Deck 25: Expenditure Multipliers: the Keynesian Model

Question 1

The sum of the components of aggregate expenditure that vary with real GDP is called

A)induced expenditures.
B)the MPC.
C)autonomous consumption.
D)autonomous expenditures.

Answer 1

A

Question 2

Which of the following shifts the aggregate expenditure curve AND shifts the aggregate demand curve?
I. A decrease in investment
II. A change in the price level
III. An increase in exports

A)I and II
B)I and III
C)II and III
D)III only

Answer 2

B

Question 3

The short- run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The long- run effect of the decrease in government expenditure changes real GDP by

A)an increase of $600.
B)nothing; that is, in the long run real GDP equals $8,000.
C)a decrease of $600.
D)a decrease of $200 because the long- run multiplier is 1.

Answer 3

B

Question 4

The multiplier effect on real GDP occurs because

A)of income taxes.
B)an autonomous change in expenditure causes an induced change in consumption expenditure.
C)changes in price levels affect our willingness to invest, consume, import and export.
D)of government stabilisation policies.

Question 5

Which of the following is NOT an autonomous expenditure in the aggregate expenditures model?

A)Government expenditures
B)Imports
C)Exports
D)Investment

Question 6

An increase in