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- 1. The AD curve is downward sloping because of
- A. The multiplier effect
- B. The wealth effect
- C. The international effect
- D. The interest rate effect
- E. All of the above (correct answer)
- 2. Which of the following make the AD curve shift?
- A. Foreign income & exchange rates
- B. Government aggregate demand policies & distribution of income
- C. Expected future income & the economyβs productive capacity
- D. A & B(Correct Answer)
- 3. If future prices are expected to decrease, the AD curve shifts in.
- A. True
- 4. If the AD curve is in the short-run range of the AS curve, what happens to the price level and real output if foreign income decreases?
- A. Both decrease
- 5. If the AD curve is in the long-run range of the AS curve, what happens to the price level and real output if the economyβs productive capacity decreases?
- B. Price level increases and real output decreases
- 6. If the AD curve is in the short-run range of the AS curve, what happens to the price level and real output if the government decreases government spending?
- A. Both decrease
- 7. The repercussions of the initial effect of the price level change on aggregate expenditures as the economy adjusts to equilibrium is called the multiplier effect.
- A. True
- 8. In the multiplier model, if the mpe is 0.75, then the multiplier is:
- C. 4
- 9. Refer to the graph on page 265. If real income is $7,000:
- B. Inventories are above their desired level
- 10. If autonomous expenditures are $2,000, income is $10,000, and the marginal propensity to expend is 0.8, then total expenditures according to the expenditure function would be:
- B. $10,000
- 11. In the equation AE = $3,000 + 0.7Y, autonomous expenditures are equal to 70 percent of income.
- B. False
- 12. In the equation AE = $4,000 + 0.65Y, autonomous expenditures are equal to $4,000.
- A. True
- 13. If potential output exceeds actual output, then the economy is experiencing a recessionary gap.
- A. True
- 14. If potential output exceeds actual output, then the economy is experiencing an inflationary gap.
- B. False
- 15. If at the intersection of aggregate demand and short-run aggregate supply the level of real GDP is $12.2 trillion, and at the intersection of aggregate demand and long-run aggregate supply the level of real GDP is $11 trillion, then:
- C. Actual output exceeds potential output, and we are in an inflationary gap
- In the multiplier model, if the mpe is 0.75, then the multiplier is:
- The multiplier = 1 / (1 - mpe) where the mpe is the marginal propensity to expend.
- It is always less than 1 because there is always some savings.
- Substituting into the equation gives us the multiplier = 1 / (1 - .75) = 1 / .25 = 4.
- C. 4
- If real income is $7,000:
- At $7,000 the economy is producing $7,000 of aggregate production, but the expenditures are only $5,500. Thus inventories are building up and are above what's normally required to keep businesses operating smoothly.
- Ans: Inventories are above their desired level
- If autonomous expenditures are $2,000, income is $10,000, and the marginal propensity to expend is 0.8, then total expenditures according to the expenditure function would be:
- AE = AE0 +mpeY, where AE is aggregate expenditures, AE0 is autonomous expenditures, mpe is the marginal propensity to expend, and Y is aggregate income.
- Substituting into the equation gives us AE = $2,000 + .8($10,000) = $2,000 + $8,000 = $10,000
- B. $10,000
- In the equation AE = $3,000 + 0.7Y, autonomous expenditures are equal to 70 percent of income
- B. False
- In the equation AE = $4,000 + 0.65Y, autonomous expenditures are equal to $4,000.
- A. True
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