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Macroeconomics For Today 6th Edition Irvin B. Tucker - Solutions
The equilibrium level of real GDP is $1,000 billion, the full-employment level of real GDP is $1,250 billion, and the marginal propensity to consume (MPC) is 0.60. The fullemployment target can be reached if government spending isa. increased by $60 billion.b. increased by $100 billion.c. increased
Keynes’s criticism of the classical theory was that the Great Depression would not correct itself.The multiplier effect would restore an economy to full employment ifa. government would follow a “least government is the best government” policy.b. government taxes were increased.c. government
If the marginal propensity to consume (MPC)is 0.90, a $100 billion increase in planned investment expenditure, other things being equal, will cause an increase in equilibrium output ofa. $90 billion.b. $100 billion.c. $900 billion.d. $1,000 billion.
If the marginal propensity to consume (MPC)is 0.75, a $50 billion decrease in government spending would cause equilibrium output toa. increase by $50 billion.b. decrease by $50 billion.c. increase by $200 billion.d. decrease by $200 billion.
If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier isa. 2.b. 5.c. 8.d. 10.
If the value of the marginal propensity to consume (MPC) is 0.50, the value of the spending multiplier isa. 0.50.b. 1.c. 2.d. 5.
The spending multiplier is defined asa. 1/(1 marginal propensity to consume).b. 1/(marginal propensity to consume).c. 1/(1 marginal propensity to save).d. 1/(marginal propensity to consume þ marginal propensity to save).
John Maynard Keynes proposed that the multiplier effect can correct an economic depression.Based on this theory, an increase in equilibrium output would be created by an initiala. increase in investment.b. increase in government spending.c. decrease in government spending.d. both (a) and (b).e.
There will be unplanned inventory investment accumulation whena. aggregate output (real GDP) equals aggregate expenditures.b. aggregate output (real GDP) exceeds aggregate expenditures.c. aggregate expenditures exceed aggregate output (real GDP).d. firms increase output.
The net exports line can bea. positive.b. negative.c. zero.d. any of the above.
Suppose the government wishes to eliminate an inflationary gap of $100 billion and the MPC is 0.50. How much must the government cut its spending? Instead of decreasing government spending by the amount you calculate, what would be the effect of the government increasing taxes by this amount?
Assume an economy is in recession with a MPC of 0.75 and there is a GDP gap of $100 billion. How much must government spending increase to eliminate the gap? Instead of increasing government spending by the amount you calculate, what would be the effect of the government cutting taxes by this
First, use the data given in Question 1, and assume the level of autonomous investment is$50 billion. If the full-employment level of output is $525 billion, what is the equilibrium level of output and employment? Does a recessionary gap or an inflationary gap exist? Second, assume the level of
Suppose autonomous investment increases by$100 billion and the MPC is 0.75.a. Use the following table to compute four rounds of the spending multiplier effect:Round Components of Total Spending New Consumption Spending (billions of dollars)1 Investment $_____________ 2 Consumption _____________ 3
Assume the MPC is 0.90 and autonomous investment increases by $500 billion. What will be the impact on real GDP?
How are changes in the MPC, changes in the MPS, and the size of the multiplier related?Answer the following questions:a. What is the multiplier if the MPC is 0?0.33? 0.90?b. Suppose the equilibrium real GDP is $100 billion and the MPC is 4/5. How much will the equilibrium output change if
Use the aggregate expenditures-output model to demonstrate the multiplier effect.
Explain the determination of equilibrium real GDP by drawing an abstract graph of the aggregate expenditures-output model. Label the aggregate expenditures line AE and the aggregate output line AO. Explain why the interaction of AE and AO determines the Keynesian equilibrium level of real GDP.
Using the data given in Question 1, what is the impact of adding net exports? Let imports equal$75 billion, and assume exports equal $50 billion. What is the equilibrium level of employment and output?
Assume the level of autonomous investment is$100 billion and aggregate expenditures equal consumption and investment. Based on the table below, answer the following questions.Employment, Output, Consumption, and Unplanned Inventory Possible Levels of Employment(millions of workers)Real
As shown in Exhibit 12, the marginal propensity to save (MPS) isa. 0.33.b. 0.50.c. 0.67.d. 0.75.
