Macro-Econ chapters 10-12

DI: 200, 225, 250, 275, 300 C: 205, 225, 245, 265, 285 The marginal propensity to consume is: A. .25. B. .75. C. .20. D. .80.

D. .80.

Private closed economy

Includes on consumers and businesses

Determinants of investment

- The market interest rate - Business expectations

Marginal Propensity to Consume

( MPC) = (change in consumption)/(change in income)

Marginal Propensity to Save

(MPS) = (change in saving)/(change in income)

Shifts vs. Movements Along C

- Movement along the consumption function results from a change in disposable income only! - Shift of the consumption function results from a change in net wealth, price level, interest rates, or future expectations.

Nonincome Determinants

- Net Wealth (increase = C increase, decrease = C decrease) - Price Level (increase = C decrease, decrease = C increase) - Interest Rates (increase = C decrease, decrease = C increase) - Expectations (increase = C increase, decrease = C decrease) - Taxation (increase = C decrease, decrease = C increase)

C=Ca +by

-Ca = autonomous consumption, does not depend on the level of income. -by = the part of consumption that is dependent on income: - b = marginal propensity to consume (MPC), or the fraction of additional income that is spent. - y = level of income in the economy.

Determinants of Exports

-More imports/less exports (line shifts down) -More export/less imports (line shifts down)

Determinants of government

-Public policy/government spending

The consumption function shows

-positive relationship between -level of disposable income -the amount spent on consumption -ceteris paribus.

1. Immediate short run aggregate supply (AS) curve 2. Short run AS curve 3. Long run AS curve

1. a horizontal line 2. an upward shifting line 3. a vertical line

The consumption schedule directly relates: A. consumption to the level of disposable income. B. saving to the level of disposable income. C. disposable income to domestic income. D. consumption to saving.

A. consumption to the level of disposable income.

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to: A. decrease by $50 billion. B. decrease by $150 billion. C. remain unchanged since spending on military goods is unproductive and usually wasteful. D. decrease by $25 billion

A. decrease by $50 billion.

If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will: A. increase by $10 billion. B. increase by $2.10 billion. C. decrease by $4.29 billion. D. increase by $4.29 billion.

A. increase by $10 billion.

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift: A. leftward by $40 billion at each price level. B. rightward by $20 billion at each price level. C. rightward by $40 billion at each price level. D. leftward by $20 billion at each price level.

A. leftward by $40 billion at each price level.

Graphically, demand-pull inflation is shown as a: A. rightward shift of the AD curve along an upsloping AS curve. B. leftward shift of the AS curve along a downsloping AD curve. C. leftward shift of the AS curve along an upsloping AD curve. D. rightward shift of the AD curve along a downsloping AS curve

A. rightward shift of the AD curve along an upsloping AS curve.

If Trent's MPC is .80, this means that he will: A. spend eight-tenths of any increase in his disposable income. B. spend eight-tenths of any level of disposable income. C. break even when his disposable income is $8,000. D. save two-tenths of any level of disposable income.

A. spend eight-tenths of any increase in his disposable income.

The MPC for an economy is: A. the slope of the consumption schedule or line. B. the slope of the savings schedule or line. C. 1 divided by the slope of the consumption schedule or line. D. 1 divided by the slope of the savings schedule or line.

A. the slope of the consumption schedule or line.

Best portrays the effects of a substantial reduction in government spending

AD curve to shift leftward

Best portrays the effects of declines in the incomes of U.S. trading partners

AD curve to shift leftward

Best portrays the effects of an increase in foreign spending on U.S. products

AD curve to shift rightward

Cost-push inflation is depicted by:

AS curve to shift leftward

Best portrays the effects of an increase in resource productivity

AS curve to shift rightward

Other things equal, an increase in investment spending is depicted by

AS curve to shift rightward

Which of the following will not cause the consumption schedule to shift? A. A sharp increase in the amount of wealth held by households. B. A change in consumer incomes. C. The expectation of a recession. D. A growing expectation that consumer durables will be in short supply.

B. A change in consumer incomes

Other things equal, a decrease in the real interest rate will: A. expand investment and shift the AD curve to the left. B. expand investment and shift the AD curve to the right. C. reduce investment and shift the AD curve to the left. D. reduce investment and shift the AD curve to the right

B. expand investment and shift the AD curve to the right.

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to: A. increase by $30 billion. B. increase by $45 billion. C. decrease by $35 billion. D. increase by $50 billion.

B. increase by $45 billion

In the diagram, a shift from AS2 to AS3 (right) might be caused by a(n): A. decrease in interest rates. B. increase in business taxes and costly government regulation. C. decrease in the prices of domestic resources. D. decrease in the price level.

B. increase in business taxes and costly government regulation.

If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion, then: A. the multiplier is 2. B. the MPC for this economy is .6. C. inflation is occurring. D. the MPS for this economy is .6.

B. the MPC for this economy is .6.

The investment demand curve portrays an inverse (negative) relationship between: A. investment and real GDP. B. the real interest rate and investment. C. the nominal interest rate and investment D. the price level and investment.

