QUESTION: 1449

Holding income constant, if consumers and investors decide to spend more on goods and services, then

additional spending will require increased borrowing (or less saving), which will drive up the real rate of interest.
producers will expand output without increasing prices to accommodate the stronger demand.
additional spending will increase the supply of loanable funds, which will reduce the real interest rate and thereby trigger additional spending.
the economy's long-run capacity (LRAS) will expand to accommodate the stronger demand.

Answer(s): A

Explanation:

Strong aggregate demand will put pressure on the market for loanable funds and will result in higher interest rates (as the demand for funds increases). This will cause aggregate demand to contract from its heightened state. This adjustment represents one of the economy's self-correcting mechanisms.

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QUESTION: 1450

The Keynesian model indicates that when individuals plan to save more (and spend less), the result may be a (n)

increase in investment because investment always equals saving.
decline in the equilibrium level of income.
increase in the marginal propensity to consume.
increase in equilibrium income by some multiple of the increase in saving.

Answer(s): B

Explanation:

An increase in savings implies a decrease in disposable income and thus a decline in consumption. As a result aggregate demand will fall and output will follow. Output is equivalent to income and thus the equilibrium level of income also declines.

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QUESTION: 1451

Given:

Population 50 million
Number in the labor force 30 million
Number employed full time 20 million
Number employed part time 8 million
Number unemployed 2 million

What is the unemployment rate of the economy?

10.0 percent
4.0 percent
7.1 percent
6.7 percent

Answer(s): D

Explanation:

The unemployment rate is the number of unemployed people divided by the number of people in the labor force or: 2/20 = 6.7%.

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QUESTION: 1452

Which of the following about the multiplier is false?

Idle resources are necessary before the multiplier can bring about an increase in real income.
The size of the multiplier relates directly to the size of the marginal propensity to consume.
It is defined as 1 / (1 - the marginal propensity to save).
It takes time for the multiplier to work.

Answer(s): C

Explanation:

The multiplier is defined as M = 1/(1-MPC) rather than 1 / (1 - MPS).

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QUESTION: 1450

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QUESTION: 1451

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QUESTION: 1452

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