Question 1

From 1983-2013, ________ for the United States were negative.

Accepted Answer

A)  planned inventories 
B)  net exports 
C)  unplanned inventories 
D)  transfer payments

Question 2

Investment spending will increase when

Accepted Answer

A)  the interest rate rises. 
B)  the corporate income tax increases. 
C)  business cash flow increases. 
D)  firms become more pessimistic about earning future profits.

Question 3

If disposable income falls by $40 billion and consumption falls by $30 billion, then the slope of the consumption function is

Accepted Answer

A)  1.33. 
B)  0.75. 
C)  0.4. 
D)  0.3.

Question 4

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

Accepted Answer

A)  There was an unplanned increase in inventories equal to $2 million. 
B)  There was no unplanned change in inventories. 
C)  There was an unplanned decrease in inventories equal to $2 million. 
D)  There was an unplanned decrease in inventories equal to $19 million.

Question 5

If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will

Accepted Answer

A)  increase consumption by $7,500. 
B)  increase consumption by $2,500. 
C)  decrease consumption by $7,500. 
D)  decrease consumption by $2,500.

Question 6

Which is the largest component of aggregate expenditure?

Accepted Answer

A)  planned investment expenditures 
B)  consumption expenditures 
C)  government expenditures 
D)  net export expenditures

Question 7

When Javier's income increases by $5,000, he spends an additional $3,750 dollars. This implies that his marginal propensity to consume is 0.75.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following will raise consumer expenditures?

Accepted Answer

A)  an increase in interest rates 
B)  a general decline in housing prices 
C)  an increase in expected future income 
D)  an increase in the price level

Question 9

If the economy is currently in equilibrium at a level of GDP that is above potential GDP, which of the following would move the economy back to potential GDP?

Accepted Answer

A)  a decrease in wealth 
B)  a decrease in interest rates 
C)  an increase in business confidence 
D)  a decrease in the value of the dollar relative to other currencies

Question 10

Figure 23-2 
-Refer to Figure 23-2. If the U.S. economy is currently at point K, which of the following could cause it to move to point N?

Accepted Answer

A)  The price level in the United States rises relative to the price level in other countries. 
B)  Congress passes investment tax incentives. 
C)  The interest rate rises. 
D)  Household wealth declines.

Question 11

Figure 23-1 
-Refer to Figure 23-1. If the economy is in equilibrium, it is at a level of aggregate expenditure given by point

Accepted Answer

A)  J. 
B)  K. 
C)  L. 
D)  Points J, K and L all represent equilibrium.

Question 12

What impact does an increase in the price level in the United States have on net exports and why?

Accepted Answer

A)  An increase in the price level decreases net exports because higher prices decrease the value of the dollar. 
B)  An increase in the price level decreases net exports by increasing the relative cost of American goods. 
C)  An increase in the price level increases net exports because higher prices lower the value of the dollar. 
D)  An increase in the price level increases net exports because higher prices decrease American spending on imports.

Question 13

The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure.

Accepted Answer

A)  aggregate demand curve 
B)  savings line 
C)  45-degree line 
D)  consumption function

Question 14

Figure 23-1 
-Refer to Figure 23-1. If the economy is at point J, what will happen?

Accepted Answer

A)  Inventories have fallen below their desired level, and firms decrease production. 
B)  Inventories have fallen below their desired level, and firms increase production. 
C)  Inventories have risen above their desired level, and firms decrease production. 
D)  Inventories have risen above their desired level, and firms increase production.

Question 15

Economists first began studying the relationship between changes in aggregate expenditures and changes in GDP

Accepted Answer

A)  in the 1950s. 
B)  during the Great Depression. 
C)  at the end of the Civil War. 
D)  during the Industrial Revolution.

Question 16

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.

Accepted Answer

A)  total production; total income; real GDP 
B)  total spending; real GDP; total income 
C)  total spending; real GDP; the price level 
D)  total income; real GDP; the price level

Question 17

Actual investment spending includes spending by consumers on

Accepted Answer

A)  durable goods. 
B)  nondurable goods. 
C)  new houses. 
D)  services.

Question 18

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?

Accepted Answer

A)  There was an unplanned change in inventories. 
B)  Aggregate expenditure is equal to GDP. 
C)  Aggregate expenditure is greater than GDP. 
D)  Aggregate expenditure is less than GDP.

Question 19

Figure 23-1 
-Refer to Figure 23-1. According to the figure above, at what point is aggregate expenditure greater than GDP?

Accepted Answer

A)  J 
B)  K 
C)  L 
D)  none of the above

Question 20

All of the following are true statements about the multiplier except

Accepted Answer

A)  The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate. 
B)  The larger the MPC, the larger the multiplier. 
C)  The multiplier is the ratio of the change in real GDP to the change in autonomous expenditure. 
D)  The multiplier makes the economy less sensitive to changes in autonomous expenditure.

Exam 23: Aggregate Expenditure and Output in the Short Run