Self-Adjustment

Question 1

1. 
   
   If businesses see that inventories are piling up:
   

   		a. They will increase production plans
   		b. They will raise prices
   		c. They will become more optimistic
   		d. They will lower prices and cut production

Question 2

1. 
   
   If leakages are greater than injections into the economy then:
   

   		a. The economy will grow
   		b. The economy will slow
   		c. Inflation will result
   		d. Business investment spending will pick up the slack

Question 3

1. 
   
   In an economy that is below full employment, an increase in investment, ceteris paribus, leads to:

   		a. Higher desired saving and higher income
   		b. Higher desired saving but no change in income
   		c. No change in desired saving but higher income
   		d. No change in desired saving and no change in income

Question 4

1. 
   
   The multiplier process describes:
   

   		a. How the economy self-adjusts to a fall in aggregate demand
   		b. How layoffs in one sector can spread to other sectors
   		c. How marginal propensity to consume will rised.
   		d. How the circular flow freezes up in a recession

Question 5

1. 
   
   The amount of change in aggregate demand that will close a recessionary gap:
   

   		a. Consists of a shift due to the change in spending
   		b. Consists of one shift due to the change in spending and an additional shift due to the multiplier effects
   		c. Consists of three shifts due to multiplier effects
   		d. Will equal the amount of leakages

Question 6

1. 
   
   The major difference between classical and Keynesian economists is:
   

   		a. Classical economists argue that prices and wages are not flexible and Keynes disagreed
   		b. Keynesians argue that the economy will not self-adjust to disruptions in aggregate demand
   		c. Keynesians argue that the multiplier process will cause the economy to self-adjust
   		d. Classical economists argue that the multiplier process will cause the economy to worsen with an economic slowdown

Question 7

1. 
   
   Which of the following is not a leakage from the economy?
   

   		a. Consumer saving
   		b. Business saving
   		c. Business investment spending
   		d. Import purchases

Question 8

1. 
   
   If investment spending falls by $100 billion, then:
   

   		a. Real GDP falls by $100 billion
   		b. Real GDP rises by $100 billion
   		c. Real GDP will fall by a multiple of that amount
   		d. Read GDP will rise by a multiple of that amount

Question 9

1. 
   
   Cyclical unemployment:
   

   		a. Increases during an inflationary gap
   		b. Falls during a recessionary gap
   		c. Increases during a recessionary gap
   		d. Does not change over the course of the business cycle

Question 10

1. 
   
   The formula for the multiplier is:

   		a. The change in consumer spending in response to a change in income
   		b. The recessionary gap divided by the multiplier
   		c. The change in spending in response to a change in the marginal propensity to consume
   		d. 1/(1-MPC)

Short Answers

1. Explain briefly how spending can multiply, and then calculate the spending multiplier

when the MPC is

a. 0.75

b. 0.8

c. 0.6

2. The economy is experiencing a contraction (recessionary gap) of $400 billion. What

government spending stimulus would you recommend to move the economy back to full

employment if the MPC is 0.75? Would your policy be any different if the MPC were

0.66?

3. If the consumption function is C= $200 billion + 0.9Y,

a) How much do consumers spend with income of $3 trillion?

b) How much do they save?

4. Suppose that investment demand increases by $100. Assume that households have a

marginal propensity to consume of 80 percent. Compute the first three rounds of

multiplier effects as follows:

a) What are the first cycle changes in spending? Total cumulative change equals?

b) What are the second cycle changes in spending? Total cumulative change equals?

c) What are the third cycle changes in spending? Total cumulative change equals?

5. If Korean exports to the U.S. decline by $15 billion, by how much will total Korean

spending drop if their MPC is 0.60?

6. What are the key features of the consumption function? What causes
consumption to rise and fall? Does the level of consumption deserve
concern today?

7. What is the MPC and APC all about? Can you compare and contrast these
concepts? Is it better to have a high propensity to consume or lower?
Which people fit the high versus low category?

 

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