The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.
total spending; real GDP; the price level
The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by
the level of aggregate expenditure.
A decrease in consumer confidence can put your job at risk if
aggregate expenditures fall.
Household spending on goods and services is known as
consumption spending.
The aggregate expenditure model focuses on the ________ relationship between real spending and ________.
short-run; real GDP
Which is the largest component of aggregate expenditure?
consumption expenditures
A decrease in Social Security payments will
decrease consumption spending.
The marginal propensity to consume is defined as
the change in consumption divided by the change in disposable income.
If firms are more optimistic that future profits will rise and remain strong for the next few years, then
investment spending will rise.
Refer to Figure 11-1. At point L in the figure above, which of the following is true?
Actual inventories are greater than planned inventories.
Which of the following leads to a decrease real GDP?
an increase in interest rates
Refer to Figure 11-3. Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP?
$100 million
Autonomous expenditure is a type of expenditure that does not depend on
GDP.
If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then
the MPC is 0.8.
A general formula for the multiplier is
1 / (1 - MPC)
Refer to Figure 11-2. If the U.S. economy is currently at point K, which of the following could cause it to move to point N?
Household wealth declines.
The aggregate demand curve illustrates the relationship between ________ and the ________, holding constant all other factors that affect aggregate expenditure.
the price level; quantity of planned aggregate expenditure
If firms reduce the rate at which inventories are rising,
firms are less likely to reduce production when sales fall.
A decrease in aggregate expenditure has what result on equilibrium GDP?
Equilibrium GDP falls.
Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP?
C = 1,000 + 0.8Y
I = 1,500
G=1,250
NX = 100
$19,250
Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume?
C = 1,500 + (MPC)Y
I = 1,000
G = 2,000
NX = -200
0.8
U.S. net export spending rises when
the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.
The difference between GDP and disposable income is
net taxes.
Investment spending will increase when
business cash flow increases.
Investment spending ________ during a recession, and ________ during an expansion.
declines; increases
Which of the following is true?
National income = Consumption + Savings + Taxes
If the marginal propensity to consume is 0.75, the marginal propensity to save is
0.25.
Which of the following will raise consumer expenditures?
an increase in expected future income
Aggregate expenditure includes spending on
C + I + G + NX
Refer to Figure 11-1. According to the figure above, at what point is aggregate expenditure greater than GDP?
J
The static aggregate demand and aggregate supply curve model helps explain
short term fluctuations in real GDP and the price level.
The aggregate demand curve shows the relationship between the ________ and ________.
price level; quantity of real GDP demanded
Which of the following best describes the "wealth effect"?
When the price level falls, the real value of household wealth rises.
When the price level in the United States rises relative to the price level of other countries, ________ will rise, ________ will fall, and ________ will fall.
imports; exports; net exports
The international trade effect states that
an increase in the price level will lower net exports.
Inflation will
...
If the U.S. dollar increases in value relative to other currencies, how does this affect the aggregate demand curve?
This will shift the aggregate demand curve to the left.
The level of long-run aggregate supply is not affected by
changes in the price level.
The level of real GDP in the long run is called
potential GDP.
The long-run aggregate supply curve
is vertical.
Potential GDP is also referred to as
full-employment GDP.
What is potential GDP?
the level of real GDP in the long run
On the long-run aggregate supply curve,
an increase in the price level has no effect on the aggregate quantity of GDP supplied.
Changes in the price level
do not affect the level of aggregate supply in the long run.
The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve?
It shifted the short-run aggregate supply curve to the right.
Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result, this should
...
Which of the following would cause the short-run aggregate supply curve to shift to the right?
a technological advance
Long-run macroeconomic equilibrium occurs when
aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve.
A decrease in aggregate demand results in a(n) ________ in the ________.
recession; short run
Short-run macroeconomic equilibrium occurs when
...
An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?
The price level will rise, and the level of GDP will be unaffected.
Refer to Figure 12-1. Which of the points in the above graph are possible long-run equilibria?
A and C
Refer to Figure 12-1. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP.
B and D
Refer to Figure 12-1. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?
A
The long-run adjustment to a negative supply shock results in
the short-run aggregate supply curve shifting to the right.
Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?
Aggregate demand and potential real GDP decrease continuously.
Refer to Figure 12-2. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2?
10%
Refer to Figure 12-2. Given the economy is at point A in year 1, What will happen to the unemployment rate in year 2?
It will rise.
In the dynamic aggregated demand and aggregate supply model, inflation occurs if
AD shifts faster than AS
In the early 2000s, oil shocks have been less likely to push the U.S. economy into recession than in the past. Which of the following can explain that?
Increases in oil prices have occurred more abruptly recently.
Money is
an asset that people are willing to accept in exchange for goods and services.
A barter economy is an economy where
goods and services are exchanged for other goods and services.
A major source of inefficiency in barter economies is that they require
a double coincidence of wants in exchange.
By making exchange ________, money allows for ________ and higher ________.
easier; specialization; productivity
When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves as a
medium of exchange.
Which of the following is the most liquid asset?
money
Liquidity is defined as
the ease with which a given asset can be converted to a medium of exchange.
M1 includes
currency in circulation, checking account deposits in banks, and holdings of traveler's checks.
In the United States, currency includes
paper money and coins in circulation.
________ is the profit made by the government from issuing fiat money.
Seigniorage
A person's wealth
equals the value the person's assets minus his or her liabilities.
If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially
decrease M1 and not change M2.
Assets are
something owned by or owed to a firm.
Liabilities are
something a firm owes to someone else.
A bank's largest liability is its
deposits of its customers.
Net worth is
the difference between a firm's assets and liabilities.
A bank holds its reserves as ________ and ________
vault cash; deposits at the Federal Reserve
Suppose the reserve ratio is RR. Then,
required reserves = RR � deposits.
A commercial bank like Wachovia creates money by
making loans.
If the required reserve ratio is RR, the simple deposit multiplier is defined as
1 / (RR)
A central bank can help stop a bank panic by
acting as a lender of last resort.
Which of the following is not a major function of the Federal Reserve System?
setting income tax rates
The primary tool the Federal Reserve uses to increase the money supply is
The primary tool the Federal Reserve uses to increase the money supply is
Which policy tool allows the Federal Reserve the greatest control over monetary policy?
open market operations
Lowering the discount rate will
increase reserves, encourage banks to make more loans, and increase the money supply.
If the Fed buys U.S. Treasury securities, then this
increases reserves, encourages banks to make more loans, and increases the money supply.
If the Fed lowers the reserve requirement, then this
increases excess reserves, encourages banks to make more loans, and increases the money supply.
The quantity theory of money assumes that
the velocity of money is constant.
The quantity equation states that
M � V = P � Y.
The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals The quantity theory of money implies that the price level will be stable (no inflation or deflation) when
the growth rate of real GDP.