Exam 9: The Keynesian Model in Action

When there is a shift in autonomous expenditure, why is there a multiple expansion of income and real GDP? Trace the multiplier effect through the first four rounds when there is an increase in autonomous expenditure of $40 billion and the marginal propensity to consume is 0.75.

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Question 1

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There is a multiple expansion of income and real GDP because one person's spending becomes another person's income who, in turn, spends and creates more income. The initial increase in autonomous spending will create $40 billion in additional income. Resource owners will spend 75 percent (MPC = 0.75)of their gain in income or $30 billion. This creates $30 billion in income from which consumers will spend $22.5 billion. In turn, this $22.5 billion in new income creates $16.88 billion in new spending. In the next round $16.88 billion in new income will create $12.66 billion in new spending.

In the aggregate expenditures model, if aggregate expenditures (AE)equal $6 trillion and GDP equals $7 trillion, then:

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Question 2

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In the Keynesian model, equilibrium occurs when aggregate output equals aggregate expenditures.

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Question 3

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If the MPC equals 0.80 then:

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Question 4

In the aggregate expenditures model, if aggregate expenditures (AE)equals $7 trillion and GDP equals $8 trillion, then inventory accumulation equals $1 trillion.

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Question 5

Suppose business decision makers become more optimistic about the future and, as a result, increase their investment spending by $20 billion. If the economy's marginal propensity to consume is 0.75, the equilibrium level of aggregate real GDP will increase by:

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Question 6

Which of the following correctly describes the mechanics of the spending multiplier?

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Question 7

At the equilibrium level of real GDP, total production equals total:

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Question 8

If the marginal propensity to consume (MPC)is 0.90, the value of the spending multiplier is 90.

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Question 9

Which of the following explains why a $100 billion reduction in consumption spending might decrease equilibrium real GDP by more than $100 billion?

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Question 10

The four components of the aggregate expenditures model are:

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Question 11

Answer the following questions: a. If aggregate expenditures falls by $5 million, and the MPC is 0.80, explain the process that will drive the economy to a new equilibrium level. b. What will be the final result of this initial change?

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Question 12

The spending multiplier does not apply to investment spending by businesses.

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Question 13

Suppose real GDP is $800 billion when the MPC is 0.80, and people decide to increase their saving by $30 billion. Before this change, the economy was in equilibrium with people intending to save $100 billion and producers intending to invest $100 billion. The new equilibrium level of real GDP is:

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Question 14

A $1 million increase in investment spending will raise equilibrium output (real GDP)by:

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Question 15

Using the aggregate expenditure-output model, assume the aggregate expenditures (AE)line is above the 45-degree line at full-employment GDP. This vertical distance is called a(n):

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Question 16

If the economy experiences a recessionary gap then:

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Question 17

Exhibit 9-2 Keynesian aggregate-expenditures model As shown in Exhibit 9-2, equilibrium GDP is:

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Question 18

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

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Question 19

Exhibit 9-5 Keynesian aggregate-expenditures model where the MPC is 0.75 The economy shown in Exhibit 9-5 is:

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Question 20

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Exam 9: The Keynesian Model in Action

When there is a shift in autonomous expenditure, why is there a multiple expansion of income and real GDP? Trace the multiplier effect through the first four rounds when there is an increase in autonomous expenditure of $40 billion and the marginal propensity to consume is 0.75.

In the aggregate expenditures model, if aggregate expenditures (AE)equal $6 trillion and GDP equals $7 trillion, then:

In the Keynesian model, equilibrium occurs when aggregate output equals aggregate expenditures.

If the MPC equals 0.80 then:

In the aggregate expenditures model, if aggregate expenditures (AE)equals $7 trillion and GDP equals $8 trillion, then inventory accumulation equals $1 trillion.

Suppose business decision makers become more optimistic about the future and, as a result, increase their investment spending by $20 billion. If the economy's marginal propensity to consume is 0.75, the equilibrium level of aggregate real GDP will increase by:

Which of the following correctly describes the mechanics of the spending multiplier?

At the equilibrium level of real GDP, total production equals total:

If the marginal propensity to consume (MPC)is 0.90, the value of the spending multiplier is 90.

Which of the following explains why a $100 billion reduction in consumption spending might decrease equilibrium real GDP by more than $100 billion?

The four components of the aggregate expenditures model are:

Answer the following questions: a. If aggregate expenditures falls by $5 million, and the MPC is 0.80, explain the process that will drive the economy to a new equilibrium level. b. What will be the final result of this initial change?

The spending multiplier does not apply to investment spending by businesses.

Suppose real GDP is $800 billion when the MPC is 0.80, and people decide to increase their saving by $30 billion. Before this change, the economy was in equilibrium with people intending to save $100 billion and producers intending to invest $100 billion. The new equilibrium level of real GDP is:

A $1 million increase in investment spending will raise equilibrium output (real GDP)by:

Using the aggregate expenditure-output model, assume the aggregate expenditures (AE)line is above the 45-degree line at full-employment GDP. This vertical distance is called a(n):

If the economy experiences a recessionary gap then:

Exhibit 9-2 Keynesian aggregate-expenditures model As shown in Exhibit 9-2, equilibrium GDP is:

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

Exhibit 9-5 Keynesian aggregate-expenditures model where the MPC is 0.75 The economy shown in Exhibit 9-5 is:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

Monetary Policy

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

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