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 economy’s 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 economy’s 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