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Everything else constant, the international trade effect indicates that aggregate expenditures in the domestic economy fall when:   A) domestic prices fall relative to foreign prices

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Everything else constant, the international trade effect indicates that aggregate expenditures in the domestic economy fall when:

 

A) domestic prices fall relative to foreign prices.

 

B) domestic interest rates fall relative to foreign interest rates.

 

C) domestic prices rise relative to foreign prices.

 

D) domestic purchasing power rises relative to foreign purchasing power.

 

E) domestic interest rates rise relative to foreign interest rates.

 

 

 

The aggregate demand curve shows:

 

A) how the equilibrium level of aggregate expenditure changes in response to changes in production.

 

B) the amount people spend at different real GDP levels.

 

C) the positive relationship between the price level and real GDP.

 

D) the negative relationship between aggregate expenditure and real GDP.

 

E) how the equilibrium level of aggregate expenditure changes as the price level changes.

 

 

 

Which of the following is associated with an increase in the average price level?

 

A) A decrease in the aggregate quantity demanded

 

B) An increase in the aggregate quantity demanded

 

C) A leftward shift of the aggregate demand curve

 

D) A rightward shift of the aggregate demand curve

 

E) Aggregate quantity demanded remains unchanged but the aggregate expenditures curve shifts leftward.

 

 

 

Suppose an appreciation of the French franc causes U.S. prices of French wine imports to rise sharply. On the other hand, Californian wine becomes relatively inexpensive to French consumers. Other things equal, this will result in:

 

A) an increase in U.S. aggregate expenditures and an increase in the aggregate quantity of U.S. goods and services demanded.

 

B) a decrease in U.S. aggregate expenditures and a decrease in the aggregate quantity of U.S. goods and services demanded.

 

C) an increase in U.S. aggregate expenditures and a decrease in the aggregate quantity of U.S. goods and services demanded.

 

D) no change in either U.S. aggregate expenditures or the aggregate quantity of U.S. goods and services demanded.

 

E) a decrease in U.S. aggregate expenditures and an increase in the aggregate quantity of U.S. goods and services demanded.

 

 

 

The Keynesian region of the aggregate supply curve is:

 

A) horizontal.

 

B) downward-sloping.

 

C) upward-sloping.

 

D) vertical.

 

E) a 45-degree line.

 

 

 

The Keynesian region of the aggregate supply curve explains the situation experienced during the Great Depression. Therefore, we can conclude that the Great Depression was characterized by:

 

A) high unemployment and low inflation.

 

B) low unemployment and low inflation.

 

C) low unemployment and high inflation.

 

D) high unemployment and high inflation.

 

E) excess capacity but no unemployment or inflation.

 

 

 

When total planned expenditures are more than real GDP, there will be inventory accumulation.

 

A) True

 

B) False

 

 

 

If total planned expenditures exceed real GDP, the economy will contract, causing production of goods and services to decrease and unplanned inventories to rise.

 

A) True

 

B) False

 

 

 

When the aggregate expenditures function of a closed economy is plotted against real GDP, any point on the 45-degree line represents C + I + G = Y, where C = Consumption, I = Investment, G = Government spending, and Y = Real GDP.

 

A) True

 

B) False

 

 

 

Injections represent outflows of planned expenditures from the real GDP stream.

 

A) True

 

B) False

 

 

 

Injections to the economy include consumption, investment, and government spending.

 

A) True

 

B) False

 

 

 

Leakages are greater than injections when total planned expenditures exceed real GDP.

 

A) True

 

B) False

 

 

 

Other things equal, a reduction in personal income taxes will decrease consumption and will have an expansionary effect on real GDP.

 

A) True

 

B) False

 

 

 

Suppose for an economy, investment = $40; saving = $50, government spending + exports = 100; and taxes + imports = $110. Then for this economy, total leakages exceed total injections by $20, so there will be pressure for the economy to contract.

