Question 1

Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then

Accepted Answer

A)  inventories will likely begin to fall, causing firms to increase production. 
B)  actual national income must be less than the equilibrium level. 
C)  actual national income must be greater than the equilibrium level. 
D)  inventories will likely begin to rise, causing firms to reduce production. 
E)  both A and B are correct. 
A)  inventories will likely begin to fall, causing firms to increase production. 
B)  actual national income must be less than the equilibrium level. 
C)  actual national income must be greater than the equilibrium level. 
D)  inventories will likely begin to rise, causing firms to reduce production. 
E)  both A and B are correct.

Question 2

When desired consumption exceeds disposable income, desired saving is ; when desired consumption is less than the disposable income, desired saving is .

Accepted Answer

A)  negative; negative 
B)  positive; negative 
C)  negative; positive 
D)  positive; positive 
E)  zero; positive 
A)  negative; negative 
B)  positive; negative 
C)  negative; positive 
D)  positive; positive 
E)  zero; positive

Question 3

Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant.
1. Y = C + I
2. C = 100 + 0.6Y
3. I = 200
TABLE 21-6
-Refer to Table 21-6. The simple multiplier in this economy is

Accepted Answer

A)  2.0. 
B)  2.5. 
C)  3.0. 
D)  4.0. 
E)  5.0. 
A)  2.0. 
B)  2.5. 
C)  3.0. 
D)  4.0. 
E)  5.0.

Question 4

Undesired or unplanned inventory accumulation is likely to occur when

Accepted Answer

A)  consumption exceeds investment. 
B)  investment exceeds consumption. 
C)  autonomous expenditure exceeds induced expenditure. 
D)  desired aggregate expenditure exceeds actual aggregate expenditure. 
E)  actual aggregate expenditure exceeds desired aggregate expenditure. 
A)  consumption exceeds investment. 
B)  investment exceeds consumption. 
C)  autonomous expenditure exceeds induced expenditure. 
D)  desired aggregate expenditure exceeds actual aggregate expenditure. 
E)  actual aggregate expenditure exceeds desired aggregate expenditure.

Question 5

FIGURE 21-3
-Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the initial first round of spending?

Accepted Answer

A)  $75 million 
B)  $25 million 
C)  $100 million 
D)  $400 million 
E)  $500 million 
A)  $75 million 
B)  $25 million 
C)  $100 million 
D)  $400 million 
E)  $500 million

Question 6

Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is

Accepted Answer

A)  zero. 
B)  a positive number between zero and one. 
C)  one. 
D)  a positive number greater than one but less than infinity. 
E)  infinitely large. 
A)  zero. 
B)  a positive number between zero and one. 
C)  one. 
D)  a positive number greater than one but less than infinity. 
E)  infinitely large.

Question 7

In a simple model of the economy with demand-determined output, the equilibrium level of national income is at an income

Accepted Answer

A)  to the right of the point where the AE curve intersects the 45-degree line. 
B)  to the left of the point where the AE curve intersects the 45-degree line. 
C)  where aggregate desired expenditure equals the value of total output. 
D)  where aggregate desired expenditure equals consumption. 
E)  where saving equals consumption. 
A)  to the right of the point where the AE curve intersects the 45-degree line. 
B)  to the left of the point where the AE curve intersects the 45-degree line. 
C)  where aggregate desired expenditure equals the value of total output. 
D)  where aggregate desired expenditure equals consumption. 
E)  where saving equals consumption.

Question 8

FIGURE 21-3
-Refer to Figure 21-3. Assuming AE0 is the prevailing aggregate expenditure function, the distance 0A is a measure of

Accepted Answer

A)  aggregate expenditure at equilibrium national income. 
B)  autonomous desired expenditures. 
C)  induced expenditures. 
D)  desired saving. 
E)  desired investment. 
A)  aggregate expenditure at equilibrium national income. 
B)  autonomous desired expenditures. 
C)  induced expenditures. 
D)  desired saving. 
E)  desired investment.

Question 9

Consider the simplest macro model in which aggregate output is demand -determined. If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion, the marginal propensity to spend must be

Accepted Answer

A)  1.0. 
B)  0.5. 
C)  0.2. 
D)  0.67. 
E)  3.0. 
A)  1.0. 
B)  0.5. 
C)  0.2. 
D)  0.67. 
E)  3.0.

