# Econ Chapter 9-13 Exam Study

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These questions may possibly be on the exam for chapter 9-13

### The most important determinant of a household's consumption spending is

its disposable income

equals saving

\$240

### If a household's income rises from \$20,000 to \$22,000 and its consumption spending rises from \$19,000 to \$20,500, then its

marginal propensity to consume is 0.75

0.25

\$14 billion

### The marginal propensity to consume is defined as the

fraction of a change in income that is spent on consumption

True

1.0

### Which of the following would not shift the consumption function? A.) a change in household wealth B.) a change in the price level C.) a change in household disposable income D.) a change in expectations about future inflation E.) a change in the rate of interest

C.) a change in household disposable income

### Expectations that the price level will increase in the future will

shift the current consumption function upward

### An investment has an expected rate of return on 5.5 percent. Mr. N. Vestor should take this opportunity if:

the prevailing interest rate is 5 percent

three

### New investment will be undertaken up to the point where the expected rate of return equals

the market interest rate

### When economists say investment is autonomous, they mean that

investment is independent of the level of income

### If business managers become more pessimistic about future sales and profits, there will be

a downward shift of the autonomous investment function

### Fluctuations in investment

account for more of the variability in GDP than consumption does

C.) saving

### The relationship between consumption and income is

positive and stable

### Which of the following is not an example of a government purchase? A.) schools and teacher salaries B.) Chinese toys to be sold in discount department stores C.) aircraft carriers D.) interstate highway construction E.) All the answers are correct

B.) Chinese toys to be sold in discount department stores

False

### Historically, consumption spending in the United States has

remained approximately constant as a percentage of income

consume and save

### Which must be true when consumption exceeds income? A.) the consumption function shifts upward B.) the consumption function shifts downward C.) aggregate expenditures equal real GDP D.) saving must be negative E.) aggregate expenditures will fall

D.) saving must be negative

### The consumption function relates consumption spending to

disposable income

### The MPC is a relationship between

a change in consumption and a change in income

### If a household's income falls from \$20,000 to \$17,000 and its consumption spending falls from \$18,000 to \$15,000, then its

marginal propensity to save is zero

0.30

### Exhibit 9-2 Income=output (Y) \$1,200 1,400 1,600 1,800 2,000 2,200 2,400 C \$1,240 1,380 1,520 1,660 1,800 1,940 2,080 Planned investment \$200 200 200 200 200 200 200 Aggregate expenditure \$1,440 1,580 1,720 1,860 2,000 2,140 2,280 Unintended inventory adjustment -\$240 -180 -120 -60 0 60 120 Actual investment -\$40 -20 80 140 200 260 320 We can tell from the data in Exhibit 9-2 that planned investment is autonomous because

it does not vary as income changes

4/5, 1/5

MPC

\$25

### An increase in wealth will

shift the consumption function upward

reduce; decrease

### An increase in the price level will

result in a downward shift of the consumption function

False

### Economists assume that the fundamental motive of investors is

to maximize profit

### A grocery store manager has \$600 in cash with which to buy a rug cleaner. Rental income from the cleaner would be about \$75 per year. The interest rate is 11 percent. Should the manager buy the machine?

Yes, since the rate of return is greater than the rate of interest.

### Which of the following best represents the opportunity cost of investing in capital? A.) the actual revenue stream generated by the investment B.) the expected revenue stream generated by the investment C.) the profit that investment is expected to generate D.) the market interest rate E.) the purchase price of the plant and equipment

D.) the market interest rate

8 percent

### Less of society's resources will be channeled into capital when

interest rates are high

### During recession years,

investment declines much faster than GDP declines

### Which of the following is the most volatile component of GDP? A.) investment (I) B.) consumption (C) C.) saving (S) D.) government purchases (G) E.) net exports (X - M)

A.) investment (I)

