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1 1 of 20 10/19/2013 1:07 PM According to Keynesian theory, which of the following is not true at each short-term macro equilibrium? The economy may or may not be at full employment. The aggregate demand curve intersects the aggregate supply curve. All macroeconomic goals are achieved. Producers are selling everything they currently produce. Some macroeconomics goals may not be achieved since the equilibrium could be below or above the full employment level of output. Which of the following forces did Keynes assert had the strongest influence on consumption decisions? Prices. Wealth. Interest rates. Disposable income. Disposable income is the strongest determinant of consumer spending, which is the largest part of the U.S. economy. When the APC is greater than 1, the APS must be Equal to 1. Greater than 1 also. Between 0 and 1. Negative. In this case, consumption exceeds disposable income and the consumer is dissaving. Difficulty: 1 Easy

2 2 of 20 10/19/2013 1:07 PM Which of the following is not true about the marginal propensity to consume? It is equal to the change in consumption divided by the change in disposable income. It is equal to the slope of the consumption function. It is equal to 1 - MPS. It is always equal to or greater than 1. The value of MPC must fall between 0 and 1. If disposable income increases from $9,000 billion to $11,000 billion, and consumption increases from $9,500 billion to $11,000 billion, the MPC must be The MPC is equal to the change in consumption spending divided by the change in disposable income: (1,500/2,000) =.75. If the MPC is 0.60 and disposable income increases from $20,000 billion to $22,000 billion, consumption will increase by $2,000 billion. $800 billion. $1,200 billion. $600 billion. Consumption spending will rise by the change in disposable income multiplied by the MPC: (2, = $1,200).

3 3 of 20 10/19/2013 1:07 PM If the MPC is 0.8 and the APC is 0.9, the MPS equals MPS plus MPC equals 1. So MPS must be equal to 0.2. The MPC and MPS always add to be 1. Separately, neither MPC nor MPS can be less than 0 or greater than 1. Which of the following is not a determinant of autonomous consumption? Wealth. Technology. Tax policy. Consumer confidence. Technology is a determinant not of consumption but of production possibilities and aggregate supply. Learning Objective: What the consumption function tells us. Given a consumption function of C = $ Y, the average propensity to consume equals 1 when disposable D income equals $25. $75. $100. -$300. If the APC equals 1, then Y = C and you can substitute Y for C in the equation. In doing so, you have (Y = 25 D D D +.75 Y ). In solving this equation, Y = 100. D D Learning Objective: What the consumption function tells us.

4 4 of 20 10/19/2013 1:07 PM Suppose a consumption function is given as C = $ Y D. The marginal propensity to consume is The MPC value is equal to the slope term (b), or.75, in the consumption function. Learning Objective: What the consumption function tells us. Suppose the consumption function is C = $ Y. If disposable income is $400, saving is D -$ $ $ $ Saving will be negative whenever consumption exceeds disposable income ($400 - $440 = -$40). Learning Objective: What the consumption function tells us. If an increase in disposable income causes consumption to increase from $4,000 to $10,000 and causes saving to increase from $1,000 to $5,000, then it can be inferred that the MPS equals Since consumption rose by $6,000 and saving rose by $4,000, MPC must be.6 and MPS must be.4. The total changes in consumption and saving sum to the total change in disposable income, or $10,000. The MPS is the change in saving divided by the change in disposable income ($4,000/$10,000). Learning Objective: What the consumption function tells us.

5 5 of 20 10/19/2013 1:07 PM Which government sector has the ability to respond countercyclically to the economy? State only. Federal only. Local only. Federal, state, and local. The federal government uses stabilizers such as income transfers to lessen the effect of economic downturns. Difficulty: 1 Easy Which of the following will not cause an increase in U.S. gross exports? An increase in foreign business investment. An increase in foreign wealth. An increase in foreign consumer income. A decrease in U.S. imports. If U.S. imports decrease, this will decrease foreign incomes, which will, in turn, decrease foreign imports of U.S. exports. Which of the following is not a component of aggregate demand? Consumption. Investment. Productivity. Net exports. Productivity is a measure of the efficiency of resources that are used to produce output.

