macro_tif1_ch11 - 11. 1 251 The _and_intheshortrun aggregate assuming_isconstant A totalincome realGDP;thepricelevel B total production;totalincome;rea

macro_tif1_ch11 - 11. 1 251 The _and_intheshortrun...

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Unformatted text preview: Chapter 11 Output and Expenditure in the Short Run 11.1 Aggregate Expenditure Model 1. 251 The expenditure model focuses on the relationship between ________ and ________ in the short run, aggregate assuming ________ is constant. A) total income; real GDP; the price level B) total production; total income; real GDP C) total spending; real GDP; the price level D) total spending; real GDP; total income Answer: C Diff: 1 Type: MC Page Ref: To pic : 768/348 T S Definition Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 2. In 2001, Systems was surprised by a decline in demand for their equipment, resulting in an unexpected increase in Cisco inventories. This event resulted from A) aggregate expenditure that was less than GDP. B) aggregate expenditure that was greater than GDP. C) spending that was greater production. D) macroeconomic equilibrium. Answer: A Diff: 1 Type: MC Page Ref: To pic : 766/346 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: Chapter Opener: Fluctuating Demand at Cisco Systems 3. The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by A) government spending. B) the level of aggregate expenditure. C) export spending. D) investment spending. Answer: B Diff: 1 Type: MC Page Ref: To pic : 768/348 T S Definition Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 4. Which of the following is not one of the four main categories of spending identified by John Maynard Keynes? A) government purchases B) transfer payments C) consumption D) planned investment Answer: B Diff: 1 Type: MC Page Ref: To pic : 768/348 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 5. A decrease in consumer confidence can put your job at risk if A) consumers expect firms to increase investment in the future. B) aggregate expenditures rise. C) aggregate expenditures fall. D) consumers expect their incomes to rise in the future. Answer: C Diff: 1 Type: MC Page Ref: To pic : 767/347 C S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: Economics in YOUR Life!: Consumer Confidence Fails-Is Your Job at Risk? 6. During the Great Depression, economists first began studying the relationship between A) changes in GDP and changes in interest rates B) changes in nominal GDP and changes in real GDP C) changes in aggregate expenditures and changes in GDP D) changes in stock prices and changes in price controls Answer: C Diff: 1 Type: MC Page Ref: To pic : 768/348 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking, Multicultural and Diversity Special Feature: None 7. Househol d spending on goods and services is known as A) net exports. B) consumption spending C) government purchases. D) planned investment spending. Answer: B Diff: 1 Type: MC Page Ref: To pic : 768/348 T S Definition Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 8. Which of the following is not a component of aggregate expenditure? A) actual investment spending B) consumption spending C) government spending D) planned investment spending Answer: A Diff: 2 Type: MC Page Ref: To pic : 768/348 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 9. The expenditure model focuses on the _____________ relationship between real spending and ______. aggregate A) short-run; inflation B) long-run; inflation C) long-run; real GDP D) short-run; real GDP Answer: D Diff: 2 Type: MC Page Ref: To pic : 768/348 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 10. Aggregate expenditure includes spending on A) C + I + G B) C + I + G - NX C) C + I + depreciation -NX D) C + I + G + NX Answer: D Diff: 2 Type: MC Page Ref: To pic : 769/349 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 11. Actual investment spending does not include A) spending on new capital equipment. B) changes in inventories. C) spending on consumer durable goods. D) spending on new houses. Answer: C Diff: 1 Type: MC Page Ref: To pic : 769/349 T S Definition Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 12. Goods that have been produced but not yet sold are referred to as A) understocks B) capital goods C) pre-sold goods D) inventories Answer: D Diff: 1 Type: MC Page Ref: To pic : 769/349 T S Definition Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 13. An unplanned increase in inventories results in A) an increase in planned investment. B) actual investment that is less than planned investment. C) actual investment that is greater than planned investment. D) a decrease in planned investment. Answer: C Diff: 2 Type: MC Page Ref: To pic : 769/349 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 14. Macroeco nomic equilibrium occurs when A) aggregate income = planned inventories. B) aggregate expenditure = GDP. C) aggregate expenditure = C+ I + G + net transfers. D) aggregate income = planned inventories. Answer: B Diff: 2 Type: MC Page Ref: To pic : 769/349 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 15. Consumpt planned investment spending is $8 million, government purchases are $10 million, and net exports are ion is $5 equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned million, changes in inventories occurred? A) There was no unplanned investment in