True

### If incomes in the United States increase, other things equal, then U.S.

imports increase and exports remain constant

### The aggregate expenditure line shows total planned spending at each

income level, holding the price level constant

### In an economy without a government and without international transactions, aggregate expenditure at each level of income is equal to

consumption plus planned investment

in balance

### Exhibit 10-1 Schedule for Real GDP With Net Taxes and Government Purchases (Trillions of Dollars) Real GDP (Y) 3.0 3.6 4.2 4.8 5.4 Net Taxes (NT) 0.9 0.9 0.9 0.9 0.9 Disposable Income (Y-NT) 2.1 2.7 3.3 3.9 4.5 Consumption (C) 2.0 2.4 2.8 3.2 3.6 Saving (S) 0.1 0.3 0.5 0.7 0.9 Planned Investment (I) 0.5 0.5 0.5 0.5 0.5 Net Exports (NX) -0.2 -0.2 -0.2 -0.2 -0.2 Government Purchases (G) 0.9 0.9 0.9 0.9 0.9 Planned Aggregate Expenditure (C+I+NX+G) 3.2 3.5 4.0 4.4 4.8 In Exhibit 10-1, which of the variables are autonomous?

investment, net exports, net taxes, and government purchases

2/3

### Given that leakages must equal injections in equilibrium, which of the following is true? A.) S + NT + NX = G + I B.) S = I C.) C + S = G + I D.) S + NT + M = X + G + I E.)the answer is indeterminate

D.) S + NT + M = X + G + I

\$20

\$6.0 trillion

\$1.3 trillion

\$1.3 trillion

0.80 or 4/5

0.20 or 1/5

### Suppose that at a particular level of real GDP, the unintended change in inventories is zero. Which of the following is true? A.) That level of real GDP is less than the equilibrium level of real GDP demanded. B.) That level of real GDP is greater than the equilibrium level of real GDP demanded. C.) That level of real GDP is the equilibrium level of real GDP demanded. D.) At that level of real GDP, there is no inflation. E.) At that level of real GDP, there is no saving.

C.) That level of real GDP is the equilibrium level of real GDP demanded

### Which of the following is illustrated by the distance between the aggregate expenditure line and the 45-degree line at each level of real GDP? A.) saving B.) unplanned inventory change C.) planned investment D.) marginal propensity to save E.) marginal propensity to consume

B.) unplanned inventory change

### If planned spending exceeds planned output, the result is

unintended inventory reductions

### The economy will expand if

injections exceed leakages

0.2

### On the aggregate expenditure graph, if autonomous investment decreases by \$10 billion,

the aggregate expenditure line shifts downward by \$10 billion

### On the aggregate expenditure graph, if autonomous investment increases by \$20 billion,

the aggregate expenditure line shifts upward by \$20 billion

### On the aggregate expenditure graph, if autonomous saving increases by \$15 billion,

the aggregate expenditure line shifts downward by \$15 billion

### The simple multiplier

is defined as 1.0 divided by the marginal propensity to save

4

1/10

\$1,000 billion

### If the multiplier is 3, a \$20 billion increase in autonomous consumption will cause a

\$60 billion increase in equilibrium real GDP demanded

True

True

True

True

### The aggregate expenditure line shows

real GDP on the horizontal axis and aggregate expenditure on the vertical axis

### The economy will contract (shrink) if

leakages exceed injections

### If households save \$40 billion less at each level of income and the MPC = 0.8, the aggregate expenditure line will

shift upward by \$40 billion

2

3/4

### If the multiplier is 4, a \$10 billion increase in autonomous investment will cause a

\$40 billion increase in equilibrium real GDP demanded

autonomous

### The aggregate demand curve illustrates a relationship between

the price level and real GDP

less than \$100

### An increase in the price level will

shift the aggregate expenditure line downward

### If the price level rises,

the aggregate expenditures line shifts downward; the economy moves upward along the aggregate demand curve

### An increase in the U.S. price level, other things constant, would

decrease U.S. exports and increase U.S. imports

### As the U.S. price level rises relative to price levels in other countries, what would happen in the U.S.?

consumption and net exports would decline

### A decrease in the price level will

increase the level of aggregate quantity demanded

### A decline in the U.S. price level, other things constant, would

stimulate U.S. exports but discourage imports, causing a rightward movement along a given aggregate demand curve

