Taylor Ch.7 The Spending Allocation Model Full Test Bank - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 7
The Spending Allocation Model
Multiple Choice Questions
1. The spending allocation model is used to determine
a. | how GDP is allocated among its major spending components. |
b. | how people’s spending is allocated to firms. |
c. | which income class spends the most and which income spends the least. |
d. | how much the government should spend on different goods and services. |
e. | how people allocate their spending over their own lifetime. |
OBJ: factual
SEC: 0. The Spending Allocation Model
TOP: GDP; Spending Allocation Model
MSC: Bloom's: Knowledge
2. Which of the following statements is the most accurate about the spending allocation model?
a. | Interest rates influence spending. |
b. | Spending influences interest rates. |
c. | There is no relationship between interest rates and spending. |
d. | Interest rates both influence and are influenced by spending. |
e. | The relationship between spending and interest rates is too uncertain to be modeled. |
OBJ: factual
SEC: 0. The Spending Allocation Model
TOP: GDP; Spending Allocation Model
MSC: Bloom's: Knowledge | AACSB: Analytic
3. The spending allocation model allows economists to determine how GDP is allocated among the major components of spending, which are
a. | income, consumption, and savings. |
b. | consumption, savings, government purchases, and net exports. |
c. | consumption, investment, government purchases, and net exports. |
d. | consumption, savings, taxes, and net exports. |
e. | None of these |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: GDP; Spending Allocation Model
MSC: Bloom's: Knowledge
4. In a speech to the House of Commons in the U.K. on June 23, 2016, Chancellor of the Exchequer George Osborne expressed concern about which of the following economic trends of the U.K.?
a. | That exports had grown too large compared to imports. |
b. | That inflation was getting dangerously large. |
c. | About the long-run path of the budget deficits. |
d. | About the long-run path of the currency value of the British pound. |
OBJ: factual
SEC: 0. The Spending Allocation Model
TOP: Spending Allocation Model
MSC: Bloom's: Knowledge | AACSB: Analytic
5. The spending allocation model is designed to explain
a. | short-run (monthly) movements in the economy. |
b. | movements in the CPI. |
c. | movements in the GDP deflator. |
d. | long-run (a period of years) movements in the economy. |
e. | why the production possibilities frontier is not a relevant concept in macroeconomics. |
OBJ: factual
SEC: 0. The Spending Allocation Model
TOP: Spending Allocation Model
MSC: Bloom's: Knowledge
/Questions
6. The spending allocation model determines how consumers allocate their income between consumption and saving.
Basic
OBJ: factual
SEC: 0. The Spending Allocation Model
TOP: Spending Allocation Model
MSC: Bloom's: Knowledge
7. The spending allocation model applies more to the long run than to the short run.
Basic
OBJ: factual
SEC: 0. The Spending Allocation Model
TOP: Spending Allocation Model
MSC: Bloom's: Knowledge
Multiple Choice Questions
8. The investment share of GDP is expressed as
a. | I. |
b. | I*Y |
c. | I/Y. |
d. | I + G. |
e. | Y I. |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge
9. In 2015, the investment share of GDP was about
a. | 27 percent. |
b. | 17 percent. |
c. | 7 percent. |
d. | 10 percent. |
e. | 68 percent. |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge
10. In 2015, the government share of GDP was about
a. | 28 percent. |
b. | 18 percent. |
c. | 7 percent. |
d. | 12 percent. |
e. | 33 percent. |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge
11. Which of the following statements is ?
a. | Recently, the government purchases share of GDP has been close to 50 percent. |
b. | The net export share of GDP can be positive or negative. |
c. | Since World War II, the consumption and investment shares of GDP have moved erratically. |
d. | Recently, the investment share of GDP has been close to 50 percent. |
e. | All four spending shares must be positive and must add up to one. |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Net Export Share of GDP
MSC: Bloom's: Knowledge
12. Which of the four spending shares is the largest?
a. | Consumption |
b. | Net exports |
c. | Government purchases |
d. | It varies from year to year. |
e. | Investment |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Spending Shares
MSC: Bloom's: Knowledge
13. The sum of the consumption, investment, government purchase and net exports share equals
a. | 1. |
b. | -1. |
c. | 0.9. |
d. | -0.9. |
e. | None of`these. |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Sum of Expenditure Shares
MSC: Bloom's: Knowledge | AACSB: Analytic
14. Which of the following is ?
a. | The government purchases share of GDP is currently less than what it was during World War II. |
b. | The government purchases share of GDP is currently greater than what it was during World War II. |
c. | The consumption share is currently at the same level it was at during World War II. |
d. | The net export share of GDP has been positive for the past 25 years. |
e. | The government purchases share has remained constant over the past 25 years. |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Government Purchase Share
MSC: Bloom's: Knowledge
15. Which of the following is the correct ordering if we want to rank the four spending shares of U.S. GDP in 2015 in descending (from highest to lowest) order?
a. | Consumption, government purchases, investment, net exports |
b. | Consumption, investment, government purchases, net exports |
c. | Government purchases, consumption, investment, net exports |
d. | Consumption, government purchases, net exports, investment |
e. | Consumption, investment, net exports, government purchases |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Spending Shares
MSC: Bloom's: Knowledge
/Questions
16. If GDP increases, then it is possible for all spending shares to increase simultaneously.
Moderate
OBJ: conceptual
SEC: 1. The Spending Shares
TOP: Shares of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
17. Between 2000 and 2010, the government purchases share of the GDP of the United States increased from about 17.5 to 20.5 percent, while the investment share decreased from 17.7 to 12.4 percent.
Moderate
OBJ: factual
SEC: 1. The Spending Shares
TOP: Government and Investment Shares
MSC: Bloom's: Application | AACSB: Analytic
18. Since the late 1980s, the government purchases share has gone up, and the investment and consumption shares have gone down.
Basic
OBJ: factual
SEC: 1. The Spending Shares
TOP: Consumption Share of GDP
MSC: Bloom's: Knowledge
19. Net exports for the United States have been negative in the past 25 years, with an increasingly larger difference between imports and exports.
