Question 1

If the marginal propensity to consume (MPC)is 0.75, the value of the spending multiplier is:

Accepted Answer

A) 0. 
B) 1. 
C) 4. 
D) 5. 
A) 0. 
B) 1. 
C) 4. 
D) 5.

Question 2

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

Accepted Answer

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

Question 3

Suppose equilibrium real GDP is currently at $800 billion and investment is $100 billion. If an increase in the interest rate reduces investment from $100 billion to $75 billion, and the MPC is 0.8, the new level of equilibrium real GDP will be:

Accepted Answer

A) $500 billion. 
B) $600 billion. 
C) $675 billion. 
D) $775 billion. 
E) $800 billion. 
A) $500 billion. 
B) $600 billion. 
C) $675 billion. 
D) $775 billion. 
E) $800 billion.

Question 4

When an economy is operating well below its full-employment capacity and the marginal propensity to consume is 0.75, a $10 billion increase in investment spending will cause the equilibrium output to rise by:

Accepted Answer

A) $5 billion. 
B) $10 billion. 
C) $20 billion. 
D) $40 billion. 
A) $5 billion. 
B) $10 billion. 
C) $20 billion. 
D) $40 billion.

Question 5

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

Accepted Answer

A) Decrease consumption. 
B) Increase investment. 
C) Decrease investment. 
D) Increase taxes. 
A) Decrease consumption. 
B) Increase investment. 
C) Decrease investment. 
D) Increase taxes.

Question 6

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

Accepted Answer

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

Question 7

Within the framework of the Keynesian Cross model, if an economy is operating at a real GDP less than full-employment real GDP:

Accepted Answer

A) a recessionary gap exists 
B) an inflationary gap exists 
C) aggregate expenditures will rise 
D) the general level of prices will rise 
A) a recessionary gap exists 
B) an inflationary gap exists 
C) aggregate expenditures will rise 
D) the general level of prices will rise

Question 8

Use the aggregate expenditures model and assume the marginal propensity to consume (MPC)is 0.80. A decrease in government spending of $1 billion would result in a decrease in GDP of:

Accepted Answer

A) $0. 
B) $0.8 billion. 
C) $1.0 billion. 
D) $5.0 billion. 
E) $8.0 billion. 
A) $0. 
B) $0.8 billion. 
C) $1.0 billion. 
D) $5.0 billion. 
E) $8.0 billion.

Question 9

In the Keynesian model, the larger the marginal propensity to consume, the:

Accepted Answer

A) larger the multiplier. 
B) larger the marginal propensity to save. 
C) higher the income level of the economy. 
D) smaller the change in income derived from a given change in government spending. 
A) larger the multiplier. 
B) larger the marginal propensity to save. 
C) higher the income level of the economy. 
D) smaller the change in income derived from a given change in government spending.

Question 10

Within the Keynesian aggregate expenditures model, which of the following autonomous changes would decrease the equilibrium output?

Accepted Answer

A) A decrease in investment spending. 
B) An increase in net exports. 
C) An increase in government spending. 
D) An increase in consumption expenditures 
A) A decrease in investment spending. 
B) An increase in net exports. 
C) An increase in government spending. 
D) An increase in consumption expenditures

Question 11

An increase in government expenditures by $100 (unmatched by an increase in taxes)would, if the MPC = 0.90, result in an increase in real GDP by:

Accepted Answer

A) $1,000. 
B) $9,000. 
C) $900. 
D) $190. 
E) inadequate information is given. 
A) $1,000. 
B) $9,000. 
C) $900. 
D) $190. 
E) inadequate information is given.

Question 12

Use the aggregate expenditures model and assume an economy is in equilibrium at $5 trillion which is $250 billion below full-employment GDP. If the marginal propensity to consume (MPC)is 0.60, full-employment GDP can be reached if government spending:

Accepted Answer

A) decreases by $60 billion. 
B) decreases by $100 billion. 
C) decreases by $250 billion. 
D) is held constant. 
A) decreases by $60 billion. 
B) decreases by $100 billion. 
C) decreases by $250 billion. 
D) is held constant.

Question 13

An inflationary gap is the amount by which aggregate expenditures ____ the amount required to achieve full-employment equilibrium GDP.

Accepted Answer

A) exceed 
B) equal 
C) fall short of 
D) are greater than 
A) exceed 
B) equal 
C) fall short of 
D) are greater than

Question 14

Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y = $800 billion, and the MPC is 0.50. What level of aggregate expenditures will close the recessionary gap?

