ECON 9
In Figure 9-5, if the second round effect of an increase in autonomous spending of $100,000 is $75,000, then the multiplier is
4
If the shift in the C + I + (X − IM) in Figure 9-5 was caused by a 80 dollar increase in investment, then the multiplier is
5
In Figure 9-3, investment plus net exports equals
800 (same as saving)
The basic idea behind the multiplier is that an ____ in spending will cause an even larger _____ in equilibrium GDP
increase/ increase
In Table 9-1, at output of 4,000, inventories are
increasing by 200
The expenditure schedule will shift upward when net exports decrease. net exports increase. total imports increase. total exports decrease.
net exports increase
In Table 9-1, inventories are being depleted as long as output is below
3000 (equilibrium output)
In Table 9-1, the equilibrium level of output is
3,000
In Table 9-1, inventories will be increasing as long as output is above
3000
An expenditure schedule model with no government sector shows the relationship between ____ and _____
C + I/ national income
A higher price level would mean ____ for a person who has a bank deposit of $2 million.
a decrease in real wealth
If total spending exceeds total output, then inventory levels will _____
fall
If an economy at the equilibrium level of GDP experiences an increase in the amount of investment spending, then inventories will be depleted, causing firms to cut production. accumulated, causing firms to cut production. depleted, causing firms to increase production. accumulated, causing firms to expand production.
accumulated, causing firms to cut production
From the demand side, the equilibrium level of GDP is one at which everyone who wants a job has one and firms are not looking for extra workers. the only unemployment is frictional. aggregate demand equals production. the only unemployment is cyclical.
aggregate demand equals production
John Maynard Keynes concluded that investment spending is determined by business confidence. economic expectations. psychological perceptions about the economy. All of the above are correct.
all the above
Total output equals total income only at equilibrium. always. only at non-equilibrium levels of income. never.
always
To avoid a coordination failure, the intentions of savers and investors must be both at their planned levels. more than full employment GDP. at levels set by the government.
at their planned levels
Economists before Keynes assumed that equilibrium GDP occurred automatically. only with the help of government stabilization. if spending was generally greater than output. only in socialist economies with central planning.
automatically
In Figure 9-3, at $3,000 billion GDP, a. inventories will be falling, signaling businesses to decrease production. b. inventories will be falling, signaling businesses to increase production. c. planned saving increases planned investment. d. inventories will be accumulating, signaling businesses to increase production.
b
In Figure 9-1, at $7,000 billion real GDP, inventories are increasing. spending falls short of output. spending exceeds output. Both a and b are correct.
both a and b are correct
In Figure 9-3, at $5,000 billion GDP, inventories will be a. falling, signaling businesses to increase production. b. accumulating, signaling businesses to increase production. c. accumulating, signaling businesses to cut production. d. falling, signaling businesses to cut production.
c
Government stabilization policy cannot influence investment spending. can stimulate aggregate demand and thereby induce businesses to invest, but the amount is not totally predictable. can stimulate aggregate demand, but investment spending will not be affected. can stimulate aggregate demand, but only in the long run.
can stimulate aggregate demand and thereby induce businesses to invest, but the amount is not totally predictable.
In a market economy, the decisions about what to produce and how much of each good or service to produce are made by
consumers and producers
In a simple macroeconomic model, only one component of expenditures is allowed to change:
consumption
One of the primary functions of markets could be labeled
coordination
Recessions and depressions are the principal examples of
coordination failure
Which of the following occurs when party A would like to change his behavior if party B would change hers, and vice versa, and yet the two changes do not take place because the decisions of A and B are made independently?
coordination failure
In Figure 9-1, a. the 45-degree line represents all points where spending equals output. b. to the left of equilibrium GDP, inventories will fall. c. to the right of equilibrium GDP, inventories will rise. d. All of the above are correct.
d
If saving exceeds investment, then the level of GDP will
decrease
If the price level rises, the effect on the expenditure schedule and equilibrium real GDP is to increase both. decrease both. shift the expenditure schedule upward and decrease equilibrium real GDP. shift the expenditure schedule downward and increase equilibrium real GDP.
