Question 1

For an economy starting at potential output, a decrease in planned investment in the short run results in a(n):

Accepted Answer

A decrease in planned investment would lead to a decrease in aggregate demand, causing a contraction of output and a recessionary output gap. It would not affect potential output in the short run, as potential output is determined by the economy's factors of production, technology, and institutions.

Question 2

In the short run with predetermined prices, when output is greater than planned aggregate expenditure, firms will:

Accepted Answer

When output is greater than planned aggregate expenditure, it means that firms have produced more than what consumers are willing to purchase at the current price level. To clear the excess inventory, firms will need to reduce production to bring it more in line with the demand.

Question 3

In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:

Accepted Answer

Since prices are fixed, firms will respond to unwanted reductions in inventories by increasing production.

Question 4

House prices in the U.S. increased dramatically _____, and decreased dramatically ______.

Accepted Answer

The housing bubble in the U.S. occurred between 2001 and 2006, causing house prices to increase dramatically. However, the bubble burst in 2007, leading to a sharp decrease in house prices from 2007 to 2009.

Question 5

If planned aggregate expenditure (PAE) in an economy equals 3,000 + 0.75Y and potential output (Y*) equals 12,000, then this economy has:

Accepted Answer

Equilibrium occurs where PAE equals Y. In this economy, (3,000 + 0.75Y)= Y, so Y = 12,000. Since Y* = 12,000 and actual output equals potential output, there is no output gap.

Question 6

In the Keynesian cross diagram, the ______ line relates planned aggregate expenditure to output and the ______ line represents the condition that planned aggregate expenditure equals short-run equilibrium output.

Accepted Answer

In the Keynesian cross diagram, the expenditure line relates planned aggregate expenditure to output, and the 45° line represents the condition that planned aggregate expenditure equals short-run equilibrium output.

Question 7

In the Keynesian cross diagram, the 45° line represents the short-run equilibrium condition that:

Accepted Answer

The 45° line represents the condition that output (Y) equals planned aggregate expenditure (PAE) in the short run. In other words, it is the level of output where the goods and services produced equals the ones demanded by households, firms, and the government. Therefore, the correct statement is A) Y = PAE.

Question 8

In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ______ and the slope of the expenditure line equals _____.

Accepted Answer

The total amount of expenditures has two parts: the autonomous part (shown by the vertical intercept), which is independent of output, and the induced part, which depends on output. In the basic Keynesian model, only consumption has an induced component, and the mpc shows the rate at which expenditure rises when output rises.

Question 9

For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n):

Accepted Answer

A decrease in autonomous expenditure shifts the aggregate demand curve to the left, resulting in a decrease in real GDP below its potential level. This leads to a recessionary output gap.

Question 10

For an economy starting at potential output, an increase in planned investment in the short run results in a(n):

Accepted Answer

An increase in planned investment in the short run will cause an increase in aggregate demand, leading to an output level above potential output. This is called an expansionary output gap.

Question 11

In the basic Keynesian model, a decline in autonomous spending:

Accepted Answer

In the basic Keynesian model, a decline in autonomous spending leads to a decrease in aggregate demand. As a result, there is a decrease in short-run equilibrium output. This is because in the short-run, prices are assumed to be fixed, so a decrease in aggregate demand leads to a decrease in output.

Question 12

An economic expansion in the U.S. ______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico.

Accepted Answer

An economic expansion in the U.S. would increase the demand for exports from Mexico as the U.S. is one of Mexico's largest trading partners. This increase in demand would result in an increase in Mexican autonomous expenditures, meaning that Mexico's economy is expanding as well. Therefore, the output gap in Mexico would be expansionary.

Question 13

The expenditure line in the Keynesian cross diagram represents the:

Accepted Answer

The expenditure line in the Keynesian cross diagram represents the relationship between planned expenditure and output. The line shows the levels of output at which planned expenditure equals actual output, and is used to find the equilibrium level of output in the economy.

Question 14

An economic recession in Japan ______ the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) ______ output gap in the East Asian countries.

Accepted Answer

A recession in Japan would decrease the demand for exports from East Asian countries, leading to a reduction in autonomous expenditures (spending not influenced by income) in these countries. This reduction in spending would result in a recessionary output gap, meaning the actual output of these countries falls below their potential output.

Question 15

In the short run with predetermined prices, when output is less than planned aggregate expenditure:

Accepted Answer

In this case, planned aggregate expenditure is greater than output so inventories are shrinking. That means actual investment, due to falling inventory, is less than planned investment.

Question 16

For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):

Accepted Answer

An increase in autonomous expenditure in the short run results in an increase in aggregate demand, which leads to an increase in output beyond potential output. This means that the economy is producing more than what it is capable of producing at potential output, which is known as an expansionary output gap.

Question 17

If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:

Accepted Answer

Potential output (Y*) in the economy is 9,000. If we substitute this value of Y* in the equation for PAE, we get:
PAE = 1,000 + 0.9Y*
PAE = 1,000 + 0.9(9,000)
PAE = 8,100
Since potential output (Y*) is greater than planned aggregate expenditure (PAE), this indicates a shortfall in output. This type of situation is known as an expansionary gap.

Question 18

An economic recession in the U.S. ______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada.

Accepted Answer

A recession in the U.S. would reduce the demand for exports from Canada, leading to a reduction in Canadian autonomous expenditures. This reduction in demand would cause a decrease in production and an output gap in Canada, which is recessionary. Therefore, the correct answer is C) reduces; recessionary.

Question 19

If planned aggregate expenditure (PAE) in an economy equals 2,000 + 0.8Y and potential output (Y*) equals 11,000, then this economy has:

Accepted Answer

Equilibrium occurs where PAE equals Y. In this economy, (2,000 + 0.8Y)= Y, so Y = 10,000. Since Y* = 11,000 and actual output falls short of potential output, there is a recessionary gap.

Question 20

In the short run with predetermined prices, when output is greater than planned aggregate expenditure:

Accepted Answer

When output is greater than planned aggregate expenditure, it means that firms are producing more than what is being purchased, leading to an unplanned increase in inventories. This implies that actual investment (which includes changes in inventories) is greater than planned investment.

Quiz 11: Financial Markets and International Capital Flows

For an economy starting at potential output, a decrease in planned investment in the short run results in a(n) :

In the short run with predetermined prices, when output is greater than planned aggregate expenditure, firms will:

In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:

House prices in the U.S. increased dramatically _, and decreased dramatically __.

If planned aggregate expenditure (PAE) in an economy equals 3,000 + 0.75Y and potential output (Y*) equals 12,000, then this economy has:

In the Keynesian cross diagram, the line relates planned aggregate expenditure to output and the line represents the condition that planned aggregate expenditure equals short-run equilibrium output.

In the Keynesian cross diagram, the 45° line represents the short-run equilibrium condition that:

In the Keynesian cross diagram, the vertical intercept of the expenditure line equals __ and the slope of the expenditure line equals _.

For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n) :

For an economy starting at potential output, an increase in planned investment in the short run results in a(n) :

In the basic Keynesian model, a decline in autonomous spending:

An economic expansion in the U.S. the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) output gap in Mexico.

The expenditure line in the Keynesian cross diagram represents the:

An economic recession in Japan the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) output gap in the East Asian countries.

In the short run with predetermined prices, when output is less than planned aggregate expenditure:

For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n) :

If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:

An economic recession in the U.S. the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) output gap in Canada.

If planned aggregate expenditure (PAE) in an economy equals 2,000 + 0.8Y and potential output (Y*) equals 11,000, then this economy has:

In the short run with predetermined prices, when output is greater than planned aggregate expenditure: