Question 1

If the MPC = 0.80,the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be

Accepted Answer

A) $150. 
B) $187.5. 
C) $500. 
D) $750. 
A) $150. 
B) $187.5. 
C) $500. 
D) $750. D

Question 2

Given the MPS = 0.40,with no government and no foreign trade,a $10 billion increase in investment will eventually result in an increase in

Accepted Answer

A) Consumption by $40 billion. 
B) Total spending by $15 billion. 
C) Total spending by $25 billion. 
D) Total spending by $2.5 billion. 
A) Consumption by $40 billion. 
B) Total spending by $15 billion. 
C) Total spending by $25 billion. 
D) Total spending by $2.5 billion. C

Question 3

The disposable income consumers receive is equal to about what percentage of total income?

Accepted Answer

A) 30 percent. 
B) 50 percent. 
C) 70 percent. 
D) 95 percent. 
A) 30 percent. 
B) 50 percent. 
C) 70 percent. 
D) 95 percent. C

Question 4

If consumers spend 80 cents out of every extra dollar received,the multiplier is

Accepted Answer

A) 5. 
B) 8. 
C) 0.80. 
D) 1.25. 
A) 5. 
B) 8. 
C) 0.80. 
D) 1.25.

Question 5

A decrease in a recessionary GDP gap will most likely be associated with a decrease in

Accepted Answer

A) Structural unemployment. 
B) Cyclical unemployment. 
C) The price level. 
D) Frictional unemployment. 
A) Structural unemployment. 
B) Cyclical unemployment. 
C) The price level. 
D) Frictional unemployment.

Question 6

Which of the following equations defines the multiplier?

Accepted Answer

A) 1 - b 
B) 1 - (c ÷ Y
D) . 
C) 1 ÷ (1 - MP
C) . 
D) 1 ÷ APS. 
A) 1 - b 
B) 1 - (c ÷ Y
D) . 
C) 1 ÷ (1 - MP
C) . 
D) 1 ÷ APS.

Question 7

Leakages include

Accepted Answer

A) Business saving. 
B) Exports. 
C) Government spending. 
D) Inventories. 
A) Business saving. 
B) Exports. 
C) Government spending. 
D) Inventories.

Question 8

If the marginal propensity to consume is 0.75,then the multiplier equals

Accepted Answer

A) 1/(1 - 0.25). 
B) 1/0.75. 
C) 1/(1 - 0.75). 
D) 0.75. 
A) 1/(1 - 0.25). 
B) 1/0.75. 
C) 1/(1 - 0.75). 
D) 0.75.

Question 9

Purchases of new plants and equipment plus any desired changes in business inventories are

Accepted Answer

A) Economic investment. 
B) Undesired investment. 
C) Desired investment. 
D) Actual investment. 
A) Economic investment. 
B) Undesired investment. 
C) Desired investment. 
D) Actual investment.

Question 10

The value of the multiplier will be larger,the

Accepted Answer

A) Smaller the value of the marginal propensity to save. 
B) Smaller the APC. 
C) Larger the value of the mps. 
D) Smaller the APS. 
A) Smaller the value of the marginal propensity to save. 
B) Smaller the APC. 
C) Larger the value of the mps. 
D) Smaller the APS.

Question 11

Suppose lower expectations lead to a decrease of $240 in desired investment in the economy and the marginal propensity to consume is 0.75. Table 10.2
$\begin{array}{c}
\begin{array}{|l|}
\hline\
 \text {Spending Cycles}\
\hline \text {First-cycle}\
\text {spending}\
\hline \text {Second-cycle}\
\text {spending}\
\hline \text {Third-cycle}\
\text {spending}\
\hline  
\end{array}
\begin{array}{c|}
\hline \text {Change in this Cycle's Spending}\
\text { and Income}\
\hline\
\quad\quad\quad\quad\quad\quad\quad\quad -\$ 240 \
\hline\
\
\hline\
\
\hline
\end{array}
\begin{array}{c|}
\hline \text {Cumulative Decrease in }\ 
\text {Spending and Income}\
\hline\
\quad\quad\quad\quad\quad\quad\quad\quad -\$240\
\hline\
\
\hline\
\
\hline
\end{array}
\end{array}$

In Table 10.2,what is the cumulative decrease in expenditure by the end of the third cycle?

Accepted Answer

A) -$960.00. 
B) -$240.00. 
C) -$420.00. 
D) -$555.00. 
A) -$960.00. 
B) -$240.00. 
C) -$420.00. 
D) -$555.00.

Question 12

Classical economists concluded that

Accepted Answer

A) Spending leakages exceed spending injections. 
B) Interest rates adjust such that business investment and consumer saving may equal. 
C) The economy might experience persistent macro instability. 
D) Investment will decrease in response to increased savings. 
A) Spending leakages exceed spending injections. 
B) Interest rates adjust such that business investment and consumer saving may equal. 
C) The economy might experience persistent macro instability. 
D) Investment will decrease in response to increased savings.

Question 13

A recessionary GDP gap is the

Accepted Answer

A) Horizontal distance between full-employment GDP and equilibrium GDP. 
B) Same as an inflationary gap. 
C) Difference between leakages and injections. 
D) Sum of leakages and injections. 
A) Horizontal distance between full-employment GDP and equilibrium GDP. 
B) Same as an inflationary gap. 
C) Difference between leakages and injections. 
D) Sum of leakages and injections.

