Question

1) In the short-run (AE) macro model, assume that inventories are increasing. This means that

a) output is less than aggregate expenditures.
b) output is unrelated to aggregate expenditures.
c) output is greater than aggregate expenditures

d) the economy is in equilibrium.

2) In the short-run (AE) macro model, consider a situation where inventories are increasing. This means that in the next period,

a) output will not change

b) output will decrease.
c) output will increase.
d) technology will improve.

3) Suppose GDP is $5000 and aggregate expenditure is $4400. Inventories will

a) decrease by $600
b) increase by $400
c) increase by $600

d) decrease by $400

4) If the output level is such that the aggregate expenditure is above the Y=AE line (45-degree line), which of the following is true?

a) AE is less than output, so inventories will increase and output will be lowered.
b) AE is greater than output, so inventories will decrease and output will be increased.

c) AE is less than output, so inventories will decrease and output will be raised.
d) AE is greater than output, so inventories will increase and output will be raised.

5) When the interest rate increases which of the following is most likely to occur:

a) the value of the US dollar will change
b) firms will be less likely to purchase new machines
c) Tesla stock will be purchased

d) more expensive household items will be purchased

6) A decrease in the value of stocks should cause

a) an increase in wealth.
b) a decrease in consumption spending.
c) an increase in consumption spending.

d) no change in consumption spending.

7) Which of the following is considered a government expenditure and part of G?

a) Social Security benefits paid to a retired worker
b) A new car bought by a government employee
c) Tuition paid by students at a public school

d) Construction on a highway

8) Assume the government decides to increase G today. Which of the following is the most certain likely outcome associated with the increase in G?

a) the debt-to-GDP ratio decreases in the short-run

b) high-income households are better off
c) low-income households are better off
d) the debt-to-GDP ratio increases in the short-run

9) The National Debt Clock showing a debt of 21 trillion and rising

a) is misleading because they do not show industrial production figures.
b) is misleading because they show the debt in nominal dollars rather than real dollars.
c) is needed to inform the American public about the massive amounts of debt the government is accumulating.
d) is misleading because they show the debt in dollars rather than as a percentage of GDP.

• Assume that the economy is in equilibrium. The equilibrium level of output is 100,000, the money supply is 1 billion dollars and the price level in the economy is 100. (Questions 10-12)

10) In this economy, $100 bonds are being sold for $96. What is the interest rate on bonds in this economy?
a) 4.17% b) 3.75% c) 4.38% d) 4.00%

11) The Federal Reserve believes that the full-employment level of output (Y-bar) is 75,000. In order to bring the economy back to full-employment equilibrium, they should ______ bonds and the price of bonds should _____.
a) sell bonds, decrease
b) purchase bonds, increase

c) sell bonds, increase
d) purchase bonds, decrease

12)After the interest rate change in the previous question, the aggregate expenditure curve will _____ because _____ will ______.
a) decrease, autonomous consumption and planned investment spending, decrease

b) increase, autonomous consumption and planned investment spending, increase

c) decrease, autonomous consumption and government expenditures, decrease
d) increase, government expenditures and planned investment spending, increase

13) Monetary policy is defined as
a) changes in the tax rate.
b) changes in spending by the Government.
c) changes in the interest rate.
d) changes in the money supply by the Federal Reserve

Answer 1

Question 1

According to the short-run (AE) macro model, mismatch between aggregate expenditure and output creates increase or decrease in inventories.

If aggregate expenditure exceeds output then inventories decrease.

On the other hand, if aggregate expenditure is less than output then inventories increase.

So, if inventories are increasing then output is greater than the aggregate expenditure.

Hence, the correct answer is the option (c).

Question 2

In short-run (AE) macro model, if inventories are increasing then this indicates that aggregate expenditure is less than the output.

Such increase in inventories compel firms to reduce or stop production until inventories revert back to desired level.

So, in next period, output will decrease.

Hence, the correct answer is the option (b).

Question 3

GDP is $5,000 and aggregate expenditure is $4,400.

When GDP or output exceeds the aggregate expenditure then, in that case, inventories increase.

Increase in inventories = GDP - Aggregate expenditures = $5,000 - $4,400 = $600

So,

Inventories will increase by $600.

Hence, the correct answer is the option (c).

Question 4

If at the output level, AE line is above the 45-degree line then, in that case, this implies that the aggregate expenditure is greater than the output.

When aggregate expenditure is greater than the output then inventories in the economy decreases.

Decrease in inventories prompt the firms to increase production and thus output will increase.

Hence, the correct answer is the option (b).