award: 0.00 points award: 0.00 points According to the Keynesian view of the macro economy, which of the following is always true at equilibrium? → Aggregate supply equals aggregate demand. The economy is at full employment. The price level is stable. The price level is too low. Equilibrium means a balance of supply and demand, though this may be achieved below, above, or at full-employment output. Multiple Choice Difficulty: 1 Easy Learning Objective: 10-01 The sources of circular flow leakages and injections. A leakage is An export from the economy. A decline in the capacity of the economy to produce goods. → A diversion of income from spending on domestic output. A decrease in aggregate supply. Saving, imports, and taxes are leakages because they are money earned but not spent by the households on domestic output. Multiple Choice Difficulty: 1 Easy Learning Objective: 10-01 The sources of circular flow leakages and injections. Assignment Print View http://ezto.mhecloud.mcgraw-hill.com/hm.tpx 1 of 18 11/5/2013 2:51 PM
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According to the Keynesian view of the macro economy, which of the following is always true at equilibrium?
→ Aggregate supply equals aggregate demand.
The economy is at full employment.
The price level is stable.
The price level is too low.
Equilibrium means a balance of supply and demand, though this may be achieved below, above, or atfull-employment output.
The disposable income consumers receive is equal to about what percentage of total income?
30 percent.
50 percent.
→ 70 percent.
95 percent.
Taxes by the federal, state, and local government, as well as business saving, which together are about 30 percent,are leakages because they are not spent by households.
→ Taxes by governments and income held back as saving by businesses.
Taxes by governments along with imports.
Employers withhold funds from employee's paychecks to pay income taxes, and businesses retain some of the profitsthey earn from the sale of goods for future investment, which causes disposable income to be less than total incomeor GDP.
When leakages are greater than injections, a greater amount of funds are diverted from spending than actuallyreturned to the circular flow model; this results in the economy contracting.
When injections are greater than leakages, a greater amount of funds is entering the circular flow than being divertedfrom households, thereby causing production to rise and unemployment to fall.
If the MPC = 0.80, the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be
$150.
$187.5.
$500.
→ $750.
One can determine the total change in spending by multiplying the initial change in spending by the multiplier, wherethe multiplier is equal to 1 ÷ (1 - MPC).
Multiple Choice Difficulty: 2 MediumLearning Objective: 10-02 What themultiplier is and how it works.
The value of the multiplier will be larger, the
→ Smaller the slope of the savings function.
Smaller the APC.
Larger the slope of the savings function.
Smaller the APS.
Since MPS represents a leakage, the lower the proportion of income saved, the greater the multiplier will be.
Multiple Choice Difficulty: 2 MediumLearning Objective: 10-02 What themultiplier is and how it works.
To illustrate the ultimate impact of the multiplier process when investment spending falls, we should
Shift the AD curve rightward once.
→ Shift the AD curve leftward twice, once for the autonomous change and second for the multiplier effect.
Shift the AD curve leftward and then rightward.
Shift the AD curve leftward and then shift the AS curve leftward.
The first shift represents the initial drop in spending, and the second shift represents the cumulative drops inspending that result due to the multiplier.
If aggregate demand shifts to the left by $400 billion and aggregate supply is upward-sloping, then real output willdecrease 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.
The new macro equilibrium will be where the AS curve intersects the new AD curve, which will be to the left of andbelow the old intersection. The decrease in price will somewhat offset the decrease in AD; therefore output will fall byless than $400 billion.
An economy with no government and no foreign trade tends to move toward equilibrium GDP because at output levelsgreater than equilibrium GDP, inventories are
→ Increasing, and actual investment exceeds desired investment.
Increasing, and actual investment is less than desired investment.
Decreasing, and actual investment exceeds desired investment.
Decreasing, and actual investment is less than desired investment.
The macro equilibrium will be achieved when saving and investment are equal and there will be no undesiredchanges to inventories.
Assume a decrease in interest rates causes an initial increase in desired investment and aggregate demand. Additionalincreases in aggregate demand will
Be caused by multiplier-induced increases in autonomous investment.
→ Be caused by increases in induced expenditures.
Be insignificant compared to the initial increase.
Not occur.
The increase in investment spending leads to higher income, which in turn spurs more spending.
Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion. If AD shifts to the leftby $10 billion,
→ Real output will fall by less than $10 billion.
Real output will fall by $10 billion.
The inflationary gap will be eliminated.
A recessionary gap will be created.
