macro 10
If the MPS = 0.25 and business investment spending increases by $10B, what is the change to the country's GDP?
GDP increases by $40B.
When disposable income falls, the _______ tells us by how much spending will fall.
MPC
the size of the multiplier depends on the value of the _________________.
MPC
identify two US Presidents whose actions were consistent with Classical Economic Theory.
President Herbert hoover was a believer in the markets ability to self adjust George H.W Bush pushed tax cuts through congress that oosted consumer disposable income
four US Presidents whoseactions were consistent with Keynesian Economic Theory.
President Obama President Trump President Biden idk the fourth
inflationary GDP gap
The amount by which equilibrium GDP exceeds full-employment GDP.
recessionary GDP gap
The amount by which equilibrium GDP falls short of full-employment GDP.
marginal propensity to consume
The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.
full employment
The lowest rate of unemployment compatible with price stability, variously estimated at between 4 percent and 6 percent unemployment.
multiplier
The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles; 1/(1 − MPC).
aggregate demand
The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.
full-employment GDP
The value of total market output (real GDP) produced at full employment
equilibrium GDP
The value of total output (real GDP) produced at macro equilibrium (AS = AD).
True or false: Household incomes will get a boost from increased investment.
True
True or false: The basic conclusion of the Keynesian analysis is that the economy is vulnerable to abrupt changes in spending behavior and won't self-adjust to a desired macro equilibrium.
True
cyclical unemployment
Unemployment attributable to a lack of job vacancies—that is, to an inadequate level of aggregate demand
explain how import spending is aform a leakage from the macro economy
When consumers buy imported goods their spending leaves the domestic circular flow and goes to foregin producers
Keynes disagreed with the classical perspective and argued that changing expectations would cause ________ in investment when consumption falls.
a decrease
A withdrawal of spending from the economy's circular flow is also called:
a leakage
The total quantity of output demanded at alternative price levels in a given time period, ceteris paribus, is
aggregate demand
According to the Keynesian adjustment process, when _______, producers cut output and employment, causing a decline in income and consumer spending, which causes further declines in production and consumption. (Select all that apply.)
aggregate supply is greater than aggregate demand at current price levels leakage exceeds injections
Classical Economists believed that spending injections would _________________ _________________ spending leakages.
always equal
Investment is ______ of spending into the circular flow of the economy.
an injection
the impact of a shift in AggregateDemand is reflected in both __________________ and ___________________ changes.
blank 1: output blank 2: price changes
we can conclude that a_____________________ in Investment Spending implies a ______________________ in household incomes.
blank 1: reduction blank 2: reduction
As long as the Aggregate Supply curve is ______________________________, there will be a trade-off between __________________and ___________________________________
blank 1: upward sloping blank 2: unemployment blank 3: inflation
the responses of market participantsto an abrupt AD shift are likely to _____________________ rather than _____________________market outcomes.
blank 1: worsen blank 2: improve
Desired investment represents purchases of new plants and equipment plus any desired changes in _______.
business inventories
why did the Classical economists believe that if goods prices fell "far enough" that consumers would buy all the output produced at full employment?
classical economists said self adjustment was possible even without flexible interest rates. consumers would buy more out put
what will households do with larger paychecks?
consumer spending increases by a multiple of the initial income change
A decline in consumer spending during the Keynesian adjustment process leads to further production cutbacks, more lost income, and still less _______.
consumption
The idea that the eventual decline in spending will be much larger than the initial (autonomous) decrease in aggregate demand is the ______.
consumption
According to the classical economists, an increase in saving leakage would ultimately lead to a change in the _____ of aggregate demand.
content but not the level
deflation (declining average prices) will reduce what three things for businesses?
declining prices squeeze the profit margins of producers causing them to cut back production and lay off workers. Retailers become more hesistant to restock inventory a king of downward spiral may emerge that pushes both prices and production don
As long as the aggregate supply curve is positively sloped, an increase in aggregate demand will yield _____ inflation.