inventories. B) There was an unplanned investment in inventories equal to $2 million. C) There was an unplanned decrease in inventory investment equal to $2 million. D) There was an unplanned decrease in inventory investment equal to $19 million. Answer: B Diff: 2 Type: MC Page Ref: To pic : 770/350 T S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 16. Consumpt is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, ion government purchases are $10 million, and net export spending is $2 million. What is aggregate spending expenditure? A) $27 million B) $23 million C) $25 million D) $15 million Answer: C Diff: 2 Type: MC Page Ref: To pic : 770/350 T S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 17. Consumpt is $5 million, planned investment spending is $8 million, unplanned investment ion spending is $2 million, government purchases are $10 million, and net export spending is $2 million. spending What is GDP? A) $27 million B) $23 million C) $15 million D) $25 million Answer: A Diff: 2 Type: MC Page Ref: To pic : 769/349 T S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 18. Consumpt is $5 million, planned investment spending is $8 million, actual investment ion spending is $8 million, government purchases are $10 million, and net export spending is $2 million. spending Based on this information, which of the following is true? A) Aggregate expenditure is greater than GDP. B) Aggregate expenditure is equal to GDP. C) Aggregate expenditure is less than GDP. D) There was unplanned investment in inventories. Answer: B Diff: 2 Type: MC Page Ref: To pic : 769/349 M S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 19. At macroeconomic equilibrium, A) total consumption equals total production. B) total investment equals total inventories. C) total spending equals total production. D) total taxes equal total transfers. Answer: C Diff: 2 Type: MC Page Ref: To pic : 769/349 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 20. When aggregate expenditure is less than GDP, which of the following is true? A) All of the above must be true when aggregate expenditure is greater than GDP. B) Firms spent more on capital goods than they anticipated. C) Households bought more new homes than they anticipated. D) There was unplanned inventory investment. Answer: D Diff: 2 Type: MC Page Ref: To pic : 770/350 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 21. In a small in 2007, aggregate expenditure was $800 million, while GDP that year was $850 million. Which of the economy following can explain the difference between aggregate expenditure and GDP that year? A) Aggregate expenditure is always less than GDP in developed countries. B) Aggregate expenditure is always less than GDP in developing countries. C) Firm investment in inventories was greater than anticipated in 2007. D) Firm investment in inventories was less than anticipated in 2007. Answer: C Diff: 2 Type: MC Page Ref: To pic : 770/350 T S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 22. Firms in a economy anticipated that inventories would grow over the past year by $500,000. Over that year, small inventories actually grew by only $400,000. This implies that A) aggregate expenditure that year was equal to GDP that year. B) there was an unplanned decrease in inventories that year. C) there was an unplanned increase in inventories that year. D) aggregate expenditure that year was greater than GDP that year. Answer: D Diff: 2 Type: MC Page Ref: To pic : 770/350 T S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 23. Firms in a economy anticipated that inventories would grow over the past year by $500,000. Over that year, small inventories did grow by exactly $500,000. This implies that A) aggregate expenditure that year was greater than GDP that year. B) aggregate expenditure that year was equal to GDP that year. C) there was an unplanned decrease in inventories that year. D) there was an unplanned increase in inventories that year. Answer: B Diff: 2 Type: MC Page Ref: To pic : 769/349 T S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 24. If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium? A) Inventories will decline, and GDP and employment will rise. B) Inventories will decline, and GDP and employment will decline. C) Inventories will rise, and GDP and employment will decline. D) Inventories will rise, and GDP and employment will rise. Answer: A Diff: 2 Type: MC Page Ref: To pic : 770/350 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 25. If firms find that consumers are purchasing more than expected, which of the following would you expect? A) The economy will adjust to macroeconomic equilibrium as inventories rise, and production and employment fall. B) The economy will adjust to macroeconomic equilibrium as inventories fall, and production and employment fall. C) Aggregate expenditure will likely be greater than GDP. D) Aggregate expenditure will likely be less than GDP. Answer: C Diff: 2 Type: MC Page Ref: To pic : 770/350 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 26. If firms sell what they expected to sell, which of the following will be true? A) Aggregate expenditure will be greater than GDP. B) Inventories will rise, and GDP and employment will fall. C) Aggregate expenditure will be less than GDP. D) There is no unplanned change in inventories. Answer: D Diff: 2 Type: MC Page Ref: To