Deck 29: Business Activity, Employment and Inflation

Question 1

In the 45° line diagram, which of the following is given by the 45° line?

A) Consumption of domestic goods and services plus injections
B) Consumption of domestic goods and services
C) National expenditure
D) Consumption of domestic goods and services plus withdrawals

Answer 1

Consumption of domestic goods and services plus withdrawals

Question 2

In the equation C = a + bY, which describes the aggregate consumption function, 'a' stands for

A) the average consumption level.
B) the amount of consumption when income is zero.
C) the marginal propensity to consume.
D) the amount of income when consumption is zero.

Answer 2

the amount of consumption when income is zero.

Question 3

The consumption function can be defined as

A) the amount that is spent on non- domestic consumption.
B) the proportion of a rise in national income that goes on consumption.
C) the relationship between consumption and national income.
D) the relationship between consumption and withdrawals.

Answer 3

the relationship between consumption and national income.

Question 4

A theory of household consumption that assumes households make consumption decisions based on their expectations of lifetime income is known as the

A) Keynesian theory of consumption.
B) interest income theory of consumption.
C) classical theory of consumption.
D) permanent income theory of consumption.

Question 5

The key difference between the Keynesian theory of consumption and the permanent income is that

A) the Keynesian theory suggests that consumption and saving decisions are likely to be based on pre- tax income alone.
B) the permanent income theory suggests that consumption and saving decisions are likely to be based on current income alone.
C) the permanent income theory suggests that consumption and saving decisions are likely to be based on both current income and expectations of future income.
D) the Keynesian theory suggests that consumption and saving decisions are likely to be based on expectations of future income alone.

Question 6

The MPS is

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

Question 7

Which of the following factors will cause a movement along the savings function?

A) An increase in personal taxation
B) Expectations of a fall in prices
C) Moving into the recessionary phase of the business cycle
D) Christmas

Question 8

Which of the following would not raise equilibrium GDP in the Keynesian 45° diagram?

A) A decrease in taxation
B) An increase in imports
C) An increase in government spending
D) A decrease in the interest rate

Question 9

Which of the following would not lower equilibrium GDP in the Keynesian 45° diagram?

A) An increase in household savings
B) A decrease in government expenditure
C) An increase in exports
D) A decrease in investment

Question 10

If the MPS is 0.4, and savings is the only withdrawal, the MPC is

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

Question 11

If the MPC is 0.8, and savings is the only withdrawal, the MPS is

A) 1.8
B) 1.25
C) 0.8
D) 0.2

Question 12

When Richard's income is £20,000 he saves £500, and when his income increases to £21,000 he saves £700. His MPS is

A) 0.33
B) 0.25
C) 0.2
D) 0.29

Question 13

The change in imports caused by a one unit change in income is the marginal propensity

A) to spend.
B) to import.
C) to save.
D) to consume.

Question 14

Income increased by £1,000 and imports increased by £250. The MPM

A) is 0.75.
B) is 4.
C) is 0.25.
D) cannot be determined from this information.

Question 15

If the marginal propensity to import is 0.10 and income increases by £1,000, then spending on imports will

A) increase by £90.
B) decrease by £90.
C) decrease by £100.
D) increase by £100.

Question 16

Which of the following best describes the multiplier effect?

A) An initial increase in aggregate supply leads to a larger increase in national income.
B) An initial increase in aggregate demand leads to a larger increase in national income.
C) An initial increase in government income leads to a larger increase in national income.
D) An initial increase in interest rates leads to a larger increase in national income.

Question 17

The multiplier can be calculated using which formula?

A) Change in GDP divided by the change in interest rates
B) Change in aggregate expenditure divided by the change in GDP
C) Change in GDP divided by the change in consumption
D) Change in GDP divided by the change in aggregate expenditure

Question 18

The effect of a sustained increase in government spending (or investment) on income

A) could be larger or smaller in an open economy than in a closed economy.
B) is larger in an open economy (i.e. one with substantial foreign trade) than in a closed economy (i.e. one with little foreign trade).
C) is the same regardless of whether the economy is open or closed.
D) is smaller in an open economy than in a closed economy.

