Deck 10: Self-Adjustment or Instability

Question 1

The primary source of macro instability,when there is no government intervention and no foreign trade,is the relationship between

A)Investment and saving.
B)Saving and taxes.
C)Investment and consumption.
D)Consumption and saving.

Answer 1

A

Question 2

The disposable income consumers receive is equal to about what percentage of total income?

A)30 percent.
B)50 percent.
C)70 percent.
D)95 percent.

Answer 2

C

Question 3

Investment represents

A)A leakage from the circular flow,like saving.
B)A leakage from the circular flow,like taxes.
C)An injection into the circular flow,like government spending.
D)An injection into the circular flow,like imports.

Answer 3

C

Question 4

Which of the following is a leakage?

A)Imports.
B)Investment.
C)Government spending.
D)Aggregate demanD.Spending on imports is not a part of aggregate demand because it is not spent on domestic goods.

Question 5

An addition of spending to the circular flow of income is

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

Question 6

According to the Keynesian view of the macro economy,which of the following is always true at equilibrium?

A)Aggregate supply equals aggregate demand.
B)The economy is at full employment.
C)The price level is stable.
D)The price level is too low.

Question 7

If leakages exceed injections,

A)The economy will stabilize at full employment.
B)Interest rates will rise.
C)The economy is contracting.
D)Microeconomic instability will persist.

Question 8

The output level at which the aggregate demand curve intersects the aggregate supply is always the level at which

A)Saving is zero.
B)Macro equilibrium is achieved.
C)Full employment is sustainable by the economy.
D)Micro equilibrium is achieveD.At macro equilibrium spending is equal to total output.

Question 9

According to Keynes,if injections equal leakages,

A)The economy will always stabilize at full employment.
B)Macroeconomic equilibrium will occur.
C)Macroeconomic equilibrium will not occur.
D)Microeconomic instability will persist.

Question 10

John Maynard Keynes argued that

A)Macro failure is likely to occur,and it isn't likely to go away.
B)Macro failure is unlikely to occur.
C)Macro failure is likely to occur but will go away quickly.
D)None of the choices are correct.

Question 11

If planned leakages exceed planned injections,then Keynesians believe

A)The economy will quickly adjust to full employment if left alone.
B)Income will fall until planned leakages equal planned injections.
C)Investment will quickly rise to bring the system to equilibrium.
D)No macro equilibrium can be achieveD.Planned leakages greater than planned injections will cause consumption and saving to fall,thereby restoring macro equilibrium at a lower level of output and spending.

Question 12

Gross business saving is equal to

A)Depreciation allowances plus retained earnings.
B)Depreciation allowances less retained earnings.
C)Retained earnings less depreciation allowances.
D)Depreciation allowances plus retained earnings and stockholder dividends.

Question 13

Disposable income is less than GDP due to

A)Taxes by governments along with exports.
B)Income held by businesses.
C)Taxes by governments and income held back as saving by businesses.
D)Taxes by governments along with imports.

Question 14

Equilibrium GDP could be upset by a change in

A)Investment only.
B)Injections only.
C)Leakages only.
D)Any leakage or injection.

Question 15

Injections include

A)Business saving.
B)Taxes.
C)Exports.
D)Consumer saving.

Question 16

Leakages include

A)Business saving.
B)Exports.
C)Government spending.
D)Inventories.

Question 17

When the economy is at equilibrium,

A)Leakages equal injections.
B)Inventories must equal zero.
C)Leakages equal aggregate demand.
D)There are no leakages.

Question 18

A leakage is

A)An export from the economy.
B)A decline in the capacity of the economy to produce goods.
C)A diversion of income from spending on domestic output.
D)A decrease in aggregate supply.

Question 19

Income not spent directly on domestic output is

A)A leakage.
B)An injection.
C)A circular.
D)Investment.

Question 20

If injections exceed leakages,

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

Question 21

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

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 22

If investment spending decreases and all other levels of spending remain constant,then aggregate

A)Supply increases.
B)Supply decreases.
C)Demand increases.
D)Demand decreases.

