Question 1

In the aggregate demand model, changes in GDP in the short run can be caused by

Accepted Answer

A)  shifts in the aggregate demand schedule. 
B)  shocks to the price level. 
C)  a change in potential GDP. 
D)  all of the above. 
E)  a and b. 
A)  shifts in the aggregate demand schedule. 
B)  shocks to the price level. 
C)  a change in potential GDP. 
D)  all of the above. 
E)  a and b. E

Question 2

The general shape of an aggregate demand curve is

Accepted Answer

A)  downward sloping because of financial factors. 
B)  downward sloping because higher prices mean lower quantities demanded. 
C)  upward sloping because higher prices elicit greater output. 
D)  vertical because potential GDP is defined by capacity and labor availability. 
E)  a and b. 
A)  downward sloping because of financial factors. 
B)  downward sloping because higher prices mean lower quantities demanded. 
C)  upward sloping because higher prices elicit greater output. 
D)  vertical because potential GDP is defined by capacity and labor availability. 
E)  a and b. A

Question 3

Slack exists even in a vigorous U.S. economy because

Accepted Answer

A)  the average capacity utilization rate is 86 percent when the 5-6 percent natural rate of unemployment is achieved. 
B)  the average capacity utilization rate is 81 percent when the 4 percent natural rate of unemployment is achieved. 
C)  the average capacity utilization rate is 81 percent and the natural rate of unemployment is roughly 5-6 percent. 
D)  even though full employment corresponds to a low 4 percent unemployment rate, the average capacity utilization rate is only 81 percent. 
A)  the average capacity utilization rate is 86 percent when the 5-6 percent natural rate of unemployment is achieved. 
B)  the average capacity utilization rate is 81 percent when the 4 percent natural rate of unemployment is achieved. 
C)  the average capacity utilization rate is 81 percent and the natural rate of unemployment is roughly 5-6 percent. 
D)  even though full employment corresponds to a low 4 percent unemployment rate, the average capacity utilization rate is only 81 percent. C

Question 4

Macroeconomists generally believe that year-to-year fluctuations in real GDP around its trend are best thought of as

Accepted Answer

A)  variations in the economy's equilibrium rate of growth. 
B)  measurement error. 
C)  the sign of a healthy dynamic economy. 
D)  temporary departures from long-run equilibrium. 
E)  none of the above. 
A)  variations in the economy's equilibrium rate of growth. 
B)  measurement error. 
C)  the sign of a healthy dynamic economy. 
D)  temporary departures from long-run equilibrium. 
E)  none of the above.

Question 5

If the marginal propensity to consume were 0.9 and a constant 20 percent tax were applied to all income, then an increase in income of $10 would cause consumption expenditure to climb by

Accepted Answer

A)  72 percent. 
B)  $0.72. 
C)  $7.20. 
D)  $9.00. 
E)  $8.00. 
A)  72 percent. 
B)  $0.72. 
C)  $7.20. 
D)  $9.00. 
E)  $8.00.

Question 6

Consider a closed economy in which consumption is described by
C = 200 + 0.81 - t)Y. Let the tax rate t = 0.2 and I = 800, and assume an active government so that G = 1,200. If the government balances its budget in equilibrium by increasing the tax rate and decreasing its spending, then

Accepted Answer

A)  GDP climbs above $5,556. 
B)  GDP remains at $5,556. 
C)  GDP falls below $5,556. 
D)  GDP rises or falls depending on which policy is stronger. 
E)  consumption expenditure either rises or falls depending on whether or not the tax increase dominates the effect of climbing GDP. 
A)  GDP climbs above $5,556. 
B)  GDP remains at $5,556. 
C)  GDP falls below $5,556. 
D)  GDP rises or falls depending on which policy is stronger. 
E)  consumption expenditure either rises or falls depending on whether or not the tax increase dominates the effect of climbing GDP.

Question 7

In the macroeconomic model developed in the book to describe the short- term behavior of the economy in the short run,

Accepted Answer

A)  equilibrium must hold in product and labor markets. 
B)  the price level adjusts to clear goods markets. 
C)  output adjusts to spending disturbances. 
D)  all of the above. 
E)  a and b only. 
A)  equilibrium must hold in product and labor markets. 
B)  the price level adjusts to clear goods markets. 
C)  output adjusts to spending disturbances. 
D)  all of the above. 
E)  a and b only.

