Deck 10: The Determination of Gross Domestic Product

Question 1

The portion of unemployment that is due to changes in technology in the economy is called:

A) frictional unemployment
B) natural unemployment
C) cyclical unemployment
D) structural unemployment

Answer 1

D

Question 2

If an increase in the level of investment by firms results in disequilibrium between injections and withdrawals in the circular flow model:

A) GDP will increase and withdrawals will decrease until J = W
B) GDP will increase and withdrawals will also increase until J = W
C) GDP will decrease and withdrawals will increase until J = W
D) GDP will decrease and withdrawals will also decrease until J = W

Answer 2

B

Question 3

The ratio of the change in the equilibrium level of output to a disequilibrium between injections and withdrawals is the:

A) multiplier
B) elasticity coefficient
C) marginal propensity to consume
D) marginal propensity to withdraw

Answer 3

A

Question 4

The fraction of a change in income that is consumed or spent is called:

A) the marginal propensity to save
B) the marginal propensity to consume
C) the marginal propensity of income
D) average consumption

Question 5

Which of the following is NOT a determinant of household consumption expenditure?

A) interest rates
B) expected future income
C) capital efficiency
D) disposable income

Question 6

The MPW is:

A) the ratio of income to saving
B) the average amount of income that is saved
C) the fraction of a change in income that is withdrawn from the circular flow
D) the ratio of saving to income

Question 7

When the aggregate expenditure curve is above the 45 degree line:

A) there will be excess demand in the economy and GDP will increase
B) there will be insufficient demand in the economy and GDP will decrease
C) there will be insufficient demand in the economy and GDP will increase
D) there will be excess demand in the economy and GDP will decrease

Question 8

If an economy's MPC is 0.7, then an increase in government spending of $2000 will increase by:

A) $2857
B) $6667
C) $3000
D) $7000

Question 9

Which of the following is NOT a reason why booms and recessions come to an end?

A) there is a basic minimum level of consumption
B) the bandwagon effect
C) governments may change their taxation policy
D) the echo effect

Question 10

Structural unemployment is the:

A) unemployment that results when people become disheartened about their chances of finding a job so they stop looking for work
B) unemployment that occurs during recessions and depressions
C) portion of unemployment that is due to the normal working of the labour market
D) portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries

Question 11

If an economy's MPC is 0.8, then an increase in government spending of $1000 will increase income by:

A) $8000
B) $5000
C) $2000
D) $10 000

Question 12

When total injections are less than total withdrawals at full- employment national income there is said to be:

A) a hysteresis effect
B) a deflationary gap
C) a paradox of thrift
D) an inflationary gap

Question 13

The tendency for investment to increase when aggregate output increases, and decrease when aggregate output decreases is known as the effect.

A) disequilibrium
B) accelerator
C) multiplier
D) cyclical

Question 14

A positive output gap is more likely to be associated with:

A) recession
B) rising unemployment
C) deflation
D) inflationary pressure

Question 15

If the MPW is 0.4, the MPC is:

A) 1.4
B) 0.6
C) 2.5
D) 0.4

Question 16

An inflationary gap occurs when:

A) when prices rise in the economy
B) potential GDP exceeds actual GDP
C) full employment GDP exceeds national expenditure
D) national expenditure exceeds full employment GDP

Question 17

A man is sacked from his job because he was late for work too many times. While he is searching for another job he would be classified as:

A) not in the labour force because his employer had a legitimate reason for sacking him
B) frictionally unemployed
C) cyclically unemployed
D) structurally unemployed

Question 18

The accelerator theory states that business cycle fluctuations are explained by fluctuations in:

A) investment
B) income
C) the multiplier
D) exports and imports

Question 19

An output gap where equilibrium GDP is below the full employment level is more likely to be associated with:

A) falling unemployment
B) recession
C) inflationary pressure
D) injections exceeding withdrawals

Question 20

A woman who retired becomes bored with retirement and begins to look for a job. During the time she is searching for work she would be classified as:

A) not unemployed because she was not working before she started looking for a job
B) structurally unemployed
C) cyclically unemployed
D) frictionally unemployed

Question 21

The largest component of aggregate demand in Australia is:

