Question 1

The economy's real GDP level and aggregate expenditures level can be identified in the aggregate expenditures model by the:

Accepted Answer

A)  intersection of the aggregate demand curve and the aggregate supply curve. 
B)  sum of consumer expenditures, government purchases, and unplanned investments. 
C)  national income minus savings. 
D)  point where the aggregate expenditures line intersects the 45-degree line. 
A)  intersection of the aggregate demand curve and the aggregate supply curve. 
B)  sum of consumer expenditures, government purchases, and unplanned investments. 
C)  national income minus savings. 
D)  point where the aggregate expenditures line intersects the 45-degree line.

Question 2

When income is $200 billion, consumption spending is $175 billion. When income is $220 billion, consumption spending is $189 billion. What is the marginal propensity to save?

Accepted Answer

A)  2 
B)  .3 
C)  .7 
D)  1.4 
A)  2 
B)  .3 
C)  .7 
D)  1.4

Question 3

The classical view assumes that an increase in government purchases:

Accepted Answer

A)  causes the money supply to rise by the amount of the increase. 
B)  is necessary to solve a recession. 
C)  is offset by a decrease in private spending. 
D)  raises total spending in the economy by the amount of the change in government purchases. 
A)  causes the money supply to rise by the amount of the increase. 
B)  is necessary to solve a recession. 
C)  is offset by a decrease in private spending. 
D)  raises total spending in the economy by the amount of the change in government purchases.

Question 4

When the aggregate expenditures model shows an equilibrium below the natural rate of output, the country's economy:

Accepted Answer

A)  is experiencing inflation. 
B)  has an unemployment problem. 
C)  has had an increase in savings. 
D)  has some positive unplanned inventory investment. 
A)  is experiencing inflation. 
B)  has an unemployment problem. 
C)  has had an increase in savings. 
D)  has some positive unplanned inventory investment.

Question 5

How does the broken window fallacy illustrate the crowding out phenomenon that is associated with fiscal policy?

Accepted Answer

The fallacy of the broken window was des

Question 6

Why do classical economists believe that expansionary fiscal policy has little impact?

Accepted Answer

A)  Time lags offset the impact of the policy. 
B)  Crowding out offsets the impact of the policy. 
C)  Fiscal policy has a multiplied impact. 
D)  Budget deficits are needed to stimulate the economy. 
A)  Time lags offset the impact of the policy. 
B)  Crowding out offsets the impact of the policy. 
C)  Fiscal policy has a multiplied impact. 
D)  Budget deficits are needed to stimulate the economy.

Question 7

Macroland has real a GDP of $650 billion, and its full-employment real GDP is $800 billion. The MPC is .75. Macroland's government decides to use a fiscal policy of changing taxes to try to reach full employment. Use the aggregate expenditures model to explain how much Macroland should change taxes and how that amount is determined.

Accepted Answer

Macroland needs to raise its real GDP le

Question 8

If the MPS = .2, what is the full potential expenditure multiplier?

Accepted Answer

A)  .8 
B)  8 
C)  1 
D)  5 
A)  .8 
B)  8 
C)  1 
D)  5

Question 9

What is the difference between aggregate demand (AD) and aggregate expenditures (AE)?

Accepted Answer

A)  AD estimates the price levels that would exist at different spending levels, and AE estimates the production that would exist at different price levels. 
B)  AD estimates the production that would exist at different spending levels, and AE estimates the price levels that would exist at different spending levels. 
C)  AD estimates spending at different average price levels, and AE estimates spending at different income or real GDP levels. 
D)  AD estimates spending at different income or GDP levels, and AE estimates spending at different average price levels. 
A)  AD estimates the price levels that would exist at different spending levels, and AE estimates the production that would exist at different price levels. 
B)  AD estimates the production that would exist at different spending levels, and AE estimates the price levels that would exist at different spending levels. 
C)  AD estimates spending at different average price levels, and AE estimates spending at different income or real GDP levels. 
D)  AD estimates spending at different income or GDP levels, and AE estimates spending at different average price levels.

Question 10

In the aggregate expenditures model, which of the following would cause the aggregate expenditures curve to increase?

Accepted Answer

A)  Disposable income decreases. 
B)  Interest rates decrease. 
C)  Net exports decrease. 
D)  Government purchases decrease. 
A)  Disposable income decreases. 
B)  Interest rates decrease. 
C)  Net exports decrease. 
D)  Government purchases decrease.

Question 11

If the consumption function is C = 25 + (.80 × disposable income), what is the marginal propensity to consume?

Accepted Answer

A)  .80 
B)  .20 
C)  .25 
D)  It is impossible to tell without knowing either the level of consumption or the level of disposable income. 
A)  .80 
B)  .20 
C)  .25 
D)  It is impossible to tell without knowing either the level of consumption or the level of disposable income.

Question 12

Keynes's theory is consistent with the idea of an economy that is producing _____ its production possibilities frontier.

Accepted Answer

A)  on 
B)  inside 
C)  outside 
D)  to the right of 
A)  on 
B)  inside 
C)  outside 
D)  to the right of

Question 13

In the aggregate expenditures model, a change in autonomous spending has _____ impact on output and income in the economy.

