Econ Chapter 23

A curve showing the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure.

The total amount of spending in the economy: the sum of consumption, planned investment, government purchases, and net exports.

A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming the price level is constant.

Expenditure that does not depend on the level of GDP.

The difference between the cash revenues received by the firm and the cash spending by the firm.

The relationship between consumption spending and disposable income.

Goods that have been produced but not yet sold.

The slope of the consumption function: the amount by which consumption spending increases when disposable income increases.

The change in saving divided by the change in disposable income.

The increase in equilibrium real GDP divided by the increase in autonomous expenditure.

The series of induced increases in consumption spending that result from an initial increase in autonomous expenditure.

Aggregate expenditure, or the total amount of spending in the economy, equals a. household spending on durable goods plus household spending on nondurable goods. b. household spending on durable goods plus business investment spending. c. consumption spending plus planned investment spending plus government purchases plus net exports. d. total spending by households plus total spending by businesses.

Fluctuations in total spending in the economy may affect a. the level of employment in the short run. b. the level of production in the short run. c. both employment and production in the short run. d. neither the level of employment nor the level of production in the short run.

The aggregate expenditure model focuses on the relationship between total spending and a. nominal GDP in the short run. b. nominal GDP in the long run. c. real GDP in the short run. d. real GDP in the long run.

The key idea of the aggregate expenditure model is that in any particular year, the level of gross domestic product (GDP) is determined mainly by a. the economy's endowment of economic resources and the current state of technology. b. the level of the interest rate for the economy as a whole. c. the level of aggregate expenditure. d. the level of government expenditures.

Economists and business analysts usually explain fluctuations in GDP in terms of fluctuations in these four categories: a. interest rates, exchange rates, inflation rates, and government purchases. b. inflation rates, unemployment rates, interest rates, and consumer spending. c. investment spending, unplanned inventory changes, government transfer spending, and government purchases. d. consumption, planned investment, government purchases, and net exports.

Which of the following statements is correct? a. Actual investment and planned investment are always the same thing. b. Actual investment will equal planned investment only when inventories rise. c. Actual investment will equal planned investment only when there is no unplanned change in inventories. d. Actual investment equals planned investment only when inventories decline.

Macroeconomic equilibrium occurs where a. the unemployment rate is zero. b. total spending, or aggregate expenditure, equals total production, or GDP. c. consumption equals investment, and investment equals government expenditure. d. total production, or GDP, equals total planned investment.

Which of the following makes up the largest fraction of GDP? a. consumption b. investment c. government expenditures d. net exports

When aggregate expenditure is greater than GDP a. inventories will rise. b. inventories will fall. c. unplanned inventory adjustment will remain the same. d. the total amount of production in the economy is greater than the total amount of spending.

If aggregate expenditure is equal to GDP, then a. inventories are rising. b. GDP and employment will fall. c. the economy is in macroeconomic equilibrium. d. inventories are falling.

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________. a. rise; increase b. rise; decrease c. fall; increase d. fall; decrease

The most important determinant of consumption is a. current disposable income. b. household wealth. c. the price level. d. the interest rate.

An increase in stock prices will a. increase the consumption component of aggregate expenditure. b. decrease the investment component of aggregate expenditure. c. increase the government purchases component of aggregate expenditure. d. not cause any change in the components of aggregate expenditure.

Which of the following causes saving to increase? a. an increase in consumption b. an increase in the interest rate c. an increase in unemployment d. an increase in the price level

If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $80 billion of disposable income? a. $88.89 billion b. $800 billion c. $72 billion d. $7.2 billion

If the MPC is 0.75, then a $100 increase in government expenditures will increase equilibrium GDP by a. $100. b. $75. c. $400. d. $133.

Which of the following equalities is correct? a. Disposable income is equal to national income plus government transfer payments plus taxes. b. Government transfer payments minus taxes equals net taxes. c. Disposable income is equal to national income minus net taxes. d. Disposable income equals national income.

When national income increases, there must be some combination of an increase in household a. consumption and saving. b. consumption, saving, and taxes. c. consumption and investment. d. saving and investment.

The amount by which consumption spending increases when disposable income increases is called a. marginal consumption. b. autonomous consumption. c. the marginal propensity to consume. d. disposable national consumption.

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals a. disposable income. b. zero. c. one. d. national income.

Which of the following is not correct? a. MPS + MPC=1 b. 0 < MPS < 1 c. MPS = 1 - (ΔC/ΔYD) d. MPS = 1 - (C/YD)

The behavior of consumption and investment over time can be described as follows: a. investment follows a smooth, upward trend, but consumption is highly volatile. b. consumption follows a smooth, upward trend, but investment is subject to significant fluctuations. c. both consumption and investment fluctuate significantly over time. d. neither consumption nor investment fluctuates significantly over time.

Which of the following statements about investment spending is correct? a. The optimism or pessimism of business firms is an important determinant of investment spending. b. A higher real interest rate results in less investment spending. c. When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. d. all of the above

Which of the following statements is correct? a. An increase in the corporate income tax decreases the after-tax profitability of investment spending. b. Changes in tax laws have no effect on investment spending. c. During periods of recession, the ability of firms to finance spending on new factories or machinery and equipment increases. d. all of the above

Concern about the federal budget deficit caused real government purchases to a. rise steadily for most of the 1979-2006 period. b. fall steadily for most of the 1979-2006 period. c. fall during the mid-1990s. d. rise during the mid-1990s.

