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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-01 What the
major components of aggregate
demand are.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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
→
0.75.
1.00.
0.90.
0.25.
The MPC is equal to the change in consumption spending divided by the change in disposable income: (1,500/2,000)
= .75.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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: (2,000 × 0.60 = $1,200).
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
10/19/2013 1:07 PM
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If the MPC is 0.8 and the APC is 0.9, the MPS equals
0.1.
→
0.2.
0.8.
1.7.
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.
Difficulty: 2 Medium
Multiple Choice
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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.
Difficulty: 2 Medium
Multiple Choice
Learning Objective: 09-02 What the
consumption function tells us.
award:
0.00 points
Given a consumption function of C = $25 + 0.75Y , 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
Multiple Choice
D
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
10/19/2013 1:07 PM
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Suppose a consumption function is given as C = $500 + 0.75Y . The marginal propensity to consume is
D
200.
→
0.75.
0.25.
-0.75.
The MPC value is equal to the slope term (b), or .75, in the consumption function.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
award:
0.00 points
Suppose the consumption function is C = $100 + 0.85Y . If disposable income is $400, saving is
D
→
-$40.00.
$40.00.
-$15.00.
$15.00.
Saving will be negative whenever consumption exceeds disposable income ($400 - $440 = -$40).
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
award:
0.00 points
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
0.60.
→
0.40.
0.05.
-0.60.
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).
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-01 What the
major components of aggregate
demand are.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-05 How and
when macro failure occurs.
award:
0.00 points
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-05 How and
when macro failure occurs.
award:
0.00 points
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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-05 How and
when macro failure occurs.
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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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-05 How and
when macro failure occurs.
award:
0.00 points
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
10/19/2013 1:07 PM
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In Figure 9.2, if the consumption function shifts from C to C autonomous consumption
2
1,
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-02 What the
consumption function tells us.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 09-03 The
determinants of investment
spending.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 09-03 The
determinants of investment
spending.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 09-03 The
determinants of investment
spending.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-05 How and
when macro failure occurs.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-05 How and
when macro failure occurs.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-04 How and
why AD shifts occur.
award:
0.00 points
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-05 How and
when macro failure occurs.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 09-05 How and
when macro failure occurs.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 09-05 How and
when macro failure occurs.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 09-05 How and
when macro failure occurs.
10/19/2013 1:07 PM
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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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 09-03 The
determinants of investment
spending.
award:
0.00 points
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 2015.
None of the choices are correct.
The deep recession of 2008-2009 caused a decline in state revenue as well as a decline in aid to states from the
federal government.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-01 What the
major components of aggregate
demand are.
award:
0.00 points
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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 09-03 The
determinants of investment
spending.
10/19/2013 1:07 PM