Question 1

Which of the following is considered a leakage?

Accepted Answer

A) Business investment. 
B) Taxes. 
C) Spending on services. 
D) Exports. 
A) Business investment. 
B) Taxes. 
C) Spending on services. 
D) Exports.

Question 2

If injections exceed leakages,

Accepted Answer

A) Unemployment will rise. 
B) Prices will fall. 
C) The economy will expand. 
D) Disposable income will fall. 
A) Unemployment will rise. 
B) Prices will fall. 
C) The economy will expand. 
D) Disposable income will fall.

Question 3

Demand-pull inflation can develop when

Accepted Answer

A) There is a shortage of investment and investors bid up interest rates. 
B) Inventories shrink and consumers bid up prices. 
C) There is a surplus of resources and so wages are bid up by employers. 
D) Undesired investment occurs. 
A) There is a shortage of investment and investors bid up interest rates. 
B) Inventories shrink and consumers bid up prices. 
C) There is a surplus of resources and so wages are bid up by employers. 
D) Undesired investment occurs.

Question 4

An addition of spending to the circular flow of income is

Accepted Answer

A) An injection. 
B) A leakage. 
C) A surplus. 
D) Household taxes. 
A) An injection. 
B) A leakage. 
C) A surplus. 
D) Household taxes.

Question 5

Desired investment equals

Accepted Answer

A) Desired changes in business inventories. 
B) Purchases of new plants and equipment plus desired changes in business inventories. 
C) Desired investment plus undesired investment. 
D) Desired changes in business inventories less purchases of new plants and equipment. 
A) Desired changes in business inventories. 
B) Purchases of new plants and equipment plus desired changes in business inventories. 
C) Desired investment plus undesired investment. 
D) Desired changes in business inventories less purchases of new plants and equipment.

Question 6

When investment increases,there is usually no impact on household income.

Accepted Answer

A) True 
 B)False

Question 7

Assume there is no foreign trade,the government sector has a balanced budget,and the economy is in equilibrium.If actual investment is greater than desired investment,then it is most likely that

Accepted Answer

A) Saving plus government spending is greater than investment plus taxes. 
B) Saving plus taxes is greater than investment plus government spending. 
C) Investment plus taxes is greater than saving plus government spending. 
D) Investment plus government spending is greater than saving plus taxes. 
A) Saving plus government spending is greater than investment plus taxes. 
B) Saving plus taxes is greater than investment plus government spending. 
C) Investment plus taxes is greater than saving plus government spending. 
D) Investment plus government spending is greater than saving plus taxes.

Question 8

Refer to Figure 10.3.If full-employment GDP is $500 billion and the economy is on AD0,

Accepted Answer

A) An inflationary gap exists,and AD must decrease by less than $100 billion to eliminate it. 
B) A recessionary gap exists,and AD must increase by more than $100 billion to eliminate it. 
C) An inflationary gap exists,and AD must increase by $100 billion to eliminate it. 
D) An inflationary gap exists,and AD must decrease by more than $100 billion to eliminate it. 
A) An inflationary gap exists,and AD must decrease by less than $100 billion to eliminate it. 
B) A recessionary gap exists,and AD must increase by more than $100 billion to eliminate it. 
C) An inflationary gap exists,and AD must increase by $100 billion to eliminate it. 
D) An inflationary gap exists,and AD must decrease by more than $100 billion to eliminate it.

Question 9

At the full-employment level of GDP,the total value of goods demanded always equals the total value of goods supplied.

Accepted Answer

A) True 
 B)False

Question 10

The critical issue of macro instability,when there is no government intervention and no foreign trade,is whether

Accepted Answer

A) spending injections will equal spending leakage at full employment. 
B) Savings and taxes will be equal. 
C) Investment and consumption will exceed disposable income. 
D) Consumption and savings lead to the ideal interest rate. 
A) spending injections will equal spending leakage at full employment. 
B) Savings and taxes will be equal. 
C) Investment and consumption will exceed disposable income. 
D) Consumption and savings lead to the ideal interest rate.