Question 8

Let a small closed economy consist of C = a + b1 - T)Y, T = T0, I = I0, and G = G0. The balanced budget multiplier for a balanced budget increase in government spending and autonomous taxes is

Accepted Answer

A)  1/[1 - b]. 
B)  -b/[1 - b]. 
C)  1/[1 + b]. 
D)  -b/[1 + b]. 
E)  1. 
A)  1/[1 - b]. 
B)  -b/[1 - b]. 
C)  1/[1 + b]. 
D)  -b/[1 + b]. 
E)  1.

Question 9

Of the many ways to measure GDP, the one used in the short-run aggregate demand model is

Accepted Answer

A)  total spending on goods and services. 
B)  total production of goods and services. 
C)  total income received by workers and firms. 
D)  total production net of depreciation on the factors of production. 
E)  all of the above; they are all equally useful in constructing a macro model. 
A)  total spending on goods and services. 
B)  total production of goods and services. 
C)  total income received by workers and firms. 
D)  total production net of depreciation on the factors of production. 
E)  all of the above; they are all equally useful in constructing a macro model.

Question 10

The short-run and long-run models used to analyze the dynamic behavior of the economy are

Accepted Answer

A)  identical in all respects. 
B)  different in terms of their treatment of the labor market. 
C)  merged by price adjustment in the medium run. 
D)  equally well suited to analyzing growth issues. 
E)  b and c. 
A)  identical in all respects. 
B)  different in terms of their treatment of the labor market. 
C)  merged by price adjustment in the medium run. 
D)  equally well suited to analyzing growth issues. 
E)  b and c.

Question 11

Consider a closed economy in which consumption is represented by

Accepted Answer

A)  GDP equals $5,556, consumption equals $3,756, and the government runs a surplus of $1,111. 
B)  GDP equals $5,556, disposable income equals $4,444, and private saving of $889 equals investment. 
C)  GDP equals $5,556, disposable income equals $4,444, and private saving of $889 net of the government deficit of $1,111 equals investment. 
D)  GDP equals $5,556, consumption equals $3,756, but investment exceeds total saving. 
E)  none of the above. 
A)  GDP equals $5,556, consumption equals $3,756, and the government runs a surplus of $1,111. 
B)  GDP equals $5,556, disposable income equals $4,444, and private saving of $889 equals investment. 
C)  GDP equals $5,556, disposable income equals $4,444, and private saving of $889 net of the government deficit of $1,111 equals investment. 
D)  GDP equals $5,556, consumption equals $3,756, but investment exceeds total saving. 
E)  none of the above.

Question 12

The marginal propensity to consume is

Accepted Answer

A)  the rate at which consumption increases as GDP increases. 
B)  the rate at which consumption increases as disposable income increases. 
C)  equal to 1 divided by the slope of the consumption function. 
D)  the rate at which tax revenue climbs as consumption increases. 
E)  none of the above. 
A)  the rate at which consumption increases as GDP increases. 
B)  the rate at which consumption increases as disposable income increases. 
C)  equal to 1 divided by the slope of the consumption function. 
D)  the rate at which tax revenue climbs as consumption increases. 
E)  none of the above.

Question 13

Suppose that taxes collected by the government could be represented by T = 100 + 0.2Y. If the marginal propensity to consume were 0.9, then an increase in GDP of $100 would cause consumption to

Accepted Answer

A)  increase by $172. 
B)  fall by $20. 
C)  increase by $72. 
D)  increase by $80. 
E)  increase by $100. 
A)  increase by $172. 
B)  fall by $20. 
C)  increase by $72. 
D)  increase by $80. 
E)  increase by $100.

Question 14

Let taxes be set equal to T, consumption be given by C = a + bY - T), investment and government spending be exogenous, and net exports be characterized by X = g - mY. Suppose both T and G increase by $10 billion. How much would equilibrium GDP increase?

