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Questions and Answers
During a recession, if the government increases spending by 200 and the multiplier is 2.5, by how much will output increase?
During a recession, if the government increases spending by 200 and the multiplier is 2.5, by how much will output increase?
- 500 (correct)
- 100
- 300
- 900
If booming economies abroad cause U.S. net exports to rise by $50 billion and the MPC is 0.75, what is the change in equilibrium GDP?
If booming economies abroad cause U.S. net exports to rise by $50 billion and the MPC is 0.75, what is the change in equilibrium GDP?
- $50 billion
- $100 billion
- $200 billion (correct)
- $75 billion
What economic conditions are present when aggregate expenditure exceeds GDP?
What economic conditions are present when aggregate expenditure exceeds GDP?
- Inventories increase, GDP increases, and employment increases.
- Inventories increase, GDP increases, and employment decreases.
- Inventories decrease, GDP increases, and employment increases. (correct)
- Inventories decrease, GDP decreases, and employment increases.
Which factor will reduce the size of the multiplier and diminish the effect of changes in investor confidence on the economy?
Which factor will reduce the size of the multiplier and diminish the effect of changes in investor confidence on the economy?
Sasha earns $50,000 in wages, receives $10,000 in transfer payments, and pays $5,000 in taxes. What is Sasha's disposable income?
Sasha earns $50,000 in wages, receives $10,000 in transfer payments, and pays $5,000 in taxes. What is Sasha's disposable income?
If an economy's output increases while the price level decreases, which curve has shifted to the right?
If an economy's output increases while the price level decreases, which curve has shifted to the right?
If a country's economy is operating near full capacity, which statement is most likely to be true?
If a country's economy is operating near full capacity, which statement is most likely to be true?
Given the aggregate supply and demand data for a country, what is the equilibrium price level if:
Given the aggregate supply and demand data for a country, what is the equilibrium price level if:
When prices of outputs in an economy rise high enough to cause production to surpass its potential GDP, the resulting situation is:
When prices of outputs in an economy rise high enough to cause production to surpass its potential GDP, the resulting situation is:
In the AD/AS model, what is represented on the horizontal axis?
In the AD/AS model, what is represented on the horizontal axis?
Within an Aggregate Demand/Aggregate Supply (AD/AS) framework, how does elevated structural unemployment manifest graphically?
Within an Aggregate Demand/Aggregate Supply (AD/AS) framework, how does elevated structural unemployment manifest graphically?
If, in an economy, inflationary pressures cause national income to be spread across a higher price base for goods and services, how is this depicted in an AD/AS model?
If, in an economy, inflationary pressures cause national income to be spread across a higher price base for goods and services, how is this depicted in an AD/AS model?
If an economy experiences rising price levels for firms' products, while production costs remain constant, what is the likely outcome?
If an economy experiences rising price levels for firms' products, while production costs remain constant, what is the likely outcome?
If economic output falls below its full potential due to insufficient incentives for firms, how long will this condition likely persist?
If economic output falls below its full potential due to insufficient incentives for firms, how long will this condition likely persist?
Imagine that Country X experiences a significant increase in individual income taxes, bringing them to their highest point in half a century. Analyze the potential macroeconomic consequences for Country X, focusing specifically on the likely impact on aggregate supply and demand.
Imagine that Country X experiences a significant increase in individual income taxes, bringing them to their highest point in half a century. Analyze the potential macroeconomic consequences for Country X, focusing specifically on the likely impact on aggregate supply and demand.
Flashcards
GDP (Gross Domestic Product)
GDP (Gross Domestic Product)
The total market value of all final goods and services produced within a country in a given period.
Disposable Income
Disposable Income
Income remaining for spending or saving after taxes and transfer payments.
Full Employment GDP (Potential GDP)
Full Employment GDP (Potential GDP)
The level of GDP when the economy is producing at its potential and unemployment is at the natural rate.
Inflation
Inflation
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Deflation
Deflation
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Aggregate Supply (AS)
Aggregate Supply (AS)
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Aggregate Demand (AD)
Aggregate Demand (AD)
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Full Employment
Full Employment
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Stagflation
Stagflation
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Keynesian zone of AS curve
Keynesian zone of AS curve
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Equilibrium Price Level
Equilibrium Price Level
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Aggregate Expenditure Model
Aggregate Expenditure Model
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Full capacity
Full capacity
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Real Investment
Real Investment
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Economic Condition
Economic Condition
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Study Notes
- If the economy is in a recession, the government aims to increase output.
