Deck 7: Short-Run Fluctuations

Question 1

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

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.

Answer 1

temporary departures from long-run equilibrium.

Question 2

When modeling aggregate demand, the question of resources is

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

Answer 2

set aside temporarily.

Question 3

An important distinction between the long-run and complete models is that

A) prices are assumed to respond quickly to market conditions.
B) output is assumed to respond quickly to market conditions.
C) output is assumed to be relatively fixed due to productive capabilities.
D) prices are assumed to be predetermined based on previous economic outcomes.
E) both prices and output are assumed to respond rapidly to market conditions.

Answer 3

prices are assumed to be predetermined based on previous economic outcomes.

Question 4

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

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

Question 5

The assumption to ignore inventory adjustment in the analysis of the economy in the short run is justified because

A) changes in demand that are matched by changes in inventory do not affect production.
B) economists are not held accountable for the assumptions they make.
C) economists are unable to incorporate such relatively minor changes into the model.
D) changes in sales are met with changes in production for the economy as a whole.
E) inventories can be replenished or drawn down as seen fit by firms.

Question 6

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

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 7

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

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 8

The theories and models of macroeconomics are used to

A) produce studies that explain major macroeconomic events of the past.
B) produce studies and understanding that can guide the design of economic policy in its attempt to avoid damaging periods of high inflation, high unemployment, or both.
C) produce studies with which future business cycles can be forecast.
D) produce analyses of how various macroeconomic policies interact.
E) all of the above.

Question 9

Short-term departures from equilibrium may be caused by

A) changes in spending decisions of households.
B) changes in fiscal policy.
C) changes in investment spending.
D) changes in foreign demand for U.S. products.
E) all of the above.

Question 10

The assumption that aggregate demand determines output is reasonable because

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 11

Short-run adjustments to changes in the economic conditions affecting the
U.S. economy are

A) usually reflected by changes in prices because output and employment decisions are difficult to alter.
B) usually reflected by changes in output and employment because changes in prices appear to be too gradual to handle month-to-month fluctuation.
C) usually reflected by changes in output decisions, because the prices of the major sectors of the U.S. economy are controlled by government policy.
D) usually reflected by changes in pricing policy because of a need to keep abreast of foreign competition.
E) seen either in price changes or in employment changes depending on the specific circumstance.

Question 12

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

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 13

The income identity Y = C + I + G + X implicitly assumes that the left-hand variable Y is simultaneously real GDP, real output, and real income. It is an exact interpretation when

A) all nominal variables are converted into real variables by dividing by a price index.
B) nominal depreciation is subtracted from GDP before the value for Y is recorded.
C) all nominal variables are converted into real variables and an assumption that capital does not depreciate is imposed.
D) all nominal variables are converted into real variables and assumptions that set both real depreciation expense and indirect taxes equal to zero are imposed.
E) none of the above.

Question 14

An assumption central to the short run analysis of the goods and services produced by an economy is that

A) a firm's operating objective is to maximize profits.
B) consumers operate according to the principle of self-interest.
C) aggregate demand determines the amount of good produced.
D) governments fulfill their role of guaranteeing property rights.
E) monetary policy assures an environment of stable prices.

Question 15

The aggregate demand model

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.

Question 16

In the short-run aggregate demand model, firms are generally assumed to

A) set production goals to enhance worker productivity.
B) respond to changes in demand by adjusting prices until markets clear.
C) operate at capacity to maximize profits in the long run.
D) adjust production levels in response to changes in demand.
E) adjust both prices and production to increase short-run profits.

Question 17

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

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.

Question 18

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

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.

Question 19

The distinction between spending balance and equilibrium is important because

A) spending balance encompasses more than equilibrium.
B) consistency of total spending and income is a requirement of equilibrium.
C) spending balance can occur in disequilibrium.
D) spending balance encompasses less than equilibrium.
E) c and d.

Question 20

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

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 21

Which of the following statements is true?

A) The open-economy multiplier is smaller than the closed-economy multiplier for investment but larger for government spending.
B) The open-economy multiplier is smaller than the closed-economy multiplier for government spending but larger for investment.
C) The open-economy multiplier is smaller than the closed-economy multiplier for both government spending and investment.
D) The open-economy multiplier is larger than the closed-economy multiplier for both government spending and investment.
E) The open-economy multiplier is smaller than the closed-economy multiplier for government spending, but they are equal for investment.

Question 22

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

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

Question 23

Consider a closed economy in which consumption is represented by

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 24

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

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

Question 25

The marginal propensity to consume is

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 26

If the marginal propensity to consume were to increase with no change in the tax rate, then the consumption function drawn on a graph with disposable income on the horizontal axis would

A) rotate to a steeper line around the same intercept.
B) rotate to a steeper line and start at a higher intercept.
C) rotate to a steeper line but start from a lower intercept.
D) rotate to a flatter line around the same intercept.
E) shift to a parallel line starting from a higher intercept.

Question 27

^{Let taxes be set equal to T = T}0 ^{+ tY, consumption given by}

A) It would increase by $10 billion.
B) It would increase by more than $10 billion.
C) It would increase less 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, and t.

Question 28

^{Let a small closed economy consist of C = a + b1 - T)Y, T = T}0^{, I = I}0^{, and G = G}0^{. The balanced budget multiplier for a balanced budget increase in} government spending and autonomous taxes is

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

Question 29

Let taxes be fixed and equal to T, consumption given by
C = a + bY - T), investment and government spending exogenous, and net exports described by X = g - mY. The multiplier for T would then be

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

Question 30

Dollar for dollar, the government spending multiplier

A) is larger than the investment multiplier.
B) is smaller than the investment multiplier.
C) is always identical to the investment multiplier in the simple Keynesian model.
D) can be larger or smaller than the investment multiplier depending on the marginal propensity to consume.
E) can be larger or smaller than the investment multiplier depending on the rate at which income is taxed.

Question 31

Macroeconomic equilibrium is stable in the simple model because

A) consumption falls more slowly than income when GDP is above equilibrium.
B) consumption increases more slowly than income when GDP is below equilibrium.
C) the marginal propensity to consume is less than unity.
D) taxes cause disposable income to move at some fraction of the pace at which GDP moves.
E) all of the above.

Question 32

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?

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 33

Net exports are

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 34

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

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 35

The general shape of an aggregate demand curve is

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.