Question 23

The marginal propensity to consume is

A)That part of the average consumer dollar that goes to saving.
B)The same as the spending multiplier.
C)The change in consumption divided by the change in disposable income.
D)Always equal to 1.

Question 24

Assuming an upward-sloping AS curve,if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant,then the price level

A)Increases and output decreases.
B)Decreases and output decreases.
C)Increases and output increases.
D)Decreases and output increases.

Question 25

Assuming an upward-sloping AS curve,if an economy is at full employment and consumption spending decreases while all other levels of spending remaining constant,then

A)Increased unemployment results.
B)Any GDP gap disappears.
C)Inventory levels are less than desired until a new equilibrium is reached.
D)Changes in consumption spending have no impact on GDP.

Question 26

The multiplier process can occur when a decrease in investment spending

A)Increases household saving,causing consumers to buy more goods and services.
B)Reduces household incomes,causing consumers to buy fewer goods and services.
C)Increases household incomes,causing consumers to buy fewer goods and services.
D)Reduces household incomes,causing consumers to buy more goods and services.

Question 27

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

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

Question 28

The marginal propensity to consume is

A)Total consumption in a given period divided by total disposable income.
B)The percentage of total disposable income spent on consumption.
C)That part of the average consumer dollar that goes to the purchase of final goods.
D)The fraction of each additional dollar of disposable income spent on consumption.

Question 29

Actual investment equals

A)Desired investment plus planned investment.
B)Planned investment minus undesired investment.
C)Desired investment plus undesired investment.
D)Desired investment minus undesired investment.

Question 30

The formula for the multiplier is

A)1/(1 - MPS).
B)1/(1 - MPC).
C)1 - MPS.
D)1 - MPC.

Question 31

Assuming an upward-sloping AS curve,if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant,then

A)A GDP gap emerges.
B)The price level increases.
C)Output increases.
D)The unemployment rate falls.

Question 32

Desired saving equals desired investment in an economy with no government and no foreign trade

A)At the full-employment level of income.
B)At the income where desired investment equals output.
C)By definition.
D)At the equilibrium level of income.

Question 33

If consumers spend 80 cents out of every extra dollar received,the multiplier is

A)5.
B)8.
C)0.80.
D)1.25.

Question 34

Classical economists assume that

A)Spending leakages exceed spending injections.
B)Interest rate adjustment will cause business investment to equal consumer saving.
C)The economy might experience persistent macro instability.
D)No leakages would occur.

Question 35

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

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 36

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

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 37

Desired investment equals

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 38

If actual investment exceeds desired investment,then

A)A recession can develop.
B)Leakages are greater than injections.
C)An inflationary spiral can develop.
D)Inventories are being depleteD.An excess buildup of inventories may lead firms to cut back production,which could result in a recession.

Question 39

When unwanted business inventories pile up,which of the following is likely to occur?

A)A lower level of unemployment.
B)A higher level of output.
C)A lower price level.
D)No change in the level of output.

Question 40

When unwanted inventories pile up in retail stores,retail managers will take actions that lead to greater

A)Inflation.
B)Unemployment.
C)Wages.
D)Economic growth.

Question 41

Which of the following equations defines the multiplier?

A)1 - b
B)1 - (c ÷ Y_D).
C)1 ÷ (1 - MPC).
D)1 ÷ APS.

Question 42

The value of the multiplier will be larger,the

A)Smaller the slope of the savings function.
B)Smaller the APC.
C)Larger the slope of the savings function.
D)Smaller the APS.

Question 43

To illustrate the ultimate impact of the multiplier process when investment spending falls,we should

A)Shift the AD curve rightward once.
B)Shift the AD curve leftward twice,once for the autonomous change and second for the multiplier effect.
C)Shift the AD curve leftward and then rightward.
D)Shift the AD curve leftward and then shift the AS curve leftwarD.The first shift represents the initial drop in spending,and the second shift represents the cumulative drops in spending that result due to the multiplier.

