Question 1

When the purchasing power of money declines:

Accepted Answer

When the purchasing power of money declines, people need more money to purchase goods and services. This leads to an increase in the demand for money, which in turn leads to an increase in interest rates. When interest rates rise, borrowing becomes more expensive, which reduces spending and slows down economic growth.

Question 2

The spending multiplier equals 1/marginal propensity to save if an economy:

Accepted Answer

The spending multiplier equals 1/marginal propensity to save only when there is no leakage (such as trade or taxes) in the economy. If an economy is open to international trade (B), it will have leakage in the form of imports and exports, so the spending multiplier will not equal 1/marginal propensity to save. Similarly, if an economy has a trade surplus (A), it will have leakage through its exports, so the spending multiplier will not equal 1/marginal propensity to save. If an economy has a higher level of saving than consumption (D), the marginal propensity to consume will be less than one, and the spending multiplier will be smaller than 1/marginal propensity to save. Finally, reducing investment expenditures to zero (E) will decrease the initial spending, which will in turn decrease the overall spending multiplier. Therefore, the answer is C: the spending multiplier equals 1/marginal propensity to save if an economy produces and consumes only domestic goods and services.

Question 3

The figure given below shows the macroeconomic equilibrium of a country.
Figure 10.7
 
-Given a potential GDP level of $3,000, the recessionary gap in Figure 10.7 equals _____.

Accepted Answer

A recessionary gap is the difference between potential GDP and actual GDP when actual GDP is less than potential GDP. If the potential GDP is $3,000 and the recessionary gap is $500, it means the actual GDP is $2,500.

Question 4

If 81 percent of Canada's exports go to the United States, a recession in the United States would probably:

Accepted Answer

A recession in the United States would likely result in a decrease in demand for Canadian exports, leading to decreased exports and a reduction in economic activity in Canada. This would result in a decrease in Canada's domestic real GDP.

Question 5

Suppose an appreciation of the French franc causes U.S. prices of French wine imports to rise sharply. On the other hand, Californian wine becomes relatively inexpensive to French consumers. Other things equal, this will result in:

Accepted Answer

The answer of Suppose an appreciation of the French franc...

Question 6

The interest rate effect states that an increase in the price level will cause:

Accepted Answer

The answer of The interest rate effect states that an...

Question 7

Assume that the multiplier effect for Mexico is 0.85 when U.S. government spending increases. Therefore, a $20 billion decrease in U.S. government spending results in:

Accepted Answer

If the multiplier effect for Mexico is 0.85, then a $20 billion decrease in U.S. government spending would result in a decrease in Mexican real GDP of $17 billion ($20 billion x 0.85 = $17 billion).

Question 8

Which of the following will not increase aggregate expenditures?

Accepted Answer

Increasing income taxes reduces disposable income and therefore decreases consumption spending, leading to a decrease in aggregate expenditures. The other options would all increase aggregate expenditures: A decrease in domestic prices would increase consumer purchasing power and lead to increased consumption spending (and potentially investment spending as well); a decrease in the interest rate would encourage borrowing and increase consumption and investment spending; an increase in real wealth would lead to increased consumption spending; and an increase in autonomous net exports (exports minus imports) would add to aggregate expenditures.

Question 9

A rise in the price level that reduces the real wealth of people who hold financial assets is an illustration of the:

Accepted Answer

The decrease in real wealth due to a rise in the price level is known as the wealth effect. It illustrates how changes in the price level can affect people's purchasing power and, ultimately, their consumption habits.

Question 10

Foreign repercussions of changes in domestic spending may cause:

Accepted Answer

The answer of Foreign repercussions of changes in domestic spending...

Question 11

The Keynesian aggregate expenditures model assumes that:

Accepted Answer

The answer of The Keynesian aggregate expenditures model assumes that:
...

Question 12

The figure given below shows the macroeconomic equilibrium of a country.
Figure 10.7
 
-In Figure 10.7, the spending multiplier equals _____.

Accepted Answer

The answer of The figure given below shows the macroeconomic...

Question 13

The multiplier effect of a change in foreign autonomous expenditures in the U.S.:

Accepted Answer

The answer of The multiplier effect of a change in...

Question 14

Which of the following is associated with an increase in the average price level?

Accepted Answer

The answer of Which of the following is associated with...

Question 15

Everything else constant, the international trade effect indicates that aggregate expenditures in the domestic economy fall when:

Accepted Answer

The international trade effect states that when domestic prices rise relative to foreign prices, consumers will increase their imports and decrease their exports, leading to a fall in aggregate expenditures in the domestic economy. This occurs because domestic consumers are more likely to purchase goods from foreign countries where prices are cheaper. This decrease in aggregate expenditures can lead to a decrease in economic growth and output.

Question 16

The aggregate demand curve shows:

Accepted Answer

The aggregate demand curve shows how the equilibrium level of aggregate expenditure changes as the price level changes. As the price level decreases, the level of aggregate expenditure increases, and vice versa. The graphical representation of the aggregate demand curve is a downward sloping curve, indicating the negative relationship between the price level and aggregate expenditure.

Question 17

If a country's imports are very important in determining the volume of exports from its trading partners, then:

Accepted Answer

The answer of If a country's imports are very important...

Question 18

If equilibrium in the economy is merely a function of aggregate demand, the aggregate supply curve must be:

Accepted Answer

The answer of If equilibrium in the economy is merely...

Question 19

Suppose the marginal propensity to consume is 0.63, the marginal propensity to import equals 0.08, and personal income taxes amount to 9 percent. The spending multiplier for this economy is equal to _____.

Accepted Answer

The answer of Suppose the marginal propensity to consume is...

Question 20

Suppose only 7 percent of Turkey's products go to the United States. Hence, an increase in U.S. imports from Turkey:

Accepted Answer

Since only 7 percent of Turkey's products go to the United States, an increase in U.S. imports from Turkey would not have a significant effect on Turkey's overall domestic income. The impact would be very limited, and Turkey's economy is much more significant than just seven percent. Therefore, the correct answer is (A) would have no significant effect on Turkey's domestic income.

Quiz 10: Income and Expenditures Equilibrium