Mid Term Review Question 21 Which of the following is not true about the aggrega
ID: 1097808 • Letter: M
Question
Mid Term Review
Question 21
Which of the following is not true about the aggregate demand curve?
Changes in the economic conditions in other countries will lead to a shift of the aggregate demand curve.
The aggregate demand curve is downward-sloping.
The aggregate demand curve shows the quantity of aggregate output demanded at different price levels.
The production possibilities curve determines the slope of the aggregate demand curve.
Question 22
The effect of an increase in aggregate supply is to lower the price level and to decrease real output.
True
False
Question 23
The real balance effect involves the way that
firms change their investment plans when the price level rises.
consumers change their planned purchases when the price level rises.
banks change their lending policies when interest rates rise.
banks change their lending polices when the price level rises.
Question 24
If actual output is above the equilibrium level, inventories will accumulate, and firms will increase prices to cover the added cost of carrying more inventory.
True
False
Question 25
In product markets, households are the sellers and businesses are the buyers.
True
False
Question 26
Unless the economy is beginning from a position of excess capacity, an increase in aggregate demand will
increase the price level.
decrease output.
decrease the price level.
decrease aggregate supply.
Question 27
Table 12.1
Real Disposable Income
Planned Real Consumption
0
3,000
2,000
4,400
4,000
5,800
6,000
7,200
8,000
8,600
10,000
10,000
12,000
11,400
14,000
12,800
Refer to Table 12.1. The table gives the combinations of income and consumption for a college student for a year. At what level of income is saving equal to zero?
10,000
14,000
4,000
6,000
Question 28
By saying that the size of the multiplier is determined by the marginal propensity to consume, we are asserting that
income is the primary determinant of consumption spending.
interest rates are the primary determinant of investment spending.
automatic stabilizers are not effective when the economy is overheated.
the crowding out effect is strong.
Question 29
The larger the marginal propensity to consume,
the smaller the multiplier is.
the less effective expansionary fiscal policy is.
the larger the marginal propensity to save is.
the larger the multiplier is.
Question 30
Investment spending is
part of aggregate demand.
an automatic stabilizer.
not subject to the multiplier effect.
equal to real income.
Question 31
Keynes argued that the economy could not reach equilibrium on its own.
True
False
Question 32
What is the multiplier when the marginal propensity to save is 0.2?
2
4
3
5
Question 33
John Maynard Keynes argued that wages
do not reflect the value of labor's true contribution
are not related to consumption spending.
should be set by the government.
are inflexible downward.
Question 34
Which one of the following would NOT shift the demand for investment?
a change in productive technology
a change in interest rates
a change in business taxes
a change in expectations of business profitability
Question 35
The demand for investment
shifts in response to interest rate changes.
depicts a negative relationship between interest rates and the level of investment.
depicts a positive relationship between interest rates and the level of investment.
is upward-sloping.
Question 36
Keynesian economics advocates the use of discretionary fiscal policy.
True
False
Question 37
If the marginal propensity to consume is 0.9, the multiplier is
0.90.
1.20.
9.
10.
Question 38
Marginal propensity to consume
is usually greater than 1.
is usually negative.
is the change in consumption divided by the change in income that produces it.
is the change in consumption divided by the change in investment that produces it.
Question 39
Why is there a resource cost associated with inflation?
because unemployment increases when there is inflation
because the existence of inflation discourages people from placing their savings in interest-bearing accounts, where it is needed to fund capital investment
because most workers end up working fewer hours during periods of inflation
because consumers, workers, and firms devote resources to protecting themselves from the financial costs of inflation
Question 40
The government agency which calculates the Consumer Price Index (CPI) is
the Council of Economic Advisors.
the American Enterprise Institute.
the Bureau of Economic Research.
the Bureau of Labor Statistics.
Question 41
Table 10.4
A Two Good Market
Item
Market Basket Quantity
2002 Price per Unit
2003 Price per Unit
Light Bulbs
500
$1.00
$2.00
Volleyballs
1000
$5.00
$7.00
Consider the data from Table 10.4, assuming that the market basket cost of light bulbs and volleyballs in the base year $4,500, what would be the price index for the year 2003?
156.30
100
92.7
177.78
Question 42
An individual who has stopped looking for a job because he is convinced that he cannot find a job is referred to as
a discouraged worker.
an unemployed worker.
a productive worker.
a contingent worker.
Question 43
The trough of a contraction is
an external shock that causes economic activity to decline.
the rate at which the level of business activity is declining.
the point in time at which the level of national business activity reaches a minimum before expanding again.
the point in time at which the level of national business activity reaches a maximum before contracting again.
Question 44
Empirical evidence shows that the nominal interest rate typically rises at the same time as the inflation rate increases. What does this suggest?
Increases in the current inflation rate lead borrowers and lenders to expect that inflation in the future will be higher than previously thought.
