Principles of Economics
|
Economics 110
|
Mr. Beck
|
SUNY College at Oneonta
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Review Questions for Chapter 26 Solutions
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Review Questions for Economics
110
1. The [C + I + G + (X-IM)] real expenditure
line crosses the 45 degree Y line at 4,000. Therefore, Y = C+I+G+(X-IM)
at 4,000. The slope of the [C + I + G + (X-IM)] line is 0.40 because as
Y increases by 1,000 (from 4,000 to 5,000), [C + I + G + (X-IM)] increases
by 400 (from 4,000 to 4,400). 400/1000 = 0.40. Another increase in Y of
1,000 (from 5,000 to 6,000) will cause another increase in [C + I + G +
(X-IM)] by 400 (from 4,400 to 4,800) because [C + I + G + (X-IM)] is linear
(it has a constant slope). We can use the information that [C + I + G +
(X-IM)] = 4,800 when Y = 6,000 to solve for inventory change (Iu) when
Y = 6,000:
Inventory Change (Iu) = Y - [C + I + G + (X-IM)].
At a level of output (Y) of 6,000, Iu = 6,000 - 4,800 = 1,200.
Return to Question 1
2. If real expenditures [C + I + G + (X-IM)]
is currently less than output produced, then inventory change (Iu) will
be positive. This buildup of unsold goods will cause firms to layoff workers
and cut back on production.
The correct answer is a,
output
will automatically decrease.
Return to Question 2
3. The answer is e, None
of the above can be concluded because inventory change (Iu) = Y
- [C + I + G + (X-IM)] and is negative whenever [C + I + G + (X-IM)]
is greater than real GDP (Y). Choices a - c are also incorrect because
the economy is currently operating
below its equilibrium level of
real GDP (Y) and output and spending will automatically increase.
Businesses will be encouraged to increase output toward a higher equilibrium
level of real GDP (Y) because the negative inventory change signifies that
businesses are able to sell more than they are currently producing.
Return to Question 3
4. The marginal propensity to consume (MPC)
can be determined by using any 2 of the rows in the table because disposable
income (DI) is equal to real GDP (Y) when there are no taxes.
Using the last two rows: MPC = DC/DDI
= (4,600-3,700)/(5,000-4,000) = 900/1,000 = 0.90.
We can determine the level of consumption when Y
= 4,400 by using the formula: DC = MPC x DDI
DC = 0.90 x (4,400 - 4,000) = 0.90 x 400
= 360. This represents the additional consumption if income (Y) increases
from 4,000 to 4,400. Since the third row of the table shows that when Y
= 4,000, C = 3,700, adding 360 to 3,700 indicates that when Y = 4,400,
C = 4,060.
[C + I + G + (X-IM)] is total real expenditures. When
Y = 4,400, [C + I + G + (X-IM)] = 4,060 + 80 + 70 = 4,210.
Return to Question 4
5. The marginal propensity to consume (MPC)
can be determined by using any 2 of the rows in the table because disposable
income (DI) is equal to real GDP (Y) when there are no taxes.
Using the last two rows: MPC = DC/DDI
= (4,800-4,400)/(5,000-4,500) = 400/500 = 0.80.
We can determine the level of consumption when Y = 5,500 by using the
formula: DC = MPC x DDI
DC = 0.80 x (5,500 - 5,000) = 0.80 x 500
= 400. This represents the additional consumption if income (Y) increases
from 5,000 to 5,500. Since the last row of the table shows that when Y
= 5,000, C = 4,800, adding 400 to 4,800 indicates that when Y = 5,500,
C = 5,200.
[C + I + G + (X-IM)] is total real expenditures.
Since I + (X-IM) = 200 and government spending (G) = 100 and is constant,
when Y = 5,500, [C + I + G + (X-IM)] = 5,200 + 300 = 5,500.
Inventory Change (Iu) = Y - [C + I + G + (X-IM)]. At a level of
Y of 5,500, Iu = 5,500 - 5,500 = 0.
