Deck 25: Demand-Side Equilibrium: Unemployment or Inflation

Question 1

If total spending is greater than current output, GDP will rise.

Answer 1

True

Question 2

Injections to the circular flow model include saving, taxes, exports, and investment.

Answer 2

False

Question 3

Equilibrium is the point where total spending equals total output, or GDP.

Answer 3

True

Question 4

Equilibrium GDP occurs when total spending equals total output.

Question 5

When income rises, total expenditures remain constant.

Question 6

Investment spending is a leakage from the circular flow model.

Question 7

When demand for goods and services is high, firms are more likely to hire more workers.

Question 8

When total spending is less than production, GDP will decrease.

Question 9

Leakages are offset by investment and government spending in the circular flow model.

Question 10

When inventories accumulate, unemployment rises.

Question 11

Free markets coordinate economic activity in such a way as to eliminate the possibility of inflation or unemployment.

Question 12

If investment spending depends on GDP, this is called induced investment.

Question 13

When GDP decreases, consumption spending increases.

Question 14

The expenditure schedule includes the consumption function.

Question 15

If the economy is suffering a recession, inventories are probably falling.

Question 16

In a simplified circular flow model with no government, in equilibrium, S = I + (X − IM).

Question 17

When spending is less than production, inventories are higher than what producers expected.

Question 18

Producers will change their prices when GDP is at the equilibrium level.

Question 19

An expenditure schedule shows the relationship between GDP and total output.

Question 20

Savings and taxes are considered leakages in the circular flow model.

Question 21

A given income-expenditure diagram always assumes a variable price level.

Question 22

An economic recession in Japan will cause the aggregate demand curve in the United States to shift to the right.

Question 23

Coordination failures can exist in both capitalist and socialist economies.

Question 24

The aggregate demand curve is directly derived from the expenditures schedule.

Question 25

Inventory reductions caused by strong demand are signals to retailers to order more products.

Question 26

The multiplier can be expressed as the ratio of the change in Y over the change in I.

Question 27

Total expenditures can be written as C + I + G + (X − IM).

Question 28

A change in the price level will cause a shift in the expenditure schedule.

Question 29

When spending is greater than output, firms will experience falling inventories, and prices of goods and services will rise.

Question 30

If inventories are being depleted, firms may respond by cutting prices.

Question 31

The U.S. economy in 2009 was characterized by an excess level of output. This corresponds to a recessionary gap.

Question 32

The equilibrium level of GDP is always accompanied by full employment and stable prices.

Question 33

A recessionary gap exists when the equilibrium level of GDP exceeds potential GDP.

Question 34

A decrease in the price level causes a lower equilibrium quantity demanded.

Question 35

High unemployment and high rates of inflation are examples of coordination successes.

Question 36

In a capitalist market economy, the decision to save is made by the same people who make the major investment decisions.

Question 37

An increase in the U.S. price level (foreign prices held constant) will cause a leftward shift in the aggregate demand curve.

Question 38

Market economies are likely to suffer from recessions and inflation because the government plans all economic activity.

Question 39

The full employment level of GDP is sometimes referred to as "potential GDP."

Question 40

When equilibrium GDP falls below potential GDP, an inflationary gap exists.

Question 41

Which of the following questions can be answered by the process of demand side GDP determination?

A) How large is equilibrium GDP?
B) What can cause unemployment?
C) Is demand side equilibrium consistent with supply side equilibrium?
D) Does the economy have inflation?

Question 42

When businesses are cutting back production, then it is probably true that

A) total spending is greater than total output.
B) total output is greater than total income.
C) total spending is less than total output.
D) inventory levels are decreasing.

Question 43

John Maynard Keynes concluded that investment spending is not determined by

A) business confidence.
B) government incentives.
C) psychological perceptions about the economy.
D) economic expectations.

Question 44

According to the income-expenditure diagram, total production must always equal total

A) inventories.
B) aggregate demand.
C) wages, profit, rents.
D) income.

Question 45

Recessions and depressions are the principal examples of

A) market failure.
B) coordination failure.
C) central planning.
D) socialist contradictions.

Question 46

When constructing a basic macroeconomic model, several assumptions (not realistic, but necessary to simplify the analysis) are made. Which of the following are assumed to be constant?

A) The price level
B) Consumption spending
C) The value of fixed-money assets
D) Taxes

Question 47

Workers in a nearby pizza restaurant may indirectly enjoy income increases from a nearby construction work site.

Question 48

In the simplified circular flow diagram, leakage can occur when consumers save some income.

Question 49

In a simple macroeconomic model, only one component of expenditures is allowed to change:

A) investment.
B) consumption.
C) net exports.
D) government spending.
E) transfer payments.

Question 50

At the equilibrium level of income, it must be true that total

A) income equals total spending.
B) product equals total output.
C) output equals total inventory.
D) income equals total saving.

Question 51

Economists before Keynes assumed that equilibrium GDP occurred

A) automatically.
B) only with the help of government stabilization.
C) if spending was generally greater than output.
D) only in socialist economies with central planning.

Question 52

Total output equals total income

A) in the income-expenditures diagram.
B) in the circular demand diagram.
C) in the circular sales diagram.
D) in the spending-output diagram.