Question 14

Keynes believed that abrupt changes in spending behavior

Accepted Answer

A) Have no effect on the economy. 
B) Help stabilize the economy. 
C) Lead to responses by market participants that may make the market outcome worse. 
D) Move the economy to full employment. 
A) Have no effect on the economy. 
B) Help stabilize the economy. 
C) Lead to responses by market participants that may make the market outcome worse. 
D) Move the economy to full employment.

Question 15

Investment represents

Accepted Answer

A) A leakage from the circular flow,similar to saving. 
B) A leakage from the circular flow,similar to taxes. 
C) An injection into the circular flow,similar to government spending. 
D) An injection into the circular flow,similar to imports. 
A) A leakage from the circular flow,similar to saving. 
B) A leakage from the circular flow,similar to taxes. 
C) An injection into the circular flow,similar to government spending. 
D) An injection into the circular flow,similar to imports.

Question 16

Consumer spending

Accepted Answer

A) Is the smallest spending component. 
B) Impacts the aggregate supply curve. 
C) Is affected by consumer confidence. 
D) Is the same as autonomous saving. 
A) Is the smallest spending component. 
B) Impacts the aggregate supply curve. 
C) Is affected by consumer confidence. 
D) Is the same as autonomous saving.

Question 17

Because the aggregate supply curve rises more steeply as the economy approaches full employment,

Accepted Answer

A) Inflation tends to accelerate. 
B) The recessionary GDP gap becomes larger. 
C) Aggregate demand shifts to the left. 
D) It becomes easier to reach full employment. 
A) Inflation tends to accelerate. 
B) The recessionary GDP gap becomes larger. 
C) Aggregate demand shifts to the left. 
D) It becomes easier to reach full employment.

Question 18

How can actual investment be greater than desired investment,and what type of gap is the economy experiencing when this occurs?

Accepted Answer

Actual investment includes the purchases

Question 19

Suppose that as a result of expectations of lower sales in the future,a decrease in autonomous business investment causes aggregate demand to shift from AD0 to AD1 as shown in Figure 10.1.Which of the following statements is true?

Accepted Answer

A) According to Keynesian theory,the economy will quickly adjust back to full employment. 
B) According to Keynesian theory,additional decreases in aggregate demand will occur. 
C) In the absence of any additional decreases in investment,the equilibrium will remain at Q1 indefinitely. 
D) The GDP gap will be eliminated by the multiplier. 
A) According to Keynesian theory,the economy will quickly adjust back to full employment. 
B) According to Keynesian theory,additional decreases in aggregate demand will occur. 
C) In the absence of any additional decreases in investment,the equilibrium will remain at Q1 indefinitely. 
D) The GDP gap will be eliminated by the multiplier.

Question 20

Income not spent directly on domestic output is

Accepted Answer

A) A leakage. 
B) An injection. 
C) A circular. 
D) Investment. 
A) A leakage. 
B) An injection. 
C) A circular. 
D) Investment.

Exam 10: Self-Adjustment or Instability

If the MPC = 0.80,the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be

Given the MPS = 0.40,with no government and no foreign trade,a $10 billion increase in investment will eventually result in an increase in

The disposable income consumers receive is equal to about what percentage of total income?

If consumers spend 80 cents out of every extra dollar received,the multiplier is

A decrease in a recessionary GDP gap will most likely be associated with a decrease in

Which of the following equations defines the multiplier?

Leakages include

If the marginal propensity to consume is 0.75,then the multiplier equals

Purchases of new plants and equipment plus any desired changes in business inventories are

The value of the multiplier will be larger,the

Classical economists concluded that

A recessionary GDP gap is the

Keynes believed that abrupt changes in spending behavior

Investment represents

Consumer spending

Because the aggregate supply curve rises more steeply as the economy approaches full employment,

How can actual investment be greater than desired investment,and what type of gap is the economy experiencing when this occurs?

Suppose that as a result of expectations of lower sales in the future,a decrease in autonomous business investment causes aggregate demand to shift from AD0 to AD1 as shown in Figure 10.1.Which of the following statements is true?

Income not spent directly on domestic output is

Economics: the Core Issues

The Useconomy: a Global View

Supply and Demand

The Role of Government

National Income Accounting

Unemployment

Inflation

The Business Cycle

Aggregate Demand

Fiscal Policy

Deficits and Debt

Money and Banks

The Federal Reserve System

Monetary Policy

Supply-Side Policy: Short-Run Options

Growth and Productivity: Long-Run Possibilities

Theory Versus Reality

Consumer Choice

Elasticity

The Costs of Production

The Competitive Firm

Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

Natural Monopolies: Deregulation

Environmental Protection

The Farm Problem

The Labor Market

Labor Unions

Financial Markets

Taxes: Equity Versus Efficiency

Transfer Payments: Welfare and Social Security

International Trade

International Finance

Global Poverty

Filters

Suppose that as a result of expectations of lower sales in the future,a decrease in autonomous business investment causes aggregate demand to shift from AD₀ to AD₁ as shown in Figure 10.1.Which of the following statements is true?