Macro eco ch 11-13

What does the full aggregate expenditures model take into consideration that the simple aggregate expenditures model does not?

Government spending , taxes, and the foreign sector

What is a possible negative effect of a positive wealth effect on the economy?

Increased spending will lead to increased inflation.

_____ depends on factors such as rate of return, the level of technology, and business expectations about the economy.

Investment

In the short run, everything else held constant, what happens to output when the aggregate price level decreases?

It decreases.

Which of these is a true statement?

When the aggregate price level increases, this causes net exports to fall.

Which of these will cause the aggregate demand curve to shift to the left?

a decrease in consumer confidence

What shape is the aggregate demand curve?

a downward-sloping line

The effect of higher interest rates on the economy can be shown as

a shift to the left of the entire aggregate demand curve.

What does the aggregate supply curve look like in the long run at full employment?

a vertical line

The U.S. economy recovered from the Great Depression when increased government spending shifted the

aggregate demand curve to the right.

The _____ curve is positively sloped in the short run, but vertical in the long run.

aggregate supply

The aggregate demand curve is downward-sloping due to the

effect of prices on household purchasing power.

The aggregate demand curve is downward-sloping due to the

effect of prices on interest rates.

Which of these appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?

exports

Aggregate demand is the total output of _____ at different price levels.

goods and services purchased

What is the principal determinant of consumption and savings?

income

The short-run aggregate supply curve is upward-sloping due to the

input costs being sticky in the short run.

Which of these would cause a rightward shift of the investment demand curve?

inventory shortages

If the economy is at both short-run and long-run macroeconomic equilibrium, then

neither the price level nor GDP will change.

The implication of Keynesian analysis for actual aggregate household savings and household intentions regarding savings is called the paradox of thrift. The paradox of thrift occurs because investment and household income have a(n) _____ relationship.

positive

When the aggregate price level increases, this causes interest rates to

rise.

If the spending multiplier is 4, then the marginal propensity to _____ is 0.25.

save

The intersection of the short-run aggregate supply curve and the aggregate demand curve is known as the _____ equilibrium.

short-run macroeconomic

The diagram shows the economy at _____ full employment.

short-run macroeconomic equilibrium below

Which of these appears in the full Keynesian model but not in the simple aggregate expenditures model?

taxes

Which of these events would be most likely to cause the shift from AD0 to AD1 in the diagram, which depicts the U.S. economy?

the Vietnam War in the 1960s

The long-run aggregate supply curve is _____ at full employment.

vertical

If the inflationary gap is $50 billion and the multiplier is 4, what is the reduction in aggregate spending needed to reach full employment?

$50 billion

In a simple aggregate expenditures model with no government and no international trade, if savings is $2 trillion and consumer spending is $6 trillion, what are aggregate expenditures?

$8 trillion

What is Alice's marginal propensity to consume if she increases her spending by $1,000 after she receives a $5,000 raise in salary?

0.2 Alice's marginal propensity to consume is 0.2. It is determined by dividing the change in consumption by the change in income. The equation is: MPC = $1,000/$5,000 = 0.2.

What is the spending multiplier if the marginal propensity to consume is 0.2?

1.25 The spending multiplier is is determined by dividing 1 by (1 − MPC). The equation is multiplier = 1/(1 − 0.2) = 1/0.8 = 1.25.

The multiplier is calculated as

1/(1 - MPC)

If the marginal propensity to save is 0.5, what is the multiplier?

2

How much will $200 in new spending change equilibrium income if the marginal propensity to save is 0.2?

$1,000 This is determined by multiplying the amount of new spending by the multiplier, which is 1/(1 − MPC) = 1/MPS = 1/(0.2) = 5; 5 × $200 = $1,000.

What is the savings amount if disposable income is $50,000 and consumption is $32,000?

$18,000 Savings is equal to $18,000. Savings equals the difference between income and consumption. The equation is savings = $50,000 − $32,000 = $18,000.

According to the full aggregate expenditures model, if investment is $4 trillion, government spending is $2 trillion, exports are $1 trillion, taxes are $2 trillion, and imports are $3 trillion, what is savings?

$2 trillion

The _____ is the change in consumption associated with a given change in income.

marginal propensity to consume

If the multiplier is 7 and new spending is $50, by how much will spending increase?

$350 The increase in spending will increase by $350. It is determined by multiplying the multiplier by the amount of new spending. $50 × 7 = $350

According to the full aggregate expenditures model, if investment is $5 trillion, government spending is $2 trillion, savings is $4 trillion, and net exports are $1 trillion, what are taxes?

