Macroeconomics Study Guide (Ch. 9,10,12,13)

Saving is $90 billion

If disposable income is $900 billion when the average propensity to consume is 0.9, it can be concluded that:

Which of the following would be one of the factors that shift the aggregate demand curve? A change in:

Profit expectations on investment projects

per-unit production cost formula

total input cost/total output

Productivity Formula

total output/total inputs

Percentage change in real income

~= percentage change in nominal income - percentage change in price level

Suppose that an economy produces 500 units of output. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this output. The per unit cost of production is:

$0.70

Assume there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, an additional $2 billion for every drop of the interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return is:

$10 billion

If the Consumer Price Index was 125 in one year and 120 in the following year, then the rate of inflation is approximately:

-4.0 percent

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is:

. 25 percent

If, in an economy, a $200 billion increase in consumption spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the marginal propensity to consume and the multiplier are, respectively:

0.8 and 5.0

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But, if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of

10 percent

The economy has an annual inflation rate of 3.5%. It will take approximately how many years for the price level to double?

20 years

The total adult population of an economy is 175 million, the number of employed is 122 million, and the number of unemployed is 17 million. The percent of adults who are not in the labor force is:

20.6 percent

If the natural rate of unemployment is 4.5 percent and the actual unemployment rate is 6.5 percent, then Okun's law indicates that the GDP gap is:

4 percent

Suppose that real domestic output in an economy is 300 units, the quantity of inputs is 50 and the unit price of the input is $9. The level of productivity and the per-unit cost of production are, respectively

6 and $1.50

A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in institutions, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate?

6 percent

If the inflation premium is 3% and the real interest on a loan is 4%, then the nominal interest rate is:

7%

If disposable income increases from $912 to $927 billion and MPC = 0.6, then consumption will increase by:

9

MPC equation

=change in consumption/change in income

MPS equation

=change in saving/change in income

APC

=consumption/income

APS

=savings/income

Which of the following fiscal policy changes would be the most expansionary?

A $40 billion increase in government spending

If the cyclically-adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion, it can be concluded that there is:

A cyclical deficit

Which statement is correct?

A. All sectors of the economy are affected to similar degrees B. Real output and employment generally show little variance over the business cycle *C. The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle D. Recessions have not been severe because economists and statisticians have been able to predict their occurrence and intensity with high accuracy. ANSWER: C

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and perunit production cost are flexible when:

AD increases but not when AD decreases

Average Propensities

APC+APS=1

If the unemployment rate for the United States economy rises from 7 to 11 percent during a year, we can conclude that:

Actual GDP is less than potential GDP

In which industry or sector of the economy is output least likely to be affected by the business cycle?

Agricultural commodities

Which combination of factors would most likely increase aggregate demand?

An increase in consumer wealth and a decrease in interest rates

Which of the following events would most likely reduce aggregate demand?

An increase in real interest rates

Real interest rates and investment spending

As real interest rates increase, gross domestic investment decreases and aggregate demand decreases.

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

Consumption schedule upward and the saving schedule downward

If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement:

Contractionary fiscal policy

Some economists prefer to use the term business fluctuations rather than business cycles to describe the historical growth record in the United States because:

Cycles imply regularity while fluctuations do not

. If the U.S. dollar appreciates in value relative to foreign currencies, then this will:

Decrease aggregate demand and increase aggregate supply

Suppose that real domestic output in an economy is 300 units, the quantity of inputs is 50 and the price of each input is $9. If productivity increased such that 400 units are now produced with the quantity of inputs still equal to 50, then per-unit production costs would:

Decrease and aggregate supply would increase

If disposable income decreases from $1800 to $1500 and MPC = 0.75, then saving will:

Decrease by $75

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

Decrease government spending and increase taxes

Actions by the Federal government that decrease the progressivity of the tax system:

Decrease the effect of automatic stabilizers

The crowding-out effect works through interest rates to:

Decrease the effectiveness of expansionary fiscal policy

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:

Decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy

Due to automatic stabilizers, when income rises, government transfer spending:

Decreases and tax revenues increase

As the consumption and saving schedules relate to real GDP, an increase in taxes will shift:

Downward both the consumption and saving schedules

If the price level increases by 15 percent while nominal income increases by 8 percent, then in percentage terms real income would:

Fall by about 7 percent

Aggregate demand decreases and real output falls but the price level remains the same. Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?

Fear of price wars

The cyclically-adjusted deficit as a percentage of GDP is 2 percent in Year 1. This deficit becomes 1 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that:

Fiscal policy was more contractionary

Which of the following statements is correct?

For a given real interest rate, the nominal interest must increase if expected inflation increases

An increase in productivity will:

Increase aggregate supply

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

Increase aggregate supply in the U.S.