Question 44

Given C = 200 + 0.75Y_D,the multiplier is

A)0.25.
B)0.75.
C)4.
D)1.33.

Question 45

If the marginal propensity to consume is 0.60,then the multiplier equals

A)2.50.
B)0.60.
C)1.67.
D)0.40.

Question 46

If the MPC = 0.60,the total change in spending resulting from an initial $500 decrease in aggregate spending will be

A)$300.
B)$800.
C)$1,250.
D)$833.

Question 47

If the marginal propensity to save is 0.10 and the initial decline in investment is $100,by how much will aggregate demand eventually decrease?

A)$100.
B)$900.
C)$1,000.
D)$10,000.

Question 48

If aggregate demand shifts to the left by $400 billion and aggregate supply is upward-sloping,then real output will decrease by

A)$400 billion,and the price level will not change.
B)Less than $400 billion,and the price level will fall.
C)$400 billion,and the price level will fall.
D)More than $400 billion,and the price level will not change.

Question 49

Calculate the total change in aggregate demand because of an initial $300 decrease in investment spending,given that C = 150 + 0.50Y_D.

A)$300 decrease.
B)$150 decrease.
C)$1,200 decrease.
D)$600 decrease.

Question 50

Calculate the total change in spending because of an initial $100 increase in aggregate demand,given that the MPC = 0.60.

A)$100 increase.
B)$100 decrease.
C)$250 increase.
D)$60 increase.

Question 51

If the MPC = 0.80,the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be

A)$150.
B)$187.5.
C)$500.
D)$750.

Question 52

An initial (autonomous)decrease in aggregate demand will likely be

A)Much smaller than the eventual decline in spending.
B)Much larger than the eventual decline in spending.
C)Equal to the eventual decline in spending.
D)Offset by an increase in planned investment.

Question 53

If the MPC = 0.90,the total change in spending resulting from an initial $200 increase in aggregate spending will be

A)$2,000.
B)$200.
C)$180.
D)$1,800.

Question 54

Suppose an economy can be described by the consumption function C = 250 + 0.90Y_D and I = $300.What is the multiplier?

A)0.1.
B)0.9.
C)3.
D)

Question 55

With a consumption function of the form C = a + bY_D,which of the following would best measure how much a recession will spread?

A)Parameter a.
B)Parameter b.
C)Variable Y_D.
D)1 ÷ (1 - b).

Question 56

Suppose an economy can be described by the consumption function C = 75 + 0.80Y_D and I = $50.What is the multiplier?

A)0.20.
B)0.80.
C)5.
D)1.25.

Question 57

Assume a decrease in interest rates causes an initial increase in desired investment and aggregate demand.Additional increases in aggregate demand will

A)Be caused by multiplier-induced increases in autonomous investment.
B)Be caused by increases in induced expenditures.
C)Be insignificant compared to the initial increase.
D)Not occur.

Question 58

Given the MPS = 0.40,with no government and no foreign trade,a $10 billion increase in investment will eventually result in an increase in

A)Consumption by $40 billion.
B)Total spending by $15 billion.
C)Consumption by $15 billion.
D)Total spending by $2.5 billion.

Question 59

An economy with no government and no foreign trade tends to move toward equilibrium GDP because at output levels greater than equilibrium GDP,inventories are

A)Increasing,and actual investment exceeds desired investment.
B)Increasing,and actual investment is less than desired investment.
C)Decreasing,and actual investment exceeds desired investment.
D)Decreasing,and actual investment is less than desired investment.

Question 60

If the marginal propensity to consume is 0.75,then the multiplier equals

A)1/(1 - 0.25).
B)1/0.75.
C)1/(1 - 0.75).
D)0.75.

Question 61

If leakages are greater than injections,equilibrium output will be

A)Less than full-employment output,and a recessionary gap will occur.
B)Less than full-employment output,and an inflationary gap will occur.
C)More than full-employment output,and a recessionary gap will occur.
D)More than full-employment output,and an inflationary gap will occur.