decrease both
The inflationary gap is the inflation rate that will occur from excess aggregate demand. budget deficit that caused the inflation to occur. distance between the equilibrium level of output and the full employment level of output. gap between expected and actual inflation.
distance between the equilibrium level of output and the full employment level of output
The recessionary gap is the amount of unemployment compensation required during a recession. budget deficit encountered during a recession. amount of government spending needed to end a recession. distance between the equilibrium level of output and the full employment level of output.
distance between the equilibrium level of output and the full employment level of output
The aggregate demand curve slopes _____
downward
A rising price level should shift the expenditure schedule ______ and ______ equilibrium real GDP
downward/ decrease
If net exports are reduced, the expenditure schedule will shift ___ and equilibrium real GDP will ____
downward/ fall
The federal government could stimulate investment spending by a. phasing out the depreciation allowance on corporate income taxes. b. enacting an investment tax credit. c. reinstating the windfall profits tax. d. reducing the tax rate on capital gains. e. Both b and d are correct.
e
When constructing a basic macroeconomic model, several assumptions (not realistic, but necessary to simplify the analysis) are made. Which of the following are assumed to be constant? a. the price level b. the rate of interest c. the foreign exchange rate d. the level of government spending e. All of the above are held constant.
e.
Which of the following questions are not answered by the process of demand side GDP determination? a. How large is equilibrium GDP? b. Does the economy have unemployment? c. Is demand side equilibrium consistent with supply side equilibrium? d. Does the economy have inflation? e. All of the above are not answered.
e.
In the income-expenditure model, at equilibrium GDP: either unemployment or inflation may occur. inflation can occur but unemployment cannot. unemployment can occur but inflation cannot. both unemployment and inflation are impossible.
either unemployment or inflation may occur
The economy will reach equilibrium in a simple economy only if saving is ____ investment
equal to
The equilibrium level of GDP is the level at which aggregate demand ____ output
equals
A recessionary gap exists when potential GDP ____ equilibrium GDP
exceeds (where the economy should be, as opposed to where it is which is behind potential line)
Which of the following shows the relationship between national income (GDP) and total spending?
expenditure schedule
45° line diagrams show how
expenditures rise with income
In Figure 9-1, the economy is a. experiencing an inflationary gap, shown by the horizontal distance EB. b. at full employment without inflation. c. experiencing a recessionary gap, shown by the horizontal distance EB. d. experiencing a recessionary gap, shown by the distance between EF.
experiencing a recessionary gap (EB) (the gap before potential GDP is recessionary)
According to Baumol and Blinder, from the demand side an increase in the price level causes aggregate expenditures to fall, resulting in a lower level of equilibrium income. fall, resulting in a higher level of equilibrium income. rise, resulting in a higher level of equilibrium income. rise, resulting in a lower level of equilibrium income.
fall, resulting in a lower level of equilibrium income
If total spending is less than total output, then price levels will _____ and output will______
fall/ decrease
When the price level in the United States rises, then net exports should____ and real GDP should ______
fall/ decrease
An expenditure schedule that lies below the full employment level of GDP will cause
falling prices
A recessionary gap exists when the equilibrium level of GDP ____ of potential GDP
falls short
Government stabilization policy would be unnecessary if the economy automatically gravitated toward
full employment
By definition, total production must always equal total
income
Assume a simple macroeconomic model. When inventories rise unexpectedly, income is above its equilibrium value. income will rise until it reaches its equilibrium value. total spending is higher than total output. All of the above.
income is above its equilibrium value
If inventory levels are decreasing, then we should expect business firms to_____ output
increase
Investment spending might be larger when GDP is higher. Such added investment as GDP rises is called a ______ investment
induced
If the expenditure schedule lies above the level of potential GDP, then there is a(n) _____ gap
inflationary
The amount by which equilibrium real GDP exceeds full-employment GDP is known as an
inflationary gap
If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that
inventory levels are decreasing
Which of the following would be associated with an inflationary gap?
inventory levels too low
A level of GDP cannot be at equilibrium when aggregate demand exceeds output because firms will notice that inventory stocks are building up. inventory stocks are being depleted. their profits are negative. many of their workers have little to do.