Interest rate changes are the main component of the GDP deflator.
Interest rate changes are the main component of the CPI.
The real rate of interest is zero.
Question 45
Which one of these factors plays a role in determining the extent and duration of frictional unemployment?
the education and skill levels of labor force participants
the degree to which the overall level of business activity fluctuates up and down
the extent to which government legislation requires firms to provide health insurance for employees
the ease with which job seekers can obtain information about job openings
Question 46
The total labor force is comprised of
only workers employed full-time.
all individuals over 16 years of age.
the unemployed and the employed.
only the employed.
Question 47
The unemployment rate tends to decrease in periods of business expansion.
True
False
Question 48
If the U.S. economy enters a recessionary phase,
the distribution of income will become more equal.
the unemployment rate will increase.
the economy enjoys full employment.
inflation will be eliminated.
Question 49
The labor force is composed of the employed and the unemployed.
True
False
Question 50
Structural unemployment can occur when
recessions occur.
the change of seasons causes construction workers to be laid off.
a worker dislikes her boss and quits.
there is a change in the nature of skills needed in the workforce.
Question 21
Which of the following is not true about the aggregate demand curve?
Changes in the economic conditions in other countries will lead to a shift of the aggregate demand curve.
The aggregate demand curve is downward-sloping.
The aggregate demand curve shows the quantity of aggregate output demanded at different price levels.
The production possibilities curve determines the slope of the aggregate demand curve.
Explanation / Answer
Question 21: D
The production possibilities curve determines the slope of the aggregate demand curve.
AD curve is downward sloping and depends on the expenditure of households (C+I+G+X-M)
Question 22: True
Increase in AS will shift AS supply curve to the right. So AD and AS curve will intersect at lower price level with higher output.
Question 23: B
The real balance effect involves the way that consumers change their planned purchases when the price level rises due to change in real money they have.
Question 24: False
If actual output is above the equilibrium level, inventories will accumulate, and firms will lower prices to cover the added cost of carrying more inventory.
Question 25: False
In factor markets, households are the sellers and businesses are the buyers.
Question 26: A
Unless the economy is beginning from a position of excess capacity, an increase in aggregate demand will increase the price level. AD and AS curve will intersect at vertical position (classical portion) of AS curve.
Question 27: A
When real disposable income is equal to real consumption, saving will be zero. (Y=C+S+T)
Question 28: C
By saying that the size of the multiplier is determined by the marginal propensity to consume, we are asserting that automatic stabilizers are not effective when the economy is overheated.
Question 29: D
The larger the marginal propensity to consume, the larger the multiplier is. Multiplier = 1/(1-MPC)
Question 30: A
Investment spending is part of aggregate demand.(y=C+I+G+NX)
Question 31: False
Keynes argued that the economy could not reach full employment on its own. Economy will always be in equilibrium where AD=AS.
Question 32: D
Multiplier = 1/MPS = 1/.2=5
Question 33: D
John Maynard Keynes argued that wages are inflexible downward due to contractual employment, union resistance. (Wage rigidity model)
Question 34: B
Investment demand depends on interest rate, and marginal efficiency of capital. Change in interest rate will have movement along demand curve, and will not shift investment demand curve.
Question 35: B
The demand for investment depicts a negative relationship between interest rates and the level of investment.
Question 36: True
Keynesian economics advocates the use of discretionary fiscal policy. By changing government expenditure, we will have multiplier impact on the level of income. In liquidity trap condition monetary policy is ineeficient.
Question 37: D
If the marginal propensity to consume is 0.9, the multiplier is
Multiplier=1/(1-MPC) =10
Question 38: C
Marginal propensity to consume
is the change in consumption divided by the change in income that produces it.
MPC= dC/dY
Question 39: B
because the existence of inflation discourages people from placing their savings in interest-bearing accounts, where it is needed to fund capital investment. Real interest rate falls when inflation increases.
Question 40: D
The government agency which calculates the Consumer Price Index (CPI) is the Bureau of Labor Statistics.
Question 41: D
Price index= (500*2+7*1000)*100/4500=177.78
Question 42: B
An individual who has stopped looking for a job because he is convinced that he cannot find a job is referred to as
Question 43: C
The trough of a contraction is
the point in time at which the level of national business activity reaches a minimum before expanding again.
Question 44: A
Increases in the current inflation rate lead borrowers and lenders to expect that inflation in the future will be higher than previously thought.
Question 45: D
the ease with which job seekers can obtain information about job openings
Question 46: C
The total labor force is comprised of the unemployed and the employed.
Question 47: True
The unemployment rate tends to decrease in periods of business expansion. Because national income increases.
Question 48: B
If the U.S. economy enters a recessionary phase, the unemployment rate will increase.
Question 49: True
The labor force is composed of the employed and the unemployed.
Question 50: D
Structural unemployment can occur when there is a change in the nature of skills needed in the workforce.