Study Quiz For Economics
Just to study. I have a huge exam coming up. . .
Questions and Answers
- 1.
A rise in the general price level resulting from an excess of total spending (demand)
- A.
Demand-pull inflation
- B.
Cost-push inflation
- C.
Inflation
- D.
Deflation
- E.
Disinflation
Correct Answer
A. Demand-pull inflationExplanation
Demand-pull inflation occurs when there is an increase in the general price level due to excessive total spending or demand in the economy. This means that consumers are demanding more goods and services, leading to an increase in prices. This type of inflation is often caused by factors such as increased consumer confidence, expansionary fiscal or monetary policies, or a decrease in interest rates, which all stimulate spending. As a result, businesses may struggle to meet the increased demand, leading to higher prices.Rate this question:
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- 2.
COLA stands for
- A.
Cost of living advancement
- B.
Cost of living addition
- C.
Cost of living adjustment
- D.
Cost of living augmentation
Correct Answer
C. Cost of living adjustmentExplanation
COLA stands for Cost of Living Adjustment. This refers to the periodic increase in wages or benefits to account for the rising cost of living. It is a common practice in many organizations to ensure that employees' salaries keep up with inflation and maintain their purchasing power.Rate this question:
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- 3.
The change in consumption resulting from a given change in real disposable income
- A.
Marginal propensity to cost (MPC)
- B.
Marginal propensity to save (MPS)
- C.
Average marginal propensity to save
- D.
Marginal propensity to spend (MPS)
- E.
Marginal propensity to consume (MPC)
Correct Answer
E. Marginal propensity to consume (MPC)Explanation
The term "marginal propensity to consume (MPC)" refers to the change in consumption that occurs as a result of a given change in real disposable income. It represents the proportion of additional income that individuals choose to spend rather than save. In other words, it measures the responsiveness of consumption to changes in income. A higher MPC indicates that individuals are more likely to spend a larger portion of their income, while a lower MPC suggests a higher propensity to save.Rate this question:
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- 4.
The part of disposable income households do not spend for consumer goods and services
- A.
Dissaving
- B.
Spending
- C.
Inflation
- D.
Saving
- E.
Deflation
Correct Answer
D. SavingExplanation
The correct answer is "saving". Saving refers to the portion of disposable income that households do not spend on consumer goods and services. It is the act of setting aside money for future use, such as for emergencies, investments, or retirement. Saving helps individuals and households to build wealth and achieve financial stability.Rate this question:
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- 5.
The theory that supply creates its own demand
- A.
Keynesian Law
- B.
Shay's Law
- C.
Say's Law
- D.
Key's Law
- E.
Keynesien Law
Correct Answer
C. Say's LawExplanation
Say's Law, also known as the theory of supply creating its own demand, is an economic principle attributed to French economist Jean-Baptiste Say. According to Say's Law, the production of goods and services generates income, which in turn creates demand for those goods and services. In other words, the act of supplying goods and services in the market creates the necessary purchasing power for those goods and services to be bought. This principle is in contrast to the Keynesian view, which emphasizes the role of demand in driving economic activity.Rate this question:
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- 6.
The actual number of dollars received (nominal income) adjusted for changes in the CPI
- A.
Nominal income
- B.
Real income
- C.
Proportional income
- D.
Recessionary income
- E.
Approximate income
Correct Answer
B. Real incomeExplanation
Real income refers to the actual purchasing power of an individual's income after adjusting for changes in the Consumer Price Index (CPI). It takes into account the effects of inflation or deflation on the value of money. By adjusting nominal income for changes in the CPI, real income provides a more accurate measure of an individual's standard of living and purchasing power. This allows for a comparison of income levels across different time periods and helps to understand the impact of inflation on people's ability to buy goods and services.Rate this question:
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- 7.
The graph or table that shows the amount households spend for goods and services at different levels of disposable income
- A.
Spending function
- B.