Moderate
OBJ: conceptual
SEC: 1. The Spending Shares
TOP: The Four Shares of Spending
MSC: Bloom's: Knowledge | AACSB: Analytic
20. The net export share has been negative for the last 30 years.
Basic
OBJ: factual
SEC: 1. The Spending Shares
TOP: Net Export Share
MSC: Bloom's: Knowledge
21. Changes in the government spending share of GDP have no effect on the investment share of GDP.
Basic
OBJ: factual
SEC: 1. The Spending Shares
TOP: Government and Investment Shares
MSC: Bloom's: Knowledge
22. The sum of all spending shares of GDP is always equal to one.
Moderate
OBJ: factual
SEC: 1. The Spending Shares
TOP: Sum of Expenditure Shares
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice Questions
23. Which of the following best explains what will happen if the government purchases share of GDP falls?
a. | The net export share of GDP will fall with it. |
b. | The consumption share of GDP will fall with it. |
c. | The investment, consumption, and/or net export share of GDP will rise. |
d. | The investment share of GDP will fall with it. |
e. | It is not clear whether any of the other shares will change since we don't know what happens to GDP. |
OBJ: conceptual
SEC: 1. The Spending Shares
TOP: Change in Shares
MSC: Bloom's: Knowledge
24. To understand how the shares of GDP are allocated in a market economy, which of the following factors needs to be understood?
a. | The rate of growth of potential GDP |
b. | The rate of growth of aggregate demand |
c. | The real rate of interest |
d. | The rate of growth of the labor force |
e. | The rate of inflation |
OBJ: factual
SEC: 1. The Spending Shares
TOP: Allocation of GDP Shares
MSC: Bloom's: Knowledge
/Questions
25. If the government share of GDP increases by a certain percent, the sum of the other shares of GDP will fall by a greater amount.
Basic
OBJ: conceptual
SEC: 1. The Spending Shares
TOP: The Sum of the Shares
MSC: Bloom's: Knowledge
26. As the import share of GDP increases relative to the export share of GDP, the sum of the consumption, investment, and government shares of GDP will decline.
Challenging
OBJ: conceptual
SEC: 1. The Spending Shares
TOP: The Sum of the Shares
MSC: Bloom's: Analysis | AACSB: Analytic
27. The consumption share of GDP must grow for the living standards of the average person to improve.
Moderate
OBJ: factual
SEC: 1. The Spending Shares
TOP: The Sum of the Shares
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer Questions
28. Explain how it is possible for the sum of government, consumption, and investment expenditure shares of GDP to exceed one.
OBJ: conceptual
SEC: 1. The Spending Shares
TOP: Sum of Expenditure Shares
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice Questions
29. All else being equal, if consumption declines as a share of GDP, then
a. | people must be saving less. |
b. | people will consume less in the future. |
c. | there must have been an increase in GDP. |
d. | people will consume more in the future. |
e. | there must have been a decrease in GDP. |
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share
MSC: Bloom's: Knowledge | AACSB: Analytic
30. Saving by households can be thought of as
a. | investment plus consumption. |
b. | future consumption. |
c. | income plus consumption. |
d. | investment plus future consumption. |
e. | GDP less investment. |
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Saving
MSC: Bloom's: Knowledge | AACSB: Analytic
31. The real interest rate is equal to the nominal interest rate
a. | minus the rate of expected inflation. |
b. | plus the rate of expected inflation. |
c. | minus the unemployment rate. |
d. | plus the unemployment rate. |
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Real Interest Rate
MSC: Bloom's: Knowledge
32. A higher real interest rate today makes current consumption
a. | more expensive relative to future consumption because the return on savings is lowered. |
b. | more expensive relative to future consumption because the return on savings is increased. |
c. | less expensive relative to future consumption because the return on savings is increased. |
d. | less expensive relative to future consumption because the return on savings is lowered. |
e. | just as expensive as future consumption because the return on saving is uncertain. |
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: The Interest Rate and Consumption
MSC: Bloom's: Knowledge | AACSB: Analytic
33. The consumption share is negatively related to the real interest rate because a higher interest rate today
a. | makes current consumption more expensive relative to future consumption. |
b. | lowers the price of current consumption relative to the future. |
c. | makes future consumption more expensive relative to current consumption. |
d. | reduces current savings. |
e. | increases the government share. |
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
34. The consumption share line is
a. | downward-sloping because an increase in the real interest rate will increase current consumption. |
b. | downward-sloping because a decrease in the real interest rate will raise the price of consuming today rather than tomorrow. |
c. | downward-sloping because a decrease in the real interest rate will reduce the price of consuming today rather than tomorrow. |
d. | upward-sloping because an increase in the real interest rate will increase saving and future consumption. |
e. | upward-sloping because an increase in the real interest rate will increase current consumption. |
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
35. An increase in the real interest rate leads to
a. | an upward movement along the consumption share line. |
b. | a rightward shift in the consumption share line. |
c. | a downward movement along the consumption share line. |
d. | a leftward shift in the consumption share line. |
e. | an ambiguous effect on the consumption share line. |
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
36. Which of the following situations best explains a rightward shift in the consumption share line?
a. | A decrease in real interest rates |
b. | A decrease in income taxes |
c. | A decrease in the consumer confidence index |
d. | An increase in real interest rates |
e. | An increase in income taxes |
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
/Questions
37. An increase in taxes will not affect the relationship between consumption and real interest rates.
Moderate
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
38. The real interest rate affects the incentive to save.
Basic
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Interest Rate
MSC: Bloom's: Knowledge
39. The real interest rate can never be negative.
Basic
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Real Interest Rate
MSC: Bloom's: Knowledge
40. The real interest rate is equal to the nominal interest rate minus an inflation premium.
Basic
OBJ: conceptual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Real Interest Rate
MSC: Bloom's: Knowledge
41. The real interest rate is the only factor that affects the consumption share of GDP.
Basic
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Interest Rate and Consumption
MSC: Bloom's: Knowledge
42. The consumption share line is very sensitive to changes in inflation.
Moderate
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
43. An increase in the real interest rate will shift the consumption share line to the left because there will be an incentive to save more and consume less.
Moderate
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
44. The consumption share will increase if there is a decrease in the real interest rate.
Moderate
OBJ: factual
SEC: 2. The Effects of Interest Rates on Spending Shares
TOP: Consumption Share
MSC: Bloom's: Knowledge | AACSB: Analytic
45. When the real interest rate falls,
a. | the investment share will not be affected. |
b. | people will choose to consume more and investment will fall. |
c. | businesses are likely to decrease their purchases of new equipment and production facilities. |
d. | businesses are likely to increase their purchases of new equipment and production facilities. |
e. | people will choose to consume less and investment will fall. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge
46. Which of the following statements is ?
a. | The observed relationship between the investment share of GDP and the real interest rate is negative, as predicted by theory. |
b. | There is no steady relationship between the investment share of GDP and real interest rates, contrary to what is predicted by theory. |
c. | The observed relationship between the investment share of GDP and the real interest rate is positive, contrary to what is predicted by theory. |
d. | The observed relationship between the investment share of GDP and the real interest rate is positive, as predicted by theory. |
e. | The observed relationship between the investment share of GDP and the real interest rate is negative, contrary to what is predicted by theory. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge
47. A decrease in real interest rates will cause
a. | a rightward shift in the investment share line. |
b. | a downward movement along the investment share line. |
c. | a leftward shift in the investment share line. |
d. | an upward movement along the investment share line. |
e. | the investment share line to become steeper. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
48. An increase in optimism about the strength of the economy will
a. | cause the investment share line to shift to the left. |
b. | cause a leftward movement along the investment share line. |
c. | have no effect on the investment share line. |
d. | cause the investment share line to shift to the right. |
e. | cause a rightward movement along the investment share line. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
49. Which of the following events is most likely to cause the investment share line to shift to the right?
a. | The release of a government report demonstrating that new computer equipment will lower future business costs |
b. | A decrease in the investment tax credit |
c. | A rise in real interest rates |
d. | An increase in pessimism |
e. | A decline in interest rates |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Investment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
/Questions
50. If an increase in the mortgage rate causes a decline in new home purchases, the consumption share of GDP will fall.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Purchases of New Homes