False

### Which of the following would cause a rightward shift of the aggregate demand curve? A.) an increase in planned investment B.) a drop in the price level C.) a rise in the price level D.) a decrease in autonomous consumption E.) anything that causes an upward shift in the saving function

A.) an increase in planned investment

### If the level of autonomous spending increases at a given price level,

the aggregate expenditure line shifts upward; the aggregate demand curve shifts to the right

### A decrease in planned investment would shift the

aggregate demand curve inward

True

AE(3)

### Aggregate supply reflects billions of production decisions made by

resource suppliers and firms

### Which of the following is true of the short-run aggregate supply curve? A.) It shows the relation between the inflation rate and the quantity of aggregate output firms supply, other things constant. B.) It shows the relation between the price of labor and the aggregate quantity of labor workers supply, other things constant. C.) It shows the relation between the interest rate and the quantity of capital goods firms supply, other things constant. D.) It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant. E.) It displays an inverse relationship between the price level and real GDP.

D.) It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.

### The expected price level is significant because

firms and resource owners make long-term agreements based on the expected price level

### The real wage represents the

quantity of goods and services a worker can purchase in exchange for work time

### The nominal wage represents

the dollar value of the goods and services a worker can purchase in exchange for work time

### Potential output is the amount produced when

firms' and workers' expectations about the price level are realized

### Which of the following types of unemployment can exist in an economy that is at its potential output level?

frictional, seasonal, and structural unemployment only

output is fixed

### Potential output depends on all of the following except one. Which is the exception? A.) the supply of labor B.) labor productivity C.) household choices regarding labor and leisure D.) the technology in current use E.) the number of consumers in the market

E.) the number of consumers in the market

### Fixed resource prices help explain why firms

increase output in the short run when the price level increases

### In constructing the short-run aggregate supply curve, we define the short run as the period in which

the costs of some resources are fixed

### If the price level turns out to be lower than expected,

businesses cut back production

130

\$6.0

### An expansionary gap is equal to

actual short-run output minus potential output

### The situation in which actual output exceeds potential output

creates pressure for inflation

### Exhibit 11-2 This is a graph and can be found here: http://bit.ly/1es3fGQ (PASSWORD PROTECTED; Ask me for password) If the actual price level in Exhibit 11-2 exceeds the expected price level, then

equilibrium output might be Y3 in the short run

### Exhibit 11-2 This is a graph and can be found here: http://bit.ly/1es3fGQ (PASSWORD PROTECTED; Ask me for password) If the actual price level in Exhibit 11-2 exceeds the expected price level, then

the actual unemployment rate is below the natural rate

Y3 - Y1

### Exhibit 11-3 This is a graph and can be found here: http://bit.ly/1bXfDB3 (PASSWORD PROTECTED; Ask me for password) Consider Exhibit 11-3. In this situation, long-run equilibrium would be established by a(n)

decrease of short-run aggregate supply to close the expansionary gap

### Which of the following would be strong evidence that an expansionary gap exists? A.) Rapid inflation during a period when plant capacity utilization is below average. B.) A steady price level and a 5 percent unemployment rate. C.) Help wanted advertising is higher than usual, and the consumer price index is up more than expected. D.) Inflation has slowed markedly and the Dow Jones average is at record levels. E.) The number of new unemployment claims has skyrocketed and the price level is falling.

C.) Help wanted advertising is higher than usual, and the consumer price index is up more than expected.

