Econ ch 5/6 exam
According to the graph, the point Y1 represents the point at which
consumption exceeds income.
Changes in the price level affect
consumption, investment, and foreign spending.
Which of the following is a component of GDP?
consumption, investment, government spending
Adaptive expectations will speed up the adjustment process that takes place when an economy operates above or below full employment.
false
An economy that operates faster than its natural level of full employment will experience high unemployment and unused resources.
false
When prices increase in the short run,
firms will increase production.
A tax cut would cause the equilibrium to move from
from point A to B
In the graph shown, an increase in the money supply will cause the equilibrium to move from
from point A to B
When graphing the investment demand curve, we place _________ on the horizontal axis and _________ on the vertical axis.
investment, interest rate
Macroeconomic equilibrium can be expressed as
leakages = injections.
According to Keynes, consumption is a function of
real GDP.
When graphing Keynes's consumption function, we place __________ on the horizontal axis and __________ on the vertical axis.
real GDP; consumption
If an economy is experiencing a(n) __________, Keynes would propose to __________ consumer demand by implementing ___________ fiscal policy.
recession; stimulate; expansionary
when prices rise,
the demand for money increases
In the classical view, the outward shift of the demand curve for labor as illustrated in the graph below causes
the equilibrium wage rate to adjust to w*'.
The Phillips curve illustrates
the short-run tradeoff between inflation and unemployment.
If autonomous spending = $10,
the y-intercept of the savings function will be −$10.
When income is above equilibrium,
unintended inventory accumulation causes businesses to cut back production.
According to Keynes, sticky wages cause the short-run aggregate supply curve to be
upward sloping.
Suppose that investment spending increases by $4.5 billion, and the slope of the aggregate expenditures (AE) line is .75. What is the change in the equilibrium level of real GDP?
$18 billion
If the slope of the aggregate expenditures line (AE) is .8 and taxes increase by $5, what is the change in equilibrium income? Assume government spending equals 0.
$20 decrease in equilibrium income
By how much does output increase if government spending and taxes rise by $20 million and the marginal propensity to consume is 0.75?
$20 million
Which of the following would cause output to rise if the economy were operating below the full-employment level of output?
An increase in the marginal propensity to consume
The graph below shows an increase in aggregate demand. Classical economists would agree that the new equilibrium price level is at point ____.
C
According to the graph, what will happen to C(Y) when autonomous consumption increases to $30?
C(Y) will shift upward with no change in the slope.
How is it possible for the United States to import more than it exports?
Foreigners lend the U.S. the money to pay for the imports.
If the value of the U.S. dollar rises relative to the French france,
French imports into the U.S. rise.
Which of the following is most likely to occur in an economy that is operating below its level of full employment?
Inflation will be low.
The fraction of each additional dollar of income spent defines which of the following terms?
Marginal propensity to consume (MPC)
Classical economists argue that inflationary and recessionary gaps
are eliminated by automatic adjustments of internal mechanisms in the economy.
An increase in consumer income will cause the consumption function to shift outward.
false
Assume taxes = $0. According to the chart, Steve is able to contribute $4 to his savings.
false
If businesses predict an upcoming recession, they will increase their investments.
false
In the long run, inflation and unemployment are closely related.
false
In the long run, the aggregate supply curve slopes upward, but in the short run the aggregate supply curve is vertical.
false
Increasing prices will cause the short-run aggregate supply curve and the long-run aggregate supply curve to shift to the left.
false
Keynes believed government could do nothing to stimulate the economy during recessionary times or to slow down the economy during inflationary times.
false
The Phillips curve's downward slope depends on rational expectations.
false
The classical view of economics states that because all prices adjust immediately, firms can increase production and profit in the short run.
false
The short-run aggregate supply (SRAS) curve is based on the premise that because all prices will change at the same rate, businesses can alter their production to take advantage of profit opportunities.
false
The vertical Phillips curve implies that expansionary monetary policy can raise the rate of inflation.
false
When prices and wages did not adjust to equilibrium during the Great Depression as classical economists predicted, John Maynard Keynes proposed increasing the supply of loanable funds to remedy the Depression.
false
In the graph shown, an increase in government spending will cause the equilibrium to move from
from point A to B
Which of the following is not a source of savings in an economy?
government spending
The supply shocks of the 1970s
led to both high inflation and unemployment.
The classical view of economics describes how
prices and wages adjust immediately to clear markets.
The vertical long-run aggregate supply curve indicates that
prices do not affect overall output.