MSC: Bloom's: Knowledge | AACSB: Analytic
51. Consumption is less sensitive than investment to changes in the real interest rate.
Basic
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge
52. The investment share line will become flatter if investment becomes more sensitive to changes in the real interest rate.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge | AACSB: Analytic
53. If a firm expects equipment prices to decline in the future, it will invest more today.
Basic
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Expectations and Investment
MSC: Bloom's: Knowledge
54. If the real interest rate increases and the investment tax credit is abolished, the investment share will increase.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge | AACSB: Analytic
55. If the real interest rate increases and businesses expect that new equipment will significantly reduce their production costs in the future, then the investment share could increase, decrease, or stay the same.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice Questions
56. Which of the following best describes the relationship between real interest rates and net exports?
a. | The relationship is positive. |
b. | There is no relationship because both imports and exports are unaffected by real interest rates. |
c. | The relationship is negative. |
d. | It is not possible to determine the relationship between the two because exports are negatively related to interest rates and imports are positively related to real interest rates. |
e. | It is not possible to determine the relationship between the two because exports are positively related to real interest rates and imports are negatively related to real interest rates. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Interest Rates
MSC: Bloom's: Knowledge | AACSB: Analytic
57. A decrease in the United States interest rate relative to the Japanese interest rate will cause the exchange rate, measured in yen per dollar, to ____ as international investors ____ their demand for dollar-denominated assets.
a. | rise; increase |
b. | fall; increase |
c. | rise; decrease |
d. | None of these are correct because only the government can change the exchange rate. |
e. | fall; decrease |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Exchange Rate
MSC: Bloom's: Knowledge
58. Ceteris paribus, a rise in U.S. interest rates
a. | will cause international investors to decrease their demand for dollar-denominated assets. |
b. | has no effect on international investors. |
c. | will cause international investors to increase their demand for dollar-denominated assets |
d. | will have no effect on dollar-denominated assets but will cause an increase in the demand for yen-denominated assets. |
e. | will have an uncertain effect on dollar-denominated assets. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Exchange Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
59. If the exchange rate between the dollar and the euro is equal to €0.8 per $1.00, then what is the U.S. dollar cost of a German-made Porsche costing €45,000?
a. | $36,000 |
b. | $39,000 |
c. | $45,000 |
d. | $56,250 |
e. | None of these |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
60. Which of the following statements is ?
a. | A higher exchange rate means cheaper exports and cheaper imports. |
b. | A higher exchange rate means more expensive exports and more expensive imports. |
c. | A higher exchange rate means more expensive exports and cheaper imports. |
d. | A higher exchange rate means cheaper exports and more expensive imports. |
e. | A higher exchange rate has no effect on the price of exports and imports. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Exchange Rates
MSC: Bloom's: Knowledge | AACSB: Analytic
61. Suppose the exchange rate in the year 2010 was 1 euro per dollar, and in 2017 the exchange rate increased to 2 euros per dollar. If the price of a German sweater was 50 euros in both years, the new dollar price in 2017 would be ____ and imports of German sweaters would ____.
a. | $25; increase |
b. | $25; decrease |
c. | $100; increase |
d. | $100; decrease |
e. | $50; remain constant |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Exchange Rates
MSC: Bloom's: Application | AACSB: Analytic
62. Which of the following is the best definition of the exchange rate?
a. | The price at which the government translates the currency of another country |
b. | The price at which imports are traded for imports in the stock exchange |
c. | The price of one currency in terms of another in the foreign exchange market |
d. | None of these |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Exchange Rate
MSC: Bloom's: Knowledge
63. A higher interest rate
a. | causes the exchange rate to increase, which causes the share of net exports to rise. |
b. | causes the exchange rate to fall, which results in a decline in the share of net exports. |
c. | causes the exchange rate to fall, which causes the share of net exports to rise. |
d. | causes the exchange rate to increase, which results in a decline in the share of net exports. |
e. | has an uncertain effect on both exchange rates and the share of net exports. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Net Export
MSC: Bloom's: Knowledge | AACSB: Analytic
/Questions
64. If the dollar gets stronger because international investors have more confidence in the U.S. economy, then the share of net exports line will shift to the right.
Challenging
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
65. If the exchange rate becomes less sensitive to changes in interest rates, the net export share line will get steeper.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Interest Rates
MSC: Bloom's: Knowledge | AACSB: Analytic
66. If net exports become less sensitive to changes in the exchange rate, the net export share of GDP will get steeper.
Challenging
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Exchange Rates
MSC: Bloom's: Analysis | AACSB: Analytic
67. If the dollar appreciates against the Chinese yuan (i.e., the exchange rate changes from ¥1.6 = $1 to ¥1.8 = $1), then Chinese exports to the United States will increase and American exports to China will decrease.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
68. The exchange rate can be defined as the price of one currency in terms of another, and it is determined in the foreign exchange market.
Basic
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Exchange Rate
MSC: Bloom's: Knowledge
69. If the exchange rate measured as yen per dollar increases, the dollar has become more expensive.
Moderate
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Exchange Rates
MSC: Bloom's: Knowledge | AACSB: Analytic
70. If the dollar is more expensive, this will reduce U.S. exports.
Basic
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Exchange Rates
MSC: Bloom's: Knowledge
Short Answer Questions
71. The generation of people who lived through the Great Depression is much more fiscally conservative than the baby boom generation. The baby boomers have tended to spend more freely, amass more debt, and save significantly less than those who lived through the Great Depression.
(A) | As those who lived through the Great Depression pass away, they are leaving their accumulated wealth to their baby boom children. What effect will this have on the consumption share line? Please explain. |
(B) | As the baby boomers continue to spend freely, how might their spending affect consumption expenditures in the future? |
(A) | When people experience increases in wealth, they tend to increase their consumption as a percentage of their income, and the consumption share line will shift to the right. |
(B) | If they spend so much that their debt continues to grow, they may be forced to reduce consumption in the future, which would shift the consumption share line to the left. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Consumption Share
MSC: Bloom's: Analysis | AACSB: Analytic
72. Explain how interest rates affect investment expenditures.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge
73. As a result of changes in the tax laws in the late 1980s, interest payments on consumer loans were no longer deductible. How should this change in the tax law affect the consumption expenditure line, assuming everything else held equal?
