Figure 11-2 Real aogregate expenditure, AE 2000 dollars AE 45 Real GOP.Y triltio

Question

Figure 11-2 Real aogregate expenditure, AE 2000 dollars AE 45 Real GOP.Y triltions of 2000 dollars 27) Refer to Figure 11-2 If the U.S. economy is currently at point N, which of the following could int K? A) Household wealth rises. B) The firm's cash flow rises as profits rise. C) Households expect future income to decline. D) Government expenditures increase 28) If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is D) 20. A) 2. B) 5. C) 10. 29) 29) The main tool that the Federal Reserve uses to conduct monetary policy is A) acting as the lender of last resort. B) check clearing. C) discount policy D) setting reserve requirements E) open market operations 30) The marginal propensity to save is defined as 30 A) saving divided by disposable income. B) the change in saving divided by the change in disposable income. C) disposable income divided by saving. D) the change in disposable income divided by the change in saving

Explanation / Answer

27) If US economy is at point N, which of the following could cause it to move to point K

Sol C) Households expects future income to decline

Reason - If people have more confidence about the state of the economy and are optimistic that the goods times will continue, then they are more likely to boost their spending. However, this extra spending is not the result of extra income. As such, aggregate expenditures increase and the aggregate expenditures line shifts up. A drop in consumer confidence works in the opposite manner with a downward shift in the aggregate expenditures line.

28) if RRR is 20%, the simple deposit multiplier is

Sol B) 5

Reason – simple deposit multiplier is 1/0.20 = 5% or 0.05

29) The main tool that the Federal Reserve uses to conduct monetary policy is

Sol E) open market operations

30) The marginal propensity to save is defined as

Sol B) the change in savings divided by change in disposable income

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