6 6 of 20 10/19/2013 1:07 PM A recessionary gap Would cause a depletion of inventories. Would occur if total output were less than aggregate demand. Is the amount by which the rate of actual spending falls short of full-employment GDP. Is the amount by which total spending exceeds GDP. A recessionary gap indicates that many resources are not being fully used. So cyclical unemployment will be above zero, and the total unemployment rate will be above its normal rate. Difficulty: 1 Easy Learning Objective: How and when macro failure occurs. Which of the following most likely occurs when an inflationary gap exists? A bidding war for available goods and services. More layoffs. Rising inventories. Excessive saving. An inflationary gap will cause the price level to rise because too many dollars are chasing too few resources. Learning Objective: How and when macro failure occurs. According to Keynes, cyclical unemployment is caused by too Much aggregate demand. Little aggregate demand. Much aggregate supply. Little aggregate supply. Spending is insufficient to purchase all output. So production falls and unemployment rises. Difficulty: 1 Easy Learning Objective: How and when macro failure occurs.

7 7 of 20 10/19/2013 1:07 PM The economy will not reach and maintain its goals of full employment and price stability unless the economy is At full employment and the price level is stable. Above full employment and the price level is stable. Below full employment and the price level is stable. None of the choices are correct. Only when AD intersects AS at the full-employment level of output at a stable price level will macro equilibrium be achieving our goals for macroeconomic performance. Difficulty: 1 Easy Learning Objective: How and when macro failure occurs. Complete Table 9.2. (Data are expressed in billions of dollars.) Given the information in Table 9.2, saving is equal to $200 billion at an output level of $500 billion. $600 billion. $700 billion. $800 billion. Disposable income is equal to saving plus consumption; when disposable income is $500, saving is $200 and consumption is $300. Learning Objective: What the consumption function tells us.

8 8 of 20 10/19/2013 1:07 PM In Figure 9.2, if the consumption function shifts from C 2 to C 1, autonomous consumption Increases, and aggregate demand shifts to the right. Decreases, and aggregate demand shifts to the right. Increases, and aggregate demand shifts to the left. Decreases, and aggregate demand shifts to the left. A decreased consumption function will intersect the vertical axis at a lower point, so autonomous consumption will be less; and the AD curve shifts to the left when the consumption function decreases. Learning Objective: What the consumption function tells us.

9 9 of 20 10/19/2013 1:07 PM The MPC in the economy depicted in Figure 9.3 Is constant. Increases steadily as disposable income increases. Decreases steadily as disposable income increases. Equals 1.0. The MPC is constant as the consumption function is linear, meaning the slope must be constant. Learning Objective: What the consumption function tells us.

10 10 of 20 10/19/2013 1:07 PM Which diagram in Figure 9.4 shows how investment responds to the expectation that the economy is about to go into a period of fast growth, causing firms to expect increased sales? A. B. C. D. If firms expect good economic times, they will invest more, thereby, leading to a rightward shift of the investment curve. Difficulty: 3 Hard Learning Objective: The determinants of investment spending.

11 11 of 20 10/19/2013 1:07 PM

12 12 of 20 10/19/2013 1:07 PM Which diagram in Figure 9.4 shows what is likely to happen to investment as a new telecommunications technology suddenly is discovered that greatly facilitates the use of computers, cable TV, and other information services? A. B. C. D. New technologies lead to greater investment because new technologies boost productivity. Difficulty: 3 Hard Learning Objective: The determinants of investment spending.

13 13 of 20 10/19/2013 1:07 PM Which diagram in Figure 9.4 shows what happens to investment as the economy enters a recession, causing both business expectations to collapse and saving to increase further, thus causing banks to lower interest rates? A. B. C. D. The investment curve shifts to the left due to the recession, and there is a movement along the new investment curve due to an increase in the supply of savings going into banks and thereby lowering the interest rate. Difficulty: 3 Hard Learning Objective: The determinants of investment spending.

