Question

1. Expectations that disposable income will increase in the future will a. shift the current consumption...

1. Expectations that disposable income will increase in the future will
a. shift the current consumption function up
b. shift the current consumption function down
c.result in a movement upward along the current consumption function
d. make the current consumption function flatter
e. make the current consumption function steeper

2. The partners in the Wonderwords word processing firm spend $12,000 on computers, hoping to earn an additional $1,000 per year with them. If the partners could earn 7 percent interest on a bank deposit they should
a. put $12,000 in the bank
b. put $6,000 in the bank and spend only $6,000 on computers
c. buy the computers becasue the rate of return on the computers is positive
d. buy the computers only if they do not have to borrow the funds to buy the computers
e. buy the computers becasue the rate of return on the computers exceeds 7 percent

3. In long-run euilibrium
a. actual output can exceed potential output
b. potential output can exceed actual output
c. actual output must equal potential output
d. actual price levels can exceed expected price levels
e. expected price levels can exceed actual price levels

4. Given the aggregate demand curve, an adverse supply shock would
a. increase output and the price level
b. decrease output and the price level
c. increase output and decrease the price level
d. decrease output and increase the price level
e. casue no change in output or the price level

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Homework Answers

Answer #1

1. Expectations that disposable income will increase in the future will
b. shift the current consumption function down
Explanation: Consumers will postpone consumption to the future

2. The partners in the Wonderwords word processing firm spend $12,000 on computers, hoping to earn an additional $1,000 per year with them. If the partners could earn 7 percent interest on a bank deposit they should
e. buy the computers becasue the rate of return on the computers exceeds 7 percent
Ans. Rate of return on computers is (1000/12000)x100 = 8.33%

3. In long-run euilibrium
c. actual output must equal potential output
Explanation: In the long run, full employment level of output exisits

4. Given the aggregate demand curve, an adverse supply shock would
d. decrease output and increase the price levela
Explanation: Aggregate supply shock means that aggregate supply curve shifts to the left

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