B. the real interest rate and investment.

A shift of the consumption schedule from C1 to C2 (upward) might be caused by a(n): A. recession. B. wealth effect of an increase in stock market prices. C. increase in income tax rates. D. increase in saving.

B. wealth effect of an increase in stock market prices.

ERR: 12, 10, 8, 6, 4, 2 Amount of investment: 10, 20, 30, 40, 50, 60 The given schedule indicates that if the real interest rate is 8 percent, then: A. we cannot tell what volume of investment will be profitable. B. $30 billion will be both saved and invested. C. $30 billion of investment will be undertaken. D. $60 billion of investment will be undertaken.

C. $30 billion of investment will be undertaken.

In a mixed open economy, the equilibrium GDP exists where: A. Ca + Ig + Xn intersects the 45-degree line. B. Ca+Ig=Sa+T+ X. C. Ca +Ig +Xn +G= GDP. D. Ca + Ig + Xn = Sa + T

C. Ca +Ig +Xn +G= GDP.

In the diagram, a shift from AS1 to AS2 (left) might be caused by: A. stricter government regulations. B. an increase in the prices of imported resources. C. a decrease in the prices of domestic resources. D. an increase in business taxes

C. a decrease in the prices of domestic resources.

Dissaving occurs where: A. income exceeds consumption. B. saving exceeds consumption. C. consumption exceeds income. D. saving exceeds income.

C. consumption exceeds income

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A. real-balances, interest-rate, and foreign purchases effects. B. determinants of aggregate supply. C. determinants of aggregate demand. D. sole determinants of the equilibrium price level and the equilibrium real output.

C. determinants of aggregate demand.

The aggregate supply curve (short run): A. slopes downward and to the right. B. graphs as a vertical line. C. slopes upward and to the right. D. graphs as a horizontal line.

C. slopes upward and to the right.

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = .6, how much will the change in investment increase aggregate demand? A. $12 billion. B. $20 billion. C. $33.3 billion. D. $50 billion.

D. $50 billion.

(Advanced analysis) Answer the question on the basis of the following consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. Refer to the given data. The MPC is: A. .45. B. .20. C. .50. D. .90.

D. .90.

Which of the following would reduce GDP by the greatest amount? A. A $20 billion increase in taxes. B. $20 billion increases in both government spending and taxes. C. $20 billion decreases in both government spending and taxes. D. A $20 billion decrease in government spending.

D. A $20 billion decrease in government spending.

Other things equal, Investment (I) curve will shift upward when: A. the level of GDP increases. B. the interest rate increases. C. EER (%) and investment ($) shifts to the left. D. EER (%) and investment ($) shifts to the right.

D. EER (%) and investment ($) shifts to the right.

The multiplier is useful in determining the: A. full-employment unemployment rate. B. level of business inventories. C. change in the rate of inflation from a change in the interest rate. D. change in GDP resulting from a change in spending.

D. change in GDP resulting from a change in spending.

If the United States wants to increase its net exports in the short term, it might take steps to: A. increase its GDP. B. reduce existing tariffs and import quotas. C. appreciate the dollar compared to foreign currencies. D. depreciate the dollar compared to foreign currencies

D. depreciate the dollar compared to foreign currencies

The determinants of aggregate supply: A. are consumption, investment, government, and net export spending. B. explain why real domestic output and the price level are directly related. C. explain the three distinct ranges of the aggregate supply curve. D. include resource prices and resource productivity.

D. include resource prices and resource productivity.

Other things equal, an interest rate decrease will: A. shift EER (%) and investment ($) to the right and shift Investment (I) curve upward. B. shift EER (%) and investment ($) to the left and shift Investment (I) curve downward. C. leave EER (%) and investment ($) in place but shift Investment (I) curve downward. D. leave EER (%) and investment ($) in place but shift Investment (I) curve B upward.

D. leave EER (%) and investment ($) in place but shift Investment (I) curve B upward.

In annual percentage terms, investment spending in the United States is: A. less variable than real GDP. B. less variable than consumption spending. C. less variable than the price level. D. more variable than real GDP

D. more variable than real GDP

An increase in investment spending caused by higher expected rates of return will: A. shift the aggregate supply curve to the left. B. move the economy up along an existing aggregate demand curve. C. shift the aggregate expenditures curve downward and the aggregate demand curve to the left. D. shift the aggregate expenditures curve upward and the aggregate demand curve to the right.

D. shift the aggregate expenditures curve upward and the aggregate demand curve to the right.

The aggregate demand curve: A. is upsloping because a higher price level is necessary to make production profitable as production costs rise. B. is downsloping because production costs decline as real output increases. C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output that will be purchased at each possible price level.

D. shows the amount of real output that will be purchased at each possible price level

The aggregate supply curve (short run) is upsloping because: A. wages and other resource prices match changes in the price level. B. the price level is flexible upward but inflexible downward. C. per-unit production costs rise as the economy moves toward and beyond its full-employment real output. D. wages and other resource prices are flexible upward but inflexible downward.

D. wages and other resource prices are flexible upward but inflexible downward.

The Aggregate Expenditure components

Household Consumption = "C" Gross Investment = "I" Government Purchases = "G" Net Exports = "Nx"

Disposable Income

Income minus net taxes