 (ECON 203-502) Homework #4
 Due: April 29th 2013
 Name:
(UIN:
)
<Chapter 12>
1) All of the following are one of the four main categories of spending identified by John
Maynard Keynes except
A) consumption
B) net exports
C) government purchases
D) taxes
2) Actual investment spending does not include
A) spending on consumer durable goods.
B) spending on new capital equipment.
C) spending on new houses.
D) changes in inventories.
3) An unplanned increase in inventories results from
A) an increase in planned investment.
B) a decrease in planned investment.
C) actual investment that is greater than planned investment.
D) actual investment that is less than planned investment.
4) Consumption is $5 million, planned investment spending is $8 million, government purchases
are $10 million, and net exports are equal to $2 million. If GDP during that same time period is
equal to $27 million, what unplanned changes in inventories occurred?
A) There was an unplanned increase in inventories equal to $2 million.
B) There was no unplanned change in inventories.
C) There was an unplanned decrease in inventories equal to $2 million.
D) There was an unplanned decrease in inventories equal to $19 million.
5) When aggregate expenditure is more than GDP, which of the following is true?
A) There was an unplanned decrease in inventories.
B) Firms spent less on capital goods than they planned.
C) Households bought fewer new homes than they planned.
D) All of the above must be true when aggregate expenditure is more than GDP.
6) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic
equilibrium?
A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.
7) If economists forecast a decrease in aggregate expenditure, which of the following is likely to
occur?
A) GDP will rise.
B) GDP will fall.
C) Wages will rise.
D) Inventories will fall.
8) ________ is defined as the value of a household's assets minus the value of its liabilities.
A) Household income
B) Household wealth
C) Personal household consumption
D) Planned household investment
9) A stock market boom which causes stock prices to rise should cause
A) a decrease in consumption spending.
B) an increase in consumption spending.
C) a decrease in wealth.
D) a decrease in net export spending.
10) Decreases in the price level will
A) lower consumption because goods and services are less affordable.
B) raise consumption because goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.
11) ________ describes the relationship between consumption spending and disposable income.
A) Household wealth
B) The liquidity trap
C) The consumption function
D) The paradox of thrift
12) If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope
of the consumption function is
A) 1.20.
B) 0.80.
C) 0.70.
D) 0.10.
Table 1
Consumption
(dollars)
$1,200
2,100
3,000
Disposable Income
(dollars)
$3,000
4,000
5,000
13) Refer to Table 1. Given the consumption schedule in the table above, the marginal
propensity to consume is
A) 0.1.
B) 0.3.
C) 0.6.
D) 0.9.
14) When we graph consumption as a function of ________ rather than as a function of
disposable income, the slope of this consumption function is ________.
A) national income; the MPC
B) personal income; (MPC - MPS)
C) national income; the MPS
D) personal income; the MPS
15) Investment spending ________ during a recession, and ________ during an expansion.
A) declines; increases
B) increases; declines
C) increases; increases
D) declines; declines
16) If firms are more optimistic that future profits will rise and remain strong for the next few
years, then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
17) During a(n) ________ many firms experience increased profits, which increases ________
and investment spending.
A) expansion; government spending
B) recession; cash flow
C) expansion; cash flow
D) recession; business confidence
18) U.S. net export spending rises when
A) the price level in the United States rises relative to the price level in other countries.
B) the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.
C) the value of the U.S. dollar increases relative to other currencies.
D) the inflation rate is higher in the United States relative to other countries.
19) Which of the following will decrease aggregate expenditure in the United States?
A) a decrease in the value of the dollar
B) a decrease in the price level
C) a decrease in interest rates
D) a decrease in government purchases
Figure 1
20) Refer to Figure 1. At point L in the figure above, which of the following is true?
A) Aggregate expenditure is greater than GDP.
B) The economy has achieved macroeconomic equilibrium.
C) Actual inventories are greater than planned inventories.
D) GDP will be increasing.
21) Refer to Figure 1. If the economy is at point L, what will happen?
A) Inventories have fallen below their desired level, and firms decrease production.
B) Inventories have fallen below their desired level, and firms increase production.
C) Inventories have risen above their desired level, and firms decrease production.
D) Inventories have risen above their desired level, and firms increase production.
22) How does a decrease in government spending affect the aggregate expenditure line?
A) It shifts the aggregate expenditure line upward.
B) It shifts the aggregate expenditure line downward.
C) It increases the slope of the aggregate expenditure line.
D) It decreases the slope of the aggregate expenditure line.
Figure 2
23) Refer to Figure 2. If the U.S. economy is currently at point K, which of the following could
cause it to move to point N?
A) The price level in the United States rises relative to the price level in other countries.
B) Congress passes investment tax incentives.
C) The interest rate rises.
D) Household wealth declines.
24) Which of the following is a true statement about the multiplier?
A) The multiplier rises as the MPC rises.
B) The smaller the MPC, the larger the multiplier.
C) The multiplier is a value between zero and one.
D) The multiplier effect does not occur when autonomous expenditure decreases.
25) Which of the following is a reason why decreases in the price level result in a rise in
aggregate expenditure?
A) Price level decreases cause firms and consumers to hold less money, which lowers the interest
rate. Lower interest rates raise consumption and planned investment expenditures, which raises
aggregate expenditure.
