Economics 252 - Review Questions Chapter 10 – Self-Adjustment or Instability

(1) Leakages include:

(a) business saving.

(b) investment.

(c) autonomous consumption.

(d) exports.

(2) If injections exceed leakages:

(a) unemployment will rise.

(b) the economy will expand.

(c) prices will fall.

(d) all of the above.

(3) If an economy is at full employment and investment spending increases while all other levels of spending remain constant, then:

(a) unemployment increases.

(b) the price level increases.

(c) there is a recessionary GDP gap.

(d) all of the above are correct.

(4) When unwanted business inventories build up, which of the following is likely to occur?

(a) a higher level of unemployment.

(b) a lower level of unemployment.

(c) a higher level of output.

(d) a higher price level.

(5) Given C = 100 + 0.80 Y, the multiplier is:

(a) 0.20

(b) 0.8

(c) 4

(d) 5

(6) Calculate the total change in spending because of an initial $100 increase in aggregate demand, given MPC = 0.75

(a) $100 increase.

(b) $100 decrease.

(c) $400 increase.

(d) $75 increase.

(7) If the MPC = 0.75, the cumulative decrease in total spending from an initial $100 reduction in autonomous spending would be:

(a) $100

(b) $300

(c) $750

(d) $400

(8) Which is eliminated when the economy's output is equal to full-employment GDP?

(a) The GDP gap.

(b) The multiplier.

(c) Leakages and injections.

(d) All of the above.

Use the information in Table 1 to answer Questions (9) and (10). Suppose lower interest rates suddenly lead to an injection of $256 additional investment spending into the economy and the marginal propensity to consume is 0.75. Complete Table 1 by calculating the spending cycles as the increased investment spending works its way through the economy.

Table 1

Change in this cycle's Cumulative increase in

spending and income spending and income

Spending Cycles

First-cycle spending $256 $256

Second-cycle spending _____ _____

Third-cycle spending _____ _____

(9) In Table 1, what is the cumulative increase in expenditure by the end of the third cycle?

(a) $80

(b) $192

(c) $448

(d) $592

(10) In Table 1, what will be the total increase in aggregate demand resulting from the initial $256 increase in investment expenditure after an infinite number of cycles?

(a) $341

(b) $1,024

(c) $2,560

(d) $256

Consider Figure 1 in answering Questions (11) and (12).

Figure 1

Real Output

(11) In Figure 1, which of the following could cause a shift from AD(0) to AD(1)?

(a) an increase in consumer confidence.

(b) a decrease in interest rates.

(c) a decrease in government spending on the environment.

(d) an increase in exports.

(12) In Figure 1, suppose the economy is in equilibrium at point a and Q(f) represents full employment output. Which of the following statements is true?

(a) The economy is experiencing a serious inflation problem.

(b) There is no GDP gap (inflationary or recessionary).

(c) Inventories are accumulating.

(d) All of the above.

Consider Figure 2 in answering Questions (13) and (14).

Figure 2

Real Output

(13) Suppose MPC in the economy in Figure 2 is 0.75 and the shift from AD(0) to AD(1) was caused by a decrease in investment of $20 billion. What will be the magnitude of the second decrease in aggregate demand be (that is, from AD(1) to AD(2))?

(a) $26.7 billion.

(b) $60 billion.

(c) $80 billion.

(d) $120 billion.

(14) Suppose that the aggregate demand curve in Figure 2 increases by a total of $50 billion, from AD(2) to AD(0). Equilibrium GDP will:

(a) increase by less than $50 billion because some of the additional spending drives up prices.

(b) increase by $50 billion.

(c) increase by more than $50 billion because of the multiplier effect.

(d) decrease because higher inflation causes unemployment.