Question 1

The aggregate expenditure line is upward sloping since as GDP increases
A) consumption increases.
B) investment increases.
C) government purchases increase.
D) net exports increase.

Accepted Answer

Consumption typically increases as GDP increases because higher income leads to higher spending by households.

Question 2

In a move up the IS curve
A) investment rises.
B) output falls.
C) the real interest rate falls.
D) saving rises.

Accepted Answer

B

Question 3

In a simple model of the economy,if the MPC is 0.8,the multiplier will equal
A) 0.2.
B) 0.8.
C) 1.25.
D) 5.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), so with an MPC of 0.8, the multiplier is 1/(1-0.8) = 1/0.2 = 5.

Question 4

An increase in the expected profitability of investment will cause
A) the IS curve to shift right.
B) the IS curve to shift left.
C) the MP curve to shift upward.
D) the MP curve to shift downward.

Accepted Answer

An increase in expected profitability of investment would increase investment demand and therefore shift the IS curve to the right.

Question 5

What effect would economic weakness in Europe due to a sovereign debt crisis have on the U.S.economy?
A) The IS curve shifts to the right.
B) The IS curve shifts to the left.
C) Potential GDP increases.
D) Potential GDP decreases.

Accepted Answer

Economic weakness in Europe due to a sovereign debt crisis would likely lead to reduced demand for U.S. exports to those countries, as well as decreased investment in the U.S. by European companies. This would shift the IS curve to the left, indicating a decrease in both output and interest rates, and likely result in a decrease in potential GDP.

Question 6

Which of the following statements about potential GDP is FALSE?
A) The Fed's goal is to have equilibrium GDP close to potential GDP.
B) When GDP is at potential, cyclical unemployment is zero.
C) It occurs when firms are producing at their maximum level of output.
D) It occurs when firms are producing with a workforce of normal size working normal hours.

Accepted Answer

Potential GDP refers to the level of GDP attainable when the economy is operating at a level of resource use that is sustainable over the long term, not necessarily at maximum output levels. It implies an economy operating at full employment, where all available resources (including labor) are being used efficiently, but not necessarily maximally. This is because operating at maximum output could lead to overutilization of resources, which is not sustainable in the long term.

Question 7

An increase in the real interest rate causes
A) the IS curve to shift to the right.
B) the IS curve to shift to the left.
C) a movement up the IS curve.
D) a movement down the IS curve.

Accepted Answer

An increase in the real interest rate does not shift the IS curve but causes a movement up along the IS curve because it represents a decrease in investment spending at any given level of income, not a shift in the overall relationship between income and the interest rate.

Question 8

If AE < Y,which of the following will NOT occur?
A) Inventories will decline.
B) Actual investment will be more than planned investment.
C) Employment will decline.
D) GDP will decline.

Accepted Answer

When AE (Aggregate Expenditure) is less than Y (Income), inventories will increase, not decline, because goods are not being sold as quickly as they are produced.

Question 9

Which of the following would NOT cause a shift in the IS curve?
A) an increase in the domestic real interest rate
B) an increase in consumer confidence
C) a decrease in the expected future profitability of capital
D) a decrease in government purchases

Accepted Answer

The IS curve represents the relationship between the interest rate and the level of income that brings the goods market into equilibrium. An increase in the domestic real interest rate does not shift the IS curve itself but moves along it, as it affects the equilibrium level of income by changing investment and consumption decisions. Changes in consumer confidence, expected future profitability of capital, and government purchases directly affect the demand for goods and services, thus shifting the IS curve.

Question 10

A key reason that FOMC members expected that their target for the federal funds rate in 2016 would be higher than it actually was is that they had expected the growth rate of real GDP to be ________ and the inflation rate to be ________ than they actually were.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Accepted Answer

FOMC members expected the target for the federal funds rate to be higher because they anticipated higher growth in real GDP and higher inflation than what actually occurred. Higher expected growth and inflation typically lead to expectations of higher interest rates to manage economic expansion and control inflation.

Question 11

The IS curve depicts the relationship between
A) aggregate output and the real interest rate.
B) investment demand and the real interest rate.
C) investment demand and the level of current output.
D) national saving and the level of current output.

Accepted Answer

The IS curve shows the relationship between aggregate output (Y) and the real interest rate (r). It represents the equilibrium in the goods market, where output equals demand. This equilibrium is affected by changes in the interest rate, which affects investment and consumption.

Question 12

If a $10 billion increase in investment leads to a $20 billion increase in GDP,the multiplier is
A) 0.5.
B) 2.
C) 10.
D) 30.

Accepted Answer

The multiplier is calculated as follows: ΔGDP/ΔInvestment. Therefore, in this case, the multiplier is 20/10 = 2.

Question 13

The level of potential GDP
A) increases as the real rate of interest decreases.
B) increases as the real rate of interest increases.
C) is unaffected by the real rate of interest.
D) is represented on the IS-MP model by a horizontal line at the world real rate of interest.