Accepted Answer

A)  It would increase by $10 billion. 
B)  It would increase by less than $10 billion. 
C)  It would increase by more than $10 billion. 
D)  It would be unaffected, since the federal deficit would be unchanged. 
E)  It would increase by more or less than $10 billion depending on the values assumed by a, b, g, and m. 
A)  It would increase by $10 billion. 
B)  It would increase by less than $10 billion. 
C)  It would increase by more than $10 billion. 
D)  It would be unaffected, since the federal deficit would be unchanged. 
E)  It would increase by more or less than $10 billion depending on the values assumed by a, b, g, and m.

Question 15

Individual's decisions to purchase goods and services are influenced by all of the following except

Accepted Answer

A)  income taxes. 
B)  interest rates. 
C)  government purchases. 
D)  prices. 
E)  income. 
A)  income taxes. 
B)  interest rates. 
C)  government purchases. 
D)  prices. 
E)  income.

Question 16

Net exports are

Accepted Answer

A)  negatively correlated with GDP. 
B)  positively correlated with GDP. 
C)  totally uncorrelated with GDP. 
D)  positively correlated with GDP, but had been negatively correlated with GDP as long as the dollar was a reserve currency. 
E)  totally uncorrelated with GDP, but had been negatively correlated with GDP until the volatility of the currency markets destroyed the efficiency of international market structures. 
A)  negatively correlated with GDP. 
B)  positively correlated with GDP. 
C)  totally uncorrelated with GDP. 
D)  positively correlated with GDP, but had been negatively correlated with GDP as long as the dollar was a reserve currency. 
E)  totally uncorrelated with GDP, but had been negatively correlated with GDP until the volatility of the currency markets destroyed the efficiency of international market structures.

Question 17

The assumption that aggregate demand determines output is reasonable because

Accepted Answer

A)  firms generally operate with some excess capacity. 
B)  firms usually maintain a supply of inventories. 
C)  the natural rate of unemployment is between 5 and 6 percent. 
D)  all of the above. 
E)  none of the above. 
A)  firms generally operate with some excess capacity. 
B)  firms usually maintain a supply of inventories. 
C)  the natural rate of unemployment is between 5 and 6 percent. 
D)  all of the above. 
E)  none of the above.

Question 18

The simple, Keynesian consumption function is founded on the notion that total consumption expenditure should

Accepted Answer

A)  increase with disposable income. 
B)  increase with wealth. 
C)  increase with expected disposable income. 
D)  increase with expected inflation. 
E)  all of the above. 
A)  increase with disposable income. 
B)  increase with wealth. 
C)  increase with expected disposable income. 
D)  increase with expected inflation. 
E)  all of the above.

Question 19

When modeling aggregate demand, the question of resources is

Accepted Answer

A)  unimportant. 
B)  set aside temporarily. 
C)  a central issue. 
D)  irrelevant. 
E)  too difficult to address. 
A)  unimportant. 
B)  set aside temporarily. 
C)  a central issue. 
D)  irrelevant. 
E)  too difficult to address.

Question 20

The aggregate demand model

Accepted Answer

A)  is based on market-clearing prices. 
B)  is used to analyze long-run growth issues. 
C)  takes the level of output as given in the short run. 
D)  takes the price level to be given in the short run. 
E)  assumes the labor market is in equilibrium but the product market may not be. 
A)  is based on market-clearing prices. 
B)  is used to analyze long-run growth issues. 
C)  takes the level of output as given in the short run. 
D)  takes the price level to be given in the short run. 
E)  assumes the labor market is in equilibrium but the product market may not be.

In the aggregate demand model, changes in GDP in the short run can be caused by

The general shape of an aggregate demand curve is

Slack exists even in a vigorous U.S. economy because

Macroeconomists generally believe that year-to-year fluctuations in real GDP around its trend are best thought of as

If the marginal propensity to consume were 0.9 and a constant 20 percent tax were applied to all income, then an increase in income of $10 would cause consumption expenditure to climb by

Consider a closed economy in which consumption is described by C = 200 + 0.81 - t)Y. Let the tax rate t = 0.2 and I = 800, and assume an active government so that G = 1,200. If the government balances its budget in equilibrium by increasing the tax rate and decreasing its spending, then

In the macroeconomic model developed in the book to describe the short- term behavior of the economy in the short run,

^{Let a small closed economy consist of}^C⁼^a⁺^b^{1 -}^T⁾^{Y, T}⁼^T0^,^{I = I}0^{, and}^G⁼^G0^{. The balanced budget multiplier for a balanced budget increase in} government spending and autonomous taxes is