As shown in Exhibit 12, saving occursa. at 0.b. between 0 and $4 trillion.c. where disposable income is greater than $4 trillion.d. at $2 trillion.
As shown in Exhibit 12, autonomous consumption isa. 0.b. $1 trillion.c. $2 trillion.d. $3 trillion.e. $6 trillion.
In Exhibit 11, aggregate disposable income will equal consumption plus investment (aggregate expenditures), and the economy will be in equilibrium when real disposable income isa. $2.33 trillion.b. $3 trillion.c. $6 trillion.d. $10 trillion.
In Exhibit 11, what is the households’ marginal propensity to consume (MPC)?a. 0.50b. 0.67c. 0.75d. 0.80
The aggregate expenditures function (AE) represents which of the following?a. The consumption function onlyb. Autonomous consumption onlyc. The investment demand curve onlyd. All three of the above combinede. A combination of (a) and (c)
Which of the following changes produces a leftward shift in the investment demand curve?a. A wave of optimism about future profitabilityb. Technological changec. High plant capacity utilizationd. An increase in business taxes
The investment demand curve represents the relationship between business spending for investment goods anda. GDP.b. interest rates.c. disposable income.d. saving.
An upward shift in the consumption schedule, other things being equal, could be caused by householdsa. becoming optimistic about the state of the economy.b. becoming pessimistic about the state of the economy.c. expecting future income and wealth to decline.d. doing none of the above.
Which of the following changes produces an upward shift in the consumption function?a. An increase in consumer wealthb. A decrease in consumer wealthc. A decrease in autonomous consumptiond. Both (b) and (c)
Above the break-even disposable income for the consumption function, which of the following occurs?a. Dissavingb. Savingc. Neither (a) nor (b)d. Both (a) and (b)
John Maynard Keynes’s proposition that a dollar increase in disposable income will increase consumption, but by less than the increase in disposable income, implies a marginal propensity to consume that isa. greater than or equal to one.b. equal to one.c. less than one, but greater than zero.d.
The consumption function represents the relationship between consumer expenditures anda. interest rates.b. saving.c. the price level.d. disposable income.
Autonomous consumption isa. positively related to the level of consumption.b. negatively related to the level of consumption.c. positively related to the level of disposable income.d. independent of the level of disposable income.
The French classical economist Jean-Baptiste Say transformed the equality of production and spending into a law that can be expressed as follows:a. The invisible hand creates its own supply.b. Wages always fall to the subsistence level.c. Supply creates its own demand.d. Aggregate output does not
The levels of real disposable income and aggregate expenditures for a two-sector economy(consumption and investment) are given in the following table:Real Disposable Income (trillions of dollars per year)Aggregate Expenditures(trillions of dollars per year)$0 $3.00 1 3.25 2 3.50 3 3.75 4 4.00 5
Suppose most business executives expect a slowdown in the economy. How might this situation affect the economy?
Why is the investment demand curve less stable than the consumption and saving schedules?What are the basic determinants that can shift the investment demand curve?
Your college is considering investing $6 million to add 10,000 seats to its football stadium. The athletic department forecasts it can sell all these extra seats each game for a ticket price of $20 per seat, and the team plays six home games per year.If the school can borrow at an interest rate of
Explain how each of the following affects the consumption function:a. The expectation is that a prolonged recession will occur in the next year.b. Stock prices rise sharply.c. The price level rises by 10 percent.d. The interest rate on consumer loans rises sharply.e. Income taxes increase.
How do households “dissave”?
Explain why the MPC and the MPS must always add up to one.
Use the consumption function data below to answer the following questions:a. Calculate the saving schedule.b. Determine the marginal propensities to consume (MPC) and save (MPS).c. Determine the break-even income.d. What is the relationship between the MPC and the MPS?
Explain how the classical economists concluded that Say’s Law is valid and long-term unemployment impossible.
