Question

1. Which of the following statements is true?

Select one:

a. holding everything else constant, an increase in planned investment spending shifts the AE function downward, leading to a higher level of GDP

b. Most recessions start with a decrease in investment spending.

c. Economists think that decreases in consumer spending often follow decreases in investment spending.

d. Answers (a), (b), and (c) are all true

e. Answers (b) and (c) are both true

2. An increase in the market interest rate

Select one:

a. Will make any given investment project less profitable

b. Will cause companies to rely more heavily on financing their investment projects through retained earnings rather than borrowing.

c. Will reduce the rate of return for any given investment project.

d. Answers (a), (b), and (c) are all correct

3. Suppose the MPC is equal to 0.5. In the simple income and expenditure model, a $100 increase in investment spending will lead to a

Select one:

a. $100 increase in spending in the first round, and a total increase in spending of $500

b. $50 increase in spending in the first round, and a total increase in spending of $100

c. $100 increase in spending in the first round, and a total increase in spending of $200

d. Total increase in spending of $100 since an increase in investment spending does not create a multiplier effect

4. Holding everything else constant, when interest rates rise, this

Select one:

a. Does not affect the profitability of investment projects financed through retained earnings.

b. Makes any given investment project less profitable.

c. Does not affect the opportunity cost of an investment project financed through retained earnings.

d. Leads to a lower level of planned investment spending.

5. In the INCOME EXPENDITURE MODEL, the role of inventories is to

Select one:

a. Ensure that aggregate expenditure is equal to aggregate production

b. Provide a signal to producers to increase or decrease their prices

6. In the short run, an increase in the aggregate price level due to a shift in AD first results in

Select one:

a. A right shift in the SRAS curve.

b. A movement along the SRAS curve.

6. In the long run, the aggregate price level increases. This

Select one:

a. Is due to the short run AS curve shifting to the right and the economy producing a level of aggregate output that is not equal to its potential output.

b. Is due to the AD curve shifting to the right.

c. Has no effect on the level of aggregate production in the economy.

d. Results in the economy moving to the level of production where aggregate output exceeds potential output.

e. Answers (a) and (c) are both correct.

f. Answers (b) and (c) are both correct.

g. Answers (c) and (d) are both correct.

h. No change in the level of aggregate production.

i. A left shift in the SRAS curve.

7.

An increase in the interest rate, holding everything else constant,

Select one:

a.
Reduces investment spending since the cost of borrowing is now higher.

b.
Reduces consumer spending since households will respond to the higher interest rate by saving more

c.
Leads to a reduction in the level of aggregate demand for final goods and services

d. Answers (a), (b), and (c) are all correct.

8. Suppose the aggregate price level in the economy falls. Holding everything else constant, this will result in the wealth effect,

Select one:

a. Which will cause the AD curve to shift to the right.

b. Because the fall in the aggregate price level increases consumers; purchasing power and this increase in purchasing power will result in a downward movement along the AD curve.

c. Which will cause the AD curve to shift to the left.

d. Because the fall in the aggregate price level increases consumers’ purchasing power and this increase in purchasing power will result in an upward movement along the AD curve.

Answer 1