demand-pull
An increase in aggregate demand will cause
demand-pull inflation
Actual investment consists of:
desired and undesired investment
A decrease in investment spending often results in a drop in
disposable
At the equilibrium level of GDP, spending leakages _____ spending injections.
equal
If the economy is at an undesirable equilibrium or if aggregate demand or aggregate supply shifts the economy away from the desirable equilibrium, the economy could end up at the wrong macro
equilibrium
The level of GDP at which the total quantity of goods produced equals the total quantity of goods purchased is the: Multiple choice question.
equilibrium GDP
An inflationary gap is the amount by which the current short-run equilibrium GDP _____.
exceeds full-employment GDP
John Keynes claimed the Classical Economists ignored the role played by _______________________________ in making business investment decisions.
expectations
Keynes disagreed with the classical perspective and argued that changing _______ would cause a decline in investment when consumer sales decrease.
expectations
In the view of classical economists, an increase in saving leakage would bring about a _____ in interest rates and corresponding _____ in investment injections.
fall; rise
The lowest rate of unemployment compatible with price stability, variously estimated at between 4 and 6%, is ______.
full employment natural rate of unemployment
The lost output due to a recession is called a recessionary
gap.
The total value of depreciation and retained earnings is called ______.
gross business savings
how are households impacted by this increase in Investment Spending?
household incomes will get a boost
The recession of 2007-2009 had its origins in the
housing industry.
A decrease in investment spending often results in a drop in household
income
leakage
income not spent directly on domestic output but instead diverted from the circular flow - for example saving imports taxes
An increase in investment spending will very likely _____ the incomes of households.
increase
Consumption will _______ when aggregate demand increases.
increase
Inventory depletion is a warning sign of potential
inflation.
A(n) ______ is the amount by which equilibrium GDP exceeds those full-employment GDP
inflationary gap
A(n) ______ is the amount by which equilibrium GDP exceeds those full-employment GDP.
inflationary gap
The economy is considered to be at macro equilibrium when leakages equal
injection
the mechanism that ClassicalEconomists counted on to achieve this was the ___________________ ____________.
interest rate
Suppose the economy is currently at the full-employment equilibrium. Higher levels of spending cause ______.
inventory levels to fall and cause businesses to increase production levels
Injections into the circular flow include ______.
investment government spending export spending
three examples of economic injections.
investment government spending exprots
Imports are a(n) ___________ from the circular flow.
leakage
The economy is considered to be at macro equilibrium when
leakage equal injections.
Imports are _____ from the circular flow
leakages
When GDP becomes ____ (less/more) than its full-employment equilibrium level, businesses will likely reduce the rate of production in order to reduce total output.
less
why did the Classical economistsbelieve that if interest rates fell "far enough" that business investment would equal consumer saving?
lower interest rates prompt businesses to borrow and invest more
n a graph showing the economy's AD and AS curves, if the AD curve shifts to the left the result will be
lower prices and real output.
When disposable income falls, the ____ propensity to consume tells us by how much spending will fall
marginal
Thanks to the Multiplier Process, the ultimate decline in Aggregate Demand will be __________ ________________ than the initial decrease in (investment) spending.
much larger
1/(1-MPC) is the formula for calculating the ______.
multiplier
Changes to investment, consumption, net exports, and government purchases lead to the _____ process, which magnifies the effect of those changes.
multiplier
The idea that the eventual change in spending will be much larger than the initial (autonomous) change in aggregate demand is the
multiplier
If there is an initial (autonomous) decrease in spending, the eventual decline in aggregate demand will be much larger because of the
multiplier effect.