Aggregate expenditures function (AE)
- C.
Tax multiplier
- D.
Laffer curve
- E.
Consumption function
Correct Answer
E. Consumption functionExplanation
The correct answer is the consumption function. The consumption function is a graph or table that shows the amount households spend for goods and services at different levels of disposable income. It represents the relationship between disposable income and consumption, indicating how much of their income households are likely to spend. This function is an important tool in understanding and analyzing consumer behavior and its impact on the overall economy.Rate this question:
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- 8.
a fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level
- A.
Fiscal policy
- B.
Supply-side fiscal policy
- C.
Demand-push fiscal policy
- D.
Recessionary gap
- E.
Inflationary gap
Correct Answer
B. Supply-side fiscal policyExplanation
A supply-side fiscal policy is a type of fiscal policy that focuses on increasing aggregate supply in order to achieve long-run economic growth, full employment, and a lower price level. This policy emphasizes government actions that promote factors such as lower taxes, reduced regulations, and increased investment incentives to encourage businesses to expand production and create more jobs. By increasing the productive capacity of the economy, supply-side fiscal policy aims to stimulate economic growth and reduce inflationary pressures.Rate this question:
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- 9.
It is the ratio of the change in real GDP to an initial change in any component of aggregate expenditures, including consumption, investment, government spending, and net exports. As a formula, the spending multiplier equals 1/(1-MPC) or 1/MPS.
- A.
Spending multiplier
- B.
Tax multiplier
- C.
Autonomous expenditure
- D.
Investment demand multiplier
- E.
Budget deficit multiplier
Correct Answer
A. Spending multiplierExplanation
The spending multiplier refers to the ratio of the change in real GDP to an initial change in any component of aggregate expenditures. It measures the impact of a change in spending on the overall economy. The formula for the spending multiplier is 1/(1-MPC) or 1/MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. This means that for every dollar increase in spending, the overall GDP will increase by a multiple of the spending multiplier.Rate this question:
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- 10.
Inflation means an increase in the price of all goods
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Inflation does not necessarily mean an increase in the price of all goods. Inflation refers to a general increase in the overall price level of goods and services in an economy over a period of time. It means that the average prices of goods and services are rising, but it does not imply that the prices of all goods are increasing. Inflation can vary across different sectors and can affect different goods and services differently. Therefore, the statement that inflation means an increase in the price of all goods is false.Rate this question:
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- 11.
Inflation is an increase in the general price level of goods and services in the economy
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Inflation refers to a sustained increase in the overall price level of goods and services in an economy over a period of time. It means that the purchasing power of money decreases, as more money is required to buy the same amount of goods and services. This increase in prices can be caused by various factors such as an increase in demand, increase in production costs, or changes in government policies. Therefore, the given statement that inflation is an increase in the general price level of goods and services in the economy is true.Rate this question:
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- 12.
The value of the CPI in the base year is always 100 because the numerator and the denominator of the CPI formula are the same in the base year
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The explanation for the given correct answer is that in the base year, the Consumer Price Index (CPI) is always 100 because the numerator and denominator of the CPI formula are equal. The CPI is calculated by dividing the price of a basket of goods and services in the current year by the price of the same basket in the base year, and then multiplying by 100. Since the base year is used as a reference point, the prices of the goods and services in the base year are set as the standard, resulting in a CPI value of 100.Rate this question:
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- 13.
Classical economists believed which of the following
- A.
Recessions will naturally cure themselves
- B.
The government should stay active in the economy, especially in a recession or depression
- C.
The price system will automatically restore full employment
- D.
Demand creates its own supply
- E.