Therefore, Y = 5,500 happens to be the equilibrium
level.
Return to Question 5
6. A stock market crash would decrease the
wealth of households. This would force people to increase their saving
to replenish their lost wealth. To increase saving at a given level of
income, households must decrease their consumption because saving (S) =
Disposable Income - Consumption. A decrease in consumption (the major component
of total real expenditures) will decrease [C + I + G + (X-IM)]. Since
the decrease in real expenditures is due to some factor other than a decrease
in households' income, the entire total real
expenditure [C + I + G + (X-IM)] line would shift down,
choice b.
Return to Question 6
7. At a level of real GDP (Y) of 6,000,
real expenditures [C + I + G + (X-IM)], read off the vertical scale,
is 5,400.
Inventory Change (Iu) = Y - [C + I + G + (X-IM)]. At a level of Y of
6,000, Iu = 6,000 - 5,400 = 600.
Return to Question 7
8. The slope of the real expenditure, [C +
I + G + (X-IM)], line is the marginal propensity to consume (MPC). The
[C + I + G + (X-IM)] real expenditure line crosses the 45 degree Y line
at 4,000. Therefore, Y = [C + I + G + (X-IM)] at 4,000. The slope of the
[C + I + G + (X-IM)] line is 0.70 because
as real GDP, measured on the horizontal axis, increases by 2,000 (from
4,000 to 6,000), [C + I + G + (X-IM)], measured on the vertical axis, increases
by 1,400 (from 4,000 to 5,400). 1,400/2,000 = 0.70.
Return to Question 8
9. The marginal propensity to consume (MPC) can be determined
by using any 2 of the rows in the table because disposable income (DI)
is equal to real GDP (Y) when there are no taxes..
Using the last two rows: MPC = DC/DDI
= (1,960-1,880)/(2,100-2,000) = 80/100 = 0.80.
We can determine the level of consumption when Y
= 2,050 by using the formula: DC = MPC x DDI
DC = 0.80 x (2,050 - 2,000) = 0.80 x 50
= 40. This represents the additional consumption if real GDP (Y) increases
from 2,000 to 2,050.
Since when Y = 2,000, C = 1,880, adding 40 to 1,880
indicates that when Y = 2,050, C = 1,920.
[C + I + G + (X-IM)] is total real expenditures.
Since I + (X-IM) = 70 and government spending (G) = 50 and is constant,
when Y = 2,050, [C + I + G + (X-IM)] = 1,920 + 70 + 50= 2,040.
The correct answer is c,
when Y = 2,050, [C + I + G + (X-IM)] is 10
less than real GDP (Y).
Return to Question 9
10. If the economy is currently operating above the
equilibrium level of output, then it is producing a level of output which
it cannot sustain. The economy automatically adjusts toward its equilibrium
level of output at which total real expenditures = output produced. Therefore,
output
(Y) will automatically decrease toward the equilibrium level. The
correct choice is d.
Return to Question 10
11. If total real expenditures [C+I+G+(X-IM)]
is currently greater than output produced (Y), then businesses are not
producing enough to satisfy the current level of spending. They must increase
their output to satisfy the greater level of expenditures. The economy
automatically always adjusts toward its equilibrium level. Currently, the
economy
is operating below its equilibrium level of output. The correct
choice is d.
Return to Question 11
12. The [C + I + G + (X-IM)] real expenditure
line crosses the 45 degree Y line at 3,000. Therefore, Y = C+I+G+(X-IM)
at 3,000. The slope of the [C + I + G + (X-IM)] line is 0.55 because as
Y increases by 1,000 (from 3,000 to 4,000), [C + I + G + (X-IM)] increases
by 550 (from 3,000 to 3,550). 550/1000 = 0.55. Another increase in Y of
1,000 (from 4,000 to 5,000) will cause another increase in [C + I + G +
(X-IM)] by 550 (from 3,550 to 4,100) because [C + I + G + (X-IM)] is linear
(it has a constant slope). We can use the information that [C + I + G +
(X-IM)] = 4,100 when Y = 5,000 to solve for inventory change (Iu) when
Y = 5,000:
Inventory Change (Iu) = Y - [C + I + G + (X-IM)].
