QUESTION: 1421

If business decision makers suddenly become more optimistic about future sales and profits, which of the following will most likely occur?

The interest rate will fall, causing both investment and GDP to rise.
Income will increase and actual saving will remain constant.
Actual investment will increase but consumption will decrease, leaving GDP unchanged.
Investment will increase, causing both aggregate demand and GDP to increase.

Answer(s): D

Explanation:

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.

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QUESTION: 1422

Which one of the following will most likely cause a future increase in a country's sustainable level of real output?

an increase in income redistribution payments from high- to low-income recipients
a decline in the nation's oil reserves
higher marginal tax rates
an increase in the national debt
an increase in the economy's net investment rate

Answer(s): E

Explanation:

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.

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QUESTION: 1423

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?

$75 million
$50 million
$25 million
$100 million

Answer(s): D

Explanation:

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.

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QUESTION: 1424

In the basic Keynesian model of national income determination, aggregate expenditures refer to

the amount of demand for consumer goods that would arise if all citizens had all the income they wanted.
the combined expenditures of consumers and businesses minus government spending.
spending for consumption, investment and exports less imports plus government purchases of goods and services.
consumer spending measured in constant prices.
the amount of GDP that could be produced if unemployment were zero.

Answer(s): C

Explanation:

Aggregate expenditures are the sum of planned consumption, investment, government expenditures and net exports.

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QUESTION: 1424

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