Ch 11 economics

Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector’s budget shows a surplus:

planned investment must exceed savings

In an effort to stop the U.S. recession of 2007-2009, the federal government

reduced taxes and increased government spending

If government spends $80 billion at each level of GDP, and imposes a lump-sum tax of $100

equilibrium GDP will now be 350

It is true that

equal increases in government spending and taxes increase the equilibrium GDP

If gross investment is $10 at all levels of GDP, the equilibrium GDP will be

220

Unintended changes in inventories

bring actual investment and saving into equality at all levels of GDP

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of

an increase in the MPC

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to

increase by $45 billion

If an unintended increase in business inventories occurs at some level of GDP, then GDP

is too high for equilibrium

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be

38 million

Exports have the same effect on the current size of GDP as

investment

Equal increases in government purchases and taxes will

increase the equilibrium GDP and the size of that increase is independent of the size of the MPC

If the economy was closed to international trade, the equilibrium GDP and the multiplier would be

$350 and 5

Classical macroeconomics was dealt severe blows by

the Great Depression and Keynes’s macroeconomic theory

In The General Theory of Employment, Interest, and Money

John Maynard Keynes attacked the classical economist’s contention that recession or depression will automatically cure itself

Answer the question on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars.
C = 60 + .6Y
I = I0 = 30

30

A recessionary expenditure gap is

the amount by which the full-employment GDP exceeds the level of aggregate expenditures

Assume the saving schedule for a private closed economy is S = -20 + .2Y, where S is saving and Y is gross domestic product. The multiplier for this economy is

5

An upward shift of the aggregate expenditures schedule might be caused by

a decrease in imports, with no change in exports

If gross investment is Ig1, the equilibrium GDP and the level of consumption will be

h and hf respectively

Other things equal, an interest rate increase will

leave curve A in place but shift curve B downward

Curve A:

is an investment demand curve and curve B is an investment schedule. and curve B are totally unrelated.

The marginal propensity to consume is

fe/de

Aggregate saving in this economy will be zero when

GDP is 60 billion

Gross investment

is independent of the level of GDP

At the $200 level of GDP

consumption is $200 and planned investment is $50 so that aggregate expenditures are $250

f net exports are Xn2, the GDP in the open economy will exceed GDP in the closed economy by

bd

Other things equal, an interest rate reduction coupled with a rightward shift in curve A will

shift curve B upward

If the full-employment real GDP is $70, the

recessionary and inflationary expenditure gaps are both $0

Actual investment is $62 billion at an equilibrium output level of $620 billion in a private closed economy. The average propensity to save at this level of output is

0.10

If government desired to raise the equilibrium GDP to $650, it could

raise G by $30 or reduce T by $40

In equilibrium saving will be

$80

Actual investment equals savingat all levels of GDP

at all levels of GDP

The equation representing the investment schedule for the economy is

I = 30 + .1Y.

where S is saving, Ig is gross investment, i is the real interest rate, and Y is GDP

$65

In this economy, a 3 percentage point decrease in the interest rate will

increase equilibrium GDP by $100

If the real interest rate is 10 percent, the equilibrium GDP will be

$300

If net exports are positive

aggregate expenditures are greater at each level of GDP than when net exports are zero or negative

If aggregate expenditures exceed GDP in a private closed economy

planned investment will exceed saving

in the aggregate expenditures model, a reduction in taxes may

increase saving

In which of the following situations for a mixed open economy will the level of GDP expand

When Ig + X + G exceeds Sa + M + T.

Which of the following statements concerning the equilibrium level of GDP is incorrect

Full employment will necessarily be realized

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

The great depression

Which of the following would reduce GDP by the greatest amount?

A $20 billion decrease in government spending

Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is .5. Aggregate expenditures must have increased by

$50 billion

Which of the following statements is correct for a private closed economy?

Saving equals planned investment only at the equilibrium level of GDP.

At the equilibrium level of GDP, the APC and APS

are 5/6 and 1/6 respectively

Other things equal, curve B will shift upward when

curve A shifts to the right

At the $300 level of GDP

aggregate expenditures and GDP are equal

All else equal, a large decline in the real interest rate will shift the

investment schedule upward

In equilibrium, the level of saving will be:

$10

A recessionary expenditure gap exists if

the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP

(Advanced analysis) Answer the question on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars.
C = 60 + .6Y
I = I0 = 30

225

A private closed economy includes:

households and businesses, but not government or international trade

If net exports decline from zero to some negative amount, the aggregate expenditures schedule would

shift downward

The data suggest that:

the interest rate and the equilibrium GDP are inversely related

If the dollar appreciates relative to foreign currencies, we would expect

a country’s net exports to fall.

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion

GDP will remain at $400 billion unless aggregate expenditures change

In a mixed open economy, the equilibrium GDP exists where

Ca + Ig + Xn + G = GDP

Suppose the economy is operating at its full-employment-noninflationary GDP and the MPC is .75. The federal government now finds that it must increase spending on military goods by $21 billion in response to deterioration in the international political situation. To sustain full-employment-noninflationary GDP, government must:

increase taxes by $28 billion

Which of the following would increase GDP by the greatest amount?

A $20 billion increase in government spending

It is true that:

equal increases in government spending and taxes increase the equilibrium GDP.