Question 19

When government spending or investment increases in an open economy

A) some of the extra consumption spending that results is on foreign products and not on domestically produced goods and services.
B) none of the extra consumption spending that results is on foreign products; all of it is on domestically produced goods and services.
C) consumption rises but income does not.
D) all of the extra consumption spending that results is on foreign products and none of it on domestically produced goods and services.

Question 20

Assuming no government or foreign sector, if the MPC is 0.8, the multiplier is

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

Question 21

Assuming there is no government or foreign sector, if the multiplier is 2.5, the MPC is

A) 0.6
B) 0.4
C) 2.5
D) 0.25

Question 22

Injections are assumed in the Keynesian model to be exogenously determined. Based on this, which of the following statements is false?

A) Injections are constant with respect to changes in national income.
B) Injections are constant with respect to time.
C) Injections in the 45° line diagram are given by a horizontal straight line.
D) All of the above

Question 23

In symbols, the (injections) multiplier can be defined as

A) OJ/OY
B) OW/OJ
C) OJ/OW
D) OY/OJ

Question 24

Which of the following is an example of cumulative causation?

A) The multiplier
B) A falling stock market leads to a loss of confidence on the part of investors, and to further falls in share prices
C) A buoyant house market leads to further rises in house prices
D) All of the above

Question 25

The equation of quantity (or 'quantity equation') assumes that

A) the velocity of circulation and real GDP are independent of the number of transactions.
B) interest rates are held constant.
C) the velocity of circulation is proportionate to real GDP.
D) the velocity of circulation and real GDP are independent of the money supply.

Question 26

Assume that a £1.00 increase in exports increases GDP by £2.00, and a £1.00 increase in income increases import spending by £0.15. In this case, a £500 million increase in exports will increase net exports by

A) £650 million.
B) £350 million.
C) £500 million.
D) £150 million.

Question 27

Which of the following would cause the value of the multiplier to fall?

A) A cut in the level of government spending
B) A balance of payments surplus
C) A fall in the level of investment
D) The population becomes more thrifty and saves a greater proportion of their income

Question 28

The following diagram shows injections and withdrawals.
If national income is currently Y₁, national income will

A) rise.
B) not change.
C) accelerate.
D) fall.

Question 29

A fall in withdrawals will lead to a multiplied rise in national income. This means that

A) OW = OY
B) OW < OY
C) OW > OY
D) none of the above

Question 30

The equation MV = PT is an expression of the quantity theory of money formulated by

A) Cambridge economists around 1900.
B) Keynes in 1933.
C) Friedman in 1948.
D) Fisher in 1911.

Question 31

Monetarists think that inflation is caused by

A) too much money in circulation.
B) demand- pull.
C) trade unions.
D) cost- push.

Question 32

Monetarist models assume that people's expectations of inflation

A) are determined by how much they think the money supply will grow.
B) will be zero in the future.
C) are determined by looking at all the relevant information and forecasting the future inflation rate.
D) are based on the way inflation has changed recently.

Question 33

According to non- Monetarist views of inflation, which of the following could bring inflation?
(i) An increase in import prices
(ii) An increase in money supply
(iii) An increase in inflationary expectations
(iv) An increase in wages

A) (ii) and (iii)
B) (i), (ii), (iii) and (iv)
C) (i) and (ii)
D) (i), (iii) and (iv)
E) (ii) and (iv)

Question 34

The equation of exchange says that________ = PY.

A) MU
B) M_d
C) MV
D) MR

Question 35

In an economy whose real national income is £200 million (measured in base- year prices), whose velocity of circulation is 8 and where the price index in base- year prices is 2, the money supply must be

A) £40 million.
B) £12.5 million.
C) £800 million.
D) £20 million.
E) £50 million.