Supply creates its own demand
Correct Answer(s)
A. Recessions will naturally cure themselves
C. The price system will automatically restore full employment
E. Supply creates its own demandExplanation
Classical economists believed that recessions will naturally cure themselves because they adhered to the concept of the self-regulating nature of the market. They argued that economic downturns were temporary and would eventually be resolved by market forces without the need for government intervention. They also believed in the price system's ability to restore full employment, as they believed that changes in prices would adjust supply and demand in the economy. Additionally, classical economists argued that supply creates its own demand, meaning that the production of goods and services would automatically generate the necessary demand for them.Rate this question:
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- 14.
Keynesian theory believes that
- A.
Full employment is not possible
- B.
The price system will automatically restore full employment
- C.
The government should be active and use discretionary fiscal policy to help during a recession or depression
- D.
Supply creates its own demand
- E.
Demand creates its own supply
Correct Answer(s)
C. The government should be active and use discretionary fiscal policy to help during a recession or depression
E. Demand creates its own supplyExplanation
The correct answer is that the government should be active and use discretionary fiscal policy to help during a recession or depression. This aligns with Keynesian theory, which argues that government intervention is necessary to stabilize the economy and promote full employment. According to Keynes, during periods of economic downturn, there is a lack of aggregate demand, and government spending can help stimulate demand and create jobs. This approach contrasts with the belief that the price system will automatically restore full employment or that supply creates its own demand.Rate this question:
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- 15.
The use of government spending and taxes to influence the nation’s spending, employment, and price level
- A.
Discretionary fiscal policy
- B.
Supply- side fiscal policy
- C.
Fiscal policy
- D.
Non-fiscal policy
- E.
Economic policy
Correct Answer
C. Fiscal policyExplanation
Fiscal policy refers to the use of government spending and taxes to influence the nation's spending, employment, and price level. It involves the government's decisions on how much to spend on public goods and services, as well as how much to tax individuals and businesses. By adjusting these factors, the government aims to stimulate economic growth, control inflation, and stabilize the economy. Fiscal policy can be either discretionary, where the government actively makes changes, or supply-side, where it focuses on incentivizing production and investment. It is a key component of economic policy.Rate this question:
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- 16.
the change in aggregate demand (total spending) resulting from an initial change in taxes. As a formula, tax multiplier equals 1- spending multiplier
- A.
Economic multiplier
- B.
Fiscal multiplier
- C.
Spending multiplier
- D.
Budget multiplier
- E.
Tax multiplier
Correct Answer
E. Tax multiplierExplanation
The tax multiplier refers to the change in aggregate demand that occurs as a result of an initial change in taxes. It is calculated by subtracting the spending multiplier from 1. When taxes are increased or decreased, it affects the disposable income of individuals and businesses, which in turn affects their spending behavior. The tax multiplier helps to quantify the impact that changes in taxes have on overall spending in the economy.Rate this question:
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- 17.
A graph depicting the relationship between tax rates and total tax revenues
- A.
Aggregate expenditures output model
- B.
Laffer curve
- C.
Aggregate expenditures function
- D.
Price index numbers
- E.
Wage-price spiral
Correct Answer
B. Laffer curveExplanation
The Laffer curve is a graph that illustrates the relationship between tax rates and total tax revenues. It suggests that there is an optimal tax rate that maximizes government revenue, and that both very high and very low tax rates can result in lower revenue. This concept is often used in discussions about tax policy and the trade-off between tax rates and government revenue.Rate this question:
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- 18.
A reduction in the rate of inflation
- A.
Deflation
- B.
Inflation
- C.
Hyper-inflation
- D.
Disinflation
- E.
Long-term deflation
Correct Answer
D. DisinflationExplanation
Disinflation refers to a decrease in the rate of inflation, meaning that while prices are still rising, they are doing so at a slower pace. This is different from deflation, which is a decrease in overall prices, and inflation, which is an increase in overall prices. Hyper-inflation refers to an extremely high and typically accelerating inflation rate. Long-term deflation refers to a sustained decrease in overall prices over an extended period. Therefore, disinflation is the correct answer as it specifically describes a reduction in the rate of inflation.Rate this question:
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- 19.