In a mixed open economy, the equilibrium GDP is determined at that point where:

Sa + M + T = Ig + X + G.

The after-tax MPC in the economy shown is

.67

Other things equal, an interest rate decrease will

leave curve A in place but shift curve B upward

The multiplier is

3

At the equilibrium level of GDP, investment and saving are both

$50

In equilibrium, consumption will be

$320

An exchange rate:

is the price that the currencies of any two nations exchange for one another

The equilibrium GDP will be

$400

The equilibrium level of income (Y) is

225

If a lump-sum tax of $40 billion is imposed and the MPC is .6, the saving schedule will shift

downward by $16 billion.

If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is

$20 billion below the full-employment GDP

If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion, then

the MPC for this economy is .8.

If the multiplier in an economy is 5, a $20 billion increase in net exports will

increase GDP by $100 billion.

The equilibrium level of GDP is associated with

no unintended changes in inventories

Planned investment plus unintended increases in inventories equals

actual investment

Saving is always equal to

actual investment.

The U.S. recession of 2007-2009 provides a good example of:

a recessionary expenditure gap

The mpc and mps are

both .5

The sizes of the multipliers associated with changes in investment and government spending in this economy are

both 2.5

If the full-employment real GDP is $100, the

recessionary expenditure gap is $10

An increase in net exports of $10 would

increase real GDP by $30

he equation representing the investment schedule for the economy is

I = 30 + .1Y.

Which two aggregate expenditure schedules AE in the diagram for a private closed economy have the same MPC, assuming investment is the same at each level of income?

I = 30 + .1Y.

In The General Theory of Employment, Interest, and Money:

John Maynard Keynes attacked the classical economist’s contention that recession or depression will automatically cure itself

The equilibrium GDP will be:

$400

Given that the interest rate is 10 (percent), the amount that businesses will want to invest will be:

$40

If S = -60 + .25Y and Ig = 60, where S is saving, Ig is gross investment, and Y is gross domestic product (GDP), then the equilibrium level of GDP is:

$480

At the equilibrium GDP for a private open economy:

net exports may be either positive or negative.

Assume in a private closed economy that the equilibrium level of income is $380 and the MPS is .25. Now suppose government collects taxes of $50 and spends the entire amount. As a result:

the equilibrium level of income will rise to $430.

At the $370 billion level of DI, the APS is approximately

4%

If the MPC in an economy is .9, a $1 billion increase in government spending will ultimately increase consumption by

$9 billion

In a mixed open economy, the equilibrium GDP exists where:

Ca + Ig + Xn + G = GDP.

If gross investment is $10 at all levels of GDP, the equilibrium GDP will be:

@220

The level of aggregate expenditures in a mixed open economy is comprised of

Ca + Ig + Xn + G.

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from

a rapid decline in investment spending

At the $200 level of GDP:

consumption is $200 and planned investment is $50 so that aggregate expenditures are $250

If the full-employment level of GDP is B and aggregate expenditures are at AE2, the

economy is in equilibrium, at full employment.

The equation representing the consumption schedule for the economy is

C = 60 + .6Y.

A lump-sum tax causes the after-tax consumption schedule

to be parallel to the before-tax consumption schedule.

Which aggregate expenditure schedule AE in the diagram for a private closed economy implies the largest MPC, assuming investment is the same at each level of income?

AE4.

Other things equal, an increase in an economy’s exports will

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

In which of the following situations for a mixed open economy will the level of GDP expand?

When Ig + X + G exceeds Sa + M + T.

The MPC and MPS are:

.5

In this economy, investment

is $40 billion at all levels of GDP.

The location of curve B depends on the

interest rate together with the location of curve A.

In equilibrium, saving is:

30

This nation is incurring

A TRADE DEFICIT

Equilibrium Y (= GDP) is:

300

The equilibrium GDP for the open economy is

400

At equilibrium real GDP in a private closed economy:

aggregate expenditures and real GDP are equal.

The multiplier in this economy is

2.5

If an additional lump-sum tax of $20 were imposed, we would expect:

equilibrium GDP to fall by $30

If the marginal propensity to consume is .9 in a private closed economy, a $20 billion decline in investment spending will decrease:

saving by 20$

If government now spends $80 billion at each level of GDP and taxes remain at zero, the equilibrium GDP

will rise to $500.

What do investment and government expenditures have in common?

Both represent injections to the circular flow

Investment and saving are, respectively

injections and leakage

In an aggregate expenditures diagram, a lump-sum tax (T) will

shift the C + Ig + Xn line downward by an amount equal to T × MPC.

The effect of imposing a lump-sum tax is to

reduce the absolute levels of consumption and saving at each level of GDP but to not change the size of the multiplier

In a mixed open economy, which of the following all affect the equilibrium GDP in the same direction?

Sa, T, and M.

The $400 level of GDP is

…

If the full-employment level of GDP is B and aggregate expenditures are at AE3, the

…

The upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects

…

a large decline in the real interest rate will shift the

…

In equilibrium, the level of consumption spending will be

…

In equilibrium, the level of consumption will be

…

If an unintended increase in business inventories occurs

…

If at some level of GDP the economy is experiencing an unintended decrease in inventories:

…

The multiplier for this economy is

…

Taxes represent

…

Which of the following statements is incorrect

…

In a private closed economy, when aggregate expenditures equal GDP

…