Accepted Answer

A)  no 
B)  an equal-sized and direct 
C)  a multiplied 
D)  an equal-sized and opposite 
A)  no 
B)  an equal-sized and direct 
C)  a multiplied 
D)  an equal-sized and opposite

Question 14

An important point in understanding the aggregate expenditures model is that real GDP:

Accepted Answer

A)  equals consumer expenditures. 
B)  consists of consumer expenditures plus savings plus jobs plus government spending. 
C)  can be negative during recessions. 
D)  equals total income in the economy. 
A)  equals consumer expenditures. 
B)  consists of consumer expenditures plus savings plus jobs plus government spending. 
C)  can be negative during recessions. 
D)  equals total income in the economy.

Question 15

The classical view is consistent with the idea of an economy that produces _____ its production possibilities frontier.

Accepted Answer

A)  on 
B)  inside 
C)  outside 
D)  to the right of 
A)  on 
B)  inside 
C)  outside 
D)  to the right of

Question 16

Changes in _____ do NOT cause the aggregate expenditures curve to shift.

Accepted Answer

A)  planned investment 
B)  expectations 
C)  government spending 
D)  national income 
A)  planned investment 
B)  expectations 
C)  government spending 
D)  national income

Question 17

The MPC = .8. Taxes are reduced by $5 million. What is the maximum potential impact on GDP after the full multiplier effect?

Accepted Answer

A)  It decreases by $20 million. 
B)  It decreases by $25 million. 
C)  It increases by $20 million. 
D)  It increases by $25 million. 
A)  It decreases by $20 million. 
B)  It decreases by $25 million. 
C)  It increases by $20 million. 
D)  It increases by $25 million.

Question 18

If the MPC = .6, what is the full potential expenditure multiplier?

Accepted Answer

A)  .4 
B)  2.5 
C)  6 
D)  4 
A)  .4 
B)  2.5 
C)  6 
D)  4

Question 19

If a recession is unexpected, business inventories typically will:

Accepted Answer

A)  keep rising. 
B)  keep falling. 
C)  fall and then rise. 
D)  rise and then fall. 
A)  keep rising. 
B)  keep falling. 
C)  fall and then rise. 
D)  rise and then fall.

Question 20

The multiplier that should be applied to a change in taxes is:

Accepted Answer

A)  -(1/(1 - MP
C)  - 1). 
B)  1/(1 - MP
C) . 
C)  -1/MPC. 
D)  -1(MPC - 1). 
A)  -(1/(1 - MP
C)  - 1). 
B)  1/(1 - MP
C) . 
C)  -1/MPC. 
D)  -1(MPC - 1).

Exam 29: The Aggregate Expenditure Model

The economy's real GDP level and aggregate expenditures level can be identified in the aggregate expenditures model by the:

When income is $200 billion, consumption spending is $175 billion. When income is $220 billion, consumption spending is $189 billion. What is the marginal propensity to save?

The classical view assumes that an increase in government purchases:

When the aggregate expenditures model shows an equilibrium below the natural rate of output, the country's economy:

How does the broken window fallacy illustrate the crowding out phenomenon that is associated with fiscal policy?

Why do classical economists believe that expansionary fiscal policy has little impact?

If the MPS = .2, what is the full potential expenditure multiplier?

What is the difference between aggregate demand (AD) and aggregate expenditures (AE)?

In the aggregate expenditures model, which of the following would cause the aggregate expenditures curve to increase?

If the consumption function is C = 25 + (.80 × disposable income), what is the marginal propensity to consume?

Keynes's theory is consistent with the idea of an economy that is producing _____ its production possibilities frontier.

In the aggregate expenditures model, a change in autonomous spending has _____ impact on output and income in the economy.

An important point in understanding the aggregate expenditures model is that real GDP:

The classical view is consistent with the idea of an economy that produces _____ its production possibilities frontier.

Changes in _____ do NOT cause the aggregate expenditures curve to shift.

The MPC = .8. Taxes are reduced by $5 million. What is the maximum potential impact on GDP after the full multiplier effect?

If the MPC = .6, what is the full potential expenditure multiplier?

If a recession is unexpected, business inventories typically will:

The multiplier that should be applied to a change in taxes is:

The Basics of Economics

Why We Trade

The Supply and Demand Model

Elasticity

Consumer Choice

The Economic Efficiency of Markets

Taxation: An Economic Analysis

Externalities, the Environment, and Public Goods

Organizing a Business

Stocks and Bonds

The Cost of Doing Business

Perfect Competition

Monopoly and Antitrust Laws

Monopolistic Competition and Price Discrimination

Oligopoly

Behavioral Economics and Strategy

Labor and Other Resources

The Distribution of Income

Information and Health Economics

GDP and the Price Level

Unemployment and the Business Cycle

Long Run Economic Growth

Saving, Investment, and the Federal Budget Deficit

The Monetary System

Money and the Price Level in the Long Run

Aggregate Supply and Aggregate Demand

Monetary Policy and Interest Rates

Fiscal Policy and the Business Cycle

Inflation Expectations and Stabilization Policies

International Trade

Foreign Exchange Markets

International Finance

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