At a level of output (Y) of 5,000, Iu = 5,000 - 4,100 = 900.
Return to Question 12
13. Inventory Change (Iu) = Y - [C + I + G
+ (X-IM)]. When real GDP (Y) is 7,000, real expenditures, [C
+ I + G + (X-IM)] is shown to be 6,200. Therefore, at a level of GDP (Y)
of 7,000, Iu = 7,000 - 6,200 = 800.
Return to Question 13
14. If total real expenditures [C+I+G+(X-IM)]
is currently greater than output produced (Y), then businesses are not
producing enough to satisfy the current level of spending. They must increase
their output to satisfy the greater level of expenditures. To increase
their output, they hire more workers and increase the amount of income
generated. Part of this income is used to engage in additional consumption
expenditures by households. As output increases, this is shown by a movement
up and to the right along a given total real expenditure [C+I+G+(X-IM)]
line. Since total real expenditures [C+I+G+(X-IM)]
will increase, the correct choice is b.
Return to Question 14
15. The equilibrium condition is [C+I+G+(X-IM)] = Y. Real GDP (Y) is
represented in column 1. Summing up columns 2, 3, and 4 provides the corresponding
values for total real expenditures [C+I+G+(X-IM)]. Only in the last row
of the table, at a level of real GDP (Y) of 8,000, will total real expenditures
(7,500 + 400 + 100) equal Y. For all other rows, total real expenditures
is greater than the corresponding level of real GDP (Y). The equilibrium
level of real GDP (Y) is 8,000.
Return to Question 15
16. Inventory Change (Iu) = Y - [C +
I + G + (X-IM)]. We must calculate the level of real expenditures,
[C + I + G + (X-IM)] when real GDP (Y) is 7,000 and subtract that value
from 7,000. The consumption function is linear. The 2 rows of the table
reveal the slope of the consumption line. As real GDP (Y) increases by
1,000 (from 5,000 to 6,000), consumption increases by 750 (from 4,500 to
5,250). Increasing real GDP (Y) by another 1,000 (from 6,000 to 7,000)
will similarly increase consumption by another 750 (from 5,250 to 6,000).
Adding 500 of [I + (X-IM)] and 140 of G to the 6,000 of consumption yields
a total real expenditure level of 6,640 when real GDP (Y) = 7,000.
Therefore, at a level of GDP (Y) of 7,000, Iu = 7,000 - 6,640
= 360.
Return to Question 16
17. At a real GDP (Y) level of $7,000 billion,
total spending [C + I + G + (X-IM)] of $6,500 billion is less
than output produced. The unsold goods result in a positive inventory change.
This inventory build up will cause business to decrease their output produced.
As output is cut, income generated will similarly be cut. With less income,
households will cut back on their level of consumption expenditures. Since
both
output and total real expenditures are decreasing, the resulting equilibrium
level of real GDP (Y) at which [C + I + G + (X-IM)] = Y will thus be some
level less than $6,500 billion. The correct
choice is e.
Return to Question 17
18. Inventory Change (Iu) = Y - [C +
I + G + (X-IM)]. If an economy's inventory change (Iu) is positive, then
total real expenditures [C + I + G + (X-IM)] is currently less than output
produced (Y). Because of too little spending and unsold goods accumulating,
businesses will be forced to decrease their output
produced. The correct choice is c.
Return to Question 18
19. The graph illustrates that at a level of output of 8,000,
total real expenditures [C + I + G + (X-IM)] is less than 8,000. It is
shown that at a level of real GDP (Y) of 8,000, the total real expenditures
[C + I + G + (X-IM)] line is below the 45 degree Y line. Since inventory
Change (Iu) = Y - [C + I + G + (X-IM)], if real GDP (Y) is greater than
total real expenditures [C + I + G + (X-IM)], the difference, inventory
change, is positive. The correct choice is d.