An increase in the general (average) price level of goods and services in the economy
- A.
Disinflation
- B.
Inflation
- C.
Hyper-inflation
- D.
Deflation
- E.
Wage-spiral
Correct Answer
B. InflationExplanation
Inflation refers to an increase in the general price level of goods and services in the economy. This means that over time, the cost of goods and services will rise, and the purchasing power of money will decrease. Inflation can be caused by various factors such as increased demand, higher production costs, or changes in government policies. It is a common economic phenomenon that can have both positive and negative effects on an economy.Rate this question:
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- 20.
Consumption function is...
- A.
An index that measures changes in the average prices of consumer goods and services
- B.
The graph or table that shows the amount households spend for goods and services at different levels of disposable income
- C.
The curve that shows the amount businesses spend for investment goods at different possible rates of interest
- D.
The model that determines the equilibrium level of real GDP by the intersection of the aggregate expenditures and aggregate output (and income) curves
- E.
The ratio of the change in real GDP to an initial change in any component of aggregate expenditures, including consumption, investment, government spending, and net exports. As a formula, the spending multiplier equals 1/(1-MPC) or 1/MPS.
Correct Answer
B. The graph or table that shows the amount households spend for goods and services at different levels of disposable incomeExplanation
The correct answer is the graph or table that shows the amount households spend for goods and services at different levels of disposable income. This is because the consumption function represents the relationship between disposable income and consumption expenditure by households. It shows how much households are willing to spend on goods and services at different levels of income, which helps in understanding the consumption patterns and behavior of households.Rate this question:
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- 21.
Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes referred to as nondiscretionary fiscal policy
- A.
Budget surplus
- B.
Spending multiplier
- C.
Automatic stabilizer
- D.
Stabilizer
- E.
Autonomous expenditure
Correct Answer
C. Automatic stabilizerExplanation
Automatic stabilizers are federal expenditures and tax revenues that automatically adjust based on the state of the economy. During an economic expansion, tax revenues increase and government expenditures decrease, helping to stabilize the economy by reducing the potential for inflation. Conversely, during an economic contraction, tax revenues decrease and government expenditures increase, providing a boost to the economy and helping to mitigate the effects of a recession. These automatic adjustments occur without the need for discretionary action by policymakers, hence the term "nondiscretionary fiscal policy". The concept of automatic stabilizers is often used to refer to the overall effect of these fiscal measures on stabilizing the economy.Rate this question:
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- 22.
Spending that does not vary with the current level of disposable income
- A.
Autonomous expenditure
- B.
Consumption expenditure
- C.
Imports
- D.
Exports
- E.
Price index
Correct Answer
A. Autonomous expenditureExplanation
Autonomous expenditure refers to spending that remains constant regardless of changes in disposable income. This means that even if a person's income increases or decreases, their autonomous expenditure will stay the same. This concept is important in understanding the factors that influence overall economic activity, as autonomous expenditure helps determine the baseline level of spending in an economy.Rate this question:
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- 23.
The curve that shows the amount businesses spend for investment goods at different possible rates of interest
- A.
Wage-price spiral
- B.
Consumer price index (CPI)
- C.
Aggregate expenditures function (AE)
- D.
Aggregate expenditures output model
- E.
Investment demand curve
Correct Answer
E. Investment demand curveExplanation
The investment demand curve represents the relationship between the interest rate and the amount of money businesses are willing to spend on investment goods. As the interest rate decreases, the cost of borrowing money decreases, making investment more attractive for businesses. This leads to an increase in the amount of money businesses are willing to spend on investment goods, resulting in a rightward shift of the investment demand curve. Conversely, as the interest rate increases, the cost of borrowing money increases, making investment less attractive for businesses. This leads to a decrease in the amount of money businesses are willing to spend on investment goods, resulting in a leftward shift of the investment demand curve.Rate this question:
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- 24.