Question 36

In an economy whose real national income is £100 million (measured in base- year prices), whose money supply is £10 million and where the price index in base- year prices is 2.5, the velocity of circulation must be

A) 25
B) 40
C) 4
D) 10
E) 50

Question 37

According to the equation of exchange, if the money supply rises by £10 million and the velocity of circulation is 4, nominal national income will rise by

A) £2.5 million.
B) £40 million.
C) £10 million.
D) It is impossible to say without knowing the price level (P).

Question 38

According to the equation of exchange, if the money supply rises by £50 million and the velocity of circulation is constant and greater than 1, nominal national income will rise by

A) >£50 million.
B) £0.
C) <£50 million.
D) £50 million.

Question 39

According to the equation of exchange, if the money supply rises by 10% and the velocity of circulation and price level are constant, then real national income will rise by

A) <10%.
B) >10%.
C) 10%.
D) It is impossible to say without knowing the original values of M and Y.

Question 40

According to the equation of exchange, if the money supply rises by £10 million and the velocity of circulation and price level are constant, then real national income will rise by

A) >£10 million.
B) <£10 million.
C) £10 million.
D) It is impossible to say without knowing the original values of M, V, and P.

Question 41

If a change in MV in the quantity equation leads to a change in P but no change in Y, then

A) the AD curve is vertical.
B) the AS curve is vertical.
C) the AS curve is horizontal.
D) the AD curve is horizontal.

Question 42

If a change in MV in the quantity equation leads to a change in Y but no change in P, then

A) the AD curve is vertical.
B) the AS curve is vertical.
C) the AS curve is horizontal.
D) the AD curve is horizontal.

Question 43

If a change in MV in the quantity equation leads to a change in both P and Y, this implies that

A) the AD curve is downward- sloping.
B) the AS curve is vertical.
C) the AD curve is horizontal.
D) the AS curve is upward- sloping.

Question 44

People hold speculative balances of money when they anticipate that the price of other assets will fall. Which of the following factors affects these expectations?

A) Changes in exchange rates
B) Changes in foreign interest rates
C) Statements of government intentions on economic policy
D) All of the above

Question 45

The chain of events that results from an expansionary monetary policy is

A) aggregate output increases, the demand for money increases, the interest rate increases, planned investment decreases, output falls.
B) money supply increases, the interest rate increases, planned investment increases, aggregate output increases, and money demand increases.
C) money demand increases, the interest rate decreases, planned investment increases, aggregate output increases, and money demand increases.
D) money supply increases, the interest rate decreases, planned investment increases, aggregate output increases, and money demand increases.

Question 46

The Keynesian view of the quantity theory of money stresses

A) the constant nature of velocity of circulation of money.
B) the unstable and unpredictable nature of the velocity of circulation.
C) the stable and predictable velocity of circulation of money.
D) the ways that the money supply can be measured accurately in practice.

Question 47

Monetarists argue that

A) the money supply should be cut in order to deal with the problem of inflation.
B) if the actual level of national income is below the full employment level, the money supply should be increased.
C) the money supply should be allowed to grow at a steady and predictable rate.
D) the size of the money supply should be varied to cause changes in aggregate demand.

Question 48

The relationship between money supply and prices can be expressed in the quantity equation.

A) MQ = VP
B) (MV)/1 = PQ
C) MV = PQ
D) M/V = P/Q
E) MP = VQ

Question 49

As the interest rate increases

A) planned investment increases and aggregate expenditure increases.
B) planned investment decreases and aggregate expenditure decreases.
C) planned investment decreases, but aggregate expenditure remains constant.
D) planned investment increases, but aggregate expenditure remains constant.

Question 50

Which of these statements is false?

A) Changes in foreign interest rates will have an effect on the demand for money.
B) The more responsive investment is to a change in interest rates, the bigger will be the final effect on national output of a fall in interest rates.
C) Quantitative easing has been used to try to reduce aggregate demand.
D) The effect of interest rates on the exchange rate can be estimated with certainty.

