Midterm 2

Question 1

From 1991 to 2001 the U.S. was in a period of

Answer 1

expansion

Question 2

what is the name of the organization that defines business cycle peaks and troughs in the United States

Answer 2

the National Bureau of Economic Research

Question 3

The effect of a recession on a company like Whirlpool Corporation is such that

Answer 3

sales decline more sharply for Whirlpool as compared to firms that do not produce durable
goods.

Question 4

Between 1950 and 2009, the average length of recessions in the United States was

Answer 4

11 months.

Question 5

Which of the following explains why fluctuations in real GDP have become less volatile in the
United States since 1950?

Answer 5

Unemployment insurance and other government transfer programs are more prevalent since
the 1950s.

Question 6

The aggregate expenditure model focuses on the relationship between ________ and
________ in the short run, assuming ________ is constant.

Answer 6

total spending; real GDP; the price level

Question 7

The key idea of the aggregate expenditure model is that in any particular year, the level of
GDP is determined mainly by__________

Answer 7

the level of aggregate expenditure.

Question 8

An unplanned increase in inventories results from _______

Answer 8

actual investment that is greater than planned investment.

Question 9

Consumption is $5 million, planned investment spending is $8 million, government purchases
are $10 million, and net exports are equal to $2 million. If GDP during that same time period is
equal to $27 million, what unplanned changes in inventories occurred?

Answer 9

There was an unplanned increase in inventories equal to $2 million

Question 10

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic
equilibrium?

Answer 10

Inventories will rise, and GDP and employment will decline.

Question 11

If inflation in the United States is higher than inflation in other countries, what will be the
effect on net exports for the United States?

Answer 11

Net exports will decrease as U.S. exports decrease

Question 12

An increase in taxes will ________ consumption spending, and a decrease in transfer
payments will ________ consumption spending.

Answer 12

decrease; decrease

Question 13

If disposable income increases by $500 million, and consumption increases by $400 million,
then the marginal propensity to consume is ______

Answer 13

0.8.

Question 14

LOOK AT 14 AND 15

Answer 14

1

Question 15

Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000,
what will the new equilibrium level of GDP be if government spending increases to 2,500?
C = 5,000 + (MPC)Y
I = 1,500
G = 2,000
NX = -500

Answer 15

$34,000

Question 16

17) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000,
what is the marginal propensity to consume?
C = 5,000 + (MPC)Y
I = 1,500
G = 2,000
NX = -500

Answer 16

0.75

Question 17

The basic aggregate demand and aggregate supply curve model helps explain

Answer 17

short-term fluctuations in real GDP and the price level.

Question 18

Which of the following is one explanation as to why the aggregate demand curve slopes
downward?

Answer 18

Decreases in the price level raise real wealth and increase consumption spending.

Question 19

The recession of 2007-2009 made many consumers pessimistic about their future incomes.
How does this increased pessimism affect the aggregate demand curve?

Answer 19

This will shift the aggregate demand curve to the left.

Question 20

If the economy receives an influx of new workers from immigration,

Answer 20

the long-run aggregate supply curve will shift to the right

Question 21

An increase in the price level will

Answer 21

move the economy up along a stationary short-run aggregate supply curve.

Question 22

Workers expect inflation to rise from 3% to 5% next year. As a result, this should

Answer 22

shift the short-run aggregate supply curve to the left.

Question 23

Studies have shown that

Answer 23

firms are reluctant to cut nominal wages during recessions but instead freeze workers’ nominal wages and allow inflation to gradually reduce real wages

Question 24

Interest rates in the economy have fallen. How will this affect aggregate demand and
equilibrium in the short run?

Answer 24

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of
GDP will rise

Question 25

Forecasts made by White House economists and economists at the Congressional Budget
Office in 2011 projected that real GDP

Answer 25

would not return to potential GDP until 2016.

Question 26

Declines in spending on residential construction are often due to increases in interest rates.
The collapse in residential construction prior to and during the recession of 2007-2009 was due
more to ________ than to higher interest rates.

Answer 26

the financial crisis that began in 2007

Question 27

number 28

Answer 27

1

Question 28

In the dynamic aggregated demand and aggregate supply model, inflation occurs if _

Answer 28

AD shifts faster than SRAS.

Question 29

If wages and intermediate prices are stickier, an increase in the price level will lead to
______ profits, ________ real GDP supplied, and, as a result, a ________ SRAS curve.

Answer 29

larger; larger; flatter

Question 30

multiplier formula

Answer 30

1/(1-MPC)