Economics 252 – Revised Review Questions Chapter 10

Use Figure 1 to answer Questions (1) to (3).

(1) In Figure 1, the equilibrium level of GDP is:

(a) $200

(b) $300

(d) $500

(2) In Figure 1, at the equilibrium level of GDP,

(a) savings equals $100.

(b) investment equals $200

(d) consumption equals $300.

(3) At a $400 level of GDP,

(a) GDP will increase as aggregate expenditure is greater than GDP.

(b) GDP will increase as GDP is greater than aggregate expenditure.

(d) GDP will decrease since savings are greater than investment.

Figure 1

C + I

500

400

300

200

100

0

300 400 500

GDP

(4) When aggregate expenditures exceed GDP:

(a) GDP will decline.

(b) unintended business inventories will rise.

(d) unintended business inventories will fall.

(5) If an unintended increase in business inventories occurs at some level of GDP,

(a) then aggregate expenditures in excess of GDP.

(b) then aggregate expenditures are less than GDP.

(d) then GDP is expected to rise.

(6) Saving is always equal to:

(a) planned investment.

(b) actual investment.

(d) consumption.

(7) Planned investment equals saving:

(a) at all levels of GDP.

(b) at all below-equilibrium levels of GDP.

(d) only at the equilibrium GDP.

Complete Table 1 to answer Questions (8) and (9).

Table 1

Aggregate Aggregate

Domestic Expenditures Expenditures

Output Closed Net Open

(GDP=PI) Economy Exports Imports Exports Economy $200 $230 $30 $20 $____ $_____

250 270 30 20 $____ $_____

300 310 30 20 $____ $_____

350 350 30 20 $____ $_____

400 390 30 20 $____ $_____

450 430 30 20 $____ $_____

500 470 30 20 $____ $_____

(8) In Table 1, if the above economy was closed to international trade, the equilibrium GDP and the multiplier would be:

(a)$300 and 5. (b)$350 and 5. (c)$400 and 4. (d) $350 and 5.

(9) In Table 1, if the above economy was open to international trade, the equilibrium GDP and the multiplier would be:

(a) $300 and 2.5 (b) $450 and 5. (c) $400 and 4. (d) $400 and 5.

(10) An upward shift of the aggregate expenditures schedule might be caused by:

(a) a decrease in exports, with no change in imports.

(b) a decrease in imports, with no change in exports.

(d) an increase in imports, with no change in exports.

(11) If the US dollar appreciates relative to foreign currencies, we would expect:

(a) the multiplier to decrease.

(b) both our exports and imports to fall.

(d) our net exports to fall.

(12) If the multiplier in an economy is 5, a $20 billion increase in net exports will:

(a) increase GDP by $100 billion.

(b) reduce GDP by $20 billion.

(d) increase GDP by $20 billion.

(13) Suppose the economy’s multiplier is 2. Other things being equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to:

(a) decrease by $50 billion.

(b) decrease by $150 billion.

(d) decrease by $25 billion.

(14) If a lump-sum tax of $25 billion is levied and the MPS is 0.20, the:

(a) saving schedule will shift upward by $5 billion.

(b) consumption schedule will shift downward by $25 billion.

(d) consumption schedule will shift upward by $25 billion.

(15) A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than a $1 decline in taxes because:

(a) government spending is more labor intensive and creates more jobs.

(b) government spending encourages people to dis-save.

(d) None of the above.

(16) Suppose the government finds it can increase the equilibrium real GDP by $45 billion by increasing government purchases by $18 billion. On the basis of this information, we can conclude that:

(a) the MPS in this economy is 0.4

(b) the MPC in this economy is 0.4

(d) the multiplier is 4.

Utilize Figure 2 to answer Questions (17), (18), and (19).

Figure 2

D

B

A

0

GDP

Definitions: C = consumption: I = Investment; Net X = Net Exports

(17) In Figure 2, if C + I are the private expenditures in the closed economy, and net exports are Net X(2) in the open economy, then

(a) exports are negative.

(b) net exports are positive.

(d) imports are greater than exports.

(18) In Figure 2, if net exports are Net X(2), the GDP in the open economy will exceed GDP in the closed economy by:

(a) AB

(b) AD

(d) BD

(19) In Figure 2, a change in aggregate expenditures from C + I + Net X(2) to C + I + Net X(1) might be caused by:

(a) an appreciation of the nation’s currency relative to the currencies of its trading partners.

(b) a depreciation of the nation’s currency relative to the currencies of its trading partners.

(d) a rightward shift of the nation’s 45-degree line.

(20) An inflationary gap is the amount by which:

(a) equilibrium GDP falls short of the full-employment GDP.

(b) aggregate expenditures exceed any given level of GDP.

(d) aggregate expenditures exceed the full-employment level of GDP.

Utilize Figure 3 in Questions (21) and (22).

Figure 3

AE = GDP

AE(1)

0

Gross Domestic

Product (GDP)

(21) In Figure 3, if the full-employment level of GDP is B, and aggregate expenditures are at AE(3), the:

(a) inflationary gap is BC.

(b) recessionary gap is BC.

(d) inflationary gap is ed

(22) In Figure 3, if the full-employment level of GDP is B, and aggregate expenditures are at AE(1), the:

(a) inflationary gap is BC.

(b) recessionary gap is BC.

(d) inflationary gap is ei.

Utilize Table 2 to answer Questions (23), (24), and (25).

Table 2

Real Gross Net Government

GDP Consumption Investment Exports Purchases

$0 $-20 $10 $+5 $15

$10 $ 0 $10 $+5 $15

$40 $20 $10 $+5 $15

$70 $40 $10 $+5 $15

$100 $60 $10 $+5 $15

$130 $80 $10 $+5 $15

$160 $100 $10 $+5 $15

(23) In Table 2, equilibrium real GDP is:

(a) $40

(b) $70

(d) $130

(24) In Table 2, if the full-employment real GDP is $100, the:

(a) inflationary gap is $30

(b) inflationary gap is $10

(d) recessionary gap is $10

(25) In Table 2, a decrease in government purchases of $5 would:

(a) increase real GDP by $5

(b) increase real GDP by $10

(d) decrease real GDP by $15.