Deck 15: A Simple Model of the Macro Economy

Question 1

A large decrease in Australia's share market index may cause:

A) an increase in consumption to compensate.
B) an increase in investment to compensate.
C) a decrease in consumption.
D) a large increase in economic growth.

Answer 1

C

Question 2

Aggregate expenditures are the sum of:

A) consumption, investment and government spending minus net exports.
B) consumption, government spending and net exports.
C) consumption, investment, government spending and net exports.
D) production, investment, government spending and net exports.

Answer 2

C

Question 3

The French economist Jean-Baptiste Say transformed the equality of total output and total spending into a law that can be expressed as follows:

A) unemployment is not possible in the short run.
B) demand and supply are never equal.
C) supply creates its own demand.
D) demand creates its own supply.

Answer 3

C

Question 4

The hands-off view of the classical school rests on which of the following two simple propositions about markets?

A) Demand creates its own supply and markets are basically competitive.
B) Competitive markets are efficient and both prices and nominal wages are flexible.
C) Market failure occurs and prices are rigid.
D) Wages are sticky downwards and market failure is inevitable.

Question 5

Keynes placed great primacy on the:

A) production function.
B) supply side of the economy.
C) demand side of the economy.
D) delivery of inputs to producer.

Question 6

The fraction of each added dollar of disposable income that is used for consumption is called the:

A) average propensity to consume (APC).
B) autonomous consumption rate (ACR).
C) marginal consumption propensity (MCP).
D) marginal propensity to consume (MPC).
E) total propensity to consume (TPC).

Question 7

According to Keynes, what is the most important determinant of households' spending on goods and services?

A) Price levels.
B) Interest rates.
C) Autonomous consumption.
D) Disposable income.

Question 8

What is the title of the John Maynard Keynes's book published in 1936 that challenged the classical self-correction economic theory?

A) In the Long Run, We are Dead.
B) Classical Economics Revised.
C) General Theory of Employment, Interest and Money.
D) A Keynesian Approach to Economic Policy.

Question 9

If people believe inflation is likely to increase sharply over the next few months, which of the following is likely to occur?

A) Current consumption will fall.
B) Current consumption will rise.
C) Government spending will increase.
D) Interest rates will fall.

Question 10

If your MPS is 0.60 that means that:

A) for every dollar increase in your disposable income, consumption will decrease by 60 cents.
B) for every dollar decrease in your disposable income, consumption will increase by 60 cents.
C) for every dollar increase in your disposable income, consumption will increase by 60 cents.
D) for every dollar increase in your disposable income, consumption will remain unchanged.

Question 11

Classical economists believed that:

A) the forces of market supply will alone achieve equilibrium.
B) a long continuing prosperity is impossible.
C) a long continuing depression is impossible.
D) the forces of market demand will alone achieve equilibrium.

Question 12

A share market boom is often accompanied by:

A) an increase in consumption.
B) falling real GDP.
C) falling investment.
D) rising unemployment.
E) a decrease in imports.

Question 13

The marginal propensity to consume (MPC) is computed as the change in:

A) consumption divided by the change in savings.
B) consumption resulted by a given change in disposable personal income.
C) consumption divided by the change in GDP.
D) consumption multiplied by the change in savings.

Question 14

The founder of the classical school of economics was:

A) Jean Say.
B) John Keynes.
C) Adam Smith.
D) John Howard.

Question 15

The relationship between consumer expenditures and disposable income is the:

A) savings function.
B) tax rate function.
C) disposable income function.
D) consumption function.

Question 16

Classical economics argued that:

A) the supply curve should remain vertical in the long run.
B) the First World War was fought to free Britain from economic ruin.
C) depression was only a short-run, temporary departure from full-employment equilibrium.
D) funeral plots need to be determined by the market.

Question 17

As income grows, the consumption:

A) decreases.
B) grows the same as income.
C) grows by less than income.
D) grows by more than income.

Question 18

The classical theory that states that 'supply creates its own demand' was developed by:

A) Adam Smith.
B) John Keynes.
C) Jean-Baptiste Say.
D) Richard Say.

Question 19

If your disposable personal income increases from $30 000 to $40 000 and your savings increase from $2000 to $4000, your marginal propensity to save (MPS) is:

A) 0.2.
B) 0.4.
C) 0.5.
D) 0.8.

Question 20

The consumption function explains:

A) the relationship between consumption and dissaving.
B) how much households want to spend on goods and services at different levels of disposable income.
C) purposes of consumption.
D) none of these.