14 14 of 20 10/19/2013 1:07 PM In Figure 9.6, if full employment occurs at Q C, then aggregate demand is Too great, causing cyclical unemployment. Too small, causing demand-pull inflation. Too small, causing cyclical unemployment. Just right. Since macro equilibrium falls to the left of the full-employment level of output, there will be a recession and cyclical unemployment. Learning Objective: How and when macro failure occurs.

15 15 of 20 10/19/2013 1:07 PM In Figure 9.6, if full employment occurs at Q A, then aggregate demand is Just right, causing no cyclical unemployment. Too great, causing an inflationary gap. Too small, causing an inflationary gap. Too great, causing a recessionary gap. Since macro equilibrium falls to the right of the full-employment level of output, there will be an inflationary gap. Learning Objective: How and when macro failure occurs.

16 16 of 20 10/19/2013 1:07 PM A decrease in U.S. exports to Japan can be represented by The aggregate expenditure curve shifting upward. The aggregate expenditure curve shifting downward. A rightward movement along the aggregate expenditure curve. A leftward movement along the aggregate expenditure curve. A drop in exports means total income will decrease, so the aggregate expenditure curve shifts down, thereby leading to a lower equilibrium output. Learning Objective: How and why AD shifts occur. If the full-employment level of income in Figure 9.7 is $200 billion, there is A recessionary gap of $100 billion per year. A recessionary gap of $200 billion per year. An inflationary gap of $100 billion per year. Achievement of macro equilibrium. The macro equilibrium occurs at the full-employment level of income. Learning Objective: How and when macro failure occurs.

17 17 of 20 10/19/2013 1:07 PM In Figure 9.8, if full-employment income is produced at $400 billion, the government can reduce a recessionary gap by Decreasing government spending. Decreasing investment spending. Decreasing income taxes on consumers. Increasing taxes. At full employment, production exceeds spending. So production will fall unless additional spending results in production equaling aggregate expenditure. Difficulty: 3 Hard Learning Objective: How and when macro failure occurs.

18 18 of 20 10/19/2013 1:07 PM In Figure 9.8, if full-employment income is produced at $400 billion, which of the following can prevent a recession? An increase in government spending. An increase in taxes. An increase in interest rates. An increase in saving. At full employment, production exceeds spending. So production will fall unless additional spending, possibly from the government, results in production equaling aggregate expenditure. Difficulty: 3 Hard Learning Objective: How and when macro failure occurs.

19 19 of 20 10/19/2013 1:07 PM If the economy depicted in Figure 9.9 produced at the full-employment output level of $150 billion instead of the equilibrium output level, inventory levels would Remain constant. Increase by $50 billion. Increase by $25 billion. Decrease by $100 billion. Total spending of $125 billion while production is $150 billion leads to an accumulation of inventory. Difficulty: 3 Hard Learning Objective: How and when macro failure occurs.

20 20 of 20 10/19/2013 1:07 PM All of the following will shift the investment curve except Innovation. Improvements in available technology. Changes to expectations. Changes to the interest rate. Changes to the interest rate cause a movement along the investment curve, not a shift. Learning Objective: The determinants of investment spending. According to an In the News article titled "Cuomo to Cut New York State Spending by $8.86 Billion, Fire 9,800 Workers," the governor did this because Increased federal funding cannot keep up with decreased state gasoline taxes. New York State taxes cannot keep up with the loss of federal aid. State law requires the governor shrink the budget by 5 percent per year through None of the choices are correct. The deep recession of caused a decline in state revenue as well as a decline in aid to states from the federal government. Difficulty: 1 Easy A rise in interest rates will cause A decline in investment spending. A rise in investment spending. Investment spending to remain constant. Investment spending to be eliminated from the economy. We anticipate a lower rate of investment spending when interest rates are high and more investment at lower rates, ceteris paribus. Difficulty: 1 Easy Learning Objective: The determinants of investment spending.

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