If business decision makers suddenly become more optimistic about future sales and profits, which of the following will most likely occur?
Answer(s): D
If business decision makers are optimistic about the future, they will increase their private investment and stimulate other parts of the economy. Thus, aggregate demand and aggregate output will increase.
Which one of the following will most likely cause a future increase in a country's sustainable level of real output?
Answer(s): E
Net investment can increase the supply of physical capital which makes it feasible for the economy to produce a higher level of output permanently into the future. Investment in physical capital can expand the supply of buildings, machines and other physical assets. This allows the economy to produce and sustain a large rate of output, shifting both LRAS and SRAS to the right.
Assume that Polaroid decides to build a camera-research facility in Twin Falls, Idaho. The plant will employ 1,000 workers who will be guaranteed full-time jobs at annual earnings of $25,000. If the marginal propensity to consume in Twin Falls is 3/4, what change in income will result from operation of the plant for one year?
The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-3/4) = 4. Therefore the 1,000 x $25,000 = $25 million increase in aggregate expenditures is magnified four times to $100 million.
In the basic Keynesian model of national income determination, aggregate expenditures refer to
Answer(s): C
Aggregate expenditures are the sum of planned consumption, investment, government expenditures and net exports.
Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called
Counter-cyclical fiscal policy promotes the economy's use of its "automatic stabilizers": government expenditures should rise during recessions (increasing aggregate demand) and should fall during economic booms (decreasing aggregate demand).
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