Demanded at alternative price levels in a given time period.
*Aggregate demand represents the total amount of spending at various price levels.
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The combination of price level and real output that is compatible with both aggregate demand and aggregate supply is the definition of:
answer
Equilibrium.
*The macro equilibrium occurs at the intersection of the AS and AD curves.
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Consumption expenditures:
answer
Account for over two-thirds of total spending.
*The largest part of spending in the U.S. economy comes from consumer spending.
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Which of the following forces did Keynes assert had the strongest influence on consumption decisions?
answer
Disposable income
Disposable income is one determinant of consumer spending which is the largest part of the U.S. economy.
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If the MPC is 0.60 and disposable income increases from $20,000 billion to $22,000 billion, then consumption will increase by:
answer
$1,200 billion.
*Consumption spending will rise by the change in disposable income multiplied by the MPC. (2000 × 0.60 = $1200)
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The consumption function implies that:
answer
Consumption increases as disposable income increases.
*There is a positive or direct relationship between consumption and disposable income.
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If autonomous consumption decreases, then:
answer
The AD curve will shift to the left.
* The AD curve will not be affected.
In this case, the consumption category falls so the AD curve would decrease, shifting to the left.
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With respect to the aggregate demand curve, improved consumer confidence would:
answer
Shift the curve rightward.
*When consumers feel more secure about the economy, they will be inclined to spend more.
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If the availability of credit increases, then:
answer
The AD curve will shift to the right.
*The availability of credit will cause interest rates to fall, giving consumers more buying power and more buying power will tend to increase consumption.
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The MPC indicates the portion of:
answer
An additional dollar of income that will be spent.
*MPC is the change in consumption divided by the change in disposable income.
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If tax policies become less favorable, then:
answer
The AD curve will shift to the left.
*When taxes are higher, consumers and businesses will not be able to spend as much, leading to a decrease in the AD curve.
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Investment spending includes expenditures on all of the following except:
answer
Stocks and bonds.
*Stocks and bonds represent how one chooses to hold one's wealth rather than physical capacity.
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Which of the following causes a movement along the investment demand curve?
answer
A change in the rate of interest
*Investment spending is inversely related to the interest rate.
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If the investment demand curve shifts to the left, then:
answer
The AD curve will shift to the left.
*Because investment spending is part of GDP, a fall in investment will decrease the AD curve.
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Which of the following lists all the components that are included in aggregate demand?
correct
answer
Consumption, government spending, net exports, and investment
*Aggregate demand includes the four components of spending that make up GDP.
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Which of the following is not a component of aggregate demand?
answer
Productivity
*Productivity is a measure of the efficiency of resources that are used to produce output.
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Which of the following occurs when the spending on final goods and services exceeds full-employment GDP?
answer
Inflationary gap
*When aggregate demand exceeds full employment GDP, resources are being over-used and bidding wars will drive up their prices, creating inflation.
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Which of the following most likely occurs when an inflationary gap exists?
answer
A bidding war for available goods and services
*An inflationary gap will cause the price level to rise as too many dollars are chasing too few resources.
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Demand-pull inflation is caused by:
answer
Excessive aggregate demand in relation to an economy's production capacity.
*When aggregate demand increases, production is unable to keep up with spending and so prices rise as a result.
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Using Figure 9.1, the amount of autonomous consumption is:
answer
$500 billion
*The consumption function intersects the vertical axis at $500 billion which is the level of autonomous consumption.
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Using Figure 9.5, a movement from Point A to Point C would result from:
answer
A decrease in the interest rates.
*Changes to interest rates cause a movement along the investment curve.
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A movement from Point A to Point B in Figure 9.5 would result in:
answer
An increase in aggregate demand.
*Investment spending is one of the four categories of spending so an increase in investment would shift the aggregate demand curve to the right.
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It is possible for the economy to be in macro equilibrium at a point below full employment output.
answer
True
question
Suppose the economy is at macro equilibrium, which is below full employment output as demonstrated by point E1 on the following graph.
Recall that an increase in C, I, G, or exports (X) shifts AD to the right while an increase in imports (M) shifts AD to the left, a negative shift. If a policy is passed that increases government spending, the new equilibrium output level will be ________, the new equilibrium price will be __________, and the economy will have moved _________ full employment output.
answer
higher, higher, closer to
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The marginal propensity to consume (MPC) is:
answer
The change in consumption divided by the change in disposable income.
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If consumers receive a $2 billion increase in disposable income and as a result increase consumption by $1.4 billion, the closest approximation (at two decimal points) to marginal propensity to consume (MPC) is:
answer
.7
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The consumption function consists of two additive terms: autonomous consumption and:
answer
Income-dependent consumption.
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For a given week, a consumer's autonomous consumption is $110, marginal propensity to consume is 0.9, and disposable income is $300. According to the consumer's consumption function, how much will he/she spend on consumption each week?
answer
$380
question
While a change in expectations will cause a shift of the investment curve, a change in interest rates will cause movement along the investment curve.
answer
True
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assume investment is initially determined by curve I1. With worse expectations, what will the interest rate need to be for planned investment to be $300?
answer
4%
question
The two chief concerns about macro equilibrium are: (1) The market's macro equilibrium might not give us full employment or price stability; and (2) Even if the market's macro equilibrium were perfectly positioned, it might not last.
answer
True
question
Based on the equilibrium level of GDP, if full-employment GDP were 8.0 trillion then the inflationary/recessionary gap would be:
answer
inflationary, 1.0
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