B) Price level decreases reduce real wealth, which causes consumption spending and aggregate
expenditure to rise.
C) As the price level falls, government spending rises, which raises aggregate expenditure.
D) Price level decreases in the United States relative to other countries lower net exports, which
raises aggregate expenditure.
<Chapter 13>
1) The basic aggregate demand and aggregate supply curve model helps explain
A) short term fluctuations in real GDP and the price level.
B) long term growth.
C) price fluctuations in an individual market.
D) output fluctuations in an individual market.
2) Which of the following best describes the "wealth effect"?
A) When the price level falls, the real value of household wealth falls.
B) When the price level falls, the nominal value of household wealth falls.
C) When the price level falls, the nominal value of household wealth rises.
D) When the price level falls, the real value of household wealth rises.
3) The "interest rate effect" can be described as an increase in the price level that raises the
interest rate and chokes off
A) government spending.
B) government spending and unplanned investment.
C) investment and consumption spending.
D) net exports.
4) Which of the following is one explanation as to why the aggregate demand curve slopes
downward?
A) Decreases in the price level raise the interest rate and increase consumption spending.
B) Decreases in the price level raise the interest rate and increase investment spending.
C) Decreases in the U.S. price level relative to the price level in other countries lower net
exports.
D) Decreases in the price level raise real wealth and increase consumption spending.
5) The recession of 2007-2009 made many consumers pessimistic about their future incomes.
How does this increased pessimism affect the aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
6) The recession of 2007-2009 made many consumers pessimistic about their future incomes.
How does this increased pessimism affect the aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
7) Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
A) an increase in interest rates
B) a decrease in disposable income
C) a decrease in expected profits for firms
D) an increase in net exports
8) Suppose the U.S. GDP growth rate is faster relative to other countries' GDP growth rates.
This will
A) move the economy up along a stationary aggregate demand curve.
B) move the economy down along a stationary aggregate demand curve.
C) shift the aggregate demand curve to the left.
D) shift the aggregate demand curve to the right.
9) How do lower taxes affect aggregate demand?
A) They increase disposable income, consumption, and aggregate demand.
B) They reduce disposable income, consumption, and aggregate demand.
C) they increase corporate investment and aggregate demand.
D) They increase aggregate supply and thus increase aggregate demand as well.
10) The level of aggregate supply in the long-run is not affected by
A) changes in technology.
B) changes in the capital stock.
C) changes in the price level.
D) changes in the number of workers.
11) The long-run aggregate supply curve
A) has a negative slope.
B) has a steep but positive slope.
C) is horizontal.
D) is vertical.
12) The long-run aggregate supply curve shows the relationship between the ________ and
________.
A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP supplied
D) price level; quantity of real GDP supplied
13) The short-run aggregate supply curve has a(n) ________ slope because as prices of
________ rise, prices of ________ rise more slowly.
A) positive; final goods and services; inputs
B) infinite; final goods and services; inputs
C) positive; inputs; final goods and services
D) infinite; inputs; final goods and services
14) All of the following are reasons why the wages of workers and the prices of inputs rise more
slowly than the prices of final goods and services except
A) unions are successful in pushing up wages.
B) firms are often slow to adjust wages.
C) contracts make prices and wages "sticky."
D) menu costs make some prices sticky.
15) An increase in the price level will
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
16) Workers expect inflation to rise from 3% to 5% next year. As a result, this should
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.
17) Which of the following would cause the short-run aggregate supply curve to shift to the
right?
A) an increase in the price level
B) a decrease in inflation expectations
C) a technological advance
D) an increase in interest rates
18) Suppose there has been an increase in investment.
the short run, and ________ in the long run.
A) increase; increases further
B) increase; decrease to its initial value
C) decrease; decrease further
D) decrease; increase to its initial level
As a result, real GDP will ________ in
19) Interest rates in the economy have fallen. How will this affect aggregate demand and
equilibrium in the short run?
A) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of
GDP will rise.
B) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of
GDP will rise.
C) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of
GDP will fall.
D) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of
GDP will fall.
20) The process of an economy adjusting from a recession back to potential GDP in the long run
without any government intervention is known as
A) monetary policy.
B) an automatic mechanism.
C) "releasing sticky prices."
D) fiscal policy.
Figure 3
21) Refer to Figure 3.
A) A and B
B) A and C
C) A and D
D) B and D
Which of the points in the above graph are possible long-run equilibria?
22) Refer to Figure 3. Suppose the economy is at point A. If investment spending increases
in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D
23) Refer to Figure 3. Suppose the economy is at point A. If the economy experiences a
supply shock, where will the eventual short-run equilibrium be?
A) A
B) B
C) C
D) D
24) A negative supply shock in the short run causes
A) the aggregate supply curve to shift to the left.
B) the price level to fall.
C) unemployment to fall.
D) equilibrium real GDP to rise.
25) When the price of oil rises unexpectedly, the equilibrium price level ________ and the
unemployment rate ________ in the short run.
A) rises; falls
B) rises; rises
C) falls; falls
D) falls; rises
26) Stagflation occurs when
A) inflation rises and GDP rises.
B) inflation falls and GDP rises.
C) inflation rises and GDP falls.
D) inflation falls and GDP falls.