Which of the following statements is true?a. Demand-pull inflation is caused by excess total spending.b. Cost-push inflation is caused by an increase in resource costs.c. If nominal interest rates remain the same and the inflation rate falls, real interest rates increase.d. If real interest rates
Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at leasta. 1.6 percent.b. 3 percent.c. 4 percent.d. 5 percent.
Cost-push inflation is due toa. excess total spending.b. too much money chasing too few goods.c. resource cost increases.d. the economy operating at full employment.
Demand-pull inflation is caused bya. monopoly power.b. energy cost increases.c. tax increases.d. full employment.
If the nominal rate of interest is less than the inflation rate,a. lenders win.b. savers win.c. the real interest rate is negative.d. the economy is at full employment.
Last year the Harrison family earned $50,000.This year their income is $52,000. In an economy with an inflation rate of 5 percent, which of the following is correct?a. The Harrisons’ nominal income and real income have both risen.b. The Harrisons’ nominal income and real income have both
When the inflation rate rises, the purchasing power of nominal incomea. remains unchanged.b. decreases.c. increases.d. changes by the inflation rate minus one.
Suppose a typical automobile tire cost $50 in the base year and had a useful life of 40,000 miles. Ten years later, the typical automobile tire cost $75 and had a useful life of 75,000 miles. If no adjustment is made for mileage, the CPI woulda. underestimate inflation between the two years.b.
Which of the following would overstate the consumer price index?a. Substitution biasb. Improving quality of productsc. Neither (a) nor (b)d. Both (a) and (b)
Deflation is a (an)a. increase in most prices.b. decrease in the general price level.c. situation that has never occurred in U.S.history.d. decrease in the inflation rate.
As shown in Exhibit 6, the rate of inflation for Year 5 isa. 4.2 percent.b. 5 percent.c. 20 percent.d. 25 percent.
As shown in Exhibit 6, the rate of inflation for Year 2 isa. 5 percent.b. 10 percent.c. 20 percent.d. 25 percent.
Consider an economy with only two goods: bread and wine. In the base year, the typical family bought four loaves of bread at $2 per loaf and two bottles of wine for $9 per bottle. In a given year, bread cost $3 per loaf, and wine cost$10 per bottle. The CPI for the given year isa. 100.b. 123.c.
If the consumer price index in year X was 300 and the CPI in year Y was 315, the rate of inflation wasa. 5 percent.b. 15 percent.c. 25 percent.d. 315 percent.
Inflation isa. an increase in the general price level.b. not a concern during war.c. a result of high unemployment.d. an increase in the relative price level.
Explain this statement: “If everyone expects inflation to occur, it will.”
How does demand-pull inflation differ from cost-push inflation?
When the economy approaches full employment, why does demand-pull inflation become a problem?
Suppose the annual nominal rate of interest on a bank certificate of deposit is 12 percent. What would be the effect of an inflation rate of 13 percent?
Suppose you borrow $100 from a bank at 5 percent interest for one year and the inflation rate that year is 10 percent. Was this loan advantageous to you or to the bank?
Who loses from inflation? Who wins from inflation?
Explain how a person’s purchasing power can decline in a given year even though he or she received a salary increase.
Suppose you earned $100,000 in a given year.Calculate your real income, assuming the CPI is 200 for this year.
What are three criticisms of the CPI?
Suppose, in the base year, a typical market basket purchased by an urban family cost $250. In Year 1, the same market basket cost $950. What is the consumer price index (CPI) for Year 1? If the same market basket cost $1,000 in Year 2, what is the CPI for Year 2? What was the Year 2 rate of
Consider this statement: “When the price of a good or service rises, the inflation rate rises.”Do you agree or disagree? Explain.
The economy is considered to be at full employment whena. the actual rate of unemployment is less than the natural rate.b. the leading economic indicators are unchanged for two consecutive quarters.c. structural unemployment is zero.d. frictional plus structural unemployment is less than the
Which of the following statements is true?a. The GDP gap is the difference between actual real GDP and full-employment real GDP.b. We desire economic growth because it increases the nation’s real GDP.c. Economic growth is measured by the annual percentage increase in a nation’s real GDP.d.