Return to Question 19
20.
The [C + I + G + (X-IM)] real expenditure line crosses the 45 degree
Y line at 5,000. Therefore, Y = C+I+G+(X-IM) at 5,000. The slope of the
[C + I + G + (X-IM)] line is 0.60 because as Y increases by 1,000 (from
5,000 to 6,000), [C + I + G + (X-IM)] increases by 600 (from 5,000 to 5,600).
600/1000 = 0.60. An increase in Y of 2,000 (from 6,000 to 8,000) will cause
an increase in [C + I + G + (X-IM)] of 0.60 x 2,000 = 1,200 (from
5,600 to 6,800) because [C + I + G + (X-IM)] is linear (it has a constant
slope). We can use the information that [C + I + G + (X-IM)] = 6,800 when
Y = 8,000 to solve for inventory change (Iu) when Y = 8,000:
Inventory Change (Iu) = Y - [C + I + G + (X-IM)].
At a level of output (Y) of 8,000, Iu = 8,000 - 6,800 = 1,200.
Return to Question 20
21. If total real expenditures [C + I + G + (X-IM)] is
currently less than output produced (real GDP), then the economy would
be in a situation such as at a real GDP level of 6,000 in the graph above
in the preceding question. At a real GDP level of 6,000, the total real
expenditures [C + I + G + (X-IM)] line is below the 45 degree Y
line. This represents a situation in which the equilibrium level of real
GDP (in which the [C + I + G + (X-IM)] real expenditure line crosses
the 45 degree Y line is less than 6,000 (5,000 in the previous question).
Thus, 6,000 would represent a case in which the economy
is currently operating at an output (real GDP) level which is greater
than the equilibrium level of output (real GDP), choice c.
Return to Question 21
22. If the level of real GDP is greater than the equilibrium
level of output (real GDP), then currently real GDP (Y) is greater than
total real expenditures [C + I + G + (X-IM)]. (The graph for question 20
above illustrates this situation for a level of real GDP of 6,000.)
Inventory Change (Iu) = Y - [C + I + G + (X-IM)]. If real GDP
(Y) is greater than [C + I + G + (X-IM)], then inventory change (Iu) would
be a positive value. The correct choice therefore is business
firms would be experiencing a net increase in inventories, choice
a.
Return to Question 22
23. Out of its disposable income, a household may either consume
or save. Saving is disposable income not consumed by households. Rather,
it is dollars that flow from households to the financial
system. The correct choice is f, Saving.
Return to Question 23
24.
|
Real GDP (Y)
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Real Expenditures [C + I + G + (X-IM)]
|
|
$6,800 billion
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$6,600 billion
|
If real GDP (Y) of $6,800 billion is greater than real expenditures [C
+ I + G + (X-IM)] of $6,600 billion, then the economy currently is operating
above its equilibrium level. Automatically, businesses will decrease their
output and move toward the equilibrium level. However, by decreasing output,
income will decrease, and this, in turn, will further decrease real
expenditures as consumption spending decreases. The economy will automatically
gravitate to an equilibrium level in which real GDP (Y) will be equal to
real expenditures [C + I + G + (X-IM)], but this will occur at a level
below $6,600 billion, the current level of
real expenditures. The correct choice is c.
Return to Question 24
25.
The graph above illustrates that at a level of output of 9,500, real
GDP (as represented by the 45 degree Y line) is greater than total real
expenditures (as represented by the [C + I + G + (X-IM)] line). The equilibrium
level of real GDP (where the 2 lines cross) is at a level of real GDP less
than 9,500. Since the economy will automatically move toward the equilibrium
level, output (real GDP) will automatically decrease,
choice c.
Return to Question 25
26.
$ spent on goods and services produced in the U.S. flow directly to
U.S. businesses, regardless of the source of these $.. Exports
(X), choice b, represent $ spent by
foreigners on goods and services produced by U.S. businesses and thus are
shown in the circular flow diagram as flowing directly to U.S. businesses.