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Consumption Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
74. Suppose, for reasons associated with political stability, international investors decide to increase their demand for dollars. Show what will happen to the net export share of GDP.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and the Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
75. Suppose businesses seriously believe that, within a year, a new generation of computers will be developed that will be more powerful than the current ones but cheaper to run. Assuming everything else held constant, how will the investment share of GDP be affected?
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Investment Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
Multiple Choice Questions
76. An increase in the real interest rate
a. | causes the nongovernment share of GDP line to shift to the right. |
b. | causes the nongovernment share of GDP line to shift to the left. |
c. | causes a downward movement along the nongovernment share line. |
d. | causes an upward movement along the nongovernment share line. |
e. | has an indeterminate effect on nongovernment expenditures since some nongovernment expenditures are positively related to the interest rate while others exhibit a negative relationship. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Nongovernment Expenditures
MSC: Bloom's: Knowledge
77. The nongovernment share of GDP
a. | is, for any real interest rate, the sum of the share of net exports, investment, and consumption expenditures. |
b. | is, for any interest rate, equal to 1 minus the government spending share of GDP. |
c. | is positively related to the real interest rate. |
d. | is, for any interest rate, the sum of investment and consumption shares. |
e. | is negatively related to the real interest rate. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
78. All else being equal, an increase in the rate of interest
a. | causes a downward movement to the right along the nongovernment share line. |
b. | causes an upward movement to the left along the nongovernment share line. |
c. | shifts the nongovernment share line to the right. |
d. | shifts the nongovernment share line to the left. |
e. | has no effect on the nongovernment share of GDP. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
/Questions
79. An increase in interest rates will cause the nongovernment share of GDP to decline.
Basic
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Nongovernment Share of GDP
MSC: Bloom's: Knowledge
80. All three nongovernment shares of GDP are negatively related to the interest rate.
Basic
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate and Nongovernment Share of GDP
MSC: Bloom's: Knowledge
Multiple Choice Questions
81. The share of GDP available for nongovernment use
a. | is, for any interest rate, the sum of the share of investment and consumption expenditures. |
b. | is the sum of the share of net exports, investment, and consumption expenditures at any given interest rate. |
c. | is equal to 1 minus the government share of GDP. |
d. | varies depending on the interest rate. |
e. | None of these |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Share of GDP for Nongovernment Use
MSC: Bloom's: Knowledge | AACSB: Analytic
82. In a mixed economy, if the government share of GDP is 20 percent, then the sum of the nongovernment shares will, in equilibrium, equal 80 percent because of
a. | government rules. |
b. | adjustments in GDP. |
c. | adjustments in the price level. |
d. | adjustments in interest rates. |
e. | adjustment in the unemployment rate. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate Adjustments
MSC: Bloom's: Knowledge
83. In a market economy, the interest rate adjusts to ensure equality among
a. | the investment, consumption, and net export shares of GDP and the share of GDP available for nongovernment use. |
b. | the investment, consumption, and net export shares of GDP and the government share of GDP. |
c. | the investment, consumption, and net export shares of GDP and GDP. |
d. | imports and exports. |
e. | the budget and trade deficits. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate Adjustments
MSC: Bloom's: Knowledge
84. In a market economy, if the sum of the consumption, investment, and net export shares of GDP is greater than 1 minus the government share of GDP, market forces will result in
a. | GDP contracting. |
b. | an increase in interest rates. |
c. | GDP expanding. |
d. | a decrease in interest rates. |
e. | an increase in the price level. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Interest Rate Adjustments
MSC: Bloom's: Application | AACSB: Analytic
85. Which share is not sensitive to changes in the real interest rate?
a. | All four shares are sensitive to changes in the real interest rate. |
b. | Consumption |
c. | Investment |
d. | Government purchases |
e. | Net exports |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Purchase Share of GDP
MSC: Bloom's: Knowledge
86. Which of the following statements is ?
a. | A decrease in the interest rate will cause the nongovernment share of GDP to decline. |
b. | A decrease in the interest rate will cause the government purchases share to decrease. |
c. | A decrease in the interest rate will cause the share of GDP available for nongovernment use to decline. |
d. | A decrease in the interest rate will cause the nongovernment share of GDP to increase. |
e. | A decrease in the interest rate will cause GDP to decrease. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Purchase Share of GDP
MSC: Bloom's: Knowledge
87. The share of GDP purchases is determined by
a. | the rate of growth of real GDP. |
b. | the rate of interest. |
c. | the willingness of consumers to save. |
d. | the political process. |
e. | the exchange rate. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Knowledge
88. The nongovernment share of GDP equals
a. | saving as a share of GDP. |
b. | the sum of the consumption and investment shares of GDP. |
c. | 1 minus the government share of GDP. |
d. | the sum of the investment and net export shares of GDP. |
e. | the sum of the consumption and net export shares of GDP. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Knowledge
89. Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the dollar exchange rate increases, then we would expect
a. | the government share of GDP to increase. |
b. | the interest rate to decrease. |
c. | the interest rate to increase. |
d. | the government share of GDP to decrease. |
e. | the net export share of GDP to increase. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
90. Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the federal government introduces a national sales tax (a federal tax on consumption), then we would expect
a. | the government share of GDP to increase. |
b. | the interest rate to decrease. |
c. | the interest rate to increase. |
d. | the government share of GDP to decrease. |
e. | the net consumption share of GDP to increase. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
91. Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then
a. | investment spending as a share of GDP increases. |
b. | the nongovernment share of GDP remains constant. |
c. | the rate of interest increases. |
d. | the government share of GDP remains at 20 percent. |
e. | All of these |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
92. Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 3 percent, respectively. Under these circumstances, we would expect
a. | the government share of GDP to increase. |
b. | the interest rate to increase. |
c. | the interest rate to remain constant. |
d. | the interest rate to decrease. |
e. | net exports to increase. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
93. The sum of the consumption, investment, and net exports shares of GDP is called
a. | the nongovernment share of GDP. |
b. | the real-economy share of GDP. |
c. | the privately held share of GDP. |
d. | None of these |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge
94. All else being constant, an increase in the government share of GDP would result in
a. | an increase in net exports. |
b. | a higher dollar exchange rate. |
c. | the interest rate remaining constant. |
d. | a lower interest rate. |
e. | a higher interest rate. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
95. If the nongovernment share of GDP shifts to the right and the government share of GDP remains constant, then
a. | there must be an increase in taxes. |
b. | the dollar exchange rate must weaken. |
c. | there must be a decrease in taxes. |
d. | the interest rate decreases. |
e. | the interest rate increases. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
/Questions
96. If the sum of the consumption and investment shares of GDP is 78 percent, the government share of GDP has to be less than or equal to 22 percent.