The AD curve shifts to the left, but the new macro equilibrium will occur at a lower price level. So there will still be aninflationary GDP gap, though it will be smaller.
If business inventories decrease below desired levels, then it is likely that a
Higher level of unemployment will result.
Lower level of output will occur.
→ Higher price level will occur.
Recessionary gap will occur.
When inventories are below desired levels, production will be increased to restore inventories, and the new macroequilibrium will be to the right of and above the old macro equilibrium.
Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy andthe marginal propensity to consume is 0.80. Complete Table 10.1 by calculating the spending cycles as the increasedinvestment spending works its way through the economy.
In Table 10.1, what is the cumulative increase in expenditure by the end of the second cycle?
→ $585.
$390.
$260.
$65.
The cumulative impact includes the $325 from the first round and the $260 from the second round, which total to$585.
Multiple Choice Difficulty: 2 MediumLearning Objective: 10-02 What themultiplier is and how it works.
Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy andthe marginal propensity to consume is 0.80. Complete Table 10.1 by calculating the spending cycles as the increasedinvestment spending works its way through the economy.
In Table 10.1, what is the change in the third cycle of spending resulting from the higher initial investment?
$50.
→ $208.
$325.
$585.
With an MPC of 0.8, the $260 in additional income results in a $208 increase in spending in the third round because0.8 times $260 is $208.
Multiple Choice Difficulty: 2 MediumLearning Objective: 10-02 What themultiplier is and how it works.
Suppose lower expectations lead to a decrease of $240 in desired investment in the economy and the marginalpropensity to consume is 0.75. Complete Table 10.2 by calculating the spending cycles as the impact of the decreasedinvestment spending works its way through the economy.
In Table 10.2, what is the cumulative decrease in expenditure by the end of the second cycle?
-$960.00.
-$180.00.
-$480.00.
→ -$420.00.
The cumulative impact includes the -$240 from the first round and the -$180 from the second round, which total to-$420.
Multiple Choice Difficulty: 2 MediumLearning Objective: 10-02 What themultiplier is and how it works.
Suppose that as a result of expectations of lower sales in the future, a decrease in autonomous business investmentcauses aggregate demand to shift from AD
0 to AD
1 as shown in Figure 10.1. Which of the following statements is true?
According to Keynesian theory, the economy will quickly adjust back to full employment.
→ According to Keynesian theory, additional decreases in aggregate demand will occur.
In the absence of any additional decreases in investment, the equilibrium will remain at Q1 indefinitely.
The GDP gap will be eliminated by the multiplier.
Additional decreases in AD will occur because the initial fall in spending leads to a multiplier effect in which spendingfalls further in additional cycles.
Suppose the MPC in the economy in Figure 10.2 equals 0.5 and the shift from AD0 to AD
1 was caused by a decrease in
consumption of $12 billion. What will the total decrease in aggregate demand be (for example, AD0 to AD
2) as a result
of the initial $12 billion decrease?
$12 billion because there are no multiplier effects associated with a change in consumption.
$600 billion.
→ $24 billion.
$60 billion.
The total change in aggregate demand after an infinite number of cycles can be found by taking the multiplier, whichis 1 ÷ (1 - MPC), and multiplying it by the initial change of $12 billion, which is equal to $24 billion. It is very importantto note that even though the AD curve shifts horizontally by $24 billion, total expenditure declines by less than$24billion due to the decrease in price level from the upward-sloping AS curve.
Multiple Choice Difficulty: 2 MediumLearning Objective: 10-02 What themultiplier is and how it works.
Refer to Figure 10.3. If full-employment GDP is $600 billion and the economy is on AD1,
A recessionary gap exists, and AD must increase by less than $100 billion to eliminate it.
→ A recessionary gap exists, and AD must increase by more than $100 billion to eliminate it.
An inflationary gap exists, and AD must increase by $100 billion to eliminate it.
An inflationary gap exists, and AD must increase by more than $100 billion to eliminate it.
The GDP gap can be closed, but it will require more than a $100 billion increase to eliminate it; this is because whenthe AS slopes upward, the new equilibrium will be higher and to the right, not horizontally to the right.
One In the News article titled "Job Losses Surge as U.S. Downturn Accelerates" states that in the next few months thenatural rate of unemployment may rise as high as
5 percent.
6 percent.
7 percent.
→ 8 percent.
12 states experienced an increase of at least two percentage points in 2008, including Florida, Idaho, North Carolina,and Illinois. Many economists thought at the time that the natural rate of unemployment might rise to 8 percent.
