chapter 12 and 13
The sum of the MPC and the MPS equals
one
If we account for the impact of increasing GDP on imports, inflation, and interest rates, the simple multiplier formula would
overstate the true value of the multiplier
On the 45-degree line diagram, for points that lie above the 45-degree line,
planned aggregate expenditure is greater than GDP
If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then
the MPC is 0.75
which of the following factors will shift the short-run aggregate supply to the right?
the labor force increases
The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by
the level of aggregate expenditure
The amount by which consumption spending increases when disposable income increases is called
the marginal propensity to consume
All of the following are true statements about the multiplier except
the multiplier is a value between zero and one
the aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded
which of the following is among the most important determinants of the level of net exports?
the price level in the US relative to the price levels in other countries
If oil prices rise unexpectedly,
the short-run aggregate supply curve will shift to the left
when the economy is in a recession, the shortfall in AE is exactly equal to
the unplanned increase in inventories that would occur if the economy were initially at potential GDP
The value of the multiplier is larger when
the value of the MPC is larger
When incomes rise faster in the United States than in other countries:
U.S. net exports will fall
macroeconomic equilibrium in the short run
Will occur at a point on the 45 degree line
Aggregate expenditure, or the total amount of spending in the economy, equals
consumption spending plus planned investment plus government purchases plus net exports
economists and business analysts usually explain fluctuations in GDP in terms of fluctuations in these four categories:
consumption, planned investment, government purchases, and net exports
when national income increases, there must be some combination of an increase in household
consumption, saving, and taxes
the most important determinant of consumption is
current disposable income
If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will
decrease consumption by $9 million
the interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment
Which of the following statements is correct?
if households become more optimistic about their future incomes, the aggregate demand curve will shift to the right
A decrease in the real interest rate will
most likely increase consumer's purchases of durable goods
Net exports have recently been ____ in most years between 1979. They tend to ___ when the US economy is in recession and ___ when the US economy is expanding
negative; increase; decrease
Actual investment spending includes spending by consumers on
new houses
If the MPC is 0.75, then a $100 increase in government expenditures will increase equilibrium GDP by
$400
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $80 billion of disposable income
$72 billion
Which of the following statements about investment spending is correct?
- The optimism or pessimism of business firms is an important determinant of investment spending - A higher real interest rate results in less investment spending - When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong (all of the above)
Refer to Figure 11-3. Suppose that investment spending decreases by $5 million, decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1. If the MPC is .8, then what is the change in GDP?
-$25 million
which of the following factors will cause the long-run aggregate supply curve to shift to the right?
-an increase in the number of workers in the economy -the accumulation of more machinery and equipment -technological change (all of the above)
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
-because contracts make some wages and prices "sticky" -because firms are often slow to adjust wages -because menu costs make some prices "sticky" (all of the above)
If income falls by $40 billion and consumption falls by $30 billion, then the slope of the consumption function is
0.75
If the consumption function is define as C = 7,250 + 0.8 Y, what is the multiplier?
5
at the points above the 45 degree line
AE>GDP
which of the following statements is correct?
Actual investment will equal planned investment only when there is no unplanned change in inventories
Macroeconomic equilibrium occurs when
Aggregate expenditure = GDP
Which of the following is correct concerning shifts in the aggregate demand (AD) curve?
An increase in corporate taxes will shift the AD curve to the left because there is an inverse relationship between corporate taxes and investment expenditure
Which of the following statements is correct?
An increase in the corporate income tax decreases the after-tax profitability of investment spending
What impact does an increase in the price level in the United States have on net exports and why?
An increase in the price level decreases net exports by increasing the relative cost of American goods
which of the following equalities is correct?
Disposable income is equal to national income minus net taxes.
In a small economy in 2009, aggregate expenditure was $850 million while GDP that year was $800 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?
Firm investment in inventories was less than anticipated in 2009
The key idea of the aggregate expenditure model is that in any particular year, the level of _____ is determined mainly by the level of aggregate expenditure
GDP
If planned aggregate expenditure is greater than total production,
GDP will increase
which of the following statements is correct
autonomous expenditure depends on level of GDP
Which of the following is not correct?
