Deck 26: Demand-Side Equilibrium: Unemployment or Inflation?

Question 1

In a simplified circular flow model with no government, in equilibrium, S = I + (X - IM).

Answer 1

True

Question 2

The expenditure schedule includes the consumption function.

Answer 2

True

Question 3

If total spending is greater than current output, GDP will rise.

Answer 3

True

Question 4

Leakages are offset by investment and government spending in the circular flow model.

Question 5

When GDP decreases, consumption spending increases.

Question 6

When demand for goods and services is high, firms are more likely to hire more workers.

Question 7

Equilibrium GDP occurs when total spending equals total output.

Question 8

If the economy is suffering a recession, inventories are probably falling.

Question 9

Producers will change their prices when GDP is at the equilibrium level.

Question 10

If investment spending depends on GDP, this is called induced investment.

Question 11

An expenditure schedule shows the relationship between GDP and total output.

Question 12

When income rises, total expenditures remain constant.

Question 13

The counterpart to the unsold output of firms is the lack of jobs for workers willing to work.

Question 14

Leakages from the circular flow include saving and imports.

Question 15

Injections include saving and taxes.

Question 16

Equilibrium is the point where total spending equals total output, or GDP.

Question 17

Investment spending is a leakage from the circular flow model.

Question 18

When spending falls short of output, additional inventories are created.

Question 19

Free markets coordinate economic activity in such a way as to eliminate the possibility of inflation or unemployment.

Question 20

When GDP is less than total spending, GDP will fall.

Question 21

A recessionary gap exists when the equilibrium level of GDP exceeds potential GDP.

Question 22

If firms are experiencing falling inventories, one can expect that firms will cut production.

Question 23

An increase in the U.S.price level (foreign prices held constant) will cause a leftward shift in the aggregate demand curve.

Question 24

The full employment level of GDP is sometimes referred to as "potential GDP."

Question 25

If inventories are being depleted, firms may respond by cutting prices.

Question 26

In a capitalist market economy, recessions and inflation can occur because of coordination failures.

Question 27

A decrease in the price level causes a lower equilibrium quantity demanded.

Question 28

The aggregate demand curve has an upward slope due to the positive relationship between the price level and aggregate quantity demanded.

Question 29

A given income-expenditure diagram always assumes a variable price level.

Question 30

The multiplier can be expressed as the ratio of the change in Y over the change in I.

Question 31

Market economies are likely to suffer from recessions and inflation because the government plans all economic activity.

Question 32

When equilibrium GDP falls below potential GDP, an inflationary gap exists.

Question 33

A change in the price level will cause a shift in the expenditure schedule.

Question 34

The equilibrium level of GDP is always accompanied by full employment and stable prices.

Question 35

High unemployment and high rates of inflation are examples of coordination successes.

Question 36

Inventory reductions caused by strong demand are signals to retailers to order more products.

Question 37

Total expenditures can be written as C + I + G + (X - IM).

Question 38

An economic recession in Japan will cause the aggregate demand curve in the United States to shift to the right.

Question 39

In a capitalist market economy, the decision to save is made by the same people who make the major investment decisions.

Question 40

The U.S.economy in 2009 was characterized by an excess level of output.This corresponds to a recessionary gap.

Question 41

At the equilibrium level of income it must be true that total

A) income equals total spending.
B) product equals total output.
C) output equals total inventory.
D) income equals total saving.

Question 42

Economists before Keynes assumed that equilibrium GDP occurred

A) automatically.
B) only with the help of government stabilization.
C) if spending was generally greater than output.
D) only in socialist economies with central planning.

Question 43

An expenditure schedule model with no government sector shows the relationship between

A) C and national product.
B) C and disposable income.
C) C + I and national income.
D) GDP and disposable income.

Question 44

In a market economy, the decisions about what to produce and how much of each good or service to produce are made by

A) government officials.
B) economic planners.
C) central bankers.
D) consumers and producers.

Question 45

By definition, total production must always equal total

A) sales.
B) demand.
C) purchases.
D) income.

Question 46

If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that

A) total output is greater than total spending.
B) price levels are decreasing.
C) inventory levels are increasing.
D) inventory levels are decreasing.

Question 47

When businesses are cutting back production, then it probably true that

A) total spending is greater than total output.
B) total output is greater than total income.
C) total spending is less than total output.
D) inventory levels are decreasing.

Question 48

When constructing a basic macroeconomic model, several assumptions (not realistic, but necessary to simplify the analysis) are made.Which of the following are assumed to be constant?

A) the price level
B) the rate of interest
C) the foreign exchange rate
D) the level of government spending
E) All of the above are held constant.

Question 49

Recessions and depressions are the principal examples of

A) market failure.
B) coordination failure.
C) central planning.
D) socialist contradictions.

Question 50

Workers in a nearby pizza restaurant may indirectly enjoy income increases from a nearby construction process.

Question 51

Which of the following questions are not answered by the process of demand side GDP determination?

A) How large is equilibrium GDP?
B) Does the economy have unemployment?
C) Is demand side equilibrium consistent with supply side equilibrium?
D) Does the economy have inflation?
E) All of the above are not answered.

Question 52

Total output equals total income

A) only at equilibrium.
B) always.
C) only at non-equilibrium levels of income.
D) never.