 

A) True

 

B) False

 

 

 

The paradox of thrift explains that increased savings by households could actually lower savings for the economy as a whole.

 

A) True

 

B) False

 

 

 

A marginal propensity to consume of 0.75 and a marginal propensity to import of 0.05 are associated with an open-economy spending multiplier of 3.33.

 

A) True

 

B) False

 

 

 

In general, autonomous spending increases have a lower multiplier effect on real GDP when the economy is open to international trade.

 

A) True

 

B) False

 

 

 

If the MPS equals 0.25 and the MPI is 0.15, then an initial change in investment spending of $250 million will result in a total change in equilibrium real GDP of $625 million.

 

A) True

 

B) False

 

 

 

Given a constant GDP gap, the higher the spending multiplier, the smaller will be the recessionary gap.

 

A) True

 

B) False

 

 

 

The recessionary gap is given by the difference between potential GDP and real GDP.

 

A) True

 

B) False

 

 

 

If the spending multiplier equals 6 and equilibrium real GDP is $32 billion below potential real GDP, then total planned expenditures need to decrease by approximately $5.33 billion to close the recessionary gap.

 

A) True

 

B) False

 

 

 

Foreign repercussions of changes in domestic imports cause the true domestic spending multiplier to be less than 1/(MPS+MPI)

 

A) True

 

B) False

 

 

 

Suppose the multiplier effect for Japan is 0.8 for any $1 billion change in U.S. government purchases. Therefore, Japanese real GDP will rise by $8 billion when U.S. government spending rises by $10 billion.

 

A) True

 

B) False

 

 

 

In reality, the simple spending multiplier [1/(MPS+MPI)] is applicable only to countries whose imports are a substantial fraction of income in foreign countries.

 

A) True

 

B) False

 

 

 

An increase in U.S. imports from Mexico will cause a decrease in income for Mexican individuals and businesses.

 

A) True

 

B) False

 

 

 

If German imports of French products are very important in determining the volume of German exports to France, we would expect the actual German spending multiplier to be larger than 1/(marginal propensity to save +marginal propensity to import).

 

A) True

 

B) False

 

 

 

The Keynesian aggregate expenditures model assumes that price level is constant.

 

A) True

 

B) False

 

 

 

A change in the price level in an economy will be depicted by a movement along the AE curve and not by a leftward or rightward movement of the curve.

 

A) True

 

B) False

 

 

 

Wealth is considered to be a nonincome determinant of consumption.

 

A) True

 

B) False

 

 

 

A depreciation of the U.S. dollar will result in an increase in aggregate expenditures in the country.

 

A) True

 

B) False

 

 

 

When the price level in an economy falls, the demand for bonds and other nonmonetary financial assets rises.

 

A) True

 

B) False

 

 

 

The aggregate demand curve depicts a negative relationship between real GDP and the general price level.

 

A) True

 

B) False

 

 

 

Ceteris paribus, a decline in the general price level in the United States will make foreign-produced goods relatively more expensive to U.S. residents and increase the aggregate demand of domestic goods.

 

A) True

 

B) False

 

 

 

A decrease in the general price level is associated with an upward shift in the aggregate expenditures function.

 

A) True

 

B) False

 

 

 

If the equilibrium level of income is solely a function of aggregate supply, then the aggregate supply curve must be in the Keynesian region.

 

A) True

 

B) False

 

 

 

The portion of the aggregate supply curve that is a positive function of the general price level represents excess capacity and unemployed resources.

 

A) True

 

B) False

 

 

 

A horizontal aggregate supply curve indicates that equilibrium real GDP is determined by aggregate supply.

 

A) True

 

B) False

 

 

 

According to economists, the fixed-price model of macroeconomic equilibrium depicts the modern economy most closely because it assumes that aggregate supply is independent of price.

 

A) True

 

B) False

 

 

 

A major drawback of the Keynesian approach to macroeconomic equilibrium is the assumption that the supply of goods and services in the economy always adjusts to aggregate expenditures

 

A) True

 

B) False.