Question 21

Net exports will rise if:

A) the currency depreciates.
B) foreign income falls.
C) domestic income increases.
D) the terms of trade remain constant.

Question 22

Marginal propensity to consume:

A) is the change in production resulting from a given change in disposable income.
B) shows the amount households want to spend on goods and services at different levels of disposable income.
C) is the change in consumption resulting from a given change in disposable income.
D) is the change in saving resulting from a given change in disposable income.

Question 23

When one observes consumption and investment patterns over time, one finds that:

A) like consumption, investment is fairly stable over time.
B) like consumption, investment is fairly erratic over time.
C) unlike consumption, which is fairly stable over time, investment is subject to erratic fluctuations.
D) unlike consumption, which is subject to erratic fluctuations, investment is fairly stable over time.

Question 24

The consumption function:

A) is the relationship between consumption and disposable income.
B) shows how consumption is determined by changes in the level of disposable income.
C) is an aggregate expenditure.
D) is a sum of individual demand curves.

Question 25

The idea that government spending can be used to influence demand in an economy was first put forward by:

A) Adam Smith.
B) John Howard.
C) Peter Costello.
D) John Maynard Keynes.

Question 26

In the aggregate demand-output model, if an economy operates above equilibrium GDP, there will be:

A) unplanned inventory depletion.
B) an increase in GDP.
C) a decrease in employment.
D) an increase in employment.

Question 27

Why is investment demand more unstable than personal consumption?

A) Because business decisions are often made based on the expectations, and moods of optimism and pessimism concerning future economic conditions.
B) Because business decisions are often made based only on interest rates.
C) Because business decisions are made more often than personal purchasing decisions.
D) Because personal purchasing decisions are often made based on the forecasts of future sales.

Question 28

In the aggregate demand-output model, if aggregate demand is less than GDP, then:

A) inventory is unchanged.
B) inventory is depleted.
C) employment increases.
D) GDP decreases.

Question 29

A lower interest rate makes more investment projects feasible, meaning that:

A) there is a direct relationship between the rate of interest and the quantity of investment spending.
B) there is an inverse relationship between the rate of interest and the quantity of investment spending.
C) there is no relationship between the rate of interest and the quantity of investment spending.
D) the demand curve for investment spending is horizontal.

Question 30

In the aggregate demand-output model, equilibrium occurs if:

A) aggregate demand (AD) is greater than GDP.
B) aggregate demand (AD) is less than GDP.
C) there is no unplanned inventory depletion or accumulation.
D) consumption equals investment.

Question 31

If the terms of trade increase then, ceteris paribus:

A) imports will fall.
B) imports will rise.
C) exports will rise.
D) exports will fall.

Question 32

The most volatile component of aggregate expenditures is:

A) personal consumption.
B) investment demand.
C) government expenditure.
D) net exports.

Question 33

Government spending is often used to:

A) change interest rates, which in turn alters consumption and investment.
B) increase demand in a recession.
C) decrease demand in a recession.
D) target inflation.

Question 34

As your income increases over time, your MPC:

A) will not remain constant.
B) will decrease.
C) will increase.
D) can remain constant or can change.

Question 35

Technological progress often results in:

A) a fall in investment as firms can produce more output for fewer inputs, including capital.
B) a rise in investment as firms try to take advantage of these improvements.
C) no change in investment, as a rise in some investment is offset by decreases in other areas of investment.
D) a rise in investment only if it is accompanied by a fall in the interest rate.

Question 36

In the aggregate demand-output model, if an economy operates above equilibrium GDP, there will be:

A) unplanned inventory depletion.
B) an increase in GDP.
C) an increase in employment.
D) a decrease in GDP.

Question 37

The ratio of the change in GDP to an initial change in aggregate demand is the:

A) spending multiplier.
B) permanent income rate.
C) marginal expenditure rate.
D) marginal propensity to consume.

Question 38

In the aggregate demand-output model, if an economy operates below equilibrium GDP, there will be:

A) unplanned inventory depletion.
B) unplanned inventory accumulated.
C) a decrease in GDP.
D) a decrease in employment.

Question 39

Real investment spending is _____ real personal consumption.

A) equal to
B) greater than
C) stable compared to
D) highly volatile compared to

Question 40

________ noted that the aggregate demand is not necessarily always equal to total production.

A) Churchill
B) Smith
C) Say
D) Keynes

Question 41

Keynes was not concerned with:

A) problems of inflation but his theory helps to fight supply-push inflation.
B) problems of interest rates but his theory helps to fight deflation.
C) problems of investments but his theory helps to fight demand-pull inflation.
D) problems of inflation but his theory helps to fight demand-pull inflation.

