Exam 4
If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by:
$$400 billion
Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25% or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be...
$10
If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is...
$20 billion below the full-employment GDP.
If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:
$5,000 billion
If the marginal propensity to consume in an economy is .8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be:
0.8
Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is...
15%
If the MPS is only half as large as the MPC, the multiplier is...
3
Which of the following will not cause the demand for product K to change?
A change in the price of product K.
Which of the following would not shift the demand curve for beef?
A reduction in the price of cattle feed.
What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?
A rise in real GDP.
In presenting the idea of a demand curve, economists presume the most important variable in determining the quantity demanded is...
the price of the product itself.
Allocative efficiency refers to...
the production of the product mix most wanted by society.
In the aggregate expenditures model, technological progress will shift the investment schedule:
upward and increase aggregate expenditures.
Which of the following statements concerning the equilibrium level of GDP is incorrect?
Full employment will necessarily be realized.
A government subsidy per unit of output increases supply. T/F
True
If X is a normal good, a rise in money income will shift the...
demand curve for X to the right.
If a lump-sum tax of $40 billion is imposed and the MPC is .6, the saving schedule will shift:
downward by $16 billion.
Capital goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending.
durable; instability
A government subsidy to the producers of a product...
increases product supply.
The saving schedule is such that as aggregate income increases by a certain amount, saving...
increases, but by a smaller amount.
Tennis rackets and ballpoint pens are...
independent goods.
If 100 percent of any change in income is spent, the multiplier will be:
infinitely large.
An exchange rate...
is the price that the currencies of any two nations exchange for one another.
In contrast to investment, consumption is...
relatively stable.
If the consumption schedule is linear, then the...
saving schedule will also be linear.
A leftward shift of a product supply curve might be caused by...
some firms leaving an industry.
If Trent's MPC is .80, this means that he will:
spend eight-tenths of any increase in his disposable income.
Classical macroeconomics was dealt severe blows by...
the Great Depression and Keyne's macroeconomic theory.
If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion, then:
the MPC for this economy is 0.6
The consumption schedule is such that...
the MPC is constant and the APC declines as income rises.
A recessionary expenditure gap exists if....
the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.
Assume in a private closed economy that the equilibrium level of income is $380 and the MPS is .25. Now suppose government collects taxes of $50 and spends the entire amount. As a result:
the equilibrium level of income will rise to $430.
Art Buchwald's article "Squaring the Economic Circle" is a humorous description of...
the multiplier.
If an effective ceiling price is placed on hamburgers, then...
the quantity demanded will exceed the quantity supplied, a black market for hamburgers may evolve, and/or consumers may want government to ration hamburgers.
The investment demand curve portrays an inverse (negative) relationship between...
the real interest rate and investment.
If the equation C = 20 + .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.
The investment demand curve suggests...
there is an inverse relationship between the real rate of interest and the level of investment spending.
A lump-sum tax causes the after-tax consumption schedule:
to be parallel to the before-tax consumption schedule.
Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus:
unplanned decreases in inventories of $10 billion will occur.
A product market is in equilibrium...
where the demand and supply curves intersect.
If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule:
will shift downward.
John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?
Great Depression
"In the corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand." In which of these two statements are the terms demand and supply being used correctly?
In the second statement.
Which of the following relations is not correct? a) 1-MPC = MPS b) APS + APC = 1 c) MPS = MPC +1 d) MPC +MPS = 1
MPS = MPC + 1
Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government purchases by $18 billion. On the basis of this information, we can say that the:
MPS in the economy is 0.4
In a mixed open economy, which of the following all affect the equilibrium GDP in the same direction?
Sa, T, and M
A government tax per unit of output reduces supply. T/F
True
A market that is achieving allocative efficiency must also be achieving productive efficiency. T/F
True
If unintended increases in business inventories occur, we can expect:
a decline in GDP and rising unemployment.
The consumption schedule shows:
a direct relationship between aggregate consumption and aggregate income.
Art Buchwald's article "Squaring the Economic Circle" humorously describes how:
a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.
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.
Economists use the term "demand" to refer to...
a schedule of various combinations of market prices and amounts/quantities demanded.
If price is above the equilibrium level, competition among sellers to reduce the resulting...
a surplus will increase quantity demanded and decrease quantity supplied.