Question 51

The Monetarist analysis is based on the theory of portfolio balance. This states that

A) in times of recession individuals will use up their savings rather than cutting down on excess spending.
B) individuals will keep an equal balance between financial assets and money in their portfolios, irrespective of the rate of interest.
C) people hold their wealth in a number of different forms, the balance depending on their relative profitability and liquidity.
D) individuals with stocks and shares spread their risks by having a broadly balanced portfolio of equities.

Question 52

Many economists claim that the velocity of circulation is relatively stable over the long run. Of the following, which can be used to support this claim?

A) Increased money supply would lead to inflation and hence a higher nominal rate of interest, thus off- setting any fall in the real rate of interest.
B) The demand for money is relatively elastic in the long run.
C) Sufficient time has elapsed for the direct mechanism to have worked fully through.
D) A and C
E) All of the above

Question 53

Which of the following would increase a deflationary gap?

A) A decline in tax levels
B) A decline in imports
C) A decline in investment
D) A decline in the saving propensity

Question 54

If potential national income is £100 billion, current national income is £90 billion and the MPW is 2, there is a

A) recessionary gap of £5 billion.
B) inflationary gap of £10 billion.
C) recessionary gap of £10 billion.
D) inflationary gap of £5 billion.

Question 55

Given the following data in £ billions, if injections are constant at £12 billion and full employment occurs at a national income of £100 billion, what is the size of the recessionary (or 'deflationary') gap?

A) £5 billion
B) £40 billion
C) £80 billion
D) £4 billion
E) £20 billion

Question 56

An economy currently has a deflationary gap of £20 billion and an equilibrium level of national income of £60 billion below the full- employment level of national income. This means that it must have an MPCD of

A) 1/6
B) 2/3
C) 1/3
D) 3
E) 3/2

Question 57

When the economy is at the full- employment level of national income, this means that

A) the amount of money in the economy is at its maximum level.
B) everybody is employed.
C) there is no deficiency of demand.
D) the multiplier effect will generate a large number of jobs.

Question 58

Which of the following defines an inflationary gap?

A) The amount by which withdrawals exceed injections at the full- employment level of national income
B) The amount by which equilibrium national income exceeds the full- employment level
C) The amount by which national income exceeds national expenditure at the full- employment level of national income
D) The amount by which national expenditure exceeds national income at the full- employment level of national income

Question 59

Which of the following would not increase the full- employment level of real GDP?

A) A rise in aggregate prices
B) An increase in capital productivity
C) A rise in labour productivity
D) A rise in the working age population

Question 60

The original Phillips curve showed

A) the influence of fiscal policy on the level of inflation and unemployment.
B) the relationship between aggregate labour demand and aggregate labour supply in the long run.
C) the direct relationship between price inflation and unemployment.
D) the effect of expectations about changes in economic activity on the level of unemployment.
E) the inverse relationship between wage inflation and unemployment.

Question 61

Which of the following would not shift the Phillips curve?

A) Increased frictional unemployment caused by labour turnover
B) A temporary fall in aggregate demand
C) A rise in inflationary expectations
D) A rise in structural unemployment

Question 62

The Phillips curve shows the relation between______and ______.

A) inflation; the balance of payments
B) unemployment; investment
C) wage inflation; the unemployment rate
D) unemployment; public spending

Question 63

If the AD curve shifts from year to year, but the AS curve does not, then the Phillips curve will be

A) upward- sloping.
B) horizontal.
C) vertical in both the long run and the short run.
D) downward- sloping.

Question 64

The Phillips curve shows _ relationship between inflation and unemployment.

A) an inverse
B) a direct
C) an indirect
D) a perverse

Question 65

For the Phillips curve to slope upward in the short run

A) price level changes must be fully anticipated.
B) input price changes must move ahead of output price changes.
C) input prices must adjust immediately to output prices.
D) input price changes must lag behind output price changes.