A) net exports
B) household consumption
C) government expenditure
D) private investment

Question 22

The increase in unemployment that occurs during recessions is called:

A) structural unemployment
B) cyclical unemployment
C) frictional unemployment
D) normal unemployment

Question 23

The net export component of aggregate demand of Australia will increase if:

A) GDP and income in Australia increase
B) GDP and income in China increase
C) household expenditure in American Samoa increases
D) household expenditure in Australia increases

Question 24

The multiplier effect refers to:

A) the total amount by which GDP falls after an initial injection
B) the change in GDP brought about by multiple policy changes
C) the amount of the initial increase in aggregate demand brought about by a new injection into the economy
D) the total amount by which GDP rises after an initial injection

Question 25

If the MPW increases, the multiplier will:

A) either increase or decrease depending on the size of the change in investment
B) remain constant
C) increase
D) decrease

Question 26

The portion of unemployment that is due to the short- run job/skill matching problems is called:

A) cyclical unemployment
B) frictional unemployment
C) natural unemployment
D) structural unemployment

Question 27

If the multiplier is 4, a $10 billion increase in investment will cause aggregate output to increase by:

A) $60 billion
B) $40 billion
C) $50 billion
D) $10 billion

Question 28

Consumption smoothing is the idea that:

A) you can save your income as a child to fund your retirement
B) people prefer to have a constant salary over their lifetime
C) the government intervenes to insure that salaries don't change, but remain smooth to enable easier decision making
D) you can borrow when your income is low and pay back when your income rises

Question 29

The formula for the multiplier is:

A) 1/MPC
B) 1 - MPC
C) 1/MPW
D) 1/(1 + MPC)

Question 30

The level of private sector investment will increase if:

A) there is an increase in the level of consumer demand
B) bank lending declines
C) there is an increase in interest rates
D) expectations regarding the future become more pessimistic

Question 31

If consumption is $25 000 when income is $21 000, and consumption increases to $25 900 when income increases to $22 000, the MPC is:

A) 1.11
B) 0.90
C) 0.84
D) 0.59

Question 32

An increase in the rate of interest causes consumers to save due to the substitution effect, and save due to the income effect.

A) less; less
B) more; less
C) less; more
D) more; more

Question 33

The Department of Defence closes its headquarters in Canberra and transfers to a new building in Melbourne. A worker at the Canberra office is given the opportunity and finance to move to Melbourne. She turns down this opportunity because of family obligations. While she is searching for a new job she would be classified as:

A) structurally unemployed
B) cyclically unemployed
C) not in the labour force because she turned down the opportunity to relocate
D) frictionally unemployed

Question 34

Within the circular flow of income, injections comprise:

A) government expenditure, investment expenditure and import expenditure
B) government expenditure, export expenditure and investment expenditure
C) saving, net taxes and import expenditure
D) saving, investment and import expenditure

Question 35

Swagman University is trying to convince taxpayers that the tax dollars spent at Swagman University are well spent. One of the university's arguments is that for every $1 spent by Swagman University an additional $5 of expenditures are generated within the economy. Swagman University is arguing that the multiplier for their expenditures is:

A) 0.2
B) 5
C) 1
D) 4

Question 36

A man who quits his job to search for one that takes full advantage of his educational background represents an example of:

A) cyclical unemployment
B) frictional unemployment
C) seasonal unemployment
D) structural unemployment

Question 37

The demand for video recorders falls when the economy enters a downturn. If a video recorder manufacturer sacks workers during an economic downturn, this would be an example of:

A) natural unemployment
B) structural unemployment
C) cyclical unemployment
D) frictional unemployment

Question 38

Full employment occurs when:

A) there is zero structural unemployment
B) there is zero frictional unemployment
C) there is zero cyclical unemployment
D) there are no unemployed people in the economy

Question 39

If the MPC is 0.75, a $20 billion decrease in planned investment will cause aggregate output to decrease by:

A) $26.67 billion
B) $80 billion
C) $15 billion
D) $20 billion

Question 40

A car worker in Geelong who loses his job because the company relocated the plant represents an example of:

A) natural unemployment
B) frictional unemployment
C) regional unemployment
D) technological unemployment

Question 41

Briefly explain what an inflationary gap is and how it can be eliminated.