Assume the marginal propensity to consume is 0.8. If consumer spending increases by $20 billion, then real GDP will:

Increase by $100 billion

A person's real income will increase by 3% if her nominal income:

Increases by 5% while the price index rises by 2%

In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2?

It rose by $600

Which of the following is an important real consequence of the public debt of the United States?

Its consequent higher interest rates lead to fewer incentives to bear risk and innovate

A decrease in expected returns on investment will most likely shift the AD curve to the:

Left because Ig will decrease

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

MPC has increased

Marginal Propensities

MPC+MPS=1

In an economy, for every $1600 decrease in income, spending falls by $1200. It can be concluded that the:

Marginal propensity to save is .25

$125 billion

Refer to the above data. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5?

.9

Refer to the above data. If plotted on a graph, the slope of the consumption schedule would be:

Peak, recession, trough, expansion

Refer to the above diagram. The phases of the business cycle from points A to D are, respectively:

Be caused by a shift in the aggregate supply curve from AS1 to AS3

Refer to the above diagram. When output increases from Q1 and the price level decreases from P1, this change will:

$20 billion in investment

Refer to the above graph. If the economy was initially in equilibrium at point 3 and a government deficit makes interest rates increase by 4 percentage points, then the crowding-out effect would be:

Increasing output produced

Refer to the above graph. If the price level is initially at P1, then the economy will adjust by:

If AD1 shifts to AD2, the economy would move to point b

Refer to the above graph. The ratchet effect would suggest that:

An increase in national incomes abroad

Refer to the above graph. Which of the following factors will shift AD1 to AD2

A decrease in business taxes

Refer to the above graph. Which of the following factors will shift AS1 to AS2

Increasing business taxes

Refer to the above graph. Which of the following would shift the investment demand curve from ID2 to ID1?

6 and 9

Refer to the above list. A change in net export spending would most likely be caused by changes in:

250 and $7000

Refer to the above table. If the quantity of real domestic output demanded increased by $2000 at each price level, the new equilibrium price level and quantity of real domestic output would be:

.75

Refer to the above table. The marginal propensity to consume is:

4

Refer to the above table. The multiplier in this economy is:

$20

Refer to the above table. The total change in income resulting from the initial change in investment will be:

GH

Refer to the consumption schedule above. At income level 3, the amount of consumption is represented by the line segment:

Q2 to Q4

Refer to the figure above. If aggregate demand curve shifts from AD2 to AD1, the full multiplier effect on real GDP will be a decrease from:

Demand-pull inflation, and the new equilibrium output will be more than Q2

Refer to the figure above. If the economy is operating at full employment when its aggregate demand curve is AD2, then a further increase in consumption and investment spending will cause:

Shift aggregate demand by increasing transfer payments

Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP?

Saving decreases

Refer to the saving schedule above. As income falls from level 3 to level 2, the amount of:

Suppose that real domestic output in an economy is 2400 units, the quantity of inputs is 60, and the price of each input is $30. Refer to the above information. All else equal, if the price of each input decreased from $30 to $20, productivity would:

Remain unchanged and aggregate supply would increase

One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the:

Start of the recession and the time it takes to recognize that the recession has started

If the negative GDP gap were equal to 4% of the potential GDP, Okun's law suggests that the actual unemployment rate would exceed the natural rate of unemployment by

Two percentage points

Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is:

Structural

A worker who loses a job at a call center because business firms switch the call center to another country is an example of:

Structural unemployment

What is the likely effect of a rise in real interest rates on consumption and saving in the best of circumstances?

The consumption schedule shifts downward slightly and the saving schedule shifts upward slightly

Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?

The economy is operating at less than full employment

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

The opportunity cost of wartime expenditures was borne by the generation that lived during the war

Which statement is correct?

The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle

An increase in aggregate demand is most likely to be caused by a decrease in:

The tax rates on household income

Wage contracts, efficiency wages, and the minimum wage are explanations for why:

Wages tend to be inflexible downward

If the consumption schedule shifts downward, and the shift was not caused by a tax change, then the saving schedule:

Will shift upward

A worker would be hurt least by inflation when the:

Worker is protected by a cost-of-living adjustment clause in an employment contract

If no mention of time frame for aggregate supply, assume that

aggregate supply means short run curve

If taxes increase then aggregate supply______

decreases

_____ in productivity increase costs

decreases, aggregate supply also decreases (shift to left)

_____ in productivity reduce costs

increases, aggregate supply also increases (shift to right)

Domestic resource prices

land, capital, labor

Changes along schedules: change in amount consumed

movement from one point to another on a given schedule

Changes along schedules: change in consumption schedule

shift in the schedule, caused by non-income determinants