Question 66

According to the equation for the expectations- augmented Phillips curve, inflation depends on

A) expected unemployment and actual prices.
B) the rate of interest and output.
C) expected inflation and actual unemployment.
D) real GDP and unemployment.

Question 67

When did the Phillips curve relationship seem to break down?

A) 1966
B) 1979
C) 1983
D) 1956

Question 68

If we draw a Phillips curve with unemployment on the horizontal axis and inflation on the vertical axis, Monetarists think that the long- run curve is

A) negatively inelastic.
B) vertical.
C) horizontal.
D) negatively elastic.

Question 69

According to the accelerationist theory, unemployment can only be kept below the natural rate if

A) interest rates continually fall.
B) inflation is allowed to rise.
C) there is scope for considerable export expansion.
D) growth is allowed to accelerate.

Question 70

Adaptive expectations state that

A) people never make the same mistake twice.
B) expectations are based upon forecasts made about the future performance of the economy.
C) expectations are on the basis of information from the past.
D) people adapt their expectations according to the policies the government is currently pursuing.
E) government economic policy will always be predicted and hence people will adapt to it before it takes effect.

Question 71

The moderate Monetarist explanation of stagflation relies on two factors:______Phillips curve loops and ______shifts of the Phillips curve.

A) anti- clockwise; rightward
B) anti- clockwise; leftward
C) clockwise; leftward
D) clockwise; rightward

Question 72

Monetarists would cure the problem of stagflation by using a______monetary policy and______ policies.

A) restrictive; supply- side
B) restrictive; demand- side
C) neutral; supply- side
D) neutral; demand- side

Question 73

If an economy moves to a point that is further to the right on a short- run Phillips curve, this point is consistent with

A) an increase in aggregate demand and no change in aggregate supply.
B) a decrease in aggregate demand and no change in aggregate supply.
C) no change in aggregate demand and a decrease in aggregate supply.
D) no change in aggregate demand and an increase in aggregate supply.

Question 74

The non- accelerating inflation rate of unemployment (NAIRU) assumes a______ Phillips curve and ______markets.

A) vertical; perfect
B) vertical; imperfect
C) sloping; imperfect
D) sloping; perfect

Question 75

The rational expectations hypothesis suggests that the forecasts people make concerning future inflation rates

A) consistently underestimate the actual values.
B) are always correct.
C) are correct on average, but subject to errors that are randomly distributed.
D) consistently overestimate the actual values.

Question 76

According to rational expectations theory, which of the following is false?

A) Expectations are based on imperfect information.
B) Errors in prediction are made at random and therefore do not result in systematic divergences between the actual and expected rate of inflation.
C) The current economic situation will have only limited impact on expectations.
D) Expectations are formed using currently available information.

Question 77

According to the rational expectations hypothesis

A) people know the true model that generates inflation and use this model to forecast future inflation rates.
B) people assume that the current inflation rate will continue into the future.
C) if people incorrectly anticipate the inflation rate, they adjust their expectations of inflation by some fraction of the difference between their original forecast and the actual inflation rate.
D) people form expectations of inflation only if the benefits of doing so exceed the costs of not forming expectations.

Question 78

According to the New Classical School, if people have rational expectations, then

A) known policy changes can produce price surprises, and thus increases in real output.
B) known policy changes can produce no price surprises, and thus no increases in real output.
C) unknown policy changes can produce no price surprises, and thus no increases in real output.
D) they will be able to predict policy changes.

Question 79

Rational expectations theory suggests there should be

A) a very small role for government policy in the economy.
B) no role for government policy in the economy.
C) a role for fiscal policy, but not monetary policy, in the economy.
D) an extensive role for government policy in the economy.

Question 80

When expectations are rational, disequilibrium in any market is

A) a permanent condition resulting from institutional rigidities in the economy.
B) only a temporary phenomenon resulting from the tendency for prices to adjust downward quickly but upward slowly.
C) only a temporary phenomenon resulting from random unpredictable shocks.
D) a permanent condition resulting from random unpredictable shocks.