Challenging
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Share of GDP for Nongovernment Use
MSC: Bloom's: Application | AACSB: Analytic
97. It is the government's responsibility to ensure that the sum of all four shares of GDP equals 1.
Basic
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Share of GDP for Nongovernment Use
MSC: Bloom's: Knowledge
98. All else held constant, interest rates will increase if there is an increase in the nongovernment share of GDP.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
99. In the spending allocation model, the government share of GDP is assumed to be unaffected by the real exchange rate, being instead directly determined by government officials.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice Questions
100. The share of GDP available for nongovernment use is
a. | negatively related to the nominal interest rate. |
b. | not dependent on the interest rate. |
c. | negatively related to the real interest rate. |
d. | positively related to the nominal interest rate. |
e. | positively related to the real interest rate. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Share of GDP for Nongovernment Use
MSC: Bloom's: Knowledge | AACSB: Analytic
101. The intersection between the sum of the nongovernment shares of GDP and the share of GDP available for nongovernment use determines
a. | nothing, since the two are the same. |
b. | the price level. |
c. | GDP. |
d. | the optimal level of taxes. |
e. | the equilibrium interest rate. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Equilibrium Interest Rate
MSC: Bloom's: Knowledge
102. In the long run, the real interest rate is determined by
a. | the exchange rate. |
b. | the amount of government spending only. |
c. | the balance between the demand for C, I, and X and the available supply of goods in the economy. |
d. | the rate of inflation. |
e. | a political process. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Real Long-Term Interest Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
103. The spending allocation pertains to the long run because
a. | it takes time for the government to adjust spending and taxes. |
b. | of the way monetary policy works. |
c. | exchange rates adjust very slowly to changing market conditions. |
d. | it takes time for consumers and businesses to completely respond to changes in interest rates. |
e. | it takes time for market interest rates to adjust to changing conditions. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Long Run
MSC: Bloom's: Knowledge | AACSB: Analytic
104. The interest rate that pertains to the spending allocation model is the
a. | nominal interest rate. |
b. | real interest rate. |
c. | federal funds rate. |
d. | prime interest rate. |
e. | interest rate on government debt. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Real Interest Rate
MSC: Bloom's: Knowledge
105. The real interest rate, in the long run, is determined by
a. | the exchange rate. |
b. | the level of taxes. |
c. | the balancing of the total spending with the supply of goods and services in the economy. |
d. | the budget deficit. |
e. | the rate of inflation. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Real Interest Rate
MSC: Bloom's: Knowledge
/Questions
106. The government purchase share of GDP is not sensitive to changes in the interest rate.
Basic
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Purchase Share of GDP and the Interest Rate
MSC: Bloom's: Knowledge
107. The government purchase share of GDP has no influence on the interest rate.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Purchase Share of GDP and the Interest Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
108. If the nongovernment share of GDP shifts to the right, the government share of GDP will decline.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
109. The four-diagram approach explains how the price level adjusts in the long run so that the shares of GDP sum to 1.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer Questions
110. Explain why the nongovernment share line of GDP slopes downward.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Nongovernment Share of GDP
MSC: Bloom's: Knowledge
111. Explain how the interest rate behaves like a price in the sense that it serves as both a signal and an incentive.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Role of the Interest Rate
MSC: Bloom's: Knowledge
112. Explain why the share of GDP available for nongovernment use does not depend on the interest rate.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Share of GDP Available for Nongovernment Use
MSC: Bloom's: Knowledge | AACSB: Analytic
113. Show that the nongovernment share of GDP influences only the interest rate and not the share of GDP available for nongovernment use.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Equilibrium Interest Rate
MSC: Bloom's: Application | AACSB: Analytic
114. Suppose that, at the current interest rate, the sum of the consumption, investment, and net export shares is greater than the share available for nongovernment use.
Explain how the current interest rate will have to change to reach the long-run equilibrium. Illustrate the effect on each of the nongovernment shares of GDP.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Equilibrium Interest Rate
MSC: Bloom's: Application | AACSB: Analytic
115. Draw a production possibilities frontier with the government spending share on the horizontal axis and the nongovernment share of GDP on the vertical axis. All else being equal, assume there is an increase in government purchases.
(A) | Use the production possibilities frontier to show what happens. |
(B) | Does your answer to part (A) correspond to what the spending allocation model would predict? |
(C) | Compared to the production possibilities curve analysis, what additional insight does the spending allocation model introduce? |
(A) | See graph below. The increase in government purchases causes a movement from point a to point b along the frontier. |
| |
| |
(B) | Moving from point a to b results in an increase in the government share of GDP and a decrease in the nongovernment share of GDP, which is what the spending allocation model predicts. |
(C) | The spending allocation model explains how the nongovernment share of GDP can decline as the government share of GDP increases. In other words, it shows the role of the interest rate in bringing about the movement from point a to point b. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Equilibrium Interest Rate
MSC: Bloom's: Application | AACSB: Analytic
Multiple Choice Questions
116. A decrease in the share of government purchases will ____ the share of GDP available for nongovernment purchases and ____ the interest rate in the long run.
a. | increase; increase |
b. | increase; have no effect on |
c. | increase; decrease |
d. | decrease; decrease |
e. | decrease; increase |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Government Purchase Share
MSC: Bloom's: Knowledge | AACSB: Analytic
117. The initial effect of an increase in the share of government purchases is
a. | a decline in the share of GDP available for nongovernment purchases. |
b. | an increase in the share of GDP available for nongovernment purchases. |
c. | a decrease in interest rates. |
d. | an increase in interest rates. |
e. | a decrease in the nongovernment share of GDP. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Government Purchase Share
MSC: Bloom's: Knowledge | AACSB: Analytic
118. To bring about an increase in the share of GDP available for nongovernment use,
a. | there will have to be a tax increase. |
b. | government purchases will have to decline. |
c. | interest rates will have to decline. |
d. | government purchases will have to increase. |
e. | interest rates will have to increase. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Share of GDP Available for Nongovernment Use
MSC: Bloom's: Knowledge | AACSB: Analytic
119. If the share of government spending decreases by 5 percentage points, the consumption share will most likely
a. | increase by 5 percentage points. |
b. | increase by less than 5 percentage points. |
c. | decrease by less than 5 percentage points. |
d. | increase by more than 5 percentage points. |
e. | decrease by more than 5 percentage points. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Government Purchase Share
MSC: Bloom's: Application | AACSB: Analytic
120. Which of the following would lower the amount of investment crowded out by an increase in government purchases?
a. | A less interest-rate-sensitive exchange rate |
b. | Imports becoming less exchange-rate sensitive |
c. | A more interest-rate-sensitive exchange rate |
d. | Government purchases becoming less interest-rate sensitive |
e. | Exports becoming less exchange-rate sensitive |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Analysis | AACSB: Analytic