Question 11

The critical issue for macro stability is whether spending injections will actually equal spending leakages at full employment.

Accepted Answer

A) True 
 B)False

Question 12

Refer to Figure 10.3.If autonomous investment spending drops by enough to shift the aggregate demand curve from AD1 to AD2,the multiplier effect is likely to

Accepted Answer

A) Create a second induced shift from AD2 to AD3. 
B) Create a second induced shift from AD2 to AD0. 
C) Have no effect on the AD curve. 
D) Create a second induced shift from AD2 back to AD1. 
A) Create a second induced shift from AD2 to AD3. 
B) Create a second induced shift from AD2 to AD0. 
C) Have no effect on the AD curve. 
D) Create a second induced shift from AD2 back to AD1.

Question 13

Which of the following can eliminate a recessionary GDP gap,ceteris paribus?

Accepted Answer

A) An increase in consumption expenditure. 
B) A decrease in investment. 
C) An increase in saving. 
D) A decrease in government spending. 
A) An increase in consumption expenditure. 
B) A decrease in investment. 
C) An increase in saving. 
D) A decrease in government spending.

Question 14

Which of the following is an example of the multiplier at work as a result of an increase in consumption expenditures?

Accepted Answer

A) Consumers compete with the government by increasing their expenditures,causing businesses to increase their investments to satisfy the increased demand. 
B) Consumption expenditures increase inflation,which reduces real incomes;consumer expenditures and investment decline,which reduces aggregate spending. 
C) Households and businesses receive income from consumption expenditures;they spend a portion of this new income;these expenditures,in turn,generate income for other businesses and households,which in turn spend a portion of the new income,and so on. 
D) Consumption expenditures stimulate investment in new plants and equipment to produce goods and services for the government,which provides fewer jobs and decreases incomes. 
A) Consumers compete with the government by increasing their expenditures,causing businesses to increase their investments to satisfy the increased demand. 
B) Consumption expenditures increase inflation,which reduces real incomes;consumer expenditures and investment decline,which reduces aggregate spending. 
C) Households and businesses receive income from consumption expenditures;they spend a portion of this new income;these expenditures,in turn,generate income for other businesses and households,which in turn spend a portion of the new income,and so on. 
D) Consumption expenditures stimulate investment in new plants and equipment to produce goods and services for the government,which provides fewer jobs and decreases incomes.

Question 15

Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80. Table 10.1
$\begin{array}{c}
\begin{array}{|l|}
\hline\
 \text {Spending Cycles}\
\hline \text {First-cycle}\
\text {spending}\
\hline \text {Second-cycle}\
\text {spending}\
\hline \text {Third-cycle}\
\text {spending}\
\hline  
\end{array}
\begin{array}{c|}
\hline \text {Change in this Cycle's Spending}\
\text { and Income}\
\hline\
\quad\quad\quad\quad\quad\quad\quad\quad \$ 325 \
\hline\
\
\hline\
\
\hline
\end{array}
\begin{array}{c|}
\hline \text {Cumulative Increase in Spending}\ 
\text {and Income}\
\hline\
\quad\quad\quad\quad\quad\quad\quad\quad \$325\
\hline\
\
\hline\
\
\hline
\end{array}
\end{array}$
 In Table 10.1,what will be the total increase in aggregate demand resulting from the initial $325 increase in investment expenditure after an infinite number of cycles?

Accepted Answer

A) $1,040. 
B) $1,625. 
C) $3,965. 
D) $325. 
A) $1,040. 
B) $1,625. 
C) $3,965. 
D) $325.

Question 16

In the short run,one reason why we do not define "full employment" as 0 percent unemployment is because

Accepted Answer

A) Of the direct relationship between unemployment and inflation. 
B) The closer the economy gets to capacity output,the greater the risk of inflation. 
C) Of the vertical aggregate supply curve. 
D) 0 percent unemployment is consistent with price stability. 
A) Of the direct relationship between unemployment and inflation. 
B) The closer the economy gets to capacity output,the greater the risk of inflation. 
C) Of the vertical aggregate supply curve. 
D) 0 percent unemployment is consistent with price stability.

