Download 1. If the MPS = 0.1, then the value of the multiplier

7/19/2015
Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
1. If the MPS = 0.1, then the value of the multiplier equals:
a. 5.
b. 10.
c. 9.
d. 1.
2. The marginal propensity to consume (MPC) is equal to the change in:
a. consumer spending divided by the change in gross domestic product.
Incorrect
b. consumer spending divided by the change in disposable income.
Correct
c. consumer spending divided by the change in investment spending.
Incorrect
d. disposable income divided by the change in consumer spending.
Incorrect
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3. Figure: Consumption and Real GDP
Reference: Ref 11­1
(Figure: Consumption and Real GDP) The slope of the consumption function is called the:
a. average propensity to consume.
Incorrect
b. marginal propensity to save.
Incorrect
c. marginal propensity to consume.
Correct
d. marginal consumption increment.
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
4. Figure: Consumption and Real GDP
Reference: Ref 11­1
(Figure: Consumption and Real GDP) The marginal propensity to consume in this example is:
a. 1.0.
Incorrect
b. 0.
Incorrect
c. 0.5.
Correct
d. 2.0.
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
5. Figure: Consumption and Real GDP
Reference: Ref 11­1
(Figure: Consumption and Real GDP) If real GDP is $8 trillion, consumption is _______ trillion and
saving is _______ trillion.
a. $4; $2
Incorrect
b. $5; $3
Correct
c. $5; $2
Incorrect
d. $4; $3
Incorrect
6. Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the
consumption function?
a. Autonomous consumption will increase.
Incorrect
b. The function will shift upward.
Incorrect
c. The slope will get steeper and autonomous consumption will increase.
Incorrect
d. The slope will get steeper.
Correct
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
7. Reference: Ref 11­2
(Table: Individual and Aggregate Consumption Functions) Which of the following represents Mark's
individual consumption function?
a. C = 200 + 0.9YD.
Correct
b. C = 0.8YD.
Incorrect
c. C = 200 + 1.1YD.
Incorrect
d. C = 450 + 0.5YD.
Incorrect
8. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income.
Reference: Ref 11­5
(Scenario: Consumption Spending) Autonomous consumption is:
a. 0.
Incorrect
b. 0.8 of disposable income.
Incorrect
c. $1,300 if disposable income is $1,000.
Incorrect
d. $500.
Correct
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
9. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income.
Reference: Ref 11­5
(Scenario: Consumption Spending) The marginal propensity to save is:
a. 0.2.
Correct
b. $500.
Incorrect
c. 0.8.
Incorrect
d. 0
Incorrect
10. Figure: Consumption Functions
Reference: Ref 11­7
(Figure: Consumption Functions) An economy's consumption function would shift from curve C to
curve Cʹʹ when there is a(n):
a. increase in wealth.
Incorrect
b. increase in expected future disposable income.
Incorrect
c. decrease in wealth.
Correct
d. increase in the price level.
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
11. Planned investment spending depends on all of the following EXCEPT:
a. the rate of interest.
Incorrect
b. the expected future level of real GDP.
Incorrect
c. the current level of real GDP.
Correct
d. the current productive capacity in the economy.
Incorrect
12. Most recessions originate from:
a. a decrease in aggregate supply.
b. an increase in investment spending.
c. a decrease in investment spending.
d. an increase in aggregate supply.
13. The supply of loanable funds increases when people decide to be thriftier. Which of the following is
most likely to occur?
a. Interest rates decrease, and investment spending increases.
b. Interest rates increase, and investment spending increases.
c. Interest rates increase, and investment spending decreases.
d. Interest rates decrease, and investment spending decreases.
14. Planned investment spending is _______ to the interest rate because ______.
a. positively related; a fall in the market interest rate decreases the supply of loanable funds
Incorrect
b. positively related; a fall in the market interest rate decreases the opportunity cost of investing
Incorrect
c. negatively related; a rise in the market interest rate causes consumption to crowd out investment
Incorrect
d.
negatively related; a rise in the market interest rate makes any given investment project less
profitable
Correct
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
15. Inventory investment is:
a. a part of the consumption spending, as these are unsold goods.
b. a part of planned investment spending and is always positive.
c. not a part of investment spending by firms, as it can't be properly planned ahead of time.
d. a part of unplanned investment spending and may either be positive or negative.
