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Inflation and Aggregate Expenditure Essay

Words: 1524, Paragraphs: 12, Pages: 6

Paper type: Essay

A change in all of the following will cause a shift in the consumption function, EXCEPT: A. Investment 2. Planned investment is a function of which of the following variables? C. Technology 3. The planned investment function shows the relationship between planned investment and the real rate of interest, thus the planned investment curve is ____________________. A decrease in the price of capital will cause this curve to ___________________. D. Downward sloping; shift outward 4. An increase in the foreign price level relative to the U. S. price level would cause the import (IM) function to: B. Shift downward 5.

An increase in the real rate of interest would lead to which of the following outcomes? A. A decrease in consumption B. A decrease in planned investment C. A decrease in planned aggregate expenditure D. All of the above 6. The planned aggregate expenditure (PAE) curve/line is: A. Upward sloping 7. The import function is _______________ , while the net export function is __________. D. Upward sloping; downward sloping 8. An income tax decrease for individual consumers will cause the planned aggregate expenditure function to: A. Shift upward 9. An increase in the real rate of interest will cause the planned aggregate expenditure function to: B.

Shift downward 10. Economic activity moves from a period of expansion to a _______ and then moves into a period of _______ until it reaches a _____. B. Peak, recession; trough 11. Potential output is: D. The maximum sustainable amount of output. 12. Planned investment may differ from actual investment because of: C. Unplanned changes in inventories. 13. The consumption function is the relationship between consumption and: D. Its determinants, such as disposable income. 14. The slope of the consumption function: D. Equals the mpc. 15. The tendency of changes in asset prices to affect spending on consumption goods is called the _____ effect.

C. Wealth 16. When housing prices decrease, household wealth _____ and consumption _____. C. Decreases; decreases 17. The marginal propensity to consume is the: B. Amount by which consumption increases when disposable income increases by $1. 18. Under the fixed price model where expected inflation is zero, an increase in government spending in the short run will lead to which of the following? A. An upward shift in the planned aggregate expenditure function B. An increase in real income C. An increase in the nominal rate of interest D. An increase in the real rate of interest E. All of the above 19.

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The difference between potential output and actual output is called the____________. C. Output gap 20. The primary difference between active fiscal policy and automatic stabilizers in regards to their lagged impacts, is that active fiscal policy does not contain an inside lag period, while the automatic stabilizers do contain an inside lag period B. False 21. If the economy experiences a credit crunch all of the following are true EXCEPT: D. The interest rate on bonds rises 22. To close a recessionary gap, the Fed ____ interest rates which ______ planned aggregate spending and _____ short-run equilibrium output.

A. Lowers; increases; increases 23. The aggregate demand curve shows the relationship between output and the ______ rate. D. Inflation 24. In the long run, an increase in the nominal money supply will cause the inflation rate to: A. Increase. 25. In the long run, an increase in the nominal money supply will cause output to: C. Remain unchanged. 26. In the long run, an increase in the nominal money supply will cause the nominal interest rate to: C. Remain unchanged. 27. The macroeconomy is comprised of four primary markets: the labor market, the goods market, the money market, and the bond market.

What is the minimum number of these individual markets that must be in equilibrium to ensure that the whole macroeconomy is equilibrium? C. 3 28. The aggregate demand curve is: B. Downward sloping 29. An increase in the actual rate of inflation will cause the aggregate demand curve to: C. Not shift 30. Which of the following will result in an outward shift in the aggregate demand curve? A. An increase in government spending B. A decrease in taxes C. An increase in the money supply D. All of the above 31. The long-run aggregate supply curve is___________, while the short-run aggregate supply curve is______________.

D. Vertical; upward sloping 32. According to the Fisher Effect, a 3% increase in expected inflation leads to a 3% increase in the real rate of interest. B. False 33. An increase in expected inflation in the long-run will lead to each of the following outcomes EXCEPT: A. A decrease in the nominal rate of interest 34. In the short run, an increase in government spending will cause the inflation rate to: A. Increase. 35. In the short run, an increase in government spending will cause output to: A. Increase. 36. In the short run, an increase in government spending will cause the nominal interest rate to: A. Increase. 7. In the short run, an increase in government spending will cause planned investment to: B. Decrease. EC202 Exam III Form A Part II 1. Using the following graph to answer the questions below. Assume planned investment, government purchases, net exports, and net taxes are autonomous variables. The only component of planned aggregate expenditure that depends on income is consumption. Assume you at currently at equilibrium marked by the “x” and the vertical line is the potential output of Y*. (1 pt. each question) A. What is the output gap in this economy? Output Gap = Actual – Potential = 150 – 300 = -150 Billion B.

Given the above scenario, is this economy experiencing a recessionary gap, an expansionary gap, or no gap in output? Recessionary Gap C. In order for the government to eliminate the output, by how much would the government need to increase their expenditures? The government would need to increase their expenditures by 50 billion as that would cause the PAE curve to shift upward to the new equilibrium. D. Given the above scenario, what is the economy’s marginal propensity to consume (MPC)? The MPC in this scenario is equivalent to the slope of the PAE curve. We calculate slope as rise/run…. thus (150-50)/(150-0) = 100/150 = . 7 Schaffer 12/6 7 E. What is the income-expenditure multiplier in this economy? (Continued from 1. ) Income Multiplier = 1/(1-MPC) = 1/(1-. 67) = 1/. 33 = 3. 00 2. Compare and contrast between automatic stabilizers, active fiscal policy, and monetary policy. Be sure to fully explain each variant of policy, provide examples of each type of policy, and explain which policy action is the fastest using the lag terms we discussed. (6 pts) Automatic Stabilizers are provisions in the law that imply automatic increases in government spending or decreases in taxes when real output (income) declines.

A good example of an automatic stabilizer is unemployment compensation. Active fiscal policy consists of actions taken on behalf of the government to change a law or pass a bill to enact some form of stimulus. A good example of this type of policy was the TARP package or the stimulus passed by George W. Bush at the onset of the financial crisis. Monetary policy are actions taken by the Federal Reserve to stimulate the economy via open market operations, changes in the discount rate, or changes in the required reserve ratio. Since the automatic stabilizers contain no inside lag it is the fastest policy action.

However, in terms of policy that needs to be implemented, monetary policy is faster than fiscal policy as the action lag for the Fed is much faster than the active fiscal policy. Schaffer 12/6 8 3. Using the AD/AS model that we developed in class, explain the impacts of a decrease in taxes by the government in the long run. Specifically your final answer should clearly state the overall impact on output, inflation, the nominal and real interest rate, and planned investment. As in the class example, you may assume that expected inflation is zero. 6 pts) Increase in output | inflation, nominal and real interest rates, and planned investments are all indeterminate 4. Using the AD/AS model that we developed in class, explain the impacts of a credit crunch in the short run. Specifically your final answer should clearly state the overall impact on output, inflation, the nominal and real interest rate, and planned investment. As in the class example, you may assume that expected inflation is zero. (6 pts) Decrease in output | decrease in inflation | decrease in nominal and real interest rates | Increase in planned investment

Schaffer 12/6 9 5. Using the AD/AS model that we developed in class, explain the impacts of an increase in average labor productivity on economic growth (obviously this is a long run question). Specifically your final answer should clearly state the overall impact on output, inflation, the nominal and real interest rate, and planned investment. As in the class example, you may assume that expected inflation is zero. (6 pts) Increase in output | decrease in inflation | nominal and real interest rates and planned investment are indeterminate

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