### Exhibit 11-4 This is a graph and can be found here: http://bit.ly/H1ZfBN (PASSWORD PROTECTED; Ask me for password) The graph in Exhibit 11-4 shows a(n)

increase in short-run aggregate supply

### Exhibit 11-4 This is a graph and can be found here: http://bit.ly/H1ZfBN (PASSWORD PROTECTED; Ask me for password) Exhibit 11-4 shows that the

economy will experience deflation

### Exhibit 11-5 This is a graph and can be found here: http://bit.ly/GRw0Rg (PASSWORD PROTECTED; Ask me for password) If the economy is at point M in Exhibit 11-5,

the actual price level is higher than expected with a \$200 billion expansionary gap

### Exhibit 11-6 This is a graph and can be found here: http://bit.ly/1bzttFz (PASSWORD PROTECTED; Ask me for password) In Exhibit 11-6, the distance between Y1 and Y2 is called

a contractionary gap

### Exhibit 11-6 This is a graph and can be found here: http://bit.ly/1bzttFz (PASSWORD PROTECTED; Ask me for password) In Exhibit 11-6, at income level Y1

the actual unemployment rate is greater than the natural rate of unemployment

### As a contractionary gap is closed in the long run,

output increases and the price level decreases

### In long-run equilibrium,

actual output must equal potential output

### Given the long-run aggregate supply curve, the aggregate demand curve determines

the price level but not the output level

### If nominal wages are sticky in the downward direction,

unemployment may persist for long periods of time

### Which of the following would cause the long-run aggregate supply curve to shift rightward? A.) a rise in energy prices B.) a drop in the actual price level C.) workers opting for more leisure time and less time on the job D.) a level of investment spending that is less than depreciation of the capital stock E.) a technological breakthrough with widespread practical applications that occurs in the microcomputer industry

E.) a technological breakthrough with widespread practical applications that occurs in the microcomputer industry

### Which of the following is true of a beneficial supply shock? A.) It could lead to a lower price level. B.) If the economy were initially in equilibrium, such a shock would create a contractionary gap. C.) It will permanently decrease the economy's price level. D.) It will cause the aggregate demand curve to shift rightward. E.) It will cause the aggregate demand curve to shift leftward.

A.) It could lead to a lower price level.

### Beneficial supply shocks include all of the following except one. Which is the exception? A.) an abundant harvest that increases food supplies B.) discoveries of natural resources C.) changes in legislation favorable to production D.) technological advances E.) establishment of the Occupational Safety and Health Administration (OSHA)

E.) establishment of the Occupational Safety and Health Administration (OSHA)

False

True

### All of the following are tools of fiscal policy except one. Which is the exception? A.) taxes B.) transfer payments C.) interest rates D.) government purchases of goods E.) government purchases of services

C.) interest rates

### The distinction between discretionary fiscal policy and the use of automatic stabilizers is that

automatic stabilizers, once adopted, are built into the structure of the economy

### Fiscal policy

uses the federal government's powers of spending and taxation to affect employment, the price level, and GDP

False

True

\$500

### In which of the following ways does government affect the consumption component of planned aggregate expenditures?

through net taxes, which change disposable income

### If autonomous net taxes decrease, which of the following correctly describes the effects?

Disposable income increases, consumption increases, and saving increases.

real GDP

equals -3

### If autonomous net taxes decline by \$40 billion and the MPC = 0.75, then equilibrium real GDP demanded

increases by \$120 billion

\$100

\$25

### To close a contractionary gap using fiscal policy, the government can A.) increase government spending by the size of the gap B.) decrease government spending by the size of the gap C.) increase government spending by more than the size of the gap D.) increase government spending by less than the size of the gap E.) decrease government spending by more than the size of the gap

D.) increase government spending by less than the size of the gap

### To close a contractionary gap using fiscal policy, the government can A.) increase taxes by the size of the gap B.) decrease taxes by the size of the gap C.) increase taxes by more than the size of the gap D.) decrease taxes by less than the size of the gap E.) decrease taxes by more than the size of the gap

D.) decrease taxes by less than the size of the gap

### Exhibit 12-2 This is a graph and can be found here: http://bit.ly/1bXhDcs (PASSWORD PROTECTED; Ask me for password) If the government wants the economy illustrated in Exhibit 12-2 to be at full employment, it should

do none of the above

### A federal budget deficit occurs when

federal government purchases exceed net taxes

### When the government closes an expansionary gap with a change in government spending, the __________ in government spending leads to __________.

decrease; a decrease in both real GDP and the price level

### To close an expansionary gap, the government can

decrease government spending, which will decrease aggregate demand

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