Question 1

In the aggregate expenditures model, a tax increase causes a(n):

Accepted Answer

A) upward shift in the aggregate expenditures curve. 
B) downward shift in the aggregate expenditures curve. 
C) shift in the 45-degree line. 
D) rightward movement along the aggregate expenditures curve. 
E) leftward movement along the aggregate expenditures curve. 
A) upward shift in the aggregate expenditures curve. 
B) downward shift in the aggregate expenditures curve. 
C) shift in the 45-degree line. 
D) rightward movement along the aggregate expenditures curve. 
E) leftward movement along the aggregate expenditures curve.

Question 2

Which of the following options could be used to eliminate a recessionary gap?

Accepted Answer

A) Increase government spending. 
B) Decrease government spending. 
C) Decrease investment. 
D) Increase taxes. 
A) Increase government spending. 
B) Decrease government spending. 
C) Decrease investment. 
D) Increase taxes.

Question 3

Suppose consumers and business decision makers become more optimistic about the future, and aggregate expenditures increase. The most likely result is that:

Accepted Answer

A) real GDP and employment and income to decline. 
B) real GDP and employment rise. 
C) real GDP rises and employment falls. 
D) real GDP falls and employment rises. 
A) real GDP and employment and income to decline. 
B) real GDP and employment rise. 
C) real GDP rises and employment falls. 
D) real GDP falls and employment rises.

Question 4

A recessionary gap can be defined as:

Accepted Answer

A) an economy that is operating above its full-employment capacity. 
B) an economy that is operating at full-employment capacity. 
C) the amount by which aggregate expenditures exceeds the aggregate expenditures level needed to generate equilibrium real GDP at full employment without inflation 
D) the amount by which aggregate expenditures falls short of the level needed to generate equilibrium real GDP at full employment without inflation. 
E) the easiest way out of a depression. 
A) an economy that is operating above its full-employment capacity. 
B) an economy that is operating at full-employment capacity. 
C) the amount by which aggregate expenditures exceeds the aggregate expenditures level needed to generate equilibrium real GDP at full employment without inflation 
D) the amount by which aggregate expenditures falls short of the level needed to generate equilibrium real GDP at full employment without inflation. 
E) the easiest way out of a depression.

Question 5

When the spending of consumers, businesses, government, and foreigners (net exports)is less than the aggregate output level of the economy, the Keynesian model result is that:

Accepted Answer

A) output will rise. 
B) output will fall. 
C) prices will rise. 
D) inventories will tend to decline. 
A) output will rise. 
B) output will fall. 
C) prices will rise. 
D) inventories will tend to decline.

Question 6

In the aggregate expenditures model, if an economy operates below equilibrium GDP, there will be unplanned inventory accumulation.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following most completely describes the workings of the aggregate expenditures model?

Accepted Answer

A) If aggregate expenditures are less than aggregate output, then there is unplanned inventory accumulation, and real GDP will decrease. 
B) If aggregate expenditures are greater than aggregate output, then there is unplanned inventory depletion, and real GDP will increase. 
C) Aggregate output generates an equal amount of aggregate spending. 
D) Both a. and b. above are correct. 
A) If aggregate expenditures are less than aggregate output, then there is unplanned inventory accumulation, and real GDP will decrease. 
B) If aggregate expenditures are greater than aggregate output, then there is unplanned inventory depletion, and real GDP will increase. 
C) Aggregate output generates an equal amount of aggregate spending. 
D) Both a. and b. above are correct.

Question 8

If the marginal propensity to consume (MPC)is 0.50, the value of the spending multiplier is:

Accepted Answer

A) 5 
B) 1 
C) 2 
A) 5 
B) 1 
C) 2

Question 9

If the MPC is 0.70, then the spending multiplier is equal to:

Accepted Answer

A) 0.70. 
B) 0.30. 
C) 0.14. 
D) 3.33. 
E) 5. 
A) 0.70. 
B) 0.30. 
C) 0.14. 
D) 3.33. 
E) 5.

Question 10

In the aggregate expenditures model, an increase in government spending causes a(n):

Accepted Answer

A) upward shift in the aggregate expenditures curve. 
B) downward shift in the aggregate expenditures curve. 
C) shift in the 45-degree line. 
D) rightward movement along the aggregate expenditures curve. 
E) leftward movement along the aggregate expenditures curve. 
A) upward shift in the aggregate expenditures curve. 
B) downward shift in the aggregate expenditures curve. 
C) shift in the 45-degree line. 
D) rightward movement along the aggregate expenditures curve. 
E) leftward movement along the aggregate expenditures curve.

Question 11

Exhibit 9-4 Keynesian aggregate expenditures model   At a real GDP of $500 billion in Exhibit 9-4, the economy experiences inventory:

Accepted Answer

A) depletion of $100 billion. 
B) depletion of $250 billion. 
C) accumulation of $100 billion. 
D) accumulation of $250 billion. 
A) depletion of $100 billion. 
B) depletion of $250 billion. 
C) accumulation of $100 billion. 
D) accumulation of $250 billion.

Question 12

Exhibit 9-2 Keynesian aggregate-expenditures model   As shown in Exhibit 9-2, if GDP is $7 trillion, the economy experiences unplanned inventory:

Accepted Answer

A) depletion of $1 trillion. 
B) depletion of $2 trillion. 
C) accumulation of $1 trillion. 
D) accumulation of $2 trillion. 
A) depletion of $1 trillion. 
B) depletion of $2 trillion. 
C) accumulation of $1 trillion. 
D) accumulation of $2 trillion.

Question 13

An inflationary gap occurs when aggregate expenditures are too high to achieve full employment.

Accepted Answer

A) True 
 B)False

Question 14

In the aggregate expenditures model, if aggregate expenditures (AE)are greater than GDP, then:

Accepted Answer

A) inventory is unchanged. 
B) inventory is accumulated. 
C) employment decreases. 
D) GDP increases. 
A) inventory is unchanged. 
B) inventory is accumulated. 
C) employment decreases. 
D) GDP increases.

Question 15

The spending multiplier also applies to investment spending by businesses.

Accepted Answer

A) True 
 B)False

Question 16

If the marginal propensity to consume (MPC)is 0.80, the value of the spending multiplier is 2.

Accepted Answer

A) True 
 B)False

Question 17

A new major league baseball expansion team is moving to your town. It will inject consumer spending worth $40 million into your local economy initially. The Chamber of Commerce predicts that this will generate a total of $500 million in additional spending for your town. The team owners think that this is an underestimate. What do you need to know to figure out who is right? Explain.

Accepted Answer

You need to know the size of t

Question 18

As the marginal propensity to consume (MPC)decreases, the spending multiplier:

Accepted Answer

A) increases. 
B) decreases. 
C) remains constant. 
D) becomes indefinable. 
A) increases. 
B) decreases. 
C) remains constant. 
D) becomes indefinable.

Question 19

The equation for the spending multiplier is:

Accepted Answer

A) 1 \ (1 - MP
C) . 
B) 1 - MPC. 
C) 1 - (MPC - MPS). 
D) MPC\MPS. 
E) none of these. 
A) 1 \ (1 - MP
C) . 
B) 1 - MPC. 
C) 1 - (MPC - MPS). 
D) MPC\MPS. 
E) none of these.

Question 20

If the marginal propensity to consume (MPC)is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:

Accepted Answer

A) increase by $50. 
B) decrease by $50. 
C) increase by $200. 
D) decrease by $200. 
A) increase by $50. 
B) decrease by $50. 
C) increase by $200. 
D) decrease by $200.

Exam 9: The Keynesian Model in Action

In the aggregate expenditures model, a tax increase causes a(n):

Which of the following options could be used to eliminate a recessionary gap?

Suppose consumers and business decision makers become more optimistic about the future, and aggregate expenditures increase. The most likely result is that:

A recessionary gap can be defined as:

When the spending of consumers, businesses, government, and foreigners (net exports)is less than the aggregate output level of the economy, the Keynesian model result is that:

In the aggregate expenditures model, if an economy operates below equilibrium GDP, there will be unplanned inventory accumulation.

Which of the following most completely describes the workings of the aggregate expenditures model?

If the marginal propensity to consume (MPC)is 0.50, the value of the spending multiplier is:

If the MPC is 0.70, then the spending multiplier is equal to:

In the aggregate expenditures model, an increase in government spending causes a(n):

Exhibit 9-4 Keynesian aggregate expenditures model At a real GDP of $500 billion in Exhibit 9-4, the economy experiences inventory:

Exhibit 9-2 Keynesian aggregate-expenditures model As shown in Exhibit 9-2, if GDP is $7 trillion, the economy experiences unplanned inventory:

An inflationary gap occurs when aggregate expenditures are too high to achieve full employment.

In the aggregate expenditures model, if aggregate expenditures (AE)are greater than GDP, then:

The spending multiplier also applies to investment spending by businesses.

If the marginal propensity to consume (MPC)is 0.80, the value of the spending multiplier is 2.

As the marginal propensity to consume (MPC)decreases, the spending multiplier:

The equation for the spending multiplier is:

If the marginal propensity to consume (MPC)is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:

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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