Question 10

Consider a simple macro model with demand-determined output. In such a model, the smaller the marginal propensity to spend, the

Accepted Answer

A)  smaller the MPS. 
B)  smaller the simple multiplier. 
C)  larger is investment. 
D)  larger the MPC. 
E)  larger the simple multiplier. 
A)  smaller the MPS. 
B)  smaller the simple multiplier. 
C)  larger is investment. 
D)  larger the MPC. 
E)  larger the simple multiplier.

Question 11

FIGURE 21-3FIGURE 21-3
-Refer to Figure 21-3. Consider the simplest macro model with no government and no foreign trade, and the aggregate expenditure function AE = C + I. If there was zero autonomous expenditure and the marginal propensity to consume was equal to one, then the AE function would be

Accepted Answer

A)  steeper than the 45-degree line. 
B)  above the 45-degree line at all points. 
C)  below the 45-degree line at all points. 
D)  coincident with the 45-degree line. 
E)  flatter than the 45-degree line. 
A)  steeper than the 45-degree line. 
B)  above the 45-degree line at all points. 
C)  below the 45-degree line at all points. 
D)  coincident with the 45-degree line. 
E)  flatter than the 45-degree line.

Question 12

Consider a simple macro model with demand-determined output. In such a model, the larger the marginal propensity to spend, the

Accepted Answer

A)  larger the MPC. 
B)  smaller the MPS. 
C)  smaller the simple multiplier. 
D)  larger the simple multiplier. 
E)  greater is investment. 
A)  larger the MPC. 
B)  smaller the MPS. 
C)  smaller the simple multiplier. 
D)  larger the simple multiplier. 
E)  greater is investment.

Question 13

Consider the simplest macro model with a constant price level and demand -determined output. If desired aggregate expenditure is less than actual national income, then

Accepted Answer

A)  inventories begin to fall, causing firms to increase production. 
B)  actual national income is below the equilibrium level. 
C)  actual national income must be above the equilibrium level. 
D)  actual national income must be at equilibrium. 
E)  inventories begin to fall, causing national income to fall. 
A)  inventories begin to fall, causing firms to increase production. 
B)  actual national income is below the equilibrium level. 
C)  actual national income must be above the equilibrium level. 
D)  actual national income must be at equilibrium. 
E)  inventories begin to fall, causing national income to fall.

Question 14

The Smith familyʹs disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their

Accepted Answer

A)  average propensity to consume decreased from 0.950 to 0.943. 
B)  average propensity to save decreased from 0.950 to 0.943. 
C)  marginal propensity to consume is 0.050. 
D)  marginal propensity to consume increased from 0.050 to 0.058. 
E)  marginal propensity to save is 0.80. 
A)  average propensity to consume decreased from 0.950 to 0.943. 
B)  average propensity to save decreased from 0.950 to 0.943. 
C)  marginal propensity to consume is 0.050. 
D)  marginal propensity to consume increased from 0.050 to 0.058. 
E)  marginal propensity to save is 0.80.

Question 15

Consider the simplest macro model with a constant price level and demand -determined output. If national income is less than its equilibrium level, it is likely that firmsʹ inventories are , and so national income tends to .

Accepted Answer

A)  accumulating; rise 
B)  accumulating; fall 
C)  being depleted; rise 
D)  being depleted; fall 
E)  constant; fall 
A)  accumulating; rise 
B)  accumulating; fall 
C)  being depleted; rise 
D)  being depleted; fall 
E)  constant; fall

Question 16

Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The simple multiplier is equal to

Accepted Answer

A)  -2.5. 
B)  -0.6. 
C)  0.4. 
D)  0.6. 
E)  2.5. 
A)  -2.5. 
B)  -0.6. 
C)  0.4. 
D)  0.6. 
E)  2.5.

Question 17

Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = 2/3)Y, then the simple multiplier is

Accepted Answer

A)  2/3. 
B)  1. 
C)  2. 
D)  3. 
E)  Insufficient information to know. 
A)  2/3. 
B)  1. 
C)  2. 
D)  3. 
E)  Insufficient information to know.

Question 18

Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause
In desired consumption and in desired investment.