pic : 769/349 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 27. If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur? A) Inventories will fall. B) Wages will rise. C) GDP will fall. D) GDP will rise. Answer: C Diff: 2 Type: MC Page Ref: To pic : 770/350 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 28. If planned investment is equal to actual investment, then aggregate expenditure is equal to GDP. Answer: True F Dif f: 2 Type: TF Page Ref: To pic : 770/350 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 29. Aggregate re includes consumption spending, unplanned investment spending, government purchases, and net expenditu exports. Answer: True F Diff : 2 Type: TF Page Ref: To pic : 769/249 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 30. If aggregate expenditure is less than GDP, then inventories rise and GDP falls. Answer: True F Dif f: 2 Type: TF Page Ref: To pic : 770/350 T S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 31. Explain, adjustment to macroeconomic equilibrium occurs when spending is less than production. Be sure to in detail, discuss how inventories play a crucial role in the adjustment process. State what happens to GDP and how the employment during adjustment process. Answer: If spending is less than production, then firms will not be selling as many goods and services as they had expected. Inventories of goods will start to build up. This sends a signal to those managing the retail firms to cut back on orders of goods from their distributors. Distributors cut back purchases from manufacturers. Manufacturers of the good will cut back on production of the good, and reduce purchases from their suppliers and lay off workers. The reduction in Diff: 2 producti on will continue until inventor ies equal their desired levels, or until spendin g equals producti on. If this happens across many different industrie s, GDP and total employ ment will decline. Type: SA Page Ref: To pic : 770/350 M S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 32. Table 111 2500 3000 3500 2000 2400 2800 250 250 250 250 250 250 100 100 100 Real GDP Refer to Table 11-1. Using the table above, compute aggregate expenditures and identify the 2000macroeconomic equilibrium. Answer: The macroeconomic equilibrium is determined where aggregate expenditures = real GDP. The value for aggregate expenditures (C + I + G + NX) for each level of real GDP is given in the table below. The value where real GDP equals aggregate Diff: 2 expendit ures is $3000, and this is equilibri um. Rea 2 2 3 3 Page Ref: 770/350 Type: SA To pic : M S Analytical Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Analytic Skills Special Feature: None 33. Why do economists care about aggregate expenditures? Answer: Increases and decreases in aggregate expenditures cause the year-to-year fluctuations in GDP. Economists devote considerable time and energy to forecasting what will happen to each component of aggregate expenditure. If they forecast aggregate expenditures will decline in the future, this is equivalent to saying that GDP will Diff: 2 decline and the econom y will enter into a recessio n. This means fewer job opportu nities, lower wages, and lower profits. Type: SA Page Ref: To pic : 768/348 D S Conceptual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 11.2 Determining the Level of Aggregate Expenditure in the Economy 1. Which is the largest component of aggregate expenditure? A) consumption expenditures B) government expenditures C) planned investment expenditures D) net export expenditures Answer: A Diff: 1 Type: MC Page Ref: To pic : 771/351 D S Factual Objective: LO1: Understand how macroeconomic equilibrium is determined in the aggregate expenditure AACSB Coding: model. Reflective Thinking Special Feature: None 2. Consumpt ion spending will ________ when disposable income ________. A) increase; decreases B) change unpredictably; decreases C) decrease; increases D) increase; increases Answer: D Diff: 1 Type: MC Page Ref: To pic : 771/351 C S Conceptual Objective: LO2: Discuss the determinants of the four components of aggregate expenditure and define the marginal propensity to AACSB Coding: consume and the marginal propensit y to save. Reflective Thinking Special Feature: None 3. The five most important variables that determine the level of consumption are A) government purchases, interest rates, income, taxes, and transfers B) disposable income, wealth, expected future income, price level, and interest rate C) D) wealth, savings account balances, checking account balances, stock portfolio balances, and bond portfolio balances Answer: B Diff: 2 Type: MC Page Ref: To pic : 771/351 C S Definition Objective: LO2: Discuss the determinants of the four components of aggregate expenditure and define the marginal propensity to AACSB Coding: consume and the marginal propensit y to save. Reflective Thinking Special Feature: None 4. An in taxes will ________ consumption spending, and a decrease in transfer payments will ________ increase consumption spending. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase Answer: B Diff: 1 Type: MC Page Ref: To pic : 771/351 C S Conceptual Objective: LO2: Discuss the determinants of the four components of aggregate expenditure and define the marginal propensity to AACSB Coding: consume and the margin...
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