$4 trillion The sum of investment, government spending, and exports must equal the sum of savings, taxes, and imports. Since the sum of government spending, investment, and exports is at least $8 trillion, taxes must be $4 trillion.

Because many input costs are sticky in the short run, the short-run aggregate supply curve is

positively sloped.

If the spending multiplier is 5, then the marginal propensity to _____ is 0.2.

save

According to the full aggregate expenditures model, if investment is $1 trillion, government spending is $4 trillion, taxes are $4 trillion, and net exports are $0, what is savings?

$1 trillion

The aggregate demand curve is downward-sloping due to the

effect of prices on the demand for money.

If the multiplier is 5 and new spending is $100, by how much will spending increase?

$500 Spending is determined by multiplying the multiplier by the amount of new spending: $100 × 5 = $500.

If the marginal propensity to consume is 0.5; taxes are increased by $500,000; and government spending is increased by $500,000, what is the change in income?

$500,000 The change in income will be $500,000 because according to the balanced budget multiplier, equal changes in government spending and taxation lead to an equal change in income.

How much will $200 in new spending change equilibrium income if the marginal propensity to consume is 0.2?

$250 This is determined by multiplying the amount of new spending by the multiplier, which is 1/(1 − MPC), or 1/MPS = 1/(1 − 0.2) = 1.25; 1.25 × $200 = $250.

According to the full aggregate expenditures model, if business investment is $2 trillion, savings is $4 trillion, and taxes are $3 trillion, how much is government spending in a closed economy?

$5 trillion If the sum of taxes and savings is $7 trillion, then that must mean that the summation of government spending and business investment is also $7 trillion; 2 + 5 = 7.

Because Susom received a raise in pay from $30,000 to $50,000, his consumption increased from $29,000 to $45,000. What is Susom's marginal propensity to save?

0.2

Because Mayara received a raise in pay from $90,000 to $100,000, her consumption increased from $50,000 to $55,000. What is Mayara's marginal propensity to consume?

0.5 Mayara's marginal propensity to consume is determined by dividing the change in consumption by the change in income. The equation is MPC = δ C/ δY = ($55,000 − $50,000)/($100,000 − $90,000) = $5,000/$10,000 = 0.5.

If Belinda's marginal propensity to save is 0.2, what is her marginal propensity to consume?

0.8

What is the average propensity to consume if income is $50,000 and savings is $10,000?

0.8

Consider a typical investment demand schedule. Which statement is correct?

The amount of investment is inversely related to the interest rate.

Which of these is NOT one of the simplifying assumptions used in modeling the private economy?

All savings are fixed in the economy There is considerable slack in the economy. The aggregate price level is fixed. Savings is personal savings.

_____ occurs when a supply shock hits the economy, shifting the short-run aggregate supply curve leftward.

Cost-push inflation

The _____ curve is vertical at full employment.

long-run aggregate supply

The _____ curve represents the full employment capacity of the economy and depends on the amount of resources available for production and the available technology.

long-run aggregate supply

In the diagram, point c represents

long-run macroeconomic equilibrium at full employment.

The spending multiplier is inversely related to the

marginal propensity to save.

Which of these, when used as inputs for production, most likely contributes to the positive slope of the short-run aggregate supply curve?

rent paid by a bakery

The _____-run aggregate supply curve is _____ sloped.

short; positively

What happens to long-run aggregate supply when the aggregate price level increases?

It stays the same.

How would an increase in government spending affect aggregate demand?

It would cause the aggregate demand curve to shift to the right.

_____ are reflected in a flatter short-run aggregate supply curve (SRAS) curve, where increases in aggregate output can be achieved without a large increase in the price level.

Sticky prices

_____ is demonstrated when the price of a given product falls, resulting in money being freed up, allowing consumers to afford more of all goods.

The income effect

Which of these is true of the paradox of thrift?

The paradox of thrift occurs when households intend to save more.

_____ is demonstrated when the price of a product falls, causing consumers to purchase more of the product because they substitute it for other higher-priced goods.

The substitution effect

Which of these will shift the long-run aggregate supply (LRAS) curve to the right?

an improvement in human capital

Which of these will cause a movement up along the aggregate demand curve?

an increase in the demand for money resulting from a higher price level

The aggregate demand curve is downward-sloping due to the

effect of prices on the competitiveness of a country's exports.

In the simple aggregate expenditures model with no government and no international trade, at the macroeconomic equilibrium desired business investment

equals desired savings.

Which of these is NOT a spending withdrawal from the economy?

exports

Which of these appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?

government spending