Accepted Answer

A)  an increase; an increase 
B)  an increase; a decrease 
C)  a decrease; a decrease 
D)  a decrease; no change 
E)  a decrease; an increase 
A)  an increase; an increase 
B)  an increase; a decrease 
C)  a decrease; a decrease 
D)  a decrease; no change 
E)  a decrease; an increase

Question 19

FIGURE 21-3
-The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in

Accepted Answer

A)  investment induced by changes in equilibrium income. 
B)  saving caused by changes in investment. 
C)  the equilibrium level of national income caused by changes in autonomous expenditure. 
D)  the rate of interest caused by increased demand for credit. 
E)  employment induced by changes in equilibrium income. 
A)  investment induced by changes in equilibrium income. 
B)  saving caused by changes in investment. 
C)  the equilibrium level of national income caused by changes in autonomous expenditure. 
D)  the rate of interest caused by increased demand for credit. 
E)  employment induced by changes in equilibrium income.

Question 20

Consider the simplest macro model with a constant price level and demand -determined output. In such a model, an upward shift of the saving function causes equilibrium national income to

Accepted Answer

A)  fall because the AE function shifts downward simultaneously. 
B)  rise because the AE function shifts upward simultaneously. 
C)  remain constant but consist of more consumption and less investment. 
D)  remain constant but consist of less consumption and more investment. 
E)  remain constant because it does not affect desired aggregate expenditure. 
A)  fall because the AE function shifts downward simultaneously. 
B)  rise because the AE function shifts upward simultaneously. 
C)  remain constant but consist of more consumption and less investment. 
D)  remain constant but consist of less consumption and more investment. 
E)  remain constant because it does not affect desired aggregate expenditure.

Exam 21: The Simplest Short-Run Macro Model

Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then

When desired consumption exceeds disposable income, desired saving is ; when desired consumption is less than the disposable income, desired saving is .

Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant. 1. Y = C + I 2. C = 100 + 0.6Y 3. I = 200 TABLE 21-6 -Refer to Table 21-6. The simple multiplier in this economy is

Undesired or unplanned inventory accumulation is likely to occur when

Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is

In a simple model of the economy with demand-determined output, the equilibrium level of national income is at an income

FIGURE 21-3 -Refer to Figure 21-3. Assuming AE0 is the prevailing aggregate expenditure function, the distance 0A is a measure of

Consider the simplest macro model in which aggregate output is demand -determined. If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion, the marginal propensity to spend must be

Consider a simple macro model with demand-determined output. In such a model, the smaller the marginal propensity to spend, the

FIGURE 21-3FIGURE 21-3 -Refer to Figure 21-3. Consider the simplest macro model with no government and no foreign trade, and the aggregate expenditure function AE = C + I. If there was zero autonomous expenditure and the marginal propensity to consume was equal to one, then the AE function would be

Consider a simple macro model with demand-determined output. In such a model, the larger the marginal propensity to spend, the

Consider the simplest macro model with a constant price level and demand -determined output. If desired aggregate expenditure is less than actual national income, then

The Smith familyʹs disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their

Consider the simplest macro model with a constant price level and demand -determined output. If national income is less than its equilibrium level, it is likely that firmsʹ inventories are , and so national income tends to .

Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The simple multiplier is equal to

Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = 2/3)Y, then the simple multiplier is

Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause In desired consumption and in desired investment.

FIGURE 21-3 -The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in

Consider the simplest macro model with a constant price level and demand -determined output. In such a model, an upward shift of the saving function causes equilibrium national income to

Economic Issues and Concepts

Economic Theories, Data, and Graphs

Demand, Supply, and Price

Elasticity

Price Controls and Market Efficiency

Consumer Behaviour

Producers in the Short Run

Producers in the Long Run

Competitive Markets

Monopoly, Cartels, and Price Discrimination

Imperfect Competition and Strategic Behaviour

Economic Efficiency and Public Policy

How Factor Markets Work

Labour Markets and Income Inequality

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

What Macroeconomics Is All About

The Measurement of National Income

Adding Government and Trade to the Simple Macro Model

Output and Prices in the Short Run

From the Short Run to the Long Run: the Adjustment of Factor Prices

Long-Run Economic Growth

Money and Banking

Money, Interest Rates, and Economic Activity

Monetary Policy in Canada

Inflation and Disinflation

Unemployment Fluctuations and the Nairu

Government Debt and Deficits

The Gains From International Trade

Trade Policy

Exchange Rates and the Balance of Payments

Filters