121. Which of the following best explains what is meant by the term crowding out?
a. | An increase in government purchases causes interest rates to rise and results in a decline in investment expenditures. |
b. | An increase in government purchases causes interest rates to fall and results in a decline in investment expenditures. |
c. | An increase in investment causes interest rates to rise and results in a drop in government purchases. |
d. | Increases in consumption expenditures cause interest rates to rise and result in a decline in investment expenditures. |
e. | An increase in consumption expenditures causes interest rates to rise and results in a decline in government purchases. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Knowledge
122. If the government share of GDP equals 25 percent of GDP and the nongovernment share of GDP equals 85 percent of GDP, then
a. | interest rates will increase until the government share of GDP declines to 20 percent. |
b. | nothing will happen unless the government reduces its share of purchases. |
c. | interest rates will decrease, resulting in a decrease in the investment, consumption, and net export shares. |
d. | interest rates will increase, resulting in a decline in the investment, consumption, and net export shares. |
e. | GDP will increase, shrinking each share until the sum of all shares equals 1. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Application | AACSB: Analytic
123. A decline in the investment share of GDP due to an increase in government purchases is known as
a. | investment blackout. |
b. | disinvestment. |
c. | crowding out. |
d. | None of these |
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Knowledge
/Questions
124. The steeper the consumption share line, the less the amount of investment that will be crowded out from an increase in government spending.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Knowledge | AACSB: Analytic
125. A decrease in the GDP share of government purchases causes a crowding out of investment in the short run.
Basic
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Knowledge
126. If net exports become less sensitive to changes in exchange rates, the crowding-out effect of government spending will increase.
Challenging
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Analysis | AACSB: Analytic
127. All else being equal, an increase in government spending will worsen the trade balance.
Moderate
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Government Purchase Share
MSC: Bloom's: Knowledge | AACSB: Analytic
128. The decline in investment due to an increase in government purchases is called crowding out.
Basic
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Crowding Out
MSC: Bloom's: Knowledge
Multiple Choice Questions
129. All else being equal, if consumption rises as a share of GDP, then
a. | future consumption will fall. |
b. | people must be saving more. |
c. | there must have been an increase in GDP. |
d. | people must have experienced an increase in wealth. |
e. | there will be less available to consume in the future. |
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Consumption Share
MSC: Bloom's: Knowledge | AACSB: Analytic
130. Which of the following situations would best explain why the real long-term interest rate would increase?
a. | An increase in the consumption share of GDP |
b. | A decrease in the investment share of GDP |
c. | A decrease in the government share of GDP |
d. | A decrease in exports |
e. | An increase in imports |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Shifts in the Consumption Share Line
MSC: Bloom's: Knowledge
131. Which of the following situations would best explain why the real long-term interest rate would decline?
a. | A decrease in wealth |
b. | An increase in the consumer confidence index |
c. | An increase in public infrastructure investment |
d. | A decrease in U.S. demand for foreign products |
e. | Optimism about the benefits of investment opportunities |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Real Long-Term Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
132. Which of the following situations best explains a leftward shift in the consumption share line?
a. | An increase in the consumer confidence index |
b. | A decrease in interest rates |
c. | An increase in interest rates |
d. | A decrease in income tax |
e. | A decrease in wealth |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Shifts in the Consumption Share Line
MSC: Bloom's: Knowledge | AACSB: Analytic
133. Which of the following best describes what would happen if all private retirement accounts were taxed?
a. | Consumption expenditures would decline, driving up interest rates and resulting in investment expenditures declining. |
b. | Consumption expenditures would increase, driving up interest rates and resulting in investment expenditures declining. |
c. | Government expenditures would increase, causing consumption expenditures to decline, which would result in interest rates declining, which would cause investment expenditures to rise. |
d. | Consumption expenditures would decline, driving down interest rates and resulting in investment expenditures increasing. |
e. | Consumption expenditures would increase, causing government spending to increase, which would result in a decline in investment expenditures. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Shift in Consumption
MSC: Bloom's: Application | AACSB: Analytic
134. According to the spending allocation model, which of the following statements is correct?
a. | Tax cuts and increases in government purchases have the same effect on the economy. |
b. | Tax cuts cause the real interest rate to fall and increases in government purchases cause the interest rate to rise. |
c. | Tax cuts cause the real interest rate to rise and increases in government purchases cause the interest rate to fall. |
d. | All else held equal, a tax cut has no effect on the nongovernment share of GDP. |
e. | All else held equal, an increase in government purchases has no effect on the nongovernment share of GDP. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Shift in Consumption
MSC: Bloom's: Analysis | AACSB: Analytic
/Questions
135. An increase in a sales tax could lead to an increase in investment.
Basic
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Effect of Consumption on Investment
MSC: Bloom's: Knowledge
136. The effect a change in the sales tax has on investment depends, in part, on how sensitive net exports are to changes in the exchange rate.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Effect of Consumption on Investment
MSC: Bloom's: Knowledge | AACSB: Analytic
137. According to most estimates, the real interest rate was higher in the 1980s than in the 1970s.
Challenging
OBJ: factual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Real Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
138. A tax cut has the same long-run effect on the economy as the long-run effect of an increase in government purchases.
Moderate
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Effect of a Tax Cut
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer Questions
139. Suppose the share of government purchases increases by 5 percentage points. Why should we predict that the resulting decline in investment will be less than 5 percent?
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: The Effect of Government on Investment
MSC: Bloom's: Application | AACSB: Analytic
140. What is the connection between an increase in government purchases and the trade deficit? What are the pros and cons associated with a trade deficit that occurs because of this?
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Government Purchase Share and the Trade Deficit
MSC: Bloom's: Analysis| AACSB: Analytic
141. Explain why a continued stock market rally (that is, a continued increase in stock prices) will lead to an increase in consumption.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Wealth and Consumption
MSC: Bloom's: Knowledge | AACSB: Analytic
142. Explain how increased investment in Eastern Europe as well as in other developing countries can result in a decline in U.S. investment. (Hint: What will happen to the demand for foreign currency by international investors relative to their demand for dollars?)
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Net Exports and Investment
MSC: Bloom's: Analysis | AACSB: Analytic
143. Suppose the government decides to reduce the tax rate for firms that increase their investment. Use the four-diagram approach to show what happens to the interest rate and the shares of GDP in the long run.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Investment Share
MSC: Bloom's: Application | AACSB: Analytic
144. The Democrats and Republicans are having their annual argument about the size of the government. The Republicans want to cut taxes for consumers and firms and cut government spending. The Democrats want to keep taxes and spending where they are. Use the four-diagram approach to show that while both plans could result in the same level of the interest rate in the long run, there would be differences in the level of the shares of GDP.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Government Purchase Share
MSC: Bloom's: Application | AACSB: Analytic
145. Suppose the government is deciding between either a reduction in income taxes or an increase in government purchases.