Of the many ways to measure GDP, the one used in the short-run aggregate demand model is

The short-run and long-run models used to analyze the dynamic behavior of the economy are

Consider a closed economy in which consumption is represented by

The marginal propensity to consume is

Suppose that taxes collected by the government could be represented by T = 100 + 0.2Y. If the marginal propensity to consume were 0.9, then an increase in GDP of $100 would cause consumption to

Let taxes be set equal to T, consumption be given by C = a + bY - T), investment and government spending be exogenous, and net exports be characterized by X = g - mY. Suppose both T and G increase by $10 billion. How much would equilibrium GDP increase?

Individual's decisions to purchase goods and services are influenced by all of the following except

Net exports are

The assumption that aggregate demand determines output is reasonable because

The simple, Keynesian consumption function is founded on the notion that total consumption expenditure should

When modeling aggregate demand, the question of resources is

The aggregate demand model

Economic Growth, Fluctuation, and Policy

Measuring Economic Performance

Employment, Job Creation, and Job Destruction

Long-Run Economic Growth

Technology and Economic Growth

Growth and the World Economy

Financial Markets and Aggregate Demand

The Economic Fluctuations Model

Consumption Demand

Investment Demand

Foreign Trade and the Exchange Rate

Spending, Taxes, and the Budget Deficit

The Monetary System

The Microeconomic Foundations of Price Rigidity

The Macroeconomic Policy Model

The New Normative Macroeconomics

Macroeconomic Policy in the World Economy

Filters

Exam 7: Short-Run Fluctuations

In the aggregate demand model, changes in GDP in the short run can be caused by

The general shape of an aggregate demand curve is

Slack exists even in a vigorous U.S. economy because

Macroeconomists generally believe that year-to-year fluctuations in real GDP around its trend are best thought of as

If the marginal propensity to consume were 0.9 and a constant 20 percent tax were applied to all income, then an increase in income of $10 would cause consumption expenditure to climb by

Consider a closed economy in which consumption is described by C = 200 + 0.81 - t)Y. Let the tax rate t = 0.2 and I = 800, and assume an active government so that G = 1,200. If the government balances its budget in equilibrium by increasing the tax rate and decreasing its spending, then

In the macroeconomic model developed in the book to describe the short- term behavior of the economy in the short run,

Let a small closed economy consist of C = a + b1 - T)Y, T = T0, I = I0, and G = G0. The balanced budget multiplier for a balanced budget increase in government spending and autonomous taxes is

Of the many ways to measure GDP, the one used in the short-run aggregate demand model is

The short-run and long-run models used to analyze the dynamic behavior of the economy are

Consider a closed economy in which consumption is represented by

The marginal propensity to consume is

Suppose that taxes collected by the government could be represented by T = 100 + 0.2Y. If the marginal propensity to consume were 0.9, then an increase in GDP of $100 would cause consumption to

Let taxes be set equal to T, consumption be given by C = a + bY - T), investment and government spending be exogenous, and net exports be characterized by X = g - mY. Suppose both T and G increase by $10 billion. How much would equilibrium GDP increase?

Individual's decisions to purchase goods and services are influenced by all of the following except

Net exports are

The assumption that aggregate demand determines output is reasonable because

The simple, Keynesian consumption function is founded on the notion that total consumption expenditure should

When modeling aggregate demand, the question of resources is

The aggregate demand model

Economic Growth, Fluctuation, and Policy

Measuring Economic Performance

Employment, Job Creation, and Job Destruction

Long-Run Economic Growth

Technology and Economic Growth

Growth and the World Economy

Financial Markets and Aggregate Demand

The Economic Fluctuations Model

Consumption Demand

Investment Demand

Foreign Trade and the Exchange Rate

Spending, Taxes, and the Budget Deficit

The Monetary System

The Microeconomic Foundations of Price Rigidity

The Macroeconomic Policy Model

The New Normative Macroeconomics

Macroeconomic Policy in the World Economy

Filters

^{Let a small closed economy consist of}^C⁼^a⁺^b^{1 -}^T⁾^{Y, T}⁼^T0^,^{I = I}0^{, and}^G⁼^G0^{. The balanced budget multiplier for a balanced budget increase in} government spending and autonomous taxes is