Question 17

Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion.If aggregate demand increases by a total of $50 billion,

Accepted Answer

A) The recessionary GDP gap will be eliminated. 
B) The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output. 
C) The resulting equilibrium GDP will be greater than full-employment GDP because of demand-pull inflation. 
D) Cyclical unemployment will increase. 
A) The recessionary GDP gap will be eliminated. 
B) The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output. 
C) The resulting equilibrium GDP will be greater than full-employment GDP because of demand-pull inflation. 
D) Cyclical unemployment will increase.

Question 18

A decrease in sales expectations may shift the AD curve to the

Accepted Answer

A) Left,causing more undesired investment. 
B) Left,causing less undesired investment. 
C) Right,causing more undesired investment. 
D) Right,causing less undesired investment. 
A) Left,causing more undesired investment. 
B) Left,causing less undesired investment. 
C) Right,causing more undesired investment. 
D) Right,causing less undesired investment.

Question 19

If consumers increase saving during a recession,what will this do and why?

Accepted Answer

An increase in saving during a recession

Question 20

If consumers spend 90 cents out of every extra dollar received,the

Accepted Answer

A) MPS is 0.90. 
B) MPC is 0.90. 
C) Multiplier is 0.90. 
D) Multiplier is 9. 
A) MPS is 0.90. 
B) MPC is 0.90. 
C) Multiplier is 0.90. 
D) Multiplier is 9.

Exam 10: Self-Adjustment or Instability

Which of the following is considered a leakage?

If injections exceed leakages,

Demand-pull inflation can develop when

An addition of spending to the circular flow of income is

Desired investment equals

When investment increases,there is usually no impact on household income.

Assume there is no foreign trade,the government sector has a balanced budget,and the economy is in equilibrium.If actual investment is greater than desired investment,then it is most likely that

Refer to Figure 10.3.If full-employment GDP is $500 billion and the economy is on AD0,

At the full-employment level of GDP,the total value of goods demanded always equals the total value of goods supplied.

The critical issue of macro instability,when there is no government intervention and no foreign trade,is whether

The critical issue for macro stability is whether spending injections will actually equal spending leakages at full employment.

Refer to Figure 10.3.If autonomous investment spending drops by enough to shift the aggregate demand curve from AD1 to AD2,the multiplier effect is likely to

Which of the following can eliminate a recessionary GDP gap,ceteris paribus?

Which of the following is an example of the multiplier at work as a result of an increase in consumption expenditures?

In the short run,one reason why we do not define "full employment" as 0 percent unemployment is because

Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion.If aggregate demand increases by a total of $50 billion,

A decrease in sales expectations may shift the AD curve to the

If consumers increase saving during a recession,what will this do and why?

If consumers spend 90 cents out of every extra dollar received,the

Economics: the Core Issues

The Useconomy: a Global View

Supply and Demand

The Role of Government

National Income Accounting

Unemployment

Inflation

The Business Cycle

Aggregate Demand

Fiscal Policy

Deficits and Debt

Money and Banks

The Federal Reserve System

Monetary Policy

Supply-Side Policy: Short-Run Options

Growth and Productivity: Long-Run Possibilities

Theory Versus Reality

Consumer Choice

Elasticity

The Costs of Production

The Competitive Firm

Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

Natural Monopolies: Deregulation

Environmental Protection

The Farm Problem

The Labor Market

Labor Unions

Financial Markets

Taxes: Equity Versus Efficiency

Transfer Payments: Welfare and Social Security

International Trade

International Finance

Global Poverty

Filters

Refer to Figure 10.3.If full-employment GDP is $500 billion and the economy is on AD₀,

Refer to Figure 10.3.If autonomous investment spending drops by enough to shift the aggregate demand curve from AD₁ to AD₂,the multiplier effect is likely to