Accepted Answer

The level of potential GDP is not affected by the real rate of interest. Potential GDP is determined by factors such as labor force participation, productivity, and technology, which are independent of the interest rate. The interest rate affects the actual level of output and employment but not the potential level. Therefore, the IS-MP model would not include a line representing potential GDP.

Question 14

If AE > Y,which of the following will NOT occur?
A) Inventories will decline.
B) Actual investment will be more than planned investment.
C) Employment will increase.
D) GDP will increase.

Accepted Answer

When AE (Aggregate Expenditure) is greater than Y (Output), it indicates that the economy is experiencing an excess demand. This situation typically leads to an increase in production to meet the higher demand, which in turn causes inventories to decline (as firms sell more than they anticipated), employment to increase (as firms hire more workers to increase production), and GDP to increase (as the total output of the economy grows). However, actual investment being more than planned investment is not a direct consequence of AE > Y; instead, it reflects a situation where firms end up investing more than they initially intended, which could be due to various factors not directly related to the relationship between AE and Y.

Question 15

An autonomous expenditure is one that does NOT depend on
A) government policy.
B) the automobile sector.
C) interest rates.
D) GDP.

Accepted Answer

Autonomous expenditures are those that do not depend on the level of GDP. They are considered independent of the current income level of the economy, such as basic consumption spending, government spending, and investment spending that occurs regardless of GDP.

Question 16

The marginal propensity to consume can best be described as
A) consumption / income.
B) the impact of a change in income on GDP.
C) the change in income divided by the change in consumption.
D) the change in consumption divided by the change in income.

Accepted Answer

The answer of The marginal propensity to consume can best...

Question 17

Which of the following does NOT lead to an increase in potential GDP?
A) labor force grows
B) technological change takes place
C) new machinery and equipment are installed
D) aggregate expenditures increase

Accepted Answer

While an increase in aggregate expenditures can lead to an increase in real GDP, it does not necessarily lead to an increase in potential GDP. Potential GDP is determined by factors such as the size and skill level of the labor force, the amount and quality of physical capital (machinery and equipment), and technological progress.

Question 18

The series of induced changes in consumption spending that result from an initial change in autonomous expenditure is called the
A) induced effect.
B) autonomous effect.
C) multiplier effect.
D) consumption effect.

Accepted Answer

The series of induced changes in consumption spending that result from an initial change in autonomous expenditure is called the multiplier effect. This is because the initial change in spending causes subsequent rounds of spending as income and consumption levels adjust.

Question 19

The capacity of a firm can best be described as
A) when a firm is producing maximum output.
B) a firm's production when operating normal hours using a normal sized workforce.
C) when a firm makes full use of all the space available in its factory or building.
D) when all of the firm's workers are producing at their maximum potential.

Accepted Answer

Capacity in a business context typically refers to the maximum amount of work that a firm is capable of completing in a given period under normal conditions. This includes considerations of normal working hours and a regular-sized workforce, rather than maximum output or space utilization.

Question 20

Which of the following would NOT cause the IS curve to shift to the left?
A) a decrease in government purchases
B) an increase in consumer confidence
C) a decrease in foreign demand for domestic products
D) a decrease in the expected future profitability of capital

Accepted Answer

An increase in consumer confidence would shift the IS curve to the right by increasing consumption and investment spending. A decrease in government purchases (A), a decrease in foreign demand for domestic products (C), and a decrease in the expected future profitability of capital (D) would all decrease aggregate demand and shift the IS curve to the left.

Quiz 18: Monetary Theory Ii: the Is-Mp Model

The aggregate expenditure line is upward sloping since as GDP increases

In a move up the IS curve

In a simple model of the economy,if the MPC is 0.8,the multiplier will equal

An increase in the expected profitability of investment will cause

What effect would economic weakness in Europe due to a sovereign debt crisis have on the U.S.economy?

Which of the following statements about potential GDP is FALSE?

An increase in the real interest rate causes

If AE < Y,which of the following will NOT occur?

Which of the following would NOT cause a shift in the IS curve?

A key reason that FOMC members expected that their target for the federal funds rate in 2016 would be higher than it actually was is that they had expected the growth rate of real GDP to be and the inflation rate to be than they actually were.

The IS curve depicts the relationship between

If a $10 billion increase in investment leads to a $20 billion increase in GDP,the multiplier is

The level of potential GDP

If AE > Y,which of the following will NOT occur?

An autonomous expenditure is one that does NOT depend on

The marginal propensity to consume can best be described as

Which of the following does NOT lead to an increase in potential GDP?

The series of induced changes in consumption spending that result from an initial change in autonomous expenditure is called the

The capacity of a firm can best be described as

Which of the following would NOT cause the IS curve to shift to the left?