A.P. Economics Section 4 Test

Planned investment spending is:

negatively related to existing productive capacity and the interest rate

The interest rate effect of an aggregate price level change causes:

the aggregate demand curve to be negatively sloped

According to the long-run aggregate supply curve, when _____, the quantity of aggregate output supplied ______.

the aggregate price level rises; does not change

When potential output is less than actual aggregate output:

the economy faces and inflationary gap

Actual investment spending is equal to:

the sum of planned investment spending and unplanned investment spending

A positive demand shock leads to:

higher prices and higher employment

The short-run aggregate supply curve in positively sloped because:

higher prices lead to higher profit and higher output

According to the wealth effect, when the price level decreases, the purchasing power of assets:

increase and consumer spending increases

Assume that marginal propensity to consume in 0.8, and potential output is $800 billion. If current real GDP is $700 billion, which of the following policies would bring the economy to potential output?

increase government spending by $20 billion

The point where the long-run aggregate supply curve intercepts the horizontal axis:

is the economy's potential output

Consider a simple economy: MPC = 0.75, income = $400 billion and aggregate consumption spending = $400 billion. The autonomous consumption is:

$100 billion

If the aggregate consumption function is C = $100,000,000 + .75 x YD, then autonomous consumption is:

$100,000,000

If real GDP is $1,000 billion and the aggregate expenditure is $850 billion, then the change in inventories will be:

$150 billion

When disposable personal income is $400, the level of personal saving is:

$20

Use Table 16-3. If the real GDP is $3,000 billion, then unplanned investment will be:

$200 billion

If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by:

$250 million

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:

$30,000

Suppose GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. At the current level of GDP, how much is consumption?

$6,900

Suppose GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. If GDP is $3,000, how much is unplanned inventory investment?

-$100

The slope of the consumption function equals:

1-MPS

The multiplier effect of changes in government purchases of goods and services is equal to:

1/(1-MPC)

If MPC = .9, then the multiplier is:

10

If the MPS = .1, then the value of the multiplier equals:

10

Use the "Fiscal Policy II" Figure 20-6. Suppose that this economy is in equilibrium at E1. If there is a increase in government purchases, then:

AD 1 will shift to the right, causing an increase in the price level and an increase in real GDP

Use the "AD-AS Model 1" Figure 19-6. When firms decrease their investment spending, which of the following will take place in the short run?

AD curve will shift to the left

Use the "AD-AS Model 1" Figure 19-6. When consumers and firms become more optimistic, which of the following will take place in the short run?

AD curve will shift to the right

Use the "Fiscal Policy II" Figure 20-6. Suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, then:

AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP

Use the "Fiscal Policy II" Figure 20-6. Suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, then:

AD1 will shift to the right, causing an increase in the price level and an increase in real GDP

A nation's potential output:

is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible

Use the "Shifts of the AD-AS Curves" Figure 19-1. In the short run, an increase in net exports is illustrated by:

Panel (A) - arrow is increasing toward quantity

Use the "Shifts of the AD-AS Curves" Figure 19-1. In the short run, an increase in factor prices is illustrated by:

Panel (D) - price level on left and arrow point to higher price level

When the value of household wealth falls, we expect to see:

a decrease in consumer spending and an even larger decrease in GDP

Suppose that political instability in the Middle Easy temporarily interrupts the supply of oil to the United States. Which of the following is most likely to occur?

The short-run aggregate supply curve shifts left, output decreases, and prices increase

Use the "Inflationary and Recessionary Gaps" Figure 20-4. A recessionary gap would be:

Y2-Y1

In response to a negative supply shock, the government decreases taxes. The most likely result of the government's tax decrease is:

a decrease in unemployment and an increase in the aggregate price level

Use the "Consumption Functions Curve C", compared with curve C, would most likely result from:

a drop in wealth

If commodity prices rise unexpectedly, it will cause:

a negative supply shock

Use the "Policy Alternatives" Figure 19-5. In Panel (B), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. At real GDP level Y1 there is:

a recessionary gap

Use the "AD-AS Model 1" Figure 19-6. If the economy is at point X, there is:

a recessionary gap with high employment

The long-run aggregate supply curve in Franklandia will shift to the left if:

a virus sickens a vast percentage of the Franklandian labor force

A recessionary gap occurs if:

actual real GDP is less than potential output

Raising personal income taxes shift the:

aggregate demand curve to the left

An increase in government spending on health care is likely to shift the:

aggregate demand curve to the right

Use the "Macroeconomics Equilibrium" Figure 19-2. In the accompanying figure, curve 1 refers to _______, curve 2 refers to ________, and curve 3 refers to ________.