Which of the following groups typically has the highest unemployment rate?a. White men and women as a groupb. African-American men and women as a groupc. Teenagers as a groupd. Persons who completed high school
Which of the following statements is true?a. The four phases of the business cycle, in order, are peak, recovery, trough, and recession.b. When unemployment is rising, then real GDP is rising.c. The economic problem typically associated with a recovery is rising unemployment.d. Full employment
The sum of the frictional and structural unemployment rates is equal to thea. potential unemployment rate.b. actual unemployment rate.c. cyclical unemployment rate.d. full employment rate.
Unemployment that is due to a recession isa. involuntary unemployment.b. frictional unemployment.c. structural unemployment.d. cyclical unemployment.
Structural unemployment is caused bya. shifts in the economy that make certain job skills obsolete.b. temporary layoffs in industries such as construction.c. the impact of the business cycle on job opportunities.d. short-term changes in the economy.
Frictional unemployment applies toa. workers with skills not required for existing jobs.b. short periods of unemployment needed to match jobs and job seekers.c. people who spend long periods of time out of work.d. unemployment related to the ups and downs of the business cycle.
The number of people officially unemployed is not the same as the number of people who can’t find a job becausea. people who have jobs continue to look for better ones.b. the armed forces are included.c. discouraged workers are not counted.d. all of the above.
People who are not working will be counted as employed if they area. on vacation.b. absent from their job because of bad weather.c. absent from their job because of a labor dispute.d. all of the above.
The labor force consists of all personsa. 21 years of age and older.b. 21 years of age and older who are working.c. 16 years of age and older.d. 16 years of age and older who are working or actively seeking work.
Which of the following is a coincident indicator?a. Personal incomeb. Industrial productionc. Manufacturing and trade salesd. All of the above
Which of the following is not a variable in the index of leading indicators?a. New consumer goods ordersb. Delayed deliveriesc. New building permitsd. Prime rate
The phase of a business cycle during which real GDP reaches its minimum level is thea. recession.b. depression.c. recovery.d. trough.
The phases of a business cycle area. upswing and downswing.b. full employment and unemployment.c. peak, recession, trough, and recovery.d. full employment, depression, expansion, and plateau.
Explain the GDP gap.
Speculate on why teenage unemployment rates exceed those for the overall labor force.
In the 1960s, economists used 4 percent as their approximation for the natural rate of unemployment. Currently, full employment is on the order of 5 percent unemployment.What is the major factor accounting for this rise?
Is it reasonable to expect the unemployment rate to fall to zero for an economy? What is the relationship of frictional, structural, and cyclical unemployment to the full-employment rate of unemployment, or natural rate of unemployment?
How does structural unemployment differ from cyclical unemployment?
Why is frictional unemployment inevitable in an economy characterized by imperfect job information?
How has the official unemployment rate been criticized for overestimating and underestimating unemployment?
Describe the relevant criteria that government statisticians use to determine whether a person is“unemployed.”
In a given year, there are 10 million unemployed workers and 120 million employed workers in an economy. Excluding members of the armed forces and persons in institutions, and assuming these figures include only civilian workers, calculate the civilian unemployment rate.
Following are real GDP figures for 10 quarters:Quarter Real GDP(billions of dollars)1 $ 400 2 500 3 300 4 200 5 300 6 500 7 800 8 900 9 1,000 10 500 Plot these data points, and identify the four phases of the business cycle. Give a theory that may explain the cause of the observed business
What is the basic cause of the business cycle?
Which of the following items is included in the calculation of GDP?a. Purchase of 100 shares of General Motors stockb. Purchase of a used carc. The value of a homemaker’s servicesd. Sale of Gulf War military surpluse. None of the above would be included
Which of the following is a shortcoming of GDP?a. GDP measures nonmarket transactions.b. GDP includes an estimate of illegal transactions.c. GDP includes an estimate of the value of household services.d. None of the above are true.
Which of the following statements is true?a. The inclusion of intermediate goods and services in GDP calculations would underestimate our nation’s production level.b. The expenditure approach sums the compensation of employees, rents, profits, net interest, and nonincome expenses for depreciation
The GDP chain price index isa. widely reported in the news.b. broadly based.c. adjusted for government spending.d. a measure of changes in consumer prices.
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