Which of the following is correct? a) APC + APS = 1 b) APC +MPS = 1 c) APS + MPC = 1 d) APS + MPS = 1
a) APC + APS = 1
A surplus of a product will arise when price is...
above equilibrium, with the result that quantity supplied exceeds quantity demanded.
Savings is always equal to
actual investment
Assuming conventional supply and demand curves, changes in the determinants of both supply and demand will generally...
alter both equilibrium and price quantity.
If for some reason households become increasingly thrifty, we could show this by:
an upward shift of the saving schedule.
As disposable income goes up, the...
average propensity to consume falls
A recent study found that an increase in the federal tax on beer (and thus an increase in the price of beer) would reduce the demand for marijuana. We can conclude that...
beer and marijuana are complementary goods.
When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
both the consumption and saving schedules downward.
Unintended changes in inventories:
bring actual investment and saving into equality at all levels of GDP.
The multiplier is useful in determining the...
change in GDP resulting from a change in spending.
The MPC can be defined as that fraction of a...
change in income that is spent.
A shift to the right in the demand curve for product A can be most reasonably explained by saying that:
consumer preferences have changed in favor of A so that they now want to buy more at each possible price.
There will be a surplus of a product when...
consumers want to buy less than producers offer for sale.
If the MPC is 0.8 and disposable income is $200, then...
consumption and saving cannot be determined from the information given.
With downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will...
decrease equilibrium price and increase equilibrium quantity.
A price floors means that...
government is imposing a minimum legal price that is typically above the equilibrium price.
A private closed economy includes...
households and businesses, but not government or international trade.
The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because:
in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.
Suppose that in each of the four successive years producers sell more of their product and at lower prices. This could be explained...
in terms of a stable demand curve and increasing supply.
If the MPC is .7 and investment increases by $3 billion, the equilibrium GDP will...
increase by $10 billion.
Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good (from the buyer's perspective) will...
increase equilibrium price and quantity.
In the aggregate expenditures model, a reduction in taxes may...
increase saving.
An increase in the price of a product A will...
increase the demand for substitute product B
Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will...
increase, quantity demanded will decrease, and quantity supplied will increase.
Other things equal, a decrease in the real interest rate will...
move the economy downward along its existing demand curve.
If a legal ceiling price is set above the equilibrium price...
neither the equilibrium price nor the equilibrium quantity will be affected.
The demand for most products varies directly with changes in consumer incomes. Such products are known as...
normal goods.
If the economy produces its most wanted goods but uses outdated production methods, it is...
not achieving productive efficiency.
If aggregate expenditures exceed GDP in a private closed economy:
planned investment will exceed saving.
Given the consumption schedule, it is possible to graph the relevant saving schedule by:
plotting the vertical differences between the consumption schedule and the 45-degree line.
The demand curve shows the relationship between...
price and quantity demanded.
A decrease in the demand for recreational fishing boats might be caused by an increase in the...
price of outboard motors.
The law of supply indicates that, other things equal...
producers will offer more of a product at high prices than at low prices.
If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:
r will rise as more investment is undertaken.
The average propensity to consume is defined as income divided by consumption. T/F
False
The multiplier is equal to the reciprocal of the MPC. T/F
False
Which one of the following will not cause a movement up along an economy's saving schedule? a) An increase in household borrowing. b) An increase in disposable income. c) An increase in stock prices. d) An increase in interest rates.
An increase in disposable income.
Which of the following is a correct statement of the impacts of a lump-sum tax?
Disposable income will decline by the amount of tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC.
A $10 billion decrease in taxes will increase the equilibrium GDP by more than would a $10 billion increase in government expenditures. T/F
False
A $20 billion decrease in investment in a private closed economy that has an MPS of .5 will reduce saving by $10 billion once the multiplier process has ended. T/F
False
A lump-sum tax causes the after-tax consumption schedule to be flatter than the before-tax consumption schedule. T/F
False
A market that achieves productive efficiency is producing the quantity of goods most desired by society. T/F
False
Economists widely agree that the value of the real world multiplier is 2.5. T/F
False
If C + Ig exceeds GDP in a private closed economy, GDP will decline. T/F
False
Producing a good in the least costly way is known as allocative efficiency. T/F
False
Surpluses drive market prices up; shortages drive them down. T/F
False