16. If a CD store has 10,000 CDs at the start of the period and 15,000 CDs at the end of the period, then its
inventory investment during the period was:
a. 5,000.
Correct
b. 1.5.
Incorrect
c. 0.67.
Incorrect
d. –5,000.
Incorrect
17. Negative inventory investment occurs when companies:
a. reduce their inventories by decreasing production.
Incorrect
b. reduce their inventories because sales increase.
Correct
c. add to their inventories by increasing production.
Incorrect
d. add to their inventories because sales fall.
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
18. In an economy without government purchases, government transfers, or taxes, aggregate autonomous
consumer spending is $750 billion, planned investment spending is $300 billion, and the marginal
propensity to consume is 0.75. What is the expression for planned aggregate spending?
a. AEPlanned = $300 + 0.25 × YD.
Incorrect
b. AEPlanned = $750 + 0.75 × YD.
Incorrect
c. AEPlanned = $500 + 0.25 × YD.
Incorrect
d. AEPlanned = $1,050 + 0.75 × YD.
Correct
19. Figure: Aggregate Expenditures and Real GDP
Reference: Ref 11­9
(Figure: Aggregate Expenditures and Real GDP) If the level of real GDP equals $9,000 billion and
there are no changes in the consumption function or in planned investment, then real GDP will
________in the next period.
a. remain unchanged
Incorrect
b. fall, but only if there is an offsetting change in autonomous consumption
Incorrect
c. fall
Correct
d. rise
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
20. Scenario: Income–Expenditure Equilibrium
GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The
marginal propensity to consume is 0.8.
Reference: Ref 11­11
(Scenario: Income–Expenditure Equilibrium) How much is planned aggregate spending?
a. $8,000
Incorrect
b. $7,100
Correct
c. $6,400
Incorrect
d. $700
Incorrect
21. Scenario: Income–Expenditure Equilibrium
GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The
marginal propensity to consume is 0.8.
Reference: Ref 11­11
(Scenario: Income–Expenditure Equilibrium) How much is unplanned inventory investment?
a. $1,100
Incorrect
b. 0
Incorrect
c. $900
Correct
d. –$900
Incorrect
22. Which of the following factors cannot shift the aggregate demand curve?
a. changes in wealth
Incorrect
b. changes in the price level
Correct
c. changes in expectations
Incorrect
d. changes in stock market indices
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
23. If prices are constant, but there is an increase in the value of financial assets:
a. aggregate demand shifts to the left
Incorrect
b. aggregate supply shifts to the right.
Incorrect
c. aggregate supply shifts to the left.
Incorrect
d. aggregate demand shifts to the right.
Correct
24. Which of the following would cause a shift in the short­run aggregate supply curve?
a. changes in aggregate demand
Incorrect
b. a change in commodity prices
Correct
c. the quantity of real output supplied
Incorrect
d. the price level
Incorrect
25. The long­run aggregate supply curve is vertical because in the long run:
a. technological progress outpaces raises in nominal wages.
Incorrect
b. all factors of production increase.
Incorrect
c. the price of labor is flexible, while the price of physical capital is fixed.
Incorrect
d. all prices are flexible.
Correct
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
26. Producing an aggregate output level that is higher than potential output is possible only if nominal
wages:
a. remain fixed.
Incorrect
b. adjust fully in an upward direction.
Incorrect
c. haven't yet fully adjusted downward.
Incorrect
d. haven't yet fully adjusted upward.
Correct
27. An increase in aggregate demand will generate _______ in real GDP and _______ in the price level in
the short run.
a. no change; an increase
Incorrect
b. an increase; an increase
Correct
c. a decrease; no change
Incorrect
d. an increase; no change
Incorrect
28. When the economy is producing output above the potential, it has a(n):
a. falling wages.
