MACROECONOMICS

REVIEW FOR TEST No. 3 Chapters 7, 8, & 9

CHAPTER 7

Inflation

Deflation

CPI

Disinflation

Why is inflation feared?

Real Income

The differences between Income & Wealth

Real Interest Rate

Demand-Pull Inflation

Cost-Push Inflation

Hyperinflation

CHAPTER 8

Classical Economists

Say’s Law

Keynes & Wage Rates

New Keynesians & Wage Rates

Keynes on Prices

Consumption Function

Dissaving

Autonomous Consumption

Price Level

Expectations & the Investment Expenditure

Marginal Propensity toSave (MPS) & Marginal Propensity to Consume (MPC)

Interest Rates & the Investment Expenditure

CHAPTER 9

Autonomous Spending & the Spending Multiplier

Inflationary GapRecessionary Gap

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Practice Questions for Macro Economics Test # 2

Directions: It’s not enough to just take this practice test. Go back to your notes and to all the self-tests. Make sure to cover the How, Why and What of all required concepts. And for extra credit, don’t forget to log on to and read the top articles (pertinent to recent class discussions), listed under the heading “Today’s Topics.”

  1. Which of the following will exacerbate inflation during an Inflationary Gap?
  2. Increasing taxes
  3. Decreasing taxes
  4. Increasing consumption
  5. Decreasing consumption
  6. B & C
  1. Union contracts can be problematic because ______
  1. Say’s Law is applicable in:a. Money economyb. Barter economy
  1. What do people do with their liquid assets during periods of hyperinflation?
  1. Which sector possesses autonomous consumption?
  1. What is autonomous consumption?
  1. Interpret the following: At a disposable income of $100, Shirley spends $70, but at a disposable income of $200, Shirley spends $160.
  1. What happens to spending, consumption and investments when interest rates drop?
  1. Which of the following does the CPI not include?

a. Food b. Energy c. Plane enginesd. Highways

  1. Deflation is most common during______
  1. If the Multiplier is 10, and Autonomous Consumption is $2 million, and Autonomous Spending is $4 million, then how is the RGDP affected?
  1. What is the lender’s real interest rate on a loan that has a nominal interest rate of 17% and an inflation rate of 3.5%? Is this good?
  1. Demand-pull inflation happens for this reason: ______, and most likely during these phases:______
  1. MPC and the RGDP are inversely related.
  1. According to Classical economists, what keeps the economy in equilibrium and, therefore, all prices as well?
  1. What do Classical economists say about wages?

a. Wages are flexibleb. Wages are inflexible

Because ______

  1. What do Keynesians say bout wages?

a. Wages are flexibleb. Wages are inflexible

Because ______

______

  1. If price level decreases, then consumption and investments ______
  1. Cost-push inflation is less desirable than demand-pull.
  1. Why is cost-push inflation less desirable than demand-pull inflation?
  1. Businesses profit from cost-push inflation.
  1. What happens to investments if businesses anticipate prices to decrease in the future?
  1. The RGDP changes the most important resource for buyers and sellers—money.

For the buyer ______changes.

For the seller ______changes.

  1. If the Natural GDP exceeds the RGDP, we have a ______gap.
  1. If the RGDP is more than the naturalRGDP, then the odds are that the actual Unemployment Rate is smaller than the natural UR.
  1. How can you beat inflation?

1.

2.

3.

4.

  1. What transpires during a recessionary gap? Specify the direction of your indicators.
  1. When is inflation a problem?
  1. Give a qualitative example on the multiplier.
  1. What is your real income if your nominal income = $90,000 and CPI = 184.7? b) What happens to disposable income if next year your income increase by $3000 and CPI increases to 186.2?

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