According to the aggregate expenditures model, the economy is said to be in equilibrium..
- A.
At the point where aggregate output and income is greater than aggregate expenditures
- B.
At the point where aggregate expenditures are greater than aggregate output
- C.
At the point where the aggregate expenditures and aggregate output and income curves intersect
- D.
At the point where the economy has full employment of all resources
Correct Answer
C. At the point where the aggregate expenditures and aggregate output and income curves intersectExplanation
According to the aggregate expenditures model, the economy is said to be in equilibrium at the point where the aggregate expenditures and aggregate output and income curves intersect. This is because at this point, the total amount of spending in the economy matches the total output and income. In other words, there is no excess supply or demand in the economy, and all resources are being fully utilized. This point represents a state of balance in the economy, where there is no tendency for output or income to change.Rate this question:
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- 25.
If the CPI this year is 180 and the CPI last was 175, then the annual rate of inflation is
- A.
3.3%
- B.
3.5%
- C.
2.9%
- D.
5.6%
- E.
4.2%
Correct Answer
C. 2.9%Explanation
The annual rate of inflation can be calculated by subtracting the previous year's CPI from the current year's CPI, dividing the result by the previous year's CPI, and then multiplying by 100. In this case, the calculation would be (180-175)/175 * 100 = 2.9%.Rate this question:
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- 26.
CPI is equal to...
- A.
(cost of the market basket of products in the current year)/(cost of the market basket of products in the base year) x 100
- B.
(cost of the market basket of products in the current year)/(cost of the market basket of products in the base year)
- C.
(cost of the market basket of products in the base year)/(cost of the market basket of products in the current year)
- D.
(cost of the market basket of products in the base year)/(cost of the market basket of products in the current year) x 100
Correct Answer
A. (cost of the market basket of products in the current year)/(cost of the market basket of products in the base year) x 100Explanation
The correct answer is (cost of the market basket of products in the current year)/(cost of the market basket of products in the base year) x 100. This formula calculates the Consumer Price Index (CPI), which is a measure of the average change in prices of goods and services over time. By comparing the cost of the market basket of products in the current year to the cost in the base year and multiplying by 100, the CPI provides a percentage that represents the overall inflation or deflation in the economy.Rate this question:
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- 27.
A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wage rates and prices is referred to as
- A.
Cost-push inflation
- B.
A wage-price spiral
- C.
Demand-pull inflation
- D.
Structural inflation
- E.
Cyclical inflation
Correct Answer
B. A wage-price spiralExplanation
A wage-price spiral occurs when increases in nominal wage rates lead to higher prices, which then result in even higher nominal wage rates and prices. This creates a cycle where wages and prices continually increase, feeding off each other. This situation can lead to inflationary pressures and can be difficult to break, as higher wages lead to higher costs for businesses, which are then passed on to consumers in the form of higher prices, causing workers to demand even higher wages. This cycle continues until some external factor intervenes to break the spiral.Rate this question:
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- 28.
Cost-push inflation is sometimes described as "too many dollars chasing too few goods."
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement provided in the question is a description of demand-pull inflation, not cost-push inflation. Cost-push inflation occurs when the cost of production increases, leading to an increase in the prices of goods and services. It is not related to the concept of "too many dollars chasing too few goods." Therefore, the correct answer is false.Rate this question:
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- 29.
Demand-pull inflation is an increase in the general price level resulting from an increase in the cost of production.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Demand-pull inflation is an increase in the general price level resulting from an increase in aggregate demand, not from an increase in the cost of production. When demand for goods and services exceeds supply, prices tend to rise. This can occur due to factors such as increased consumer spending, government spending, or investment. An increase in the cost of production, on the other hand, can lead to cost-push inflation, where businesses pass on the higher costs to consumers by raising prices. Therefore, the statement that demand-pull inflation is caused by an increase in the cost of production is false.Rate this question:
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- 30.
