Econ Test 3

If the MPC is .50 and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap is

$20 billion.

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by:

$6 billion

With an MPS of .3, the MPC will be:

1 - .3

The relationship between the MPS and the MPC is such that:

1 - MPC = MPS

If the MPC is .6, the multiplier will be:

2.5 1/(1-MPC)

When aggregate demand declines, the price level may remain constant, at least for a time, because

firms individually may fear that their price cut may set off a price war.

Prices and wages tend to be

flexible upward, but inflexible downward.

multiplier

if you spend an extra dollar in this economy, given peoples marginal propensity to consume, how much will that increase total output?

disposable personal income

income after taxes

Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will:

increase by more than $100 billion.

If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to

increase domestic output and employment.

Equal increases in government purchases and taxes will

increase the equilibrium GDP and the size of that increase is independent of the size of the MPC.

Exports have the same effect on the current size of GDP as:

investment.

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift

leftward by $40 billion at each price level.

cyclical deficit

part of the budget deficit that is a result of a downturn in economic activity(recession)

Investment spending in the United States tends to be unstable because

profits are highly variable

If households consume less at each level of disposable income, they are:

Saving more

If there is a decrease in disposable income in an economy, then:

The APC rises and the APS falls

Tessa's break-even income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000, her level of

consumption spending will be $14,500

personal saving

disposable personal income - consumption =

Capital goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending.

durable; instability

The investment demand slopes downward and to the right because lower real interest rates:

enable more investment projects to be undertaken profitably.

Other things equal, the multiplier effect associated with a change in government spending is:

equal to that associated with a change in investment or consumption

Aggregate demand Price level high, quantity of output low Price level low, quantity of output high As price decreases quantity demanded increases As price increases quantity demanded decreases

Aggregate supply Price level low, quantity of output low Price level high, quantity of output high Higher price incentivized higher supply

The investment schedule shows the

Amounts business firms collectively intend to invest at each possible level of GDP

Which of the following effects best explains the downward slope of the aggregate demand curve

An interest-rate effect

As disposable income decreases, consumption:

And saving both decrease

The fraction, or percentage, of total income which is consumed is called the:

Average propensity to consume

The fraction, or percentage, of total income which is consumed (consumption over disposable income)

Average propensity to consume (consumption over disposable income)

As disposable income decreases, the:

Average propensity to consume increases

If Sara Thomas' disposable income increases from $4,000 to $4,500 and her level of saving increases from $200 to $325, it may be concluded that her marginal propensity to:

Consume is .75

When the consumption schedule is plotted on a graph:

Consumption is on the vertical axis and disposable income is on the horizontal axis

An increase in household wealth that creates a wealth effect shifts the

Consumption schedule upward and the saving schedule downward

The consumption schedule shows the relationship of household consumption to the level of:

Disposable income

Personal saving is equal to

Disposable income minus consumption

If the consumption schedule is a straight line, it can be concluded that the:

MPC is constant at various levels of income

The intersection of the aggregate demand and aggregate supply curves determines the

Equilibrium level of real domestic output and prices

MPS

In this case, the marginal propensity to save equals $100/$500 = 0.2. It can be interpreted as the fraction of an extra $1 of disposable personal income that people save. Thus, if a person with an MPS of 0.2 received an extra $1,000 of disposable personal income, that person's saving would rise by $0.20 for each extra $1 of disposable personal income, or $200. Since people have only two choices of what to do with additional disposable personal income—that is, they can use it either for consumption or for personal saving—the fraction of disposable personal income that people consume (MPC) plus the fraction of disposable personal income that people save (MPS) must add to 1

If consumption increases while income remains the same, the average propensity to consume will:

Increase

An increase in expected future income will

Increase aggregate demand

If the price of crude oil decreases, then this event would most likely

Increase aggregate supply in the U.S.

An increase in disposable income

Increases consumption by moving upward along a given consumption schedule

The aggregate demand curve shows the

Inverse relationship between the price level and real GDP purchased

If the real interest rate falls, then the:

Investment schedule will shift upward

When a consumption schedule is plotted as a straight line, the slope of the consumption line is:

Less than the slope of the 45º line

If the slope of a linear consumption schedule increases in a private, closed economy, then it can be concluded that the:

MPC has increased

If the consumption schedule is a straight line, it can be concluded that the

MPC is constant at various levels of income

The upward-sloping aggregate supply curve—also known as the short run aggregate supply curve—shows the positive relationship between price level and real GDP in the short run.

The aggregate supply curve slopes up because when the price level for outputs increases while the price level of inputs remains fixed, the opportunity for additional profits encourages more production.

price level

The average of the prices of goods and services produced in the aggregate economy. In a theoretical sense, the price level is the price of aggregate production. In a practical sense, the price level is measured by either of two price indexes, the Consumer Price Index (CPI) or the GDP price deflator.

If consumers expect prices to rise and shortages to occur in the future, then it will shift:

The consumption schedule upward and the saving schedule downward

Aggregate demand is the amount of total spending on domestic goods and services in an economy.

The downward-sloping aggregate demand curve shows the relationship between the price level for outputs and the quantity of total spending in the economy.

marginal propensity to consume (MPC)

The ratio of the change in consumption (ΔC) to the change in disposable personal income (ΔYd)

marginal propensity to save (MPS)

The ratio of the change in personal saving (ΔS) to the change in disposable personal income (ΔYd)

Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S. GDP, then:

U.S. real GDP will fall.

Break even income

When disposable income equals consumption

If the dollar appreciates relative to foreign currencies, we would expect:

a country's net exports to fall.

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because:

a portion of a tax cut will be saved.

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources

a rise in the real GDP

aggregate

a whole formed by combining several (typically disparate) elements

In a private closed economy _____ investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where _____ investment is equal to saving

actual; planned

The interest-rate effect suggests that:

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

The investment demand curve will shift to the right as the result of:

businesses becoming more optimistic about future business conditions.

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:

consume is three-fifths.

permanent income hypothesis

consumption in any period depends on permanent income

The interest rate effect

reflects the fact that most consumers and business finance managers will cut back on their borrowing activities when interest rates increase.

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:

rightward by $50 billion at each price level.

If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease:

saving by $20.

In an aggregate expenditures diagram equal increases in government spending and in lump-sum taxes will:

shift the aggregate expenditures line upward.

total budget defecit

structural deficit + cyclical deficit

The investment demand curve will shift to the right as a result of

technological progress

A recessionary expenditure gap is

the amount by which the full-employment GDP exceeds the level of aggregate expenditures.

Permanent income is

the average annual income people expect to receive for the rest of their lives

The most important determinant of consumer spending is

the level of income

MPC

the marginal propensity to consume equals $400/$500 = 0.8. It can be interpreted as the fraction of an extra $1 of disposable personal income that people spend on consumption. Thus, if a person with an MPC of 0.8 received an extra $1,000 of disposable personal income, that person's consumption would rise by $0.80 for each extra $1 of disposable personal income, or $800.

Potential GDP, or full-employment GDP

the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions

The investment demand curve portrays an inverse (negative) relationship between:

the real interest rate and investment. as the interest rate increases, demand for investment decreases.

structural defecit

the remainder or the deficit that would exist if the economy were operating at full employment

The following factors explain the downward slope of the aggregate demand curve, except: A substitution effect A real-balance effect An interest-rate effect A foreign-purchases effect

the substitution effect

Aggregate supply is the total quantity of output firms will produce and sell.

—in other words, the real GDP