(A) | According to the spending allocation model, all else held constant, what effect will the reduction in income taxes have on the interest rate? |
(B) | According to the spending allocation model, all else held constant, what effect will the increase in government purchases have on the interest rate? |
(C) | Consider the following statement and explain whether it is correct or incorrect. Because the reduction in income taxes and the increase in government purchases have the same effect on the interest rate, the two policies have the same effect on the economy. |
(A) | Assuming the government share of GDP remains constant, the reduction in income taxes will shift the consumption share and therefore the nongovernment share of GDP to the right. Because the share of GDP available for nongovernment use remains constant, the interest rate will rise. |
(B) | An increase in government purchases reduces the share of GDP available for nongovernment use, which, in turn, causes the interest rate to increase. |
(C) | The statement is not correct. Though both policies have the same effect on interest rates, they have a different effect on the mix of output. The income tax cut will not change the share of GDP available for nongovernment use. However, the makeup of this share will change. There will be less output as a share of GDP allocated to investment and net exports and more output as a share of GDP allocated to consumption. |
The increase in government purchases reduces the share of GDP available for nongovernment use. Therefore, the government share of GDP will rise and the consumption, investment, and net export shares of GDP will decline. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Change in Government Purchase Share Compared to a Change in Taxes
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice Questions
146. Which of the following equations is correct?
a. |
|
b. |
|
c. |
|
d. |
|
e. |
|
OBJ: factual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving
MSC: Bloom's: Knowledge | AACSB: Analytic
147. Which of the following equations is correct?
a. |
|
b. |
|
c. |
|
d. |
|
e. |
|
OBJ: factual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
148. National saving in 2015 was
a. | 14.1 percent of GDP. |
b. | 1.4 percent of GDP. |
c. | 20.2 percent of GDP. |
d. | 31.3 percent of GDP. |
e. | 41.6 percent of GDP. |
OBJ: factual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
149. Which of the following is an appropriate definition of the national saving rate?
a. | The real interest rate that applies to the whole country |
b. | The interest rate that makes people save |
c. | The percentage of GDP that is not consumed or part of government expenditures |
d. | The percentage of GDP that is consumed through banking transactions |
e. | All of these |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving
MSC: Bloom's: Knowledge | AACSB: Analytic
150. The national saving rate
a. | is positively related to the interest rate because it depends on consumption, which is negatively related to the interest rate. |
b. | does not depend on the interest rate. |
c. | is negatively related to the interest rate because it depends on consumption, which is positively related to the interest rate. |
d. | is positively related to the interest rate because it depends on consumption, which is positively related to the interest rate. |
e. | is negatively related to the interest rate because it depends on consumption, which is negatively related to the interest rate. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate
MSC: Bloom's: Analysis | AACSB: Analytic
151. When the government share of GDP increases,
a. | there is a downward movement along the national saving rate line. |
b. | the national saving rate line shifts to the right. |
c. | the national saving rate line shifts to the left. |
d. | there is an upward movement along the national saving rate line. |
e. | the national saving rate is unaffected. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
152. The equilibrium interest rate is determined where
a. |
|
b. |
|
c. |
|
d. |
|
e. |
|
.
.
.OBJ: factual
SEC: 4. The Relationship between Saving and Investment
TOP: Equilibrium Interest Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
153. Which of the following would cause the national saving rate to decline for any given interest rate?
a. | A decline in consumer confidence |
b. | A decline in the government share of GDP |
c. | A decline in the investment tax credit |
d. | An increase in the level of wealth |
e. | An increase in the net export share of GDP |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Changes in the National Saving Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
154. Which of the following would cause the national saving rate to increase for any given interest rate?
a. | An increase in the consumption share of GDP |
b. | A decline in the investment share of GDP |
c. | A decline in the net export share of GDP |
d. | A decline in the government share of GDP |
e. | An increase in the net export share of GDP |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Changes in the National Saving Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
/Questions
155. An increase in G reduces the national saving rate.
Basic
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate and Government Purchases
MSC: Bloom's: Knowledge
156. An increase in X does not affect the national saving rate schedule.
Basic
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Equilibrium Interest Rate
MSC: Bloom's: Knowledge
157. The national saving rate, S/Y, is equal to 1 minus the government share.
Basic
OBJ: factual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate
MSC: Bloom's: Knowledge
158. To determine the long-run interest rate, you can use either the four-diagram approach or the saving-investment approach.
Basic
OBJ: factual
SEC: 4. The Relationship between Saving and Investment
TOP: Saving-Investment Approach
MSC: Bloom's: Knowledge
159. The United States currently runs two large deficits, one on its budget account and one on its current account.
Basic
OBJ: conceptual | factual
SEC: 4. The Relationship between Saving and Investment
TOP: U.S. Deficits
MSC: Bloom's: Knowledge
160. As of 2015, the United States current account deficit is close to 60 percent of GDP.
Basic
OBJ: conceptual | factual
SEC: 4. The Relationship between Saving and Investment
TOP: U.S. Deficits
MSC: Bloom's: Knowledge
Short Answer Questions
161. If state governments decide to cut both taxes and government spending, what will happen to the national saving rate and interest rates?
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: National Saving Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
162. Suppose foreign demand for U.S. products increases.
(A) | Use the saving-investment approach to show what happens to the long-run interest rate. |
(B) | Use the four-diagram approach to show what happens to the long-run interest rate. |
(C) | What happens to the four shares of GDP? |
(A) | The |
| |
(B) | The net export share line, and hence the non-government share line, will shift to the right, and the interest rate will increase. |
| |
(C) | The consumption and investment shares will fall, the net export share will rise, and the government share will remain the same. |
line will shift to the right, and the interest rate will increase.
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Change in Net Export Share
MSC: Bloom's: Application | AACSB: Analytic
163. Suppose initially that C = 800, I = 300, G = 200, and X = 100.
(A) | What is GDP? |
(B) | Calculate the four shares of GDP. |
(C) | Suppose G increases to 300 and GDP increases to 1,500. What is the new government spending share? Draw a diagram to illustrate what happens to the equilibrium interest rate. |
(D) | Without doing any calculations, explain what happens to each of the three nongovernment shares of GDP after the government spending and GDP increase in (C). |
(E) | Suppose instead that G increases to 300 and GDP increases to 2,000. What is the new government spending share? Draw a diagram to illustrate what happens to the equilibrium interest rate. |
(F) | Without doing any calculations, explain what happens to each of the three nongovernment shares of GDP after the government spending and GDP increase in (E). |
(A) | Y = C + I + G + X = 1200 |
(B) |
|
(C) | The new G/Y share is 20 percent. The equilibrium interest rate will increase. |
| |
(D) | The other three shares will fall as the interest rate increases. The price of consuming today relative to the price of consuming tomorrow will increase, which will reduce consumption. Investment will fall as the cost of borrowing increases. The net export share will fall as demand for dollar-denominated assets increases, the exchange rate will increase, and net exports will drop. |
(E) | The new G/Y is 15 percent. The interest rate will fall. |
| |
(F) | The three shares will increase as the interest rate falls. |
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Calculating Shares of GDP
MSC: Bloom's: Application | AACSB: Analytic
164. Answer the questions below:
(A) | Using the diagram below, find the equilibrium interest rate when the government share is 25 percent. What is the investment share? |
(B) | Explain what happens to all of the variables if there is an increase in the demand for U.S. exports. |
(A) | When the government share of GDP is 25 percent, the share available for nongovernment spending is 75 percent, which corresponds to an equilibrium interest rate of 8 percent. The investment share of GDP is 13 percent. |
(B) | For any given interest rate, the net export share of GDP will be larger. If the government spending share remains fixed, interest rates will rise and investment and consumption shares will fall. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Equilibrium Interest Rate