Incorrect
b. Keynesian gap
Incorrect
c. recessionary gap.
Incorrect
d. inflationary gap.
Correct
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
29. An economy is currently operating at an output level below its potential real GDP. If the government
wishes use fiscal policy to bring the economy back to its potential real GDP, it will:
a. increase taxation.
Incorrect
b. increase government spending.
Correct
c. decrease the money supply.
Incorrect
d. increase the money supply.
Incorrect
30. A government might want to increase aggregate demand to:
a. lower prices in the economy.
Incorrect
b. close an inflationary gap.
Incorrect
c. lower employment in the economy.
Incorrect
d. close a recessionary gap.
Correct
31. Expansionary fiscal policy includes:
a. decreasing government expenditures.
Incorrect
b. increasing government expenditures.
Correct
c. increasing taxes.
Incorrect
d. increasing the money supply.
Incorrect
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32. Contractionary fiscal policy causes the aggregate demand curve to shift to the _______ and is used to
close a(n) _______ gap.
a. left; recessionary
Incorrect
b. right; recessionary
Incorrect
c. left; inflationary
Correct
d. right; inflationary
Incorrect
33. Figure: Fiscal Policy Options
Reference: Ref 13­8
(Figure: Fiscal Policy Options) If the aggregate demand curve is AD″:
a. a contractionary fiscal policy may be warranted.
Correct
b. an expansionary fiscal policy may be warranted.
Incorrect
c. the economy is experiencing a recessionary gap.
Incorrect
d. the economy is in long­run equilibrium.
Incorrect
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
34. If the economy is at full employment, expansionary fiscal policy is most likely to lead to:
a. higher inflation rates.
Correct
b. lower inflation rates.
Incorrect
c. increases in unemployment.
Incorrect
d. decreases in interest rates.
Incorrect
35. Decreasing funding to explore space:
a. will shift the aggregate supply curve to the right.
Incorrect
b. will shift the aggregate demand curve to the left.
Correct
c. will shift the aggregate demand curve to the right.
Incorrect
d. will shift the aggregate supply curve to the left.
Incorrect
36. If the marginal propensity to consume is 0.75 and the federal government increases spending by $100
billion, the income expenditure model would predict that real GDP will increase by:
a. $100 billion.
Incorrect
b. $400 billion.
Correct
c. $750 billion.
Incorrect
d. $300 billion.
Incorrect
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37. A cut in taxes will have a greater impact on aggregate demand if it is given to:
a. those who hold a large amount of wealth.
Incorrect
b. people with a high MPC.
Correct
c. people with a low MPC.
Incorrect
d. everyone in the economy.
Incorrect
38. Which of the following is an automatic stabilizer?
a. Medicare payments to the elderly
Incorrect
b. military spending on the war in Iraq
Incorrect
c. unemployment compensation payments to unemployed autoworkers
Correct
d. disability payments to war veterans
Incorrect
39. Which one of the following represents the government budget surplus most accurately?
a. T – G – TR
Correct
b. T + TR – G
Incorrect
c. T + G – TR
Incorrect
d. T + G + TR
Incorrect
40. Expansionary fiscal policies:
a. make the budget deficit smaller.
b. affect only taxes.
c. affect only government spending.
d. make the budget surplus smaller.
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41. Most economists believe that a balanced budget requirement would:
a. undermine the role of taxes and transfers as automatic stabilizers.
b. strengthen the ability of policy makers to conduct discretionary fiscal policy.
c. not have any impact on the role of taxes and transfers as automatic stabilizers.
d. enhance the effect of automatic stabilizers in the economy.
42. If the current level of real GDP lies below potential GDP, then an appropriate fiscal policy would be to
_____, which will shift the _____ curve to the _____.
a. increase government purchases; AD; right.
Correct
b. increase government purchases; AD; left.
Incorrect
c. increase tax rates; AD; right.
Incorrect
d. increase transfer payments; AS; right.