Real income will rise if...
- A.
Nominal income falls more than the CPI rises
- B.
Nominal income falls and the CPI falls by the same amount
- C.
Nominal income rises and the CPI rises by the same amount
- D.
Nominal income rises and the CPI remains the same
Correct Answer
D. Nominal income rises and the CPI remains the sameExplanation
If nominal income rises and the CPI remains the same, it means that the increase in income is not eroded by inflation. In other words, the purchasing power of the individual's income has increased because prices have not gone up. Therefore, the individual can afford to buy more goods and services with their income, leading to an increase in real income.Rate this question:
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- 31.
The United States has one of the highest inflation rates in the world
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because the United States does not have one of the highest inflation rates in the world. In fact, compared to many other countries, the United States has a relatively low inflation rate. While inflation rates can fluctuate over time, it is generally not accurate to say that the United States has one of the highest inflation rates in the world.Rate this question:
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- 32.
What is the real rate of interest if an account has a nominal interest rate of 10 percent and inflation is 4 percent?
- A.
10%
- B.
4%
- C.
14%
- D.
6%
Correct Answer
D. 6%Explanation
The real rate of interest is the nominal interest rate minus the inflation rate. In this case, the nominal interest rate is 10% and the inflation rate is 4%. Subtracting 4% from 10% gives us a real rate of interest of 6%.Rate this question:
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- 33.
1-MPC=MPS
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement "1-MPC=MPS" is true. MPC refers to the marginal propensity to consume, which is the fraction of additional income that is spent on consumption. MPS refers to the marginal propensity to save, which is the fraction of additional income that is saved. Since consumption and saving are the only two uses of income, they must add up to the total income. Therefore, 1-MPC=MPS is a true statement.Rate this question:
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- 34.
According to classical economists...
- A.
Unemployment is the result of a short-lived adjustment period in which wages and prices decline or people voluntarily choose not to work.
- B.
a continuing depression is impossible because markets eliminate persistent shortages.
- C.
There is a natural tendency for the economy to restore full employment over time
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
According to classical economists, unemployment is seen as a temporary phenomenon caused by either a decrease in wages and prices or by individuals voluntarily choosing not to work. They believe that a prolonged depression is not possible because markets will eventually eliminate any persistent shortages. Additionally, classical economists argue that there is a natural tendency for the economy to restore full employment over time. Therefore, the correct answer is "all of the above" as all these statements align with the views of classical economists on unemployment and market dynamics.Rate this question:
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- 35.
Which of the following equations expresses the consumption function?
- A.
A+b=CY
- B.
Y=a+bC
- C.
C=a+bY
- D.
C=Y
Correct Answer
C. C=a+bYExplanation
The consumption function represents the relationship between consumption (C) and income (Y). In the given options, the equation C=a+bY expresses the consumption function, where a and b are constants representing autonomous consumption and the marginal propensity to consume, respectively. This equation shows that consumption (C) is determined by income (Y), with a positive relationship between the two variables. As income increases, consumption also increases, reflecting the idea that individuals tend to spend a portion of their income on consumption goods and services.Rate this question:
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- 36.
If a GDP gap of $100 billion exists below full employment and the spending multiplier is 2 then taxes will have to be
- A.
Cut by $100 billion
- B.
Cut by $200 billion
- C.
Increased by $100 billion
- D.
Increased by $200 billion
Correct Answer
B. Cut by $200 billionExplanation
If a GDP gap of $100 billion exists below full employment and the spending multiplier is 2, it means that the economy is producing $100 billion less than its potential output. In order to stimulate economic activity and close this gap, taxes would need to be cut by a larger amount, specifically $200 billion. This is because the spending multiplier of 2 indicates that for every dollar cut in taxes, there will be a $2 increase in spending, thereby boosting aggregate demand and closing the GDP gap.Rate this question:
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- 37.