MSC: Bloom's: Application | AACSB: Analytic
165. Suppose the government increases spending on the war on drugs by one-half a percent of GDP.
(A) | Suppose no other policy accompanies this increase in spending. Describe this policy's effect on interest rates and on consumption, investment, and net exports as a share of GDP. |
(B) | Suppose, because of a balanced budget agreement, the funds for this policy must come from funds initially earmarked for other spending programs. Describe this policy's effect on interest rates and on consumption, investment, and net exports as a share of GDP. |
(C) | Suppose the government decides to adopt a national sales tax to pay for the higher government spending. Describe this policy's effect on interest rates and on the four shares of GDP. |
(A) | Government spending as a share of GDP will increase, and the nongovernment share of GDP will decline. Interest rates will rise, and investment, net exports, and consumption will decline because of higher interest rates. |
(B) | The government share will not change. Therefore, the investment, net exports, and consumption shares will remain the same. |
(C) | A national sales tax will reduce consumption and thus reduce the nongovernment share. The interest rate may increase, decrease, or stay the same depending on the magnitude of the two changes. The effect on the four shares depends on the effect on the interest rate. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: The Government Share
MSC: Bloom's: Application | AACSB: Analytic
166. Suppose there is an increase in the government share of GDP.
(A) | Draw a diagram showing the effect this has on the nongovernment share of GDP. What happens to interest rates? |
(B) | Suppose you observe that, concurrent with the increase in the government share of GDP, a decline in the net export share occurs. Is this a coincidence? Explain. |
(C) | If the decline in the net export share of GDP is substantial, what might this imply about the interest rate sensitivity of net exports? |
(A) | The effect of the increase in the government share of GDP is illustrated in the diagram below. The nongovernment share of GDP declines, and the equilibrium interest rate increases from R0 to R1. |
| |
(B) | This is not a coincidence. All else remains constant, the increase in interest rates leads to a stronger dollar, which in turn leads to a reduction in exports and an increase in imports. Hence, the net export share of GDP declines. |
(C) | Net exports are sensitive to changes in interest rates. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Nongovernment Share of GDP
MSC: Bloom's: Application | AACSB: Analytic
167. Answer the questions below:
(A) | Some argue that Japan's saving rate is too high. Suppose all Japanese citizens decide to save at a lower rate. Show what happens in this case in the saving and investment diagram where the S/Y curve shifts. |
(B) | Now show the same situation in the C/Y, I/Y, and X/Y diagrams. Which curve shifts? If the government share of GDP does not change, then what must happen to interest rates? Explain how this affects the four shares. |
(C) | Suppose that when the Japanese citizens began saving at a lower rate, the government reduced its level of spending, and the government share of GDP fell. Illustrate the effect on the interest rate using the saving-investment approach and the four-diagram approach in parts (A) and (B). What happens to the four shares of GDP? |
(A) | The effect of a decrease in the Japanese saving rate is shown in the following diagram. Notice that the decrease in saving results in Japanese interest rates increasing from R0 to R1. |
| |
(B) | The decrease in saving results in an increase in the consumption share of GDP. The sum of all three shares shifts as illustrated in the following diagram. Notice the equilibrium interest rate increases from R0 to R1. Because of the higher interest rate, the net exports share of Japanese GDP declines, as does the investment share. The government share stays the same, and the consumption share increases by the same amount as the decrease in the investment plus net export share. |
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(C) | The reduction in saving by the Japanese citizens will shift the national saving rate line to the left while the reduction in government spending will shift the line to the right. It is impossible to say what happens to the interest rate and the four shares without knowing which shift is larger. In the four-diagram approach, the nongovernment share line will shift to the right, and the available share for nongovernment spending line will also shift to the right. |
|
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Saving Investment Approach
MSC: Bloom's: Application | AACSB: Analytic
168. Suppose the government's share of GDP declines by 10 percent. Draw a diagram to show what the I/Y and X/Y curves will look like if there is very little change in the interest rate. Does this mean that nongovernment spending is not sensitive to changes in the interest rate? Explain.
OBJ: conceptual
SEC: 3. Determining the Equilibrium Interest Rate
TOP: Impact of a Change in Government Purchase Share
MSC: Bloom's: Application | AACSB: Analytic
169. Suppose that, as a result of a financial crisis in Asia, there is a large decline in the demand for U.S. exports.
(A) | What effect will this have on the interest rate and the four shares of GDP? |
(B) | Suppose that, at the same time, there is a sharp increase in the demand for U.S. dollar-denominated assets as a result of the financial crisis in Asia. Will this tend to offset or enhance the changes that you found in part (A)? |
(A) | The net export share line and the nongovernment share line will shift to the left, and the interest rate will fall. The consumption and investment shares will increase, the government share will not change, and the net export share will fall. |
(B) | Enhance. The increase in the demand for dollar-denominated assets will increase the demand for dollars, which will increase the exchange rate. This will make U.S. exports more expensive and U.S. imports cheaper, which will reduce net exports. At any given exchange rate, the net export share line will be smaller. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Calculating Shares of GDP
MSC: Bloom's: Application | AACSB: Analytic
170. Suppose the C/Y line shifts to the right because of a change in attitude about the future. At the same time, because of political pressure, the government share of GDP declines, with the result that the interest rate stays constant.
(A) | If the investment share is the only thing that affects growth in the system, what will happen to growth? |
(B) | If the consumption share increased by 5 percent, what must have happened to the government share? |
(C) | Suppose that when the C/Y line shifted to the right and the government cut spending, the interest rate actually fell. What happened to each of the four shares in this case? |
(A) | Because the investment share schedule does not shift and the interest rate remains constant, investment remains the same. This means that economic growth is unaffected. |
(B) | The consumption, investment, and net export shares increased. It must have fallen by 5 percent. |
(C) | The consumption, investment, and net export shares increased, and the government share decreased. |
OBJ: conceptual
SEC: 4. The Relationship between Saving and Investment
TOP: Investment Share of GDP
MSC: Bloom's: Application | AACSB: Analytic