Suppose a supply shock causes an inward shift of the short-run aggregate supply curve. In the short run,
prices rise, and output falls.
Which of the following does not represent a leakage from household consumption?
purchases
Unemployment _______________ when real GDP declines.
rises
From the microeconomic perspective, the income effect occurs when
rising prices decrease consumer wealth and demand.
Assume that consumers are the only players in the economy. When income equals consumption, we can conclude that
savings is equal to zero
When a factor, other than the price level, that affects the aggregate quantity supplied changes, we would expect the short-run aggregate supply curve to
shift inward or outward
An increase in taxes reduces aggregate expenditures by an amount equal to
the change in taxes multiplied by −b.
When investment is added to the consumption function,
the y-intercept shifts upward.
How do households react to an increase in taxes?
they reduce both consumption and savings
A downward movement along the Phillips curve will cause an inward shift in the aggregate demand curve.
true
According to Say's Law, supply creates demand.
true
An increase in autonomous spending will shift the aggregate expenditures (AE) line upward.
true
An increase in the price level will increase the demand for money.
true
Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.
true
Assuming taxes equal zero, if the average propensity to consume = .9, we can conclude that consumers typically save 10% of their total income.
true
Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment.
true
Business spending, or investment, is an injection into the circular flow model.
true
Businesses cut back spending when the price level rises, because the resulting increased demand for money drives the interest rate upward.
true
Classical economists argued that the Great Depression would eventually end when output returned to the full employment level with no help from the government.
true
Government policy can shift the aggregate demand curve either inward or outward.
true
If the marginal propensity to consume = .85 and taxes = 0, we know that consumers typically save $.15 of each additional dollar of income they receive.
true
Improvements in technology or resource endowments will shift the classical supply curve outward.
true
In the short run, there is a positive relationship between the aggregate price level and the quantity of goods and services supplied.
true
Keynes's circular flow model illustrates the flow real variables while holding nominal variables constant.
true
Rising production costs will shift the short-run aggregate supply curve inward.
true
The aggregate demand/aggregate supply model relates the effects of changing prices on the components of the Keynesian model.
true
The minimum wage law can prevent immediate wage increases and allows firms to profit from lower labor costs and high revenue.
true
There are no profit opportunities in the long run.
true
When an economy is operating above full employment, we expect prices to adjust upwards.
true
Which of the following is the correct expression of the tax multiplier?
−b / (1 − b)
If the marginal propensity to consume is 0.5, to how much will GDP increase if autonomous spending increases by $5 million?
$10 million
What is the effect on output of an increase in spending of $50 if the marginal propensity to consume is 0.8?
$250
Assume taxes = $0. According to the chart, Steve's consumption is equal to
$34
What is the effect on output of an increase in government spending of $1 million, if the marginal propensity to consume is 0.8?
$5 million
Assume taxes = $0. According to the chart, Dean's consumption is equal to
$50
Assume taxes = $0. According to the chart, Bruce's consumption is equal to
$66
If a $6 billion increase in investment spending causes a $30 billion increase in equilibrium real GDP, the slope of the aggregate expenditures (AE) line equals ______.
.8
Suppose your total consumption = $800, and your total income = $1,000, your average propensity to consume is _____.
.8
Given the linear consumption function C = 20 + 0.9Y, the slope of the line is ______.
0.9
Assume taxes = 0 and imports = 0. If the marginal propensity to consume = .5, the value of the multiplier is
2
Given the linear consumption function C = 20 + 0.9Y, the y-intercept is ______.
20
Suppose the U.S. dollar strengthens relative to the German deutsche mark. Which of the following is most likely to occur?
German imports into the U.S. will increase.
If income increases by $250 million as a result of a $50 million autonomous increase in investment spending, how large is the multiplier?
5
What is the most likely short-run result of an inward shift of the aggregate demand curve?
A lower equilibrium price and output
Which of the following events most likely caused the aggregate demand curve to shift inward?
A tax increase reduced consumers' disposable income.
According to the graph below, a change in the spending plans of consumers, businesses, government, or foreigners is illustrated by the movement from point ______ to point ______.
A;B
The Keynesian model of aggregate expenditures
ALL OF THE ABOVE is driven by demand. represents macroeconomic equilibrium. can be illustrated by the circular flow model.
Which of the following would cause output to fall as a result of an increase in the price level?
ALL THE ABOVE Investment spending declines. Consumer spending falls. Exports decline
Which of the following factors affects the demand for imports and exports?