Question 53

One of the primary functions of markets could be labeled

A) stimulation.
B) coordination.
C) planification.
D) decentralization.

Question 54

If inventory levels are decreasing, then we should expect business firms to

A) decrease prices.
B) decrease output.
C) lay off workers.
D) increase output.

Question 55

John Maynard Keynes concluded that investment spending is determined by

A) business confidence.
B) economic expectations.
C) psychological perceptions about the economy.
D) All of the above are correct.

Question 56

The main examples of macroeconomic coordination failures are

A) profit declines.
B) relative price changes.
C) recessions and depressions.
D) consumer taste changes.

Question 57

If total spending exceeds total output, then

A) inventory levels will rise.
B) inventory levels will remain constant.
C) inventory levels will fall.
D) output will eventually decrease.

Question 58

In a simple macroeconomic model, only one component of expenditures is allowed to change:

A) investment.
B) consumption.
C) net exports.
D) government spending.
E) transfer payments.

Question 59

If total spending is less than total output, then price levels will

A) rise and output will increase.
B) rise and output will decrease.
C) fall and output will increase.
D) fall and output will decrease.

Question 60

Economists are very good at explaining how individual markets work.Economists are less successful at explaining

A) market pricing.
B) recessions and inflation.
C) central planning.
D) business firm profits.

Question 61

The slope of the aggregate demand curve illustrates that as the price level rises,

A) real GDP demanded decreases.
B) real GDP demanded increases.
C) the aggregate demand curve shifts rightward.
D) the aggregate demand curve shifts leftward.

Question 62

If the economy is in equilibrium, it must be

A) on the 45° line.
B) on the 60° line.
C) below the 45° line.
D) below the 60° line.

Question 63

If net exports decrease, the expenditure schedule will

A) get steeper.
B) get flatter.
C) shift upward.
D) shift downward.

Question 64

If the price level rises, the effect on the expenditure schedule and equilibrium real GDP is to

A) increase both.
B) decrease both.
C) shift the expenditure schedule upward and decrease equilibrium real GDP.
D) shift the expenditure schedule downward and increase equilibrium real GDP.

Question 65

The slope of the aggregate demand curve illustrates that real GDP demanded will increase when

A) the price level rises.
B) the price level falls.
C) real income rises.
D) real income falls.

Question 66

Two variables that affect the slope of the aggregate demand curve are

A) government purchases and real taxes.
B) tax rates and interest rates.
C) government purchases and interest rates.
D) exchange rates and income rates.

Question 67

Equilibrium GDP on the demand side occurs when total spending

A) equals total production, and inventories are zero.
B) equals total production, and firms are unable to adjust inventories.
C) exceeds total production, and inventories are rising.
D) equals total production, and inventories remain at desired levels.
E) is less than total production, and inventories are falling.

Question 68

The price level effects consumer spending through changes in real

A) disposable income.
B) interest rates.
C) wealth.
D) GDP.

Question 69

Which of the following shows the relationship between national income (GDP) and total spending?

A) Demand schedule
B) Consumption curve
C) Expenditure schedule
D) Balance schedule

Question 70

An increase in the U.S.price level will

A) increase the slope of the expenditure schedule.
B) decrease the slope of the expenditure schedule.
C) shift the expenditure schedule upward.
D) shift the expenditure schedule downward.

Question 71

A higher price level would mean ____ for a person who has a bank deposit of $2 million.

A) an increase in real income
B) a decrease in real wealth
C) a decrease in nominal income
D) an increase in nominal income

Question 72

The expenditure schedule will shift upward when

A) net exports decrease.
B) net exports increase.
C) total imports increase.
D) total exports decrease.

Question 73

The aggregate demand curve

A) slopes upward.
B) slopes downward.
C) is perfectly vertical.
D) is perfectly horizontal.

Question 74

If the U.S.economy is experiencing falling price levels, the

A) expenditure schedule will shift downward.
B) expenditure schedule will shift upward.
C) slope of the expenditure schedule increases.
D) slope of the expenditure schedule decreases.

Question 75

A rising price level should shift the expenditure schedule

A) upward and decrease equilibrium real GDP.
B) downward and increase equilibrium real GDP.
C) downward and decrease equilibrium real GDP.
D) upward and increase equilibrium real GDP.

Question 76

If net exports are reduced, the expenditure schedule will shift

A) downward and equilibrium real GDP will rise.
B) upward and equilibrium real GDP will rise.
C) downward and equilibrium real GDP will fall.
D) upward and equilibrium real GDP will fall.

Question 77

Investment spending might be larger when GDP is higher.Such added investment as GDP rises is called

A) mutual investment.
B) induced investment.
C) positive investment.
D) net investment.

Question 78

When the price level in the United States rises, then net exports should

A) rise and equilibrium real GDP should increase.
B) fall and equilibrium real GDP should increase.
C) fall and equilibrium real GDP should decrease.
D) rise and equilibrium real GDP should decrease.

Question 79

Each C + I + G + (X - IM) expenditure schedule is drawn assuming a specific

A) income level.
B) spending level.
C) production level.
D) price level.

Question 80

Given the slope of the aggregate demand curve, real GDP demanded will decrease when

A) real income rises.
B) real income falls.
C) the price level falls.
D) the price level rises.