Net exports have been __________ in most years between 1979 and 2006. Net exports have usually __________ when the U.S. economy is in recession and __________ when the U.S. economy is expanding. a. positive; increased; decreased b. positive; decreased; increased c. negative; increased; decreased d. negative; decreased; increased

Which of the following is among the most important determinants of the level of net exports? a. the price level in the United States relative to the price levels in other countries b. the unemployment rate in the United States relative to the unemployment rate in other countries c. the level of investment spending in the United States relative to the level of investment spending in other countries d. all of the above

If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports. a. increase; increase; decreases b. increase; decrease; increases c. decrease; increase; increases d. decrease; increase; decreases

When incomes rise faster in the United States than in other countries, a. U.S. net exports will rise. b. U.S. net exports will fall. c. foreign consumers' purchases of U.S. goods and services will increase faster than U.S. consumers' purchases of foreign goods and services. d. exports usually rise faster than imports.

An increase in the value of the dollar (the dollar appreciates against other currencies) will _________ exports and _________ imports, so net exports will _________. a. increase; decrease; rise b. decrease; increase; fall c. increase; decrease; fall d. increase; increase; rise

At points above the 45o line, a. aggregate expenditure is greater than GDP. b. aggregate expenditure is less than GDP. c. aggregate expenditure is equal to GDP. d. aggregate expenditure is in equilibrium.

As long as the AE line is above the 45o line, a. inventories will rise and firms will expand production. b. inventories will decline and firms will expand production. c. inventories will rise and firms will reduce production. d. inventories will decline and firms will reduce production.

Macroeconomic equilibrium in the short run a. must be consistent with macroeconomic equilibrium in the long run. b. results in a zero unemployment rate. c. will occur at a point on the 45o line. d. all of the above

When is the economy in a recession? a. when the aggregate expenditure line does not intersect the 45o line anywhere b. when the aggregate expenditure line intersects the 45o line at a level of GDP below potential real GDP c. when the aggregate expenditure line intersects the 45o line at a level of GDP above potential real GDP d. when the aggregate expenditure line intersects the 45o line at a level of GDP equal to potential real GDP

When the economy is in a recession, the shortfall in aggregate expenditure is exactly equal to a. the value of GDP. b. the shortfall in aggregate production. c. the unplanned increase in inventories that would occur if the economy were initially at potential GDP. d. all of the above

Which of the following statements is correct? a. Autonomous expenditure depends on the level of GDP. b. Autonomous expenditure does not depend on the level of GDP. c. No part of consumption spending is autonomous. d. No part of government purchases is autonomous.

What is the multiplier? a. The multiplier is the amount by which investment spending increases following an initial increase in consumption spending. b. The multiplier is the ratio of the unemployment rate to the inflation rate. c. The multiplier is the ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure. d. The multiplier is the ratio of the increase in autonomous expenditure to the increase in equilibrium real GDP.

The multiplier works a. only when autonomous expenditures rise, not when they decline. b. only when autonomous expenditures decline, not when they rise. c. both when autonomous expenditures rise and when they decline. d. only if autonomous expenditures don't change.

The value of the multiplier is larger when a. the value of the MPC is smaller. b. the value of the MPC is larger. c. the value of the MPC equals zero. d. the value of the MPC is equal to the value of autonomous expenditure.

If we account for the impact of increasing GDP on imports, inflation, and interest rates, the simple multiplier formula would a. reflect accurately the true value of the multiplier. b. understate the true value of the multiplier. c. overstate the true value of the multiplier. d. change to MPC/(1 − MPC).

Which of the following happens if the price level rises? a. investment will rise, while consumption and net exports will fall b. investment and consumption will fall, but net exports will rise c. investment, consumption and net exports will all rise d. investment, consumption and net exports will all fall

A curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called a. the inflation curve. b. the autonomous expenditure function. c. aggregate demand. d. the price-expenditure curve.

What is the value of autonomous expenditure in the following macroeconomic model? C = 1,000 + 0.75Y Consumption function I = 500 Investment function G = 600 Government spending function NX = -300 Net export function Y = C + I + G + NX Equilibrium condition a. 800 b. 1,800 c. 2,400 d. 7,200

Find equilibrium GDP using the following macroeconomic model: C = 1,000 + 0.75Y Consumption function I = 500 Investment function G = 600 Government spending function NX = -300 Net export function Y = C + I + G + NX Equilibrium condition a. 800 b. 1,800 c. 2,400 d. 7,200

Which of the following is correct concerning shifts in the aggregate demand (AD) curve? a. An increase in the price level will decrease real household wealth, which will decrease consumption and shift the AD curve to the left. b. A larger MPS will cause the AD curve to shift further to the right when there is an increase in autonomous expenditures. c. An increase in taxes will shift the AD curve to the left because the tax multiplier is negative. d. An increase in the price level will increase interest rates, which will reduce investment expenditures and shift the AD curve to the left.