Question 42

The interest-rate effect predicts that higher prices:

A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) decrease borrowing, leading to higher interest rates and less investment.
D) increase borrowing, leading to higher interest rates and less investment.

Question 43

Which of the following are the components of the aggregate demand curve?

A) Government spending (G) and Investment (I).
B) Saving.
C) Consumption excluding exports.
D) Only total imports.

Question 44

A $1 million increase in investment spending will raise equilibrium output (real GDP) by:

A) less than $1 million.
B) exactly $1 million.
C) between $0.5 and $1.5 million.
D) more than $1 million.

Question 45

The aggregate demand is:

A) C + I + G + (X + M).
B) C + I + G - (X - M).
C) C + I + G*(X - M).
D) C + I + G + (X - M).

Question 46

The interest-rate effect is the impact on:

A) the value of all final goods and services produced during a given time period based on current prices.
B) the value of all final goods and services produced during a given time period based on the prices existing in a selected base year.
C) the value of all intermediate goods and services sold during a given time period.
D) the value of all raw materials extracted during a given time period based on the prices existing in a selected base year.

Question 47

Which of the following is not a reason for the downward slope of an aggregate demand curve?

A) Real balance effect.
B) Real interest-rate effect.
C) Net exports effect.
D) Effect of changes in the composition of inputs for aggregate production function.

Question 48

The aggregate demand curve shows:

A) that people are willing to buy more goods and services at a lower average price level.
B) an increase in average price level.
C) that people are willing to buy less goods and services at a lower average price level.
D) supply is lagging behind demand.

Question 49

The aggregate demand curve is downward sloping because:

A) an increase in the price level will cause an increase in spending.
B) at lower price levels, real wealth decreases, causing a decrease in the quantities of goods and services demanded.
C) at lower price levels, interest rates decrease, causing a decrease in the quantities of goods and services demanded.
D) at lower price levels, exports increase, causing an increase in the quantities of goods and services demanded.

Question 50

The aggregate demand curve:

A) shows the level of real GDP purchased in the economy at different possible price levels during a period of time.
B) shows the level of real GDP produced in the economy at different possible price levels during a period of time.
C) shifts to the left whenever there is an increase in aggregate expenditures.
D) slopes upward and shifts to the left whenever there is an increase in aggregate
Expenditures.

Question 51

Which of the following is not a component of the aggregate demand curve?

A) Government spending (G).
B) Investment (I).
C) Consumption (C).
D) Saving.

Question 52

The net exports effect is the _____ relationship between net exports and the price level of an economy.

A) inverse
B) independent
C) direct
D) linear

Question 53

The aggregate demand curve shows how real GDP purchased varies with changes in:

A) unemployment.
B) output.
C) the price level.
D) the interest rate.

Question 54

The effect of an increase in investment on real GDP will be greater, the larger the:

A) MPC.
B) APC.
C) MPS.
D) APS.

Question 55

Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following?

A) People's desire to maintain real wealth holdings, the interest rate and international trade.
B) People's desire to increase the price level, the interest rate and the economic growth effect.
C) The interest rate, the economic growth effect and international trade.
D) Cost-pull inflation, demand-pull inflation and the need to maintain real wealth holdings.

Question 56

The manipulation of spending to influence aggregate demand was first put forward because:

A) the classical view of flexible prices and wages did not necessarily hold in reality.
B) unemployment often remained stubbornly high for too long during and after a
Depression.
C) inflation was extremely high during the Great Depression.
D) the classical view of flexible prices and wages did not necessarily hold in reality and unemployment often remained stubbornly high for too long during and after a
Depression.

Question 57

According to the net-exports effect, as the price level falls relative to the rest of the world:

A) foreigners buy fewer goods.
B) foreigners buy more Australian goods.
C) the aggregate demand curve shifts to the left.
D) the aggregate demand curve shifts to the right.

Question 58

The horizontal axis used in the aggregate demand curve measures:

A) the amount of all final goods and services included in real GDP.
B) the value of all final goods and services included in nominal GDP.
C) the value of all intermediate goods and services.
D) the value of all final goods and services included in real GDP.

Question 59

As the marginal propensity to consume (MPC) decreases, the spending multiplier:

A) increases.
B) decreases.
C) remains constant.
D) becomes undefinable.

Question 60

According to the Keynesian model:

A) the equilibrium is found by equating the output produced to aggregate demand.
B) the equilibrium is found by equating the inventories to aggregate demand.
C) the equilibrium is found by equating the investment to aggregate demand.
D) the equilibrium is found by equating the output produced to aggregate supply.

