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10-1. When the economy is at equilibrium:
→ Leakages equal injections.
Inventories must equal zero.
Leakages equal aggregate demand.
There are no leakages.
10-2. Leakages include:
→ Business saving.
Exports.
Government spending.
Inventories.
10-3. Injections include:
Business saving.
Taxes.
→ Exports.
Consumer saving.
10-4. Investment represents:
A leakage from the circular flow, like saving.
A leakage from the circular flow, like taxes.
→ An injection into the circular flow, like
government spending.
An injection into the circular flow, like imports.
10-5. If injections exceed leakages:
Unemployment will rise.
Prices will fall.
→ The economy will expand.
Disposable income will fall.
10-6. If an economy is at full employment and
investment spending decreases while all other
levels of spending remaining constant then:
→ A GDP gap emerges.
The price level increases.
Output falls.
The unemployment rate falls.
10-7. When unwanted business inventories pile up,
which of the following is likely to occur?
A lower level of unemployment
A higher level of output
→ A lower price level
No change in the level of output
10-8. If consumers spend 80 cents out of every
extra dollar received, the multiplier is:
→ 5.
8.
0.80.
1.25.
10-9. Suppose an economy can be described by the
consumption function C = 250 + 0.90YD and I =
$300. What is the multiplier?
0.1
0.9
3
→ 10
10-10. Given the MPS = 0.40, with no government
and no foreign trade a $10 billion increase in
investment will eventually result in an increase in:
Consumption by $40 billion.
Total spending by $15 billion.
→ Consumption by $15 billion.
Total spending by $2.5 billion.
10-2. Business saving is funds received from sale of
goods that is not immediately put back into the
circular flow.
10-1. The total amount of funds leaving the circular
flow returns if the economy is in equilibrium.
10-4. Investment is money spent by businesses, a
sector other than the household, which is an
important spending component.
10-3. Business saving, taxes, and consumer saving
are leakages.
10-6. Spending will fall short of the level required
to maintain full-employment, creating a
recessionary GDP gap.
10-5. When injections are greater than leakages, a
greater amount of funds are entering the circular
flow than being diverted from households, causing
production to rise and unemployment to fall.
10-8. The multiplier can be calculated using the
formula, multiplier = 1 ÷ (1 - MPC).
10-7. The undesired inventory build-up may lead
firms to cut prices.
10-10. You can use the MPS to get the MPC (MPC =
1 - MPS), then use the MPC to get the multiplier
using the equation 1 ÷ (1 - MPC).
10-9. The multiplier is equal to 1 ÷ (1 - MPC), and
MPC is the slope variable.
10-11. If aggregate demand shifts to the left by
$400 billion and aggregate supply is upward
sloping, then real output will decrease by:
$400 billion and the price level will not change.
→ Less than $400 billion and the price level will
fall.
$400 billion and the price level will fall.
More than $400 billion and the price level will
not change.
10-13. A decrease in aggregate demand will most
likely cause a change in which of the following
types of unemployment?
Seasonal
→ Cyclical
Frictional
Structural
10-15. In Table 10.1, what is
the change in the second cycle
of spending resulting from the
higher initial investment?
$65
$1,625
$325
→ $260
10-12. Assuming an upward-sloping aggregate
supply curve, when aggregate demand decreases,
unemployment:
Decreases and the price level decreases.
→ Increases and the price level decreases.
Decreases and the price level increases.
Increases and the price level increases.
10-14. Assume the equilibrium level of output is less
than full employment. To achieve a full-employment
equilibrium the aggregate demand curve must shift to
the right by:
The amount of the recessionary GDP gap.
An amount less than the recessionary GDP gap
because the spending increase causes the multiplier
process to occur.
→ An amount greater than the recessionary GDP gap
because the spending increase raises the price level.
10-17. In Table 10.1, what will be
the total increase in aggregate
10-16. In Table 10.1, what is the change demand resulting from the initial
in the third cycle of spending resulting $325 increase in investment
from the higher initial investment?
expenditure after an infinite number
$50
of cycles?
→$208
$1.040
$325
→$1,625
$585
$3,965
$325
10-12. When aggregate demand decreases, the new
macro equilibrium will occur to the left and below
the old equilibrium, resulting in a higher level of
unemployment and a lower price level.
10-11. The new macro equilibrium will be where
the AS curve intersects the new AD curve which will
be to the left and below the old intersection. The
decrease in price will somewhat offset the decrease
in AD, therefore output will fall by less than $400
billion.
10-14. When AD increases, some the extra spending
goes toward paying higher prices. Therefore, the
AD shift must shift to the right by an amount larger
than the recessionary GDP gap. The shift must be
the horizontal distance between the initial AD and
the AD that leads to full employment, not the
diagonal distance along the AS curve.
10-13. A decrease in AD leads to a new macro
equilibrium with less output, so cyclical
unemployment will increase from its existing level.
10-17. With an MPC of 0.8, the
$325 in additional income results
in a $260 increase in spending in
the second round because 0.8
times $325 is $260.
10-16. With an MPC of 0.8, the $260
in additional income results in a $208
increase in spending in the third
round because 0.8 times $260 is
$208.
10-15. The total change in
spending after an infinite number
of cycles can be found by taking the
multiplier, which is 1 ÷ (1 - 0.80)
and multiplying it by the initial
change of $325 which is equal to
$1625.
10-18. In Figure 10.1, which of the following could
cause a shift from AD0 to AD1, ceteris paribus?
→ A decrease in investment
An increase in exports
An increase in consumer confidence
An increase in consumption
10-19. In Figure 10.1, suppose this economy is in
equilibrium at Point a and that QF represents full
employment output. Which of the following
statements is true?
The economy is experiencing serious inflation
problems.
→ There is no GDP gap.
Inventories are accumulating.
Inventories are falling
10-20. Suppose the MPC in the economy in Figure
10.2 equals 0.8 and the shift from AD0 to AD1 was
caused by a decrease in investment of $30 billion.
What will the total decrease in aggregate demand
be (i.e., AD0 to AD2) as a result of the initial $30
billion decrease?
$37.5 billion
$130 billion
→ $150 billion
$240 billion
10-18. A drop in spending such as a fall in
consumption or investment would cause AD to
decrease.
10-19. At point a, macro equilibrium corresponds
to the full-employment level of output so there is
neither a recessionary or inflationary GDP gap.
10-20. The total change in spending after an infinite
number of cycles can be found by taking the
multiplier, which is 1 ÷ (1 - MPC) and multiplying it
by the initial change of $30 billion which is equal to
$150.