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Terms in this set (102)
The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.
Total spending: real GDP; the price level
All of the following are one of the four main categories of spending identified by John Maynard Keynes except
Economists first began studying the relationship between changes in aggregate expenditures and changes in GDP
During the great depression
Actual investment spending does not include
spending on consumer durable goods
An unplanned increase in inventories results from
actual investment is greater than planned investment
Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?
there was unplanned increase in inventories equal to 2 million
at macroeconomic equilibrium
total spending equals total production
if aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?
inventories will rise, and GDP and employment will decline
Which of the following will cause a direct increase in consumption spending?
an increase in disposable income
________ is defined as the value of a household's assets minus the value of its liabilities.
decreases in the price level will
raise consumption because real wealth increases
The slope of the consumption function is equal to
the change in consumption divided by the change in disposable income
f disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is
If firms are more optimistic that future profits will rise and remain strong for the next few years, then
investment spending will rise
If inflation in the United States is higher than inflation in other countries, what will be the effect on net exports for the United States?
net exports will decrease as U.S. exports decrease
Which of the following will decrease aggregate expenditure in the United States?
a decrease in government purchases
Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports.
An increase in the price level in the United States will reduce exports and increase imports.
Higher interest rates increase both consumption and investment spending.
On the 45-degree line diagram, for points that lie below the 45-degree line,
planned aggregate expenditure is less than GDP
If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?
an increase in wealth
Which of the following leads to an increase real GDP?
a decrease in interest rates
How does a decrease in government spending affect the aggregate expenditure line?
it shifts the aggregate expenditure line downward
Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP?
in the aggregate expenditure model, ________ has both an autonomous component and an induced component
If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then
the multiplier is 8
The multiplier is calculated as the
change in real GDP/ change in autonomous expenditure
Which of the following is a true statement about the multiplier?
the multiplier rises as the MPC rises
The aggregate demand curve illustrates the relationship between ________ and the ________, holding constant all other factors that affect aggregate expenditure.
price level; quantity of planned aggregate expenditure
Which of the following correctly describes how an increase in the price level affects consumption spending?
an increase in the price level raises real wealth, which causes consumption to increase
An increase in aggregate expenditure has what result on equilibrium GDP?
equilibrium GDP rises
Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP?
C = 2,000 + 0.9Y
I = 2,500
G = 3,000
NX = 400
Given the equations for C, I, G, and NX below, what is the marginal propensity to consume?
C = 2,000 + 0.9Y
I = 2,500
G = 3,000
NX = 400
Macroeconomic equilibrium can occur at any point on the 45-degree line.
The formula for the multiplier is (1 - MPC).
If the multiplier is 5, the marginal propensity to consume must be 0.8.
An increase in the price level in the United States will shift the aggregate expenditure line upward.
Money is defined as
any asset people generally accept in exchange for goods and services
The major shortcoming of a barter economy is
the requirement of a double coincidence of wants
silver is an example of a
The statement, "My iPhone is worth $300" represents money's function as
a unit of account
Which of the following functions of money would be violated if inflation were high?
store of value
Which of the following information about fiat money is false? Fiat money
is backed by gold
the M1 measure of the money supply equals
currency plus checking account balances plus traveler's checks
If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.
increase; not change
The M2 measure of the money supply equals
M1 plus savings account balances plus small denomination time deposits plus non institutional money market shares
The major assets on a bank's balance sheet are its
reserves, loans, and holdings of securities
The largest liability on the balance sheet of most banks is its
checking account and savings account
The required reserves of a bank equal its ________ the required reserve ratio.
deposits multiplied by
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's reserves immediately increase by
Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of
Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of
Banks can continue to make loans until their
actual reserves equal their required reserves
Which of the following best describes how banks create money?
banks create checking accounts deposits when making loans from excess reserves
Economies cannot function without money.
The amount of national income in an economy equals the money supply in an economy.
If banks receive a greater amount of reserves and do not hold all of these reserves as excess reserves, the money supply expands.
Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic?
required reserves would increase
The Federal Reserve was established in 1913 to
stop bank panics by acting as a lender of last resort
The seven members of the Board of Governors of the Federal Reserve are appointed by
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements
The purchase of Treasury securities by the Federal Reserve will, in general,
increase the quantity of reserves held by banks
A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of
To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could
sell treasury securities
The process of bundling loans together and buying and selling these bundles in a secondary financial market is called
If a bank receives a $1 million discount loan from the Federal Reserve, then the bank's reserves will
increases by $1 million
The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.
Federal Reserve's Board of Governors; four presidents from the other 11 Federal Reserve banks
Which of the following is not a function of the Federal Reserve System, or the "Fed"?
insuring deposits in the banking system
In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by
the establishment of the Federal Deposit Insurance Corporation
The State that has two regional Federal Reserve Banks is:
To increase the money supply, the Federal Reserve could
conduct an open market purchase of Treasury securities
Which of the following is not a consequence of the Fed changing the reserve requirement?
changes in the ratio are easily incorporated into banks' routine management
A series of bank runs in a country should have no effect on M1 as money simply moves from checking deposits to currency.
The Fed has complete control over the money supply.
The Fed has more control over open market operations as compared to discount policy.
Total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports
A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.
Aggregate expenditure model
four components of AE that together make up GDP according to Keynes
Consumption, Planned Investment, Government Purchases, Net Exports
When aggregate expenditure is greater than GDP what happens
inventories will decline, and GDP and total employment will increase.
When aggregate expenditure is less than GDP, what happens
inventories will increase, and GDP and total employment will decrease.
five factors of consumption
current disposable income, household wealth, expected future income, the price level, the interest rate
A household's wealth is the value of its assets minus the value of its liabilities. is
Disposable income is the income remaining to households after they have paid the personal income tax and received government transfer payments is
Current Disposable Income
Most people prefer to keep their consumption fairly stable from year to year, even if their income fluctuates significantly is
Expected Future Income
measures the average prices of goods and services in the economy.
the price level
The slope of the consumption function: The amount by which consumption spending changes when disposable income changes.
Marginal propensity to consume (MPC)
The relationship between consumption spending and disposable income.
formula for MPC
MPC=Change in consumption/Change in disposable income
formula for change in consumption
change in disposable income X MPC
formula for national income
National income = Consumption + Saving + Taxes
The amount by which saving changes when disposable income changes is
Marginal Propensity to save (MPS)
The difference between the cash revenues received by a firm and the cash spending by the firm
The increase in equilibrium real GDP divided by the increase in autonomous expenditure.
The process by which an increase in autonomous expenditure leads to a larger increase in real GDP.
An expenditure that does not depend on the level of GDP.
anything of value owned by a person or a firm
Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.
what are the functions of money
Medium of exchange, unit of account, store of value, standard of deferred payment
Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money is
what is included in M1
the value of all checking account deposits at banks, Currency, the value of traveler's checks
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