- With a multiplier of 2.5, a government spending increase of 200 results in a 500 increase in output.
- If booming economies cause US net exports to rise by $50 billion and the MPC is 0.75, the equilibrium GDP will increase by $200 billion.
- When aggregate expenditure exceeds GDP, inventories decrease, GDP increases, and employment increases.
- Bigger leakages will cause the multiplier to be smaller and changes in investor confidence to have a smaller effect on the economy.
- If Sasha earns $50,000 in wages, gets $10,000 in transfer payments, and pays $5000 in taxes, her disposable income is $55,000.
- When an economy's output increases and the price level decreases, the AS curve has shifted to the right.
- When an economy operates close to full capacity, cyclical unemployment is close to zero.
- The equilibrium price level is 400 when aggregate demand and supply are both 8,000.
- High prices of outputs causing production to exceed potential GDP will result in hyper-intense production that will be unsustainable in the long run.
- In an AD/AS model, real GDP is shown on the horizontal axis.
- An increase in structural unemployment will have no effect on the AS or AD in an AD/AS diagram.
- Inflationary pressures spreading national income across a higher overall price base will result in a downward sloping AD curve in an AD/AS model.
- If the price level of what firms produce is rising across an economy, but the costs of production are constant, higher profits will induce expanded production.
- If economic production has fallen to less than full potential due to inadequate incentives for firms to produce, the duration of this economic condition will likely be short-term.
- A significant increase in world oil prices will most likely increase input prices.
- In an AD/AS model, the point where the economy has excess capacity is called the Keynesian zone of the AS curve.
- Whether the economy is in a recession is illustrated in the AD/AS model by how close the equilibrium is to the potential GDP line.
- A shift to the left in either AS or AD in an AD/AS diagram could explain a rise in cyclical unemployment
- Aggregate demand curves slope downwards for each of the following reasons EXCEPT the substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods.
- Aggregate supply (AS) denotes the relationship between the total quantity that firms choose to produce and sell and the price level for output, holding the price of inputs fixed.
- If a consumer's disposable income is $50,000 and she spends $45,000 of it on consumption, she saved $5,000.
- An increase in interest rates lead to real investment spending declines.
- The most important component of consumption spending is current disposable income.
- In any particular year, the level of GDP is determined by the level of aggregate expenditure.
- Full employment GDP happens when the economy is producing at its potential and unemployment is at the natural rate of unemployment.
- Productivity growth is considered the most important factor in the AD/AS model because it shifts the AS curve in the long-term.
- If input prices rise and AS shifts to the left by 2,000 units at each price level, the new equilibrium price will be equal at 7,000.
- Increased individual income taxes and taking them to their highest level in 50 years, the economy will experience lower economic growth
- Changes in the price level of the different components of aggregate demand are reflected in the AD/AS macroeconomic model by a downward sloping AD curve
- An increase in structural unemployment will have no effect on AS or AD.
- The steep portion of the AS curve in an AD/AS diagram is most relevant to Say's Law.
- The term "full employment GDP" is synonymous with potential GDP.
- Potential GDP describes the maximum quantity that an economy can produce, in the context of its existing inputs, market and legal institutions.
- Wealth effect means that a higher price level leads to lower real wealth.
- Say's Law argues that a given value of supply must create an equivalent value of demand somewhere else in the economy.
- The maximum quantity that an economy can produce, given its existing levels of labor, physical capital, technology, and institutions, is called potential GDP.
- The economy as a whole is in macroeconomic equilibrium if all of the above: aggregate expenditure equals GDP, total spending equals GDP, aggregate expenditure equals total production and total spending equals total production.
- The equilibrium level of national income for this economy is Y=400.
- If input prices decrease and AS shifts to the right by 3,000 units at each price level, the new price level will equal 300.
- Aggregate demand (AD) denotes the relationship between the total quantity of domestically produced goods and services purchased by consumers, business, and governments and the price level for output.
- A significant increase in individual income taxes, taking them to their highest level in 50 years the result is unemployment is likely to rise
- Deflation will increase the purchasing power of the funds a person has managed to save.
- Stagflation results when an economy experiences high unemployment and high inflation at the same time.
- As the aggregate price level in an economy decreases, interest rates decrease.
- The equilibrium output is 7,000.
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