If a GDP gap of $100 billion exists below the full employment level of GDP, and the spending multiplier is 4 then the
- A.
Inflationary gap is $100 billion
- B.
Inflationary gap is $400 billion
- C.
Recessionary gap is $25 billion
- D.
Recessionary gap is $100 billion
Correct Answer
C. Recessionary gap is $25 billionExplanation
If a GDP gap of $100 billion exists below the full employment level of GDP and the spending multiplier is 4, it means that the economy is producing $100 billion less than its potential. The spending multiplier indicates the change in GDP resulting from a change in spending. In this case, a spending multiplier of 4 means that every $1 increase in spending will result in a $4 increase in GDP. Therefore, to close the GDP gap of $100 billion, the necessary increase in spending would be $25 billion (100/4). This means that the recessionary gap is $25 billion.Rate this question:
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- 38.
If the MPC = 0.75 and consumption spending increases by $100 billion then the real GDP level will
- A.
Decrease by $500 billion
- B.
Decrease by $250 billion
- C.
Increase by $400 billion
- D.
Increase by $100 billion
Correct Answer
C. Increase by $400 billionExplanation
If the MPC (marginal propensity to consume) is 0.75, it means that for every additional dollar of income, individuals will spend 75 cents. Therefore, if consumption spending increases by $100 billion, it implies that individuals will spend $100 billion * 0.75 = $75 billion of that increase. The multiplier effect comes into play, which means that this initial increase in consumption spending will lead to further increases in income and spending. The multiplier is calculated as 1 / (1 - MPC), which in this case is 1 / (1 - 0.75) = 4. Thus, the total increase in real GDP will be $75 billion * 4 = $300 billion. However, since the question asks for the increase in real GDP level, the correct answer is $400 billion.Rate this question:
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- 39.
If the MPC = 0.9 and government spending decreases by $50 billion then the real GDP level will
- A.
Decrease by $300 billion
- B.
Decrease by $500 billion
- C.
Increase by $450 billion
- D.
Increase by $100 billion
Correct Answer
B. Decrease by $500 billionExplanation
If the MPC (marginal propensity to consume) is 0.9 and government spending decreases by $50 billion, it means that households will consume 90% of any increase in their income. Therefore, a decrease in government spending by $50 billion will result in a decrease in aggregate demand by $45 billion (90% of $50 billion). According to the multiplier effect, this decrease in aggregate demand will lead to a cumulative decrease in real GDP. Since the multiplier effect is 10 (1/MPC), the decrease in real GDP will be 10 times the initial decrease in aggregate demand, resulting in a decrease of $500 billion.Rate this question:
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- 40.
Keynes argued that an economy could be stuck forever in a below-full-employment equilibrium level of real GDP.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Keynes argued that an economy could be stuck forever in a below-full-employment equilibrium level of real GDP. This means that even with available resources and potential for growth, the economy may not reach its full potential due to various factors like lack of demand or inadequate government intervention. Keynes believed that in such situations, government policies like fiscal stimulus and increased public spending could help to stimulate demand and bring the economy back to full employment. Therefore, the statement is true according to Keynesian economics.Rate this question:
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- 41.
Demand-pull inflation is the result of
- A.
A rightward shift of the aggregate supply curve.
- B.
A leftward shift of the aggregate demand curve.
- C.
A rightward shift of the aggregate demand curve.
- D.
A leftward shift of the aggregate supply curve.
Correct Answer
C. A rightward shift of the aggregate demand curve.Explanation
Demand-pull inflation occurs when there is an increase in aggregate demand in an economy. This means that there is a higher demand for goods and services, leading to an increase in prices. A rightward shift of the aggregate demand curve represents an increase in demand, which can be caused by factors such as increased consumer spending, government spending, or investment. As a result, businesses raise prices to meet the higher demand, leading to inflation.Rate this question:
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Mar 22, 2023Quiz Edited by
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Jul 29, 2009Quiz Created by
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