Question 61

Which of the following are beliefs of classical theory?

A) Both production costs as well as selling prices are flexible.
B) Inflexible wages.
C) Inflexible prices.
D) Prices cannot change rapidly.

Question 62

A leftward shift in the aggregate demand curve can be caused by:

A) a decrease in the price level.
B) an increase in business investment spending.
C) a decrease in business investment spending
D) an increase in consumer optimism about the future.

Question 63

Keynes argued that prices and wages were likely to be inflexible during a recession because:

A) unemployment would be high and firms would have little spare capacity.
B) unemployment would be low and firms would have little spare capacity.
C) unemployment would be high and firms would have substantial spare capacity.
D) unemployment would be low and firms would have substantial spare capacity.

Question 64

The pre-Keynesian or classical economic theory predicted that in the long run the economy would experience:

A) long periods of high unemployment.
B) rising rates of inflation.
C) only temporary periods of high unemployment.
D) idle factors of production.

Question 65

If every household in Australia won a lottery which gave each of them an extra $50 000 to spend, the:

A) aggregate supply curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) general price level would rise, causing a movement up the aggregate demand curve.
D) aggregate demand curve would shift to the right in the short-run.

Question 66

To illustrate the classical argument that 'supply creates its own demand', the aggregate supply curve should be drawn:

A) downward sloping.
B) upward sloping.
C) horizontal.
D) vertical.

Question 67

The aggregate supply curve is defined as:

A) net national product.
B) the sum of wages, rent, interest and profits.
C) the real GDP produced at different price levels.
D) the total dollar value of household expenditures.

Question 68

Suppose an increase in government spending stimulates real GDP without affecting the price level. What is the relevant range of the aggregate supply curve in this case?

A) The classical range.
B) The intermediate range.
C) The Keynesian range.
D) The monetarist range.

Question 69

According to classical theory, if the aggregate demand curve decreased and the economy experienced unemployment, then:

A) the economy would remain in this condition indefinitely.
B) the government must increase spending to restore full employment.
C) prices and wages would fall quickly to restore full employment.
D) the supply of money would increase until the economy returned to full employment.

Question 70

A cut in government spending, a decrease in income abroad, an increase in taxes or an expectation that future consumer income will fall will all cause aggregate:

A) demand to shift outward.
B) demand to shift inward.
C) supply to shift outward.
D) supply to shift inward.

Question 71

The net export effect is caused by:

A) the negative relationship between the price level and the exports minus imports.
B) the positive relationship between the price level and the exports minus imports.
C) the negative relationship between the price level and the exports.
D) the negative relationship between the price level and the exports plus imports.

Question 72

The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be:

A) horizontal at the full-employment level of real GDP.
B) positively sloped at the full-employment level of real GDP.
C) vertical at the full-employment level of real GDP.
D) backward bending at the full-employment level of real GDP.

Question 73

In the intermediate range of the aggregate supply curve, higher aggregate demand will increase:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level, but reduce real GDP.

Question 74

According to the interest-rate effect, as the price level:

A) rises, people feel poorer and buy less.
B) rises, Australian products become more expensive and foreigners buy fewer Australian goods.
C) rises, interest rates fall and people buy less.
D) rises, interest rates rise and people buy less.

Question 75

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:

A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Question 76

If an economy is operating along the Keynesian section of the aggregate supply curve, then an increase in aggregate demand will result in:

A) an increase in inflation and an increase in real GDP.
B) no change in the price level and a decrease in unemployment.
C) a decrease in the price level and a decrease in unemployment.
D) no change in the price level and an increase in unemployment.

Question 77

Which of the following will shift the aggregate demand curve to the right?

A) Consumers becoming more pessimistic about the future.
B) A decrease in government spending.
C) An increase in business optimism.
D) A decrease in business optimism.

Question 78

Which of the following characterises the classical view of the economy?

A) The economy is inherently unstable.
B) Prices and wages are not flexible.
C) The economy will automatically self-correct to full employment.
D) The economy needs government intervention to adjust to full employment.

Question 79

The aggregate supply curve:

A) shows the level of nominal GDP that firms are willing to produce at different
Price levels.
B) shows the level of real GDP that firms are willing to consume at different price levels.
C) shows the level of real GDP that firms are willing to produce at different price levels.
D) shows the amount of goods and services consumers are willing to buy at different
Price levels.

Question 80

The aggregate supply curve is:

A) always vertical.
B) always horizontal.
C) a summation of individual supply curves and is always upward sloping.
D) horizontal, vertical and upward sloping.