Question 53

One of the primary functions of markets could be labeled

A) stimulation.
B) coordination.
C) planification.
D) decentralization.

Question 54

In a market economy, the decisions about what to produce and how much of each good or service to produce are made by

A) government officials.
B) economic planners.
C) central bankers.
D) consumers and producers.

Question 55

If inventory levels are decreasing, then we should expect business firms to

A) decrease prices.
B) decrease output.
C) lay off workers.
D) increase output.

Question 56

Economists are very good at explaining how individual markets work. Economists are less successful at explaining

A) market pricing.
B) recessions and inflation.
C) central planning.
D) business firm profits.

Question 57

If savings exceeds investment at full employment, demand will fall short of total output.

Question 58

The main examples of macroeconomic coordination failures are

A) profit declines.
B) relative price changes.
C) recessions and depressions.
D) consumer taste changes.

Question 59

Government spending and private sector funding toward new businesses have multiplied effects on GDP.

Question 60

If total spending exceeds total output, then

A) inventory levels will rise.
B) inventory levels will remain constant.
C) inventory levels will fall.
D) output will eventually decrease.

Question 61

If total spending is less than total output, then price levels will

A) rise and production will increase.
B) rise and production will decrease.
C) fall and production will increase.
D) fall and production will decrease.

Question 62

A rising price level should shift the expenditure schedule

A) upward and decrease equilibrium real GDP.
B) downward and increase equilibrium real GDP.
C) downward and decrease equilibrium real GDP.
D) upward and increase equilibrium real GDP.

Question 63

Equilibrium GDP on the demand side occurs when total spending

A) equals total production, and inventories are zero.
B) equals total production, and firms are unable to adjust inventories.
C) exceeds total production, and inventories are rising.
D) equals total production, and inventories remain at desired levels.
E) is less than total production, and inventories are falling.

Question 64

Which of the following shows the relationship between national income (GDP) and total spending?

A) Demand schedule
B) Consumption curve
C) Expenditure schedule
D) Balance schedule

Question 65

When net exports increase,

A) the expenditures schedule increases.
B) the expenditures schedule decreases.
C) there is a corresponding increase along the aggregate demand curve.
D) there is a corresponding decrease along the aggregate demand curve.

Question 66

If net exports are reduced, the expenditure schedule will shift

A) downward and equilibrium real GDP will rise.
B) upward and equilibrium real GDP will rise.
C) downward and equilibrium real GDP will fall.
D) upward and equilibrium real GDP will fall.

Question 67

If the U.S. economy is experiencing falling price levels, the

A) expenditure schedule will shift downward.
B) expenditure schedule will shift upward.
C) slope of the expenditure schedule increases.
D) slope of the expenditure schedule decreases.

Question 68

The slope of the aggregate demand curve illustrates that as the price level rises,

A) real GDP demanded decreases.
B) real GDP demanded increases.
C) the aggregate demand curve shifts rightward.
D) the aggregate demand curve shifts leftward.

Question 69

If the U.S. price level decreases, then

A) the expenditure schedule slope will flatten.
B) the expenditure schedule slope will become steeper.
C) shift the expenditure schedule upward.
D) shift the expenditure schedule downward.

Question 70

Real wealth changes with

A) disposable income.
B) consumption.
C) the price level.
D) GDP.

Question 71

The slope of the aggregate demand curve illustrates that real GDP demanded will increase when

A) the price level rises.
B) the price level falls.
C) real income rises.
D) real income falls.

Question 72

An expenditure schedule model with no government sector shows the relationship between

A) C and national product.
B) C and disposable income.
C) C + I and national income.
D) GDP and disposable income.

Question 73

Investment spending might be larger when GDP is higher. Such added investment as GDP rises is called

A) mutual investment.
B) induced investment.
C) positive investment.
D) net investment.

Question 74

When the price level in the United States rises, then net exports should

A) rise and equilibrium real GDP should increase.
B) fall and equilibrium real GDP should increase.
C) fall and equilibrium real GDP should decrease.
D) rise and equilibrium real GDP should decrease.

Question 75

If the price level rises, the effect on the expenditure schedule and equilibrium real GDP is to

A) increase both.
B) decrease both.
C) shift the expenditure schedule upward and decrease equilibrium real GDP.
D) shift the expenditure schedule downward and increase equilibrium real GDP.

Question 76

If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that

A) total output is greater than total spending.
B) price levels are decreasing.
C) inventory levels are increasing.
D) inventory levels are decreasing.

Question 77

If net exports decrease, the expenditure schedule will

A) get steeper.
B) get flatter.
C) shift upward.
D) shift downward.

Question 78

45° line diagrams show how

A) investment varies with income.
B) expenditures vary with income.
C) investment spending rises when GDP rises.
D) GDP is affected by government purchases.

Question 79

A higher price level would mean ____ for a person who has a bank deposit of $2 million.

A) an increase in real income
B) a decrease in real wealth
C) a decrease in nominal income
D) an increase in nominal income

Question 80

If the economy is in equilibrium, it must be

A) on the 45° line.
B) on the 60° line.
C) below the 45° line.
D) below the 60° line.