Question 62

Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion.If AD shifts to the left by $10 billion,

A)Real output will fall by less than $10 billion.
B)Real output will fall by $10 billion.
C)The inflationary gap will be eliminated.
D)A recessionary gap will be createD.The AD curve shifts to the left,but the new macro equilibrium will occur at a lower price level.So there will still be an inflationary GDP gap,though it will be smaller.

Question 63

A decrease in a recessionary GDP gap will most likely be associated with a decrease in

A)Structural unemployment.
B)Cyclical unemployment.
C)The price level.
D)Frictional unemployment.

Question 64

Assuming an upward-sloping aggregate supply curve,when aggregate demand increases,unemployment

A)Decreases,and the price level decreases.
B)Increases,and the price level decreases.
C)Decreases,and the price level increases.
D)Increases,and the price level increases.

Question 65

Assuming an upward-sloping aggregate supply curve,when aggregate demand decreases,unemployment

A)Decreases,and the price level decreases.
B)Increases,and the price level decreases.
C)Decreases,and the price level increases.
D)Increases,and the price level increases.

Question 66

There is a trade-off between unemployment and inflation when the aggregate

A)Supply curve is upward-sloping.
B)Supply curve is downward-sloping.
C)Supply curve is vertical.
D)Demand curve is downward-sloping.

Question 67

Assuming the economy is at full employment,a decrease in aggregate demand will most likely cause a change in which of the following types of unemployment?

A)Seasonal.
B)Cyclical.
C)Frictional.
D)Structural.

Question 68

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

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

Question 69

Which of the following situations results in the lowest level of cyclical unemployment?

A)Undesired inventory accumulation.
B)Total value of goods supplied exceeds total value of goods demanded.
C)A period of significant inflation.
D)Desired saving exceeds desired investment.

Question 70

In the short run,if AD increases,the unemployment rate will

A)Rise,and the price level will rise.
B)Fall,and the price level will rise.
C)Rise,and the price level will fall.
D)Fall,and the price level will fall.

Question 71

Assume the equilibrium level of output is less than full employment.To achieve full-employment equilibrium,the aggregate demand curve must shift to the right by

A)The amount of the recessionary GDP gap.
B)An amount less than the recessionary GDP gap because the spending increase causes the multiplier process to occur.
C)An amount greater than the recessionary GDP gap because the spending increase raises the price level.
D)An amount less than the recessionary GDP gap because the spending increase raises output and prices.

Question 72

The recessionary GDP gap represents the

A)Amount by which aggregate demand must increase to reach full employment.
B)Value of the goods and services that could be produced but were not due to unemployed resources.
C)Leakages minus injections.
D)Amount by which actual investment differs from desired investment.

Question 73

A recessionary GDP gap is the

A)Horizontal distance between full-employment GDP and equilibrium GDP.
B)Same as an inflationary gap.
C)Difference between leakages and injections.
D)Sum of leakages and injections.

Question 74

Full employment is estimated to occur at an unemployment rate

A)Between 4 and 6 percent.
B)Between 1 and 2 percent.
C)Equal to 0 percent.
D)Between 10 and 12 percent.

Question 75

Which of the following is eliminated when the economy's output is equal to full-employment GDP?

A)The real GDP gap.
B)The multiplier.
C)Leakages and injections.
D)The MPC.

Question 76

Unplanned inventory depletion is a warning sign of

A)Impending inflation.
B)A recessionary gap.
C)Cyclical unemployment.
D)Both a recessionary gap and cyclical unemployment.

Question 77

If leakages are less than injections,equilibrium output will be

A)Less than full-employment output,and a recessionary gap will occur.
B)More than full-employment output,and a recessionary gap will occur.
C)Less than full-employment output,and an inflationary gap will occur.
D)More than full-employment output,and an inflationary gap will occur.

Question 78

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)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 79

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

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 80

When an economy is operating at "full employment," as economists usually define the term,

A)Everyone who wants a job has a job.
B)Inflation is a significant problem.
C)The unemployment rate is 4-6 percent.
D)The unemployment rate is 0 percent.