Incorrect
43. The national debt _______ in years in which the federal government incurs a _______.
a. stays the same; surplus
b. rises; deficit
c. falls; deficit
d. rises; surplus
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Krugman/Wells Macroeconomics 3e LaunchPad ­ Exam Three
44. How does a nation's saving rate, as measured by the marginal propensity to save, affect the size of the
spending multiplier? Explain with both intuition and the formula for the multiplier. Perhaps include a
diagram of the circular flow of the economy.
Correct Answer: The multiplier process relies upon spending at every step. If disposable income rises,
consumers increase spending at every stage of the process, by an amount equal to the marginal
propensity to consume multiplied by the increase in disposable income. If the MPC is large, the MPS is
small, and more total spending is multiplied throughout the economy. However, if consumers decide to
increase savings at each stage of the process, the MPS increases, and disposable income leaks out of
the spending multiplier.
The multiplier M = 1 / (1 – MPC). If the MPS increases, the MPC decreases, so (1 – MPC) increases. If
(1 – MPC) increases, 1 / (1 – MPC) decreases and the multiplier, M, falls.
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45. Reference: Ref 11­21
(Table: Real GDP) Suppose the economy has no government spending and no foreign trade. With no
taxes and transfers, real GDP is equal to disposable income (YD). The data in the accompanying table
show consumption spending (C) and planned investment (Iplanned).
a. What is the MPC in this economy?
b. At what level of real GDP will the economy find its income–expenditure equilibrium?
Correct Answer: a. As YD increases by $1,000, C increases by $900, so the MPC = 900 / 1,000 =
0.90.
b. If you create a new column for AEplanned = C + Iplanned, you will see that real GDP = AEplanned at
$7,000.
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46. Suppose the economy is in short­run equilibrium. Use the AD–AS model to predict short­run changes
to real GDP and the aggregate price level if commodity prices suddenly increase. Explain your
reasoning.
Correct Answer: Producers use commodities to produce final goods and services. If commodity prices
are rising, it becomes more expensive to produce those goods and services, and therefore shifts the
SRAS to the left. This leftward shift in SRAS will decrease real GDP and increase the aggregate price
level.
47. Suppose the economy is initially in long­run equilibrium and there is a negative demand shock to the
economy. Describe the short­run effects of this demand shock and how the economy will adjust in the
long run. Use a diagram.
Correct Answer: If the economy is initially at potential real GDP and the AD curve shifts to the left, it
will decrease real GDP and the price level along the SRAS curve. This is a recessionary gap. Because
of the high level of unemployment, nominal wages eventually fall, which gradually shifts the SRAS to
the right. As the SRAS increases, real GDP increases and the price level decreases along the new AD
curve. The adjustment process concludes when real GDP again reaches the level of potential real GDP,
but at a lower price level.
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48. Many economists caution against extremely active stabilization policy because of time lags in its use.
Explain this rationale.
Correct Answer: It takes several months for enough economic data to be gathered and analyzed, so
there is a lag in the recognition of a recessionary or inflationary gap. There is also a time lag in crafting
appropriate legislative action to remedy the economy. Once the law has been passed, there is a time lag
in implementing the policy. Because of these time lags, the policy makers may be far behind the actual
business cycle, thereby engaging in policy that is no longer necessary or perhaps even
counterproductive.
49. Explain the difference between automatic stabilizers and discretionary fiscal policy measures. Provide
examples to clarify the distinctions.
Correct Answer: Automatic stabilizers are spending and taxation rules that automatically help to slow
down recessions and also help to slow down economic expansions, without requiring deliberate action
by lawmakers. For example, more people qualify for unemployment benefits during a recession. This
puts transfer payments in the hands of more people, thus helping to expand the economy. Discretionary
fiscal policy is fiscal policy that is the direct result of deliberate actions by lawmakers. For example,
the president and Congress might pass an economic stimulus package during a recession to give tax
breaks to most households. This deliberate reduction in taxes acts as expansionary fiscal policy.
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