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Exam 12: Aggregate Expenditure and Output in the Short Run

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Question 1

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Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure?

A) Price level increases raise real wealth,which causes consumption spending and aggregate expenditure to decline.
B) Price level increases cause firms and consumers to hold more money,which raises the interest rate.Higher interest rates lower consumption and planned investment expenditures,which lowers aggregate expenditure.
C) Price level increases in the United States relative to other countries raise net exports,which lowers aggregate expenditure.
D) As the price level rises,government spending falls,which lowers aggregate expenditure.

E) A) and B)
F) A) and C)

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B

Question 2

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When aggregate expenditure is more than GDP,which of the following is true?

A) There was an unplanned decrease in inventories.
B) Firms spent less on capital goods than they planned.
C) Households bought fewer new homes than they planned.
D) All of the above must be true when aggregate expenditure is more than GDP.

E) None of the above
F) A) and D)

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Question 3

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Examples of assets that are included in household wealth would be

Article Summary Although growing at only half the average rate following the seven previous recessions, consumer spending has increased 9 percent since the end of the 2007-2009 recession, and consumer confidence has been on the rise as household finances, the job market, and the housing market continue to improve. The Federal Reserve projects a 3% - 3.5% growth rate for the economy in 2014, up from the recent average of 2%. Debt payments have fallen to an average of 15.69% of after-tax income for households, the lowest level in 30 years, and lower debt payments leave households with more to spend on consumer goods. Source: Neil Shah, "Pocketbooks Begin to Open As Household Wealth Grows," Wall Street Journal, June 25, 2013. -Refer to the Article Summary.The increase in consumer spending discussed in the article summary was due in part to lower debt payments which have resulted in an increase in disposable income.The increase in consumption resulting from the increase in disposable income caused a(n) ________ the aggregate expenditure curve.

Firms in a small economy anticipated that inventories would grow over the past year by $500,000.Over that year,inventories actually grew by only $400,000.This implies that

If the marginal propensity to save is 0.25,then a $10,000 decrease in disposable income will

If inflation in the United States is higher than inflation in other countries,what will be the effect on net exports for the United States?

If firms are more pessimistic and believe that future profits will fall and remain weak for the next few years,then

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP,then

What impact does a higher price level have on interest rates,wealth,and investment spending?

Figure 12-2 -Refer to Figure 12-2.Suppose that the level of GDP associated with point N is potential GDP.If the U.S.economy is currently at point K,

A stock market crash which causes stock prices to fall should cause

All of the following are components of aggregate expenditure except

When aggregate expenditure = GDP,

If consumption is defined as C = 2,400 + 0.9Y,then the marginal propensity to consume is 0.9.

Table 12-11 -Refer to Figure 12-3.Suppose that investment spending decreases by $5 million,decreasing aggregate expenditure and decreasing real GDP from GDP₂ to GDP₁.If the MPC is 0.8,then what is the change in GDP?

Table 12-11 -Refer to Figure 12-3.Suppose that government spending increases,shifting up the aggregate expenditure line.GDP increases from GDP₁ to GDP₂,and this amount is $200 billion.If the MPC is 0.8,then what is the distance between N and L or by how much did government spending change?

An decrease in the price level in the United States will shift the aggregate expenditure line downward.

Economists think that the marginal propensity to consume for the U.S.economy is somewhere around 0.9.Based on our simple multiplier formula,this would imply that the multiplier for the United States should be around 10.However,economists agree that the spending multiplier is closer to 2.What might explain this supposed anomaly?

Explain how a stock market crash has the potential to lead to a recession in an economy.