ALL THE ABOVE The exchange rate Income Preferences
In the short run, the unemployment rate depends on
ALL THE ABOVE monetary policy. the level of aggregate demand. the rate of inflation.
The microeconomic demand curve
ALL THE ABOVE shows how the substitution effect causes a decrease in quantity demanded as a result of increasing prices. shows how the income effect causes a decrease in quantity demanded as a result of increasing prices. measures the effect of nominal variables on other nominal variables.
the aggregate demand curve measures
ALL THE ABOVE the real value of nominal variables. aggregate expenditures as a function of the price level. the aggregate price level across the economy and real GDP, or income.
What happens if the government increases taxes without increasing spending?
Aggregate demand falls, and output declines.
This graph shows a shift in the aggregate expenditures (AE) line. Which of the following statements regarding the causes of the shift are true?
An autonomous spending component increased.
Which of the following policy measures would help close a recessionary gap?
An increase in government spending
Which of the following factors would increase the size of the multiplier?
An increase in the marginal propensity to consume
Which of the following statements regarding the marginal propensity to consume (MPC) is correct?
Assuming taxes = 0, MPC = 1 − the marginal propensity to save (MPS).
If the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system?
Autonomous spending increases by $2,000, and GDP rises by $20,000.
What is the effect of technological progress on prices and output?
Both the long-run and the short-run aggregate supply curves shift outward.
Which of the following could cause aggregate demand to decrease?
Consumers decide to increase their savings.
Which of the following is not a reason why wages might be sticky?
Employees work more when wages rise.
Which of the following correctly expresses how savings equals investment?
I = S + (T − G) − NX
How does the household savings rate affect the impact on output of an increase in government spending?
If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been.
Which of the following will shift the classical aggregate supply curve outward?
Improvements in technology
What effect does a depreciation in the dollar have on net exports by the United States?
It increases net exports, increasing output.
Which of the following does not directly influence investment expenditures?
Marginal propensity to consume
Which of the following statements regarding output in the long run is correct?
Output is determined by the quantity and productivity of resources.
If the level of imports remains constant and the marginal propensity to consume is 0.75, what happens to output when exports increase from $550 to $750 million?
Output rises by $800 million.
Which of the following statements regarding Keynes's aggregate expenditures (AE) model is correct?
Taxes are leakages out of the circular flow model and reduce disposable income.
Which of the following statements regarding the aggregate demand (AD) curve is correct?
The AD curve represents the inverse relationship between the expenditures of households, businesses, government, and foreigners and the aggregate price level.
Government spending depends on
POLICYMAKERS
In the short run, what is the effect of an outward shift in the aggregate demand curve?
Prices and output rise.
What happens when the economy is operating beyond the full-employment level of output?
Prices and wages begin to rise, causing firms to cut back on production until the full-employment level of output is reached.
What happens in the short run to prices and output if the price of oil rises temporarily?
Prices rise, and output falls below the short-run equilibrium level.
In the long run, what happens to the levels of prices and output as a result of an outward shift in the short-run aggregate supply curve?
Prices rise, and output returns to the full-employment level.
Which of the following will occur when the economy operates above full employment?
Prices will adjust upward.
Which of the following events will most likely cause an inward shift of the short-run aggregate supply curve?
The economy experiences a supply shock.
Which of the following events will most likely cause an outward shift in the aggregate demand curve?
The government increases spending.
Which of the following statements about the multiplier is true?
The higher the marginal propensity to consume, the larger the multiplier.
What would happen if the government increased its spending in response to an increase in consumer savings?
The increase in government spending would offset (fully or partially) the decline in consumer spending.
Suppose an economy experiences a surge in immigration. Which of the following is the most likely result?
The long-run aggregate supply curve and the short-run aggregate supply curve will shift to the right.
Which of the following will occur if the natural rate of unemployment falls?
The long-run aggregate supply curve shifts to the right.
What determines the slope of the aggregate expenditures line?
The marginal propensity to consume
Which of the following must be true if output rises by $400 million following an increase in government spending of $100 million?
The marginal propensity to consume must be 0.75.
Which of the following identifies a problem with the Keynesian model?
The model ignores the effects of price changes on income, or real GDP.
According to the graph, what will happen to C(Y) when the marginal propensity to consume increases?
The slope of C(Y) will steepen.
Suppose the government provides an extra incentive for consumers to save. What do you predict will happen?
The slope of the AE line will flatten.
Which of the following provides the savings with which businesses finance their investments?
The trade deficit
Which of the following describes the macroeconomic equilibrium?
