full-employment GDP; nominal GDP is likely to increase, but real GDP is not likely to increase; the economy is likely to experience demand-pull inflation; both nominal GDP and real GDP are likely to increase; the economy is likely to produce either at potential or just above potential output)

changes in trade barriers, court decisions in key labor or antitrust cases, and changes in exchange rates

Which of the following may be reasons for substantial shifts in business expectations? (changes in trade barriers, court decisions in key labor or antitrust cases, steady increases in price levels, changes in exchange rates)

debt, expectations, wealth, real interest rates

Which of the following nonincome determinants of consumption cause a shift of the consumption schedule? (debt, tax revenues, expectations, wealth, real interest rates, net exports)

acquisition, maintenance, and operating costs, technological charge, and business taxes

Which of the following shift the investment demand curve? (wealth accumulation, acquisition, maintenance, and operating costs, technological change, business taxes)

not spending and that part of disposable income not consumed

Which of the following state how economists define the concept of personal saving? (that part of gross income not consumed, not spending, paying a fair share of income taxes, that part of disposable income not consumed)

the investment demand curve is based upon and determined by the real rate of interest; the investment schedule is the amount of investment forthcoming at each level of GDP

Which of the following statements are true of investment schedule and investment demand curve? (The investment schedule is the amount of investment forthcoming based upon disposable incomes, the investment demand curve is based upon and determined by the real rate of interest, the investment demand curve is based upon and determined by the cost of capital, the investment schedule is the amount of investment forthcoming at each level of GDP)

income and output

Which of the following two variables change by more than an initial change in spending? (rate of return, interest rate, income, output)

an increase in US net exports; a decrease in the price, in terms of the other currencies, of US goods

Which of the following will result from the depreciation of the US dollar relative to other currencies? (an increase in US net exports; a decrease in the price, in terms of the other currencies, of US goods; an increase in the price, in terms of the other currencies, of US goods; an increase in imports by US citizens; a decrease in US net exports)

exports

_____________ are included as part of U.S. GDP because they create jobs and income when purchased by foreigners.

Investment

______________ expenditure is the most volatile component of total spending.

investment

______________ is an injection into the income-expenditure circular flow in a private closed economy.

lump-sum tax

a tax that yields the same amount of tax revenue at each level of GDP regardless of the level of government purchases

aggregate expenditure model

helps to explain the situation of massive unemployment, as well as to better understand how an economy will react to such economic shocks as changes in tax rates as well as government and household spending

false

t/f equilibrium GDP always occurs at the full-employment GDP.

false

t/f in a private open economy, net exports are always positive.