inventory stocks are being depleted
Equilibrium GDP will not exist where output exceeds aggregate demand because businesses will notice that their profits are positive. inventory stocks are building up. inventory stocks are being depleted. their level of depreciation is rising.
inventory stocks are being depleted
Investment spending cannot be stimulated by decreasing the interest rate. is often the cause of business fluctuations in the United States. is a remarkably stable function of the level of real GDP. is the primary solution to recessions and inflations, according to John Maynard Keynes.
is often the cause of business fluctuation in the united states
Using the standard 45-degree line diagram, how does a decrease in investment spending effect the expenditure schedule? It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule. It shifts the expenditure schedule downward. It shifts the expenditure schedule upward.
it shifts the expenditure schedule downward
Using the standard 45-degree line diagram, how does a decrease in net exports effect the expenditure schedule? It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule. It shifts the expenditure schedule upward. It shifts the expenditure schedule downward.
it shifts the expenditure schedule downward
Using the standard 45-degree line diagram, how does an increase in autonomous consumption effect the expenditure schedule? It shifts the expenditure schedule downward. It shifts the expenditure schedule upward. It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule.
it shifts the expenditure schedule upward
Using the standard 45-degree line diagram, how does an increase in investment spending effect the expenditure schedule? It shifts the expenditure schedule downward. It shifts the expenditure schedule upward. It increases the slope of the expenditure schedule. It decreases the slope of the expenditure schedule.
it shifts the expenditure schedule upward (increase investment spending shifts whole graph)
In the circular flow diagram saving is a ____ and investment is a _____
leakage/ injection
An inflationary gap will exist when the full employment level of GDP is ____ equilibrium GDP
less than
Inventory reductions are a signal indicating that the economy is close to disaster. the Dow Jones Industrial Average will fall. manufacturers need to increase production. All of the above are true.
manufacturers need to increase their production
If total spending is less than the value of total output, firms may decide to cut prices. may increase production levels. will tend to raise prices. will notice inventories falling.
may decide to cut prices
The concept that increases in spending cause larger increases in equilibrium GDP is known as the
multiplier
When aggregate demand exceeds current production: both output and the price level are in equilibrium. output is not in equilibrium, but the price level is. prices are not in equilibrium, but output is. neither output nor the price level is in equilibrium.
neither output nor the price level is in equilibrium
Why does an increase in the price level cause a decrease in real GDP demanded? Consumer wealth increases. Net exports will increase. Interest rates decrease and cause higher investment. Net exports will decrease.
net exports will decrease
If the economy is in equilibrium, it must be
on the 45 line
The reason for the multiplier effect is that businesses make decisions about investment projects based on anticipated profits. one person's additional expenditure creates a new source of income for another person, and this additional income leads to still more spending. changes in government spending typically deepen recessions and exacerbate inflationary conditions in the economy. additional spending lowers the rate of interest and leads to further borrowing and spending.
one person's additional expenditure creates a new source of income for another person, and this additional income leads to still more spending
In a simple economy (no government), the vertical distance between the consumption function and the expenditure schedule measures
planned investment
Each C + I + G + (X − IM) expenditure schedule is drawn assuming a specific _____ level
price
Which one of the following could cause a recessionary gap? Interest rates are too low. Consumers spend more than they earn. Price levels are too high. Businesses spend more than they save.
price levels are too high
The slope of the aggregate demand curve illustrates that as the price level rises, real GDP demanded decreases. real GDP demanded increases. the aggregate demand curve shifts rightward. the aggregate demand curve shifts leftward.
real GDP demanded decreases
When equilibrium real GDP falls short of potential GDP, there is a(n) ____ gap
recessionary
If the expenditure schedule must be shifted upward to reach potential GDP, then the economy is experiencing a(n)
recessionary gap
Economists are very good at explaining how individual markets work. Economists are less successful at explaining
recessions and inflation
The main examples of macroeconomic coordination failures are ____ and ____
recessions/ depressions
According to Baumol and Blinder, from the demand side a decrease in the price level causes aggregate expenditures to fall, resulting in a lower level of equilibrium income. fall, resulting in a higher level of equilibrium income. rise, resulting in a higher level of equilibrium income. rise, resulting in a lower level of equilibrium income.