Question 42

If there is a deflationary gap, injections will be below withdrawals.

Question 43

The real business cycle theory explains cyclical fluctuations in terms of external effects.

Question 44

If aggregate expenditure exceeds actual GDP, how will this impact on economic activity?

Question 45

How is it possible for the actual level of employment to be above the full- employment level?

Question 46

The 'echo effect' refers to the need to replace durable consumer goods sometime, and the subsequent effect this will have on the business cycle.

Question 47

If GDP is less than national expenditure, an inflationary gap will arise.

Question 48

Describe two of the determinants of household consumption expenditure.

Question 49

Explain the accelerator effect.

Question 50

Select the correct answer for the following.
Statement
a() If the MPC is 0.9, the size of the multiplier is:
b() If the MPW is 0.15, the size of the multiplier is:
c() If the MPC is 0.80, the size of the multiplier is:
Answer

Question 51

A shift to the use of gas instead of coal for electricity generation could cause structural unemployment.

Question 52

If the MPC is 0.8, the multiplier is:

A) 0.2
B) 5
C) 1.25
D) 0.8

Question 53

What is meant by the 'real business cycle theory'?

Question 54

As the MPW decreases, (all else constant), what happens to the size of the multiplier? Why?

Question 55

What is the relationship between the financial sector and the level of investment in an economy?

Question 56

Find the word or phrase that best completes each statement or answers the question.
Statement
a() Replacement investment emerges during the stage of the business cycle.
b() The accelerator leads to an increase in investment during the _ _ stage of the business cycle.
c() Firms find their stocks are rising during the stage of the business cycle.
Answer

Question 57

Explain why the MPC and the MPW must sum to one.

Question 58

A person who has chosen to leave their job while looking for a new job would not be classified as unemployed.

Question 59

In the withdrawals/injections diagram, the withdrawals curve is sloping, showing the relationship between withdrawals and GDP.

A) upward; negative
B) upward; positive
C) downward; positive
D) downward; negative

Question 60

Match the following statements with the options below:
Statement
a() When an industry declines and people become unemployed, this is classified as:
b() Unemployment that results from a drop in aggregate demand is classified as:
c() When a person is unemployed while looking for a job after re- entering the workforce following taking time off to have a family, this is classified as:
Answer

Question 61

Explain the way in which Australian exports may be affected by another country's national income.

Question 62

Raising taxes could help to reduce a deflationary gap.

Question 63

Define equilibrium as the term is used in macroeconomics. Draw a graph to show an economy is in equilibrium. Then illustrate and explain how an inflationary gap and a deflationary gap can occur.

Question 64

As GDP rises, withdrawals from the circular flow will also rise.

Question 65

At the full- employment level of GDP, there will be some unemployment.

Question 66

The marginal propensity to consume is the ratio of consumption to income.

Question 67

Describe the interaction between the multiplier and accelerator following an increase in government spending.

Question 68

The accelerator theory states that the level of investment depends on the level of GDP.

Question 69

The size of the multiplier is determined by the ratio of the change in withdrawals to the change in GDP.

Question 70

The formula for the multiplier is 1- MPW.

Question 71

If there is an inflationary gap, injections will be below withdrawals.

Question 72

Explain three different types of unemployment. Give an example of each type.
Given what you have learned about the different types of unemployment, suggest three policies that could be used to reduce unemployment, one for each type of unemployment.

Question 73

The multiplier effect goes on forever, however each successive effect is smaller than the previous effect.

Question 74

The largest component of aggregate demand in the Australian economy is investment by firms in the private sector.

Question 75

Explain how the multiplier process works. As the MPW increases, what happens to the size of the multiplier? Why?

Question 76

Government sector spending can be viewed as independent of national income.

Question 77

If GDP exceeds national expenditure, unemployment levels would begin to rise.

Question 78

The cost of debt servicing increases when interest rates rise.

Question 79

The full- employment level of unemployment for Australia has been calculated by statisticians to be exactly 4.5%.

Question 80

The larger the marginal propensity to withdraw, the smaller the multiplier.