aggregate demand; long-run aggregate supply; short-run aggregate supply

The long-run aggregate supply curve is vertical because in the long run:

all prices are flexible

The nation of Foxystan sees an increase in exports to other nations. This should result in:

an increase in aggregate demand in Foxystan

An economy is currently in the midst of a recession. An example of a government policy aimed at moving the economy back to potential GDP is:

an increase in government spending on infrastructure improvements

Use the "Inflationary and Recessionary Gaps" Figure 20-4. Suppose the economy is producing a level of output equal to Y1. An appropriate fiscal policy would be:

an increase in transfer payments

Which of the following is an expansionary fiscal policy?

an increase in unemployment benefits

Which of the following will shift the AD curve to the right?

an increase in wealth

An increase in investment leads to ________ in the price level and _________ in real GDP in the short run.

an increase; and increase

Use the "AD-AS" Figure 20-9. Consider and economy that is producing an output level of Y1. Then the economy is in:

an inflationary gap and contractionary fiscal policy can remove the gap

Suppose that the economy is in long-run macroeconomics equilibrium and aggregate demand increases. As the economy moves to short-run macroeconomics equilibrium, there is:

an inflationary gap with low unemployment

Which of the following has the most direct effect on aggregate demand ?

changes in government spending

A government might want to increase aggregate demand to:

close a recessionary gap

In the aggregate expenditures model, if real GDP exceeds aggregate expenditures, the economy will:

contract, causing employment to decrease

Use the "Fiscal Policy Options" Figure 20-8. If the aggregate demand curve is "AD", of the choices below, the most appropriate discretionary fiscal policy would be to:

decrease government spending and maintain income tax rates

Contractionary fiscal policy includes:

decreasing government expenditures

If real GDP is less than aggregate expenditure, then inventories will:

fall and firms will increase their future production

In the long run, wages and prices are considered to be:

flexible

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output?

increase taxes by $12.5 billion

The Federal Reserve, the central bank of the U.S., had been cutting interest rate in order to stimulate the recessionary economy. Fed's interest cuts are supposed to:

increase the investment spending and thus increase GDP via the multiplier

Expansionary fiscal policy:

increases aggregate demand

An increase in total wealth:

increases the aggregate consumption function

Expansionary fiscal policy includes:

increasing government expenditures

If the Fed increases the quantity of money in circulation:

interest rates decrease, investment increases, and the aggregate demand curve shifts to the right

Suppose the level of planned aggregate expenditure in an economy is $1,000 while the real GDP is $800. According to the simple model developed in this chapter, where the aggregate price level is assumed to be constant, we can expect:

inventories will decrease

Planned investment spending is

investment spending that businesses plan to undertake during a period

Use the "Inflationary and Recessionary Gaps" Figure 19-3. In Panel (B), the level of real GDP represented by Yp:

is potential output for this economy

A decrease in aggregate demand will generate _______ in real GDP and ______ in the price level in the short run.

no change; an increase

In the long run, a rising aggregate price level has:

no effect on the quantity of aggregate output

The intersection of the economy's aggregate demand and long-run aggregate supply curves:

occurs at the economy's potential output

Use the "Policy Alternatives" Figure 19-5. Assume that the economy depicted in Panel (A) is in shortrun equilibrium at a real GDP level of Y1. Doing nothing and letting the economy correct itself:

occurs in the long run as wages fall

Total investment equals:

planned investment plus unplanned investment

Suppose interest rates are rising. We expect that:

planned investment spending falls and GDP falls by an even larger amount

An improvement in the business outlook of forms is a type of _______ and therefore shifts the _______ to the ________.

positive demand shock, aggregate demand curve; right

Keynesians argue that a lack of spending is:

possible and can lead to prolonged recessions

Unplanned inventory investment leads to:

production decreasing

When the aggregate price level rises, this will:

result in a decrease in the quantity of aggregate output demanded

If there is a recessionary gap, discretionary fiscal policy would likely involve action to:

shift aggregate demand to the right

A decrease in aggregate demand is seen as a(n):

shift to the left in the aggregate demand curve

A self-correcting recessionary gap results in:

short-run aggregate supply that gradually increases

The aggregate demand curve:

slopes downward

Fiscal policy attempts to affect the level of overall spending in the economy by changes in:

taxes and spending

The wealth effect explains why:

the aggregate demand curve slopes downward since changes in aggregate price levels change the purchasing power of people's assets

In the aggregate expenditures model, if real GDP equals $700 billion and aggregate expenditures equals $400 billion:

unplanned inventory accumulation equals $300 billion

The long-run aggregate supply curve is:

vertical