MPS = 1- (C/YD)
If inflation in the United States is lower than inflation in other countries, what will be the effect on net exports for the United States?
Net exports will decrease as U.S. imports decrease
Assume that steel is the only good produced in the economy. Which of the following would explain why the short-run aggregate supply curve for steel would be upward sloping?
Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the production of steel—remains fixed by contract.
what is the multiplier?
The multiplier is the ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure
Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?
There was an unplanned decrease in inventories equal to $2 million
When aggregate expenditure is less than GDP, which of the following is true?
There was an unplanned increase in inventories.
which of the following factors does not cause the aggregate demand curve to shift
a change in the price level
which of the following will reduce consumer expenditures?
a decrease in expected future income
the international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports nd an increase in imports
which of the following will not shift the aggregate demand curve to the right
a fall in the price level
what is the impact of an increase in the price level on the short-run aggregate supply curve?
a movement up and to the right along a stationary curve
which of the following will cause the short-run aggregate supply curve to shift to the right?
a technological change
An unplanned decrease in inventories results in
actual investment that is less than planned investment
a curve showning the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called
aggregate demand
an unexpected increase in the price of oil would be called ___ by economists
an adverse supply shock
which of the following causes saving to increase
an increase in the interest rate
Why does the short-run aggregate supply curve slope upward?
because profits rise when the price of the goods and services firms sell rise more rapidly than the price they pay for inputs
Fluctuations in total spending in the economy may affect:
both employment and production in the short run
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
which of the following makes up the largest fraction of GDP
consumption
The behavior of consumption and investment over time can be described as follows:
consumption follows a smooth, upward trend, but investment is subject to significant fluctuations
An increase in the value of the dollar will ___ exports and ____ imports, so net exports will _____
decrease; increase; fall
When aggregate expenditure is greater than GDP, inventories will ____ and GDP and total employment will ____
fall; increase
If the MPC is 0.95, then a $10 million increase in disposable income will
increase consumption by $9.5 million
an increase in stock prices will
increase the consumption component of aggregate expenditure
if real GDP in the US increases faster than real GDP in other countries, US imports will ___ faster than US exports, and net exports will ____
increase; fall
If inflation in the United States is lower than inflation in other countries, then U.S. exports ____ and US imports _____, which ____ net exports
increases; decrease: increases
As long as the AE line is above the 45o line,
inventories will decline and firms will expand production
When aggregate expenditure is greater than GDP
inventories will fall
If firms are more pessimistic and believe that future profits will fall and remain weak for a few years, then
investment spending will fall
Which of the following happens if the price level rises?
investment, consumption and net exports will all fall
according to the paradox of thrift, a simultaneous increase in saving and decrease in consumption lead to
lower real GDP in the short run but higher real GDP in the long run
An increase in the price level ______ real wealth, which causes consumption to ______
lowers; decrease
which of the following government policies affects the economy through intended changes in the money supply and interest rates?
monetary policy
the aggregate expenditure model focuses on the relationship between total spending and
real GDP in the short run
if the exchange rate between the dollar and foreign currencies rises, the price in foreign currency of US products will ___ and the US aggregate demand curve will shift to the ____
rise; left
For most of the 1979-2008 period, real government purchases
rose steadily
The long-run aggregate supply curve
shifts to the right as technological change occurs
what are menu costs?
the costs to firms of changing prices
if aggregate expenditure is equal to GDP, then
the economy is in macroeconomic equilibrium.
if the price level increases, then
the economy will move up and to the left along a stationary aggregate demand curve.
U.S. net export spending falls when
the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.
Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1 change in consumption/change in Y
John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending,
they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP
When is the economy in a recession?
when the AE line intersects the 45o line at a level of GDP below potential real GDP
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption
an increase in net exports that results from a change in the price level in the US
will not cause the aggregate demand curve to shift