Total spending = total output
Which of the following statements regarding aggregate expenditures is correct?
When the interest rate is low, investment spending increases.
Which of the following equations accurately represents the macroeconomic equilibrium in an open economy?
Y = C + I + G + NX
A shift in the aggregate expenditures (AE) line causes
a change in equilibrium GDP larger than the shift of the AE line.
An increasing price level will cause
a reduction in the overall quantity of goods and services demanded.
Policymakers can expand aggregate demand and lower unemployment, but the cost is
a temporary increase in inflation.
In a simple model where aggregate expenditures (AE) are comprised only of consumption and investment, the intersection of the AE line and the 45-degree line is
above the point where savings equals zero.
In the aggregate expenditure identity, the equilibrium condition is that
aggregate expenditure equals output.
The aggregate demand (AD) curve graphically illustrates the inverse relationship between
aggregate expenditures and the price level.
According to Keynes's aggregate expenditures model, macroeconomic equilibrium occurs when
aggregate expenditures equal income.
According to Keynes, which of the following could have helped pull the United States out of the Great Depression?
an increase in government spending
The aggregate demand curve slopes downward because
an increase in the aggregate price level reduces the quantity of goods and services demanded.
When the equilibrium level of output in the economy is greater than the full-employment level, the economy is said to have
an inflationary gap
According to the graph, if real GDP is below $500, inventories will be
below the planned level, and firms will increase their production.
According to the graph below, at point A
businesses are not producing enough and must increase production.
When the price level is above the equilibrium price,
businesses recognize increasing profits.
According to the aggregate demand/aggregate supply curve, when prices rise,
businesses will cut back spending.
When the U.S. price level rises, we expect foreigners to
buy less U.S. goods and services.
Which of the following would not shift the aggregate demand curve?
changes in the price level
The belief that the economy adjusts immediately to its long-run equilibrium is consistent with the
classical view.
The short-run aggregate supply (SRAS) curve slopes upward, because
confusion, sticky wages, and sticky prices provide businesses with profit opportunities in the short run.
The short-run aggregate supply curve slopes upward because of
confusion, sticky wages, and sticky prices.
According to the aggregate demand/aggregate supply model, when prices rise,
consumers will decrease their spending.
taxes
decrease disposable income
When interest rates rise, we can predict that businesses will
decrease their quantity invested.
When businesses decide to increase their investments,
equilibrium income rises.
Which of the following is not a result of an outward shift of the aggregate demand curve?
higher unemployment
Expected inflation is
how much people expect the aggregate price level to change.
An increase in autonomous spending raises GDP by more than the original increase in spending, because
individuals spend part of the money, increasing incomes of other individuals, who then spend part of their extra money.
According to the graph, point Y2 represents the point at which
income exceeds consumption.
John Maynard Keynes, during the Great Depression in the 1930s, wrote that economies experiencing high unemployment should follow policies that
increase aggregate demand.
Over time, the long-run aggregate supply curve can shift outward as a result of
increases in productivity.
Keynes's model of a demand-driven economy ignores the effects of
inflation and supply shocks.
The change in savings that results from a change in income represents the
marginal propensity to save
Suppose the government decides to cut taxes. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.
outward; decrease; increase
Suppose the government increases its spending. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.
outward; decrease; increase
Adaptive expectation formation means that
people base their expectations of the future on what has occurred in the past.
Point A on the graph represents the
point where consumption equals income.
If a household's disposable income increases from $80,000 to $87,500 and their consumption increases from $60,000 to $66,000, the
slope of the savings function is .2.
When the wage rate falls below equilibrium, excess demand for labor is alleviated through which of the following processes according to the classical theory?
slope w arrows upward
Which of the following is not a component of aggregate expenditures?
taxes
___________ are leakages out of the circular flow model.
taxes
A kink in the short-run aggregate supply curve reflects the fact that
wages rise when the economy operates beyond full employment but tend not to fall when the economy's resources are underemployed.
Keynes's sticky wage theory holds that
wages will not immediately adjust to higher levels, and firms are able to profit from increased production.
An increase in an economy's resource pool will
will shift both the long-run and short-run aggregate supply curves outward.
Suppose that, as a producer, your production costs have increased at the same rate as your revenue. You can conclude that
your profit will remain unchanged.
If households saved each additional dollar of income they received, the slope of the consumption function would equal
zero
Suppose the linear consumption funtion is C = 15 + 0.8Y. Using the savings approach, what is the y-intercept of the savings function?
−15