rise, resulting in a higher level of equilibrium income
When the expenditure level is above the full employment level of GDP, a possible consequence is
rising prices
A major reason for the existence of inflationary and deflationary gaps is that corporations do most of the nation's saving. saving and investing are done by people with no social conscience. consumers do most of the nation's saving. saving and investing are done by different groups.
saving and investing are done by different groups
In a simple economy (no government sector), the equilibrium level of GDP will be less than the full employment level of income if, at the full employment level of income, the: saving that consumers want to do is less than investing that businesses want to do. saving that consumers want to do is greater than investing that businesses want to do. saving that consumers want to do is less than spending that consumers want to do. inventories are being depleted.
saving that consumers want to do is greater than investing that businesses want to do
If net exports decrease, the expenditure schedule will
shift downward
An increase in the U.S. price level will
shift the expenditure schedule downward
If the U.S. economy is experiencing falling price levels, the expenditure schedule will
shift upward
To eliminate a recessionary gap, the expenditure schedule should be
shifted upward
At the equilibrium level of income it must be true that total income equals total ___
spending
In Figure 9-1, at $3,000 billion real GDP, spending exceeds total output and inventories will fall. inventories are constant. aggregate demand equals aggregate supply. spending falls short of output and inventories will rise.
spending exceeds total output and inventories will fall
Two variables that affect the slope of the aggregate demand curve are ____ and ____
tax rates/ interest rates
If total spending is greater than the value of output, firms will cut prices. decrease production levels. tend to raise prices. see inventories rise.
tend to raise prices
In Figure 9-4, if the economy faces an inflationary gap, what must happen to reach potential GDP? The expenditure level must rise and/or the price level must rise. The expenditure level must rise and/or the price level must fall. The expenditure level must fall and/or the price level must fall. The expenditure level must fall and/or the price level must rise.
the expenditure level must fall and/ or the price level must rise
In Figure 9-4, if the economy is in a recessionary gap, what must happen to reach potential GDP? The expenditure level must fall and/or the price level must rise. The expenditure level must rise and/or the price level must fall. The expenditure level must rise and/or the price level must rise. The expenditure level must fall and /or the price level must fall.
the expenditure level must rise and/ or the price level must fall
In the basic 45-degree line model, what is the effect of an increase in the price level?
the expenditure line will shift downward
In the basic 45-degree line model, what is the effect of a decrease in the price level?
the expenditure line will shift upward
The slope of the aggregate demand curve illustrates that real GDP demanded will increase when the price level rises. the price level falls. real income rises. real income falls.
the price level falls
Given the slope of the aggregate demand curve, real GDP demanded will decrease when real income rises. real income falls. the price level falls. the price level rises.
the price level rises
If the amount that consumers wish to save at the full employment level of income is greater than the amount that businesses plan to invest, then there will be an inflationary gap. there will be a recessionary gap. total demand will exceed potential GDP. the economy will move to a higher level of output.
there will be a recessionary gap
If, at the full employment level of income, the amount that businesses plan to invest is greater than the amount that consumers plan to save, then
there will be an inflationary gap
Equilibrium GDP on the demand side occurs when total spending equals _____ and inventories ______
total production/ remain at desired levels
When businesses are cutting back production, then it probably true that
total spending is less than total output
One of the possible consequences of the expenditure schedule lying below the level of full employment GDP is
unemployment
Recessionary gaps are most likely to be accompanied by
unemployment
Writing during the Great Depression, Keynes naturally focused on problems of
unemployment
In the 2007-2009 period, the expenditure level in the United States intersected the 45-degree line below potential GDP, causing
unemployment (when GDP is below potential GDP line, the gap is recessionary and recessionary gaps are associated with unemployment)
The price level effects consumer spending through changes in real
wealth
One of the main conclusions of Keynes in The General Theory of Employment, Interest, and Money is that the economy will usually be at full employment. will not automatically gravitate to full employment. will automatically move quickly toward full employment without inflation. is usually on the verge of a major depression or hyperinflation.
will not automatically gravitate to full employment
If the economy automatically tends toward full employment, then government stabilization policy
will not be necessary