21. If autonomous expenditures equal $1,000 and the mpe is 0.8, then equilibrium

Question

21. If autonomous expenditures equal $1,000 and the mpe is 0.8, then equilibrium income will be $800. True False

22. Suppose the economy is initially in an inflationary gap and then consumer and business expectations become even more optimistic. Assuming that the LAS Curve remains stationary and does not shift, in the long run it follows that: A. real output and the price level will be higher. B. only real output will be higher. C. only the price level will be higher. D. real output will be lower and the price level will be higher.

23. The short run aggregate supply curve assumes that firms adjust__________________________________________, given a shift in aggregate demand: A. both prices and quantities in the short run B. prices but not quantities in the short run C. quantities but not prices in the short run D. neither prices nor quantities in the short run

24. Let's say that England's Prime Minister wanted to increase her/his country's income say by $2,000. Their finance minister tells them that the mpe is 0.95. The government should increase its spending by: A. $100 B. $200 C. $1,900 D. $2,000

25. The SAS Curve shifts down and to the right when a significant number of firms: A. decrease price. B. increase price. C. increase the quantity supplied. D. decrease the quantity supplied.

26. If autonomous expenditures are $1,000, income is $4,000, and the marginal propensity to expend is 0.75, then total aggregate expenditures would be: A. $3,000 B. $4,000 C. $5,000 D. $6,000

27. If productivity increases by 4% but wages increase by 2%, then it is most likely that: A. the SAS Curve will shift up. B. the SAS Curve will shift down. C. the SAS Curve will not shift. D. the AD Curve will shift to the left.

28. The SAS Curve is most likely to shift down if: A. productivity rises, but wages fall. B. productivity rises, but not as fast as wages. C. productivity falls, but wages rise. D. wages fall, but not as fast as productivity.

29. If aggregate expenditures increased by $150 when income increased by $200, we could conclude that the mpe is equal to 0.25. True False

30. Suppose autonomous expenditures equal $1,500 and the mpe is 0.9. Now suppose the mpe falls to 0.8. Using the Multiplier Equation, we know that equilibrium income will: A. decrease by $150. B. increase by $1,350. C. decrease by $1,350. D. decrease by $7,500.

31. The LAS Curve plays an important role in determining: A. the price level in the short run. B. aggregate output in the short run. C. the price level in the long run. D. aggregate output in the long run.

32. If ____________________ exceeds ____________________, eventually input prices will fall and output will rise. A. aggregate supply; aggregate demand B. aggregate demand; aggregate supply C. potential output; aggregate demand D. aggregate demand; potential output

33. Assuming that the LAS Curve remains stationary and does not shift, if an economy is at its potential output, an expansionary macro policy will cause real output to: A. fall in the short run and in the long run. B. rise in the long run but not in the short run. C. rise in the short run but not the long run. D. rise in both the short run and the long run.

34. Assuming that there is no government policy intervention, if potential output is less than aggregate demand at a given price level, eventually the short run aggregate supply curve will shift: A. up and eliminate the recessionary gap. B. down and eliminate the recessionary gap. C. up and eliminate the inflationary gap. D. down and eliminate the inflationary gap.

35. If workers begin to expect more inflation in the future, then we would expect that: A. the short run aggregate supply curve will shift up. B. the short run aggregate supply curve will shift down. C. the short run aggregate supply curve will not shift at all. D. workers would react by jumping up and down and breakdancing with reckless abandon.

36. If a fall in the price level increases the quantity of aggregate demand, it might be because: A. people feel poorer and spend less. B. people feel poorer and save more. C. people feel richer and spend more. D. people feel richer and save more.

37. According to the AS/AD Model, the aggregate economy is depicted as being in a long run equilibrium: A. at the intersection of the LAS Curve and the AD Curve. B. at the intersection of the SAS Curve and the AD Curve. C. at any point along the entire AD Curve. D. at any point along the entire LAS Curve.

38. Expenditures that would exist at a zero level of income are called autonomous expenditures. True False

39. According to the multiplier equation, equilibrium income will be equal to autonomous expenditures. True False

40. The Multiplier Model provides numerical estimates of how ________________ changes in response to changes in ________________. A. equilibrium output; the price level B. equilibrium output; aggregate expenditures C. the price level; aggregate expenditures D. the price level; equilibrium output

41. In the Multiplier Model, the price level is assumed to be _______________ so the short run aggregate supply curve is _____________. A. fixed; flat B. partially flexible; upward sloping C. perfectly flexible; vertical D. None of the above.

42. Autonomous expenditures are defined as: A. expenditures that occur in equilibrium. B. expenditures that equal income. C. expenditures that do not depend on income. D. expenditures that depend on income.

Explanation / Answer

(21) False

Consumption function: C = $1,000 + 0.8Y

In equilibrium, Y = C

Y = 1,000 + 0.8Y

0.2Y = 1,000

Y = 5,000

(22) (C)

When business expectations are more optimistic, aggregate demand increases, shifting AD cuve in short run which increases both price level and ouput in short run. In long run, higher price level increases cost of inputs, so firms lower production, and short run AS curve shifts leftward, intersecting new AD curve and LAS at a further higher price level, but restoring output to potential output level.

(23) (A)

A change in aggregate demand changes both price level and output in short run.

(24) (A)

Multiplier = 1 / (1 - mpe) = 1 / (1 - 0.95) = 1 / 0.05 = 20

Required increase in spending = Required increase in income / Multiplier = $2000 / 20 = $100

NOTE: As per Chegg Answering Policy, first 4 questions are answered.

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