Return to Question 26
27. If the economy level of real GDP (output) exceeds the amount of
real expenditures by $200 billion then there will be a net inventory build
up of unsold goods of $200 billion.
Inventory Change (Iu) = Y - [C + I + G + (X-IM)] in which Y represents
income which always equals output produced (GDP).
Inventory Change (Iu) = $7,800 billion - $7,600 billion = $200 billion.
Because spending is less than output produced and inventories are accumulating,
businesses will reduce output produced.
The correct choice is b, inventory
change (Iu) would be positive and the economy's output would decrease.
Return to Question 27
28. Inventory Change (Iu) = Y - [C + I + G + (X-IM)] in which
Y represents income which always equals output produced (GDP). If real
expenditures [C + I + G + (X-IM)] is currently less than output produced,
then the difference represents the amount of unsold goods accumulating
as additions to business inventories. The correct answer is thus a,
inventory
change (Iu) currently is positive.
Return to Question 28
29.
|
Real GDP (Y)
|
Consumption (C)
|
I + (X-IM)
|
Government Spending (G) |
|
6,000
|
5,300
|
400
|
230
|
|
7,000
|
6,100
|
400
|
230
|
Inventory Change (Iu) = Y - [C + I + G + (X-IM)]. We must calculate
the level of real expenditures, [C + I + G + (X-IM)] when real GDP (Y)
is 8,000 and subtract that value from the real GDP (Y) level of 8,000.
The consumption function is linear. The 2 rows of the table reveal the
slope of the consumption line. As real GDP (Y) increases by 1,000 (from
6,000 to 7,000), consumption increases by 800 (from 5,300 to 6,100). Increasing
real GDP (Y) by another 1,000 (from 7,000 to 8,000) will similarly increase
consumption by another 800 (from 6,100 to 6,900). This is shown in the
table below:
|
Real GDP (Y)
|
Consumption (C)
|
I + (X-IM)
|
Government Spending (G) |
|
6,000
|
5,300
|
400
|
230
|
|
7,000
|
6,100
|
400
|
230
|
|
8,000
|
6,100 + 800 = 6,900
|
400
|
230
|
Adding 400 of [I + (X-IM)] and 230 of G to the 6,900 of consumption yields
a total real expenditure level of 7,530 when real GDP (Y) = 8,000.
Therefore, at a level of GDP (Y) of 8,000, Iu = 8,000 - 7,530
= 470.
Return to Question 29
30.
Note that this is the same question as number 25, except with different
choices.
The graph above illustrates that at a level of output of 9,500, real
GDP (as represented by the 45 degree Y line) is greater than total real
expenditures (as represented by the [C + I + G + (X-IM)] line). Since inventory
Change (Iu) = Y - [C + I + G + (X-IM)], if Y exceeds [C + I + G + (X-IM)],
then inventory change (Iu) currently is positive,
choice d.
Return to Question 30
31. If total real expenditures [C + I + G + (X-IM)] currently
is greater than output produced, then the resulting negative inventory
change (reduction in size of business inventories) will signal to businesses
to increase their output produced. This increase in output is represented
by an increase in the economy's level of real GDP (Y), choice a.
Return to Question 31
32.
|
Real GDP (Y)
|
Real Expenditures [C + I + G + (X-IM)]
|
|
$8,200 billion
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$8,000 billion
|
Note that this is the same question as number 24, but with different numbers.
If real GDP (Y) of $8,200 billion is greater than real expenditures
[C + I + G + (X-IM)] of $8,000 billion, then the economy currently is operating
above its equilibrium level. Automatically, businesses will decrease their
output and move toward the equilibrium level. However, by decreasing output,
income will decrease, and this, in turn, will further decrease real
expenditures as consumption spending decreases. The economy will automatically
gravitate to an equilibrium level in which real GDP (Y) will be equal to
real expenditures [C + I + G + (X-IM)], but this will occur at a level
below $8,000 billion, the current level of
real expenditures. The correct choice is e.
Return to Question 32
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