Question

Answer fifteen (15) of the following true or false questions. Put a “T” or “F” at the end of the statement.

1) An increase in the interest rate would shift the consumption function upward.

2) The slope of the consumption function equals the marginal propensity to consume.

3) The marginal propensity to consume measures the change in consumption divided by the change in income.

4) A decrease in the price level decreases net wealth and increases consumption spending.

5) The only way in which government can affect aggregate demand is through changes in its own purchases.

6) If investment is autonomous, an increase in income will shift the investment function upward.

7) An increase in the interest rate, other things constant, decreases the amount of investment spending.

8) An increase in the value of the U.S. dollar in world markets, other things constant, would increase the demand for U.S. exports.

9) Consumption plus saving equals disposable income at every level of real GDP demanded.

10) The larger the MPC, the greater the multiplier effect.

11) A $200 increase in government purchases has a greater effect on the equilibrium level of real GDP than a $200 decrease in autonomous net taxes would.

12) An increase in the price level can be indicated by a downward shift of the aggregate expenditure line.

13) Movement along the aggregate demand curve may be caused by a change in autonomous investment spending.

15) One disadvantage of discretionary fiscal policy is that it can return the economy to its potential level of output but at the cost of increasing the price level.

16) A change in consumers' expectations about the future will shift both the aggregate expenditure curve and the aggregate demand curve.

17) Automatic stabilizers automatically adjust with the ups and downs of the economy to stabilize disposable income.

18) Discretionary fiscal policy works by shifting the aggregate demand curve.

19) When the real estate market in the United States crashed in 2006, it caused a significant decline in net wealth.

20) At the potential level of output, there is no seasonal unemployment.

21) If the actual price level is less than the expected price level reflected in long-term contracts, firm owners will find production more profitable than they had expected.

22) The amount by which actual output falls short of potential output is called an contractionary gap.

23) In the long run, the price level is determined by aggregate supply.

24) An increase in the federal minimum wage would shift the long-run aggregate supply curve inward (to the left).

25) Because nominal wages fall slowly, the supply-side adjustments needed to close a contractionary gap may take very long.

26) The oil price shock of the 1970’s would be an example of a negative supply shock.

27) A $100 billion increase in government purchases will have the same effect on real GDP as a $100 billion decrease in taxes.

28) If government purchases increase by $5 billion when the MPC is 0.8, then real GDP will increase by $20 billion.

29) An increase in imports increases aggregate demand.

30) A change in government spending can close an expansionary gap by shifting the short-run aggregate supply curve.

Answer 1

1. False.. Because higher interest rates lower consumption because then it becomes expensive in relation savings

2. True because mpc is the % of disposable income which the consumers spend on their consumption.

3. True. MPC = change in consumption / change in Income

4. False because with decrease in price level the value of wealth increases and thus will increase the consumption.

5. False- govt can influence demand both through fiscal( govt purchases, transfer payments and taxes) and monetary ( repo rates, reverse report rates etc.) measures.

6. False -An autonomous investment does not depend on income or interest rates or level of output. The word autonomous shows in dependency.

7 True-

9 True

10 true- The MPC determines the size of multiplier. The higher the MPC, the higher will be the multiplier.

11. True

12. True as the price level increases it decreases the expenditure done

13. False. Movement along the demand curve change in qty of goods and services demanded and a change in price level causes the movement.

17 True ...Automatic stabilizers such as revenue and spending programs will automatically adjust

18 true... A discretionary policy may be either or expansionary or contractionary and a change in govt purchases shifts the Aggregate demand curve.