If a $10 billion change in investment leads to a $50 billion change in output and income, then the ______.
multiplier is 5
An initial decrease of the AD curve will precipitate an additional decrease due to the ______.
multiplier process
If a business experiences an undesired inventory accumulation, then it apparently has, in setting its production plans, _____ customer sales.
overestimated
The amount of ____ investment represents purchases of new plants and equipment plus any desired changes in business inventories.
planned
Full-employment is the lowest rate of unemployment compatible with _______.
price stability
A(n) ______ is the amount by which equilibrium GDP falls short of the full-employment GDP.
recessionary gap
The recession of 2007-2009 was precipitated by a sharp decline in
residential investment.
a sudden increase in Investment Spending will shift the Aggregate Demand curve to the _________________.
right
A withdrawal of spending from the economy's circular flow is also called:
saving
what is the Paradox of Thrift?
saving more money in a recession pulls the reins on spending just when the economy needs it the most
The total value of depreciation and retained earnings is called gross business
savings
explain how consumer saving is a form a leakage from the macro economy.
savings reduces the amount available for spending.
depreciation
the consumption of capital in the production process the wearing out of plant and equipment
identify the basic conclusion ofKeynesian analysis.
the economy is vulnerable to abrupt changes in spending behavior and wont self adjust to a desired macro equilibrium
If the leakage of saving is greater than the injection of investment then ______.
there will be a disequilibrium level of GDP
what are the two different ways that business owners could respond when they see inventory piling up?
they could regard the inventory pileup as a brief aberration and continue producing at full-employment levels If the inventory pileup might also set off sales alarms, theyre likely to start cutting prices in an attempt to increase the rate of sales.
When equilibrium GDP is at full-employment GDP and autonomous consumption declines, firms are induced ______
to reduce production output, thus moving the level of GDP downward
how many times does the Aggregate Demand curve shift to the right (based on the example discussed in the text)? What does each shift represent?
twice
A firm expects slower future sales and reduces inventory. If in reality sales stay brisk, the difference in expected sales and actual sales will be accounted for as ______.
undesired inventory changes
Because the AS curve is upward-sloping in the short run, there is a trade-off between
unemployment and inflation
So long as the AS curve is _______, there is a trade-off between unemployment and inflation.
upward-sloping in the short run
what is the critical issue for macrostability?
wether spending injections must equal speding leakage at full employment. leakages if all the output supplied is to equal the output demanded
According to Keynes, the economy is vulnerable to abrupt changes in spending behavior and ______ self-adjust(s) to equilibrium.
will not
what are the three main ways that consumers feel the impact of production cutbacks?
workers lose their jobs or face pay cuts layoffs among home builders mortage companies banks ect a decline in travel caused layoffs at airlines and aaircraft manufacturers
John Keynes argued that once a spending shortfall emerged, things were likely to get ___________________ not ______________.
worse not better
Currently the country's GDP = $500B and the MPC =.90. If autonomous consumption spending increases by $15B, what is the country's new level of real GDP?
$650B
what two things did John Keynesemphasize?
1) macro failure is likely to occur in such an economy 2) macro failure isnt likely to go away
The formula for calculating the multiplier is:
11-MPC
explain how taxes are a form a leakage from the macro economy
A lot of revenue generated in market sales get diverted into federal state and local government coffers
injection
An addition of spending to the circular flow of income.
demand-pull inflation
An increase in the price level initiated by excessive aggregate demand.
Why does a $5B increase or decrease in investment spending by firms cause the real GDP to increase or decrease by $20B?
Because of the multiplier process.
Actual investment consists of ______ and _____ investment.
Blank 1: undesired Blank 2: desired
gross business saving
Depreciation allowances and retained earnings
True or false: Keynes agreed with the classical notion of self-adjustment.
False
True or false: Keynes argued that once a spending shortfall emerged, the economy would self-adjust.
False
When firms increase their investment spending, employment (either in jobs or working hours) will very likely decrease.
False
When firms see undesired inventory piling up, they are likely to increase the rate of production.
False
disposable income
After-tax income of households; personal income less personal taxes.
Changes to which of the following lead to the multiplier effect?
Consumption Government spending Net exports Investment
