Econ CH 12
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income
$90 billion
What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP
Inventories decrease, GDP increases, and employment increases.
Which of the following equalities is correct
Disposable income is equal to national income minus net taxes
Aggregate expenditure, or the total amount of spending in the economy, equals
consumption spending plus planned investment spending plus government purchases plus net exports
The most important determinant of consumption is _________
current disposable income
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________
fall, increase
If firms accumulate excess inventories and then spending quickly returns to its normal levels, firms usually do not sell their excess inventories before returning to producing at normal levels
false
On a 45 -line diagram (or Keynesian Cross), the horizontal axis measures _________, while the vertical axis measures ___________.
real GDP, real aggregate expenditure
When potential real GDP is equal to 70, this economy is in
recession
A curve showing 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
the aggregate demand curve
Which graph best depicts the impact of an increase in exports
the graph on the left
If the MPC is 0.8, then a $100 million increase in government expenditures will increase equilibrium GDP by _________
$500 million
If the marginal propensity to save (MPS) is 0.2, how much additional consumption will result from an increase of $100 billion in disposable income
$80 billion
The unplanned change in inventories is ________ and real GDP will ________
-$700, increase
According to the graph on the right, what is the level of autonomous consumption when aggregate income is 300?
100
The formula for the multiplier is
1/(1-MPC)
Find equilibrium GDP using the following macroeconomic model:
10,000
What happens when there is an unplanned decrease in inventories
Actual investment is less than planned investment
Which of the following statements is correct
Actual investment will equal planned investment only when there is no unplanned change in inventories
Which of these statements about autonomous expenditure is correct
Autonomous expenditure does not depend on the level of GDP
If you think of the aggregate expenditure function as a line on the 45°-line diagram, the intercept would be
C+ I+ G+NX
We can use the diagram to the right to compare movements in real government purchases between 1979 and 2006 Note: The values are seasonally adjusted at an annual rate
Government purchases grew steadily for most of the period shown, with the exception of the mid-1990s.
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
The basic formula for GDP or aggregate income is
GDP = C + I + G + (X−M)
If you think of the aggregate expenditure function as a line on the 45°-line diagram, the slope would be
MPC
In the figure at right, a $20 trillion increase in planned investment increased the AE line from AE 1 to AE 2However, real GDP increased by $40 trillion. Why
The multiplier effect
At points above the 45 degree line in the AE model:
aggregate expenditure is greater than GDP
The shift of the function in this graph could have been caused by a _____
change in the MPC
An increase in household wealth will
increase the consumption component of aggregate expenditure
If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports
increase; decrease; increases
According to the paradox of thrift, a simultaneous increase in saving without any change in income leads to
lower real GDP in the short run but higher real GDP in the long run
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals
one
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion of disposable income
$90 billion
What is the effect on real GDP of a $150 billion change in planned investment if the MPC is 0.50?
300
Indicate which of the following is correct about the multiplier effect
-A decrease in autonomous spending decreases real GDP by a multiple of the change. -The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. -The larger the MPC, the more additional consumption that occurs
Which of the following will increase planned investment spending on the part of firms
-A lower real interest rate -Increased optimism about future demand for its product
We say that the economy as a whole is in macroeconomic equilibrium if
-aggregate expenditure equals total production. -total spending equals total production. -total spending equals GDP. -aggregate expenditure equals GDP
In the aggregate expenditure model, when is planned investment greater than actual investment
When there is an unplanned decrease in inventories
-the U.S. price level relative to other countries' price levels ______ net exports. -the growth rate of U.S. GDP relative to other countries' ______ net exports. -the exchange rate between the dollar and other currencies_____ net exports
decrease decrease decrease
the price level ___consumption. household wealth___consumption. expected future income _____ consumption. current disposable income _____ consumption. the interest rate _____ consumption.
decrease increase increase increase decrease
The amount by which consumption spending increases when disposable income increases is called _________
the marginal propensity to consume
The process that occurs when an increase in autonomous consumption leads to a bigger increase in real GDP is known as
the multiplier effect
The amount of the shortfall in planned aggregate expenditure is equal to
the vertical distance between AE and the 45degrees° line at the level of potential real GDP
Actual investment will equal planned investment only when _________
there is no unplanned change in inventory
When is the economy in a recession
when the aggregate expenditure line intersects the 45o line at a level of GDP below potential GDP
The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories
AE=C+I+G+NX
Which of the following statements about investment spending is correct
All of the above are correct
According to John Maynard Keynes, which of these is not a primary determinant of consumption
All of these are primary determinants of consumption
Which of the following statements is correct
An increase in the corporate income tax decreases the after-tax profitability of investment spending
We can use the diagram to compare movements in real consumption between 1979 and 2017. Which of the following statements is true
Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions
An increase in __________ will cause savings to increase
interest rates
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals
one
The aggregate expenditure model focuses on the relationship between total spending and
real GDP in the short run
When aggregate expenditures are less than the GDP inventories will
rise
For most of the 1979-2010 period, real government purchases
rose steadily
The value of the multiplier is larger when
the value of the MPC is larger
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production or GDP
The value of the multiplier is larger when the value of the _________
MPC is larger
The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as
MPC + MPS = 1. MPS = 1−MPC. MPC = 1−MPS
Which of the following is not correct
MPS = 1 - (C/YD)
Macroeconomic equilibrium in the short run
Macroeconomic equilibrium in the short run
In this graph of the income-expenditure model, what happens at y*
Output equals planned expenditures
Which point on this graph best represents (Ca + I)
Point 4
We can use the diagram to the right to compare movements in real net exports between 1979 and 2006 Note: The values are seasonally adjusted at an annual rate
The United States has imported more goods and services than it exported during most of the years shown
When incomes rise faster in the United States than in other countries
U.S. net exports will fall
When incomes rise faster in the United States than in other countries,
U.S. net exports will fall.
Which of the following is NOT included in the calculation of total government purchases
Unemployment insurance benefits paid for by the federal government
Which of the following causes saving to increase
an increase in the interest rate