Accepted Answer

A) $50 billion. 
B) $80 billion. 
C) $140 billion. 
D) $200 billion. 
E) $400 billion. 
A) $50 billion. 
B) $80 billion. 
C) $140 billion. 
D) $200 billion. 
E) $400 billion.

Question 15

Assume General Motors has decided to build an assembly plant in St. Louis. The plant will employ 1,000 full-time workers at an annual wage of $40,000 each. If the marginal propensity to consume in St. Louis is 2\3, what change in income will result from operation of the plant for one year?

Accepted Answer

A) $26.7 million. 
B) $40 million. 
C) $80 million. 
D) $120 million. 
A) $26.7 million. 
B) $40 million. 
C) $80 million. 
D) $120 million.

Question 16

When households' marginal propensity to consume (MPC)increases, the size of the spending multiplier:

Accepted Answer

A) also increases. 
B) decreases. 
C) remains unchanged. 
D) reacts unpredictably. 
A) also increases. 
B) decreases. 
C) remains unchanged. 
D) reacts unpredictably.

Question 17

The size of the spending multiplier depends on the marginal propensity to consume (MPC).

Accepted Answer

A) True 
 B)False

Question 18

The equilibrium level of real GDP is $1,000, the target full-employment level of real GDP is $1,500, and the marginal propensity to consume is 0.75. The target can be reached if government spending is:

Accepted Answer

A) increased by $100 billion. 
B) increased by $125 billion. 
C) increased by $500 billion. 
D) held constant. 
A) increased by $100 billion. 
B) increased by $125 billion. 
C) increased by $500 billion. 
D) held constant.

Question 19

According to the Keynesian model, the government can increase spending or cut taxes to close a recessionary gap.

Accepted Answer

A) True 
 B)False

Question 20

Given full-employment output = $2,800, equilibrium output = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of national output?

Accepted Answer

A) $300 decrease in taxes. 
B) $75 increase in government spending. 
C) $75 decrease in taxes. 
D) $300 increase in government spending. 
E) $75 decrease in government spending. 
A) $300 decrease in taxes. 
B) $75 increase in government spending. 
C) $75 decrease in taxes. 
D) $300 increase in government spending. 
E) $75 decrease in government spending.

Exam 9: The Keynesian Model in Action

If the marginal propensity to consume (MPC)is 0.75, the value of the spending multiplier is:

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

Suppose equilibrium real GDP is currently at $800 billion and investment is $100 billion. If an increase in the interest rate reduces investment from $100 billion to $75 billion, and the MPC is 0.8, the new level of equilibrium real GDP will be:

When an economy is operating well below its full-employment capacity and the marginal propensity to consume is 0.75, a $10 billion increase in investment spending will cause the equilibrium output to rise by:

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

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

Within the framework of the Keynesian Cross model, if an economy is operating at a real GDP less than full-employment real GDP:

Use the aggregate expenditures model and assume the marginal propensity to consume (MPC)is 0.80. A decrease in government spending of $1 billion would result in a decrease in GDP of:

In the Keynesian model, the larger the marginal propensity to consume, the:

Within the Keynesian aggregate expenditures model, which of the following autonomous changes would decrease the equilibrium output?

An increase in government expenditures by $100 (unmatched by an increase in taxes)would, if the MPC = 0.90, result in an increase in real GDP by:

Use the aggregate expenditures model and assume an economy is in equilibrium at $5 trillion which is $250 billion below full-employment GDP. If the marginal propensity to consume (MPC)is 0.60, full-employment GDP can be reached if government spending:

An inflationary gap is the amount by which aggregate expenditures ____ the amount required to achieve full-employment equilibrium GDP.

Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y = $800 billion, and the MPC is 0.50. What level of aggregate expenditures will close the recessionary gap?

Assume General Motors has decided to build an assembly plant in St. Louis. The plant will employ 1,000 full-time workers at an annual wage of $40,000 each. If the marginal propensity to consume in St. Louis is 2\3, what change in income will result from operation of the plant for one year?

When households' marginal propensity to consume (MPC)increases, the size of the spending multiplier:

The size of the spending multiplier depends on the marginal propensity to consume (MPC).

The equilibrium level of real GDP is $1,000, the target full-employment level of real GDP is $1,500, and the marginal propensity to consume is 0.75. The target can be reached if government spending is:

According to the Keynesian model, the government can increase spending or cut taxes to close a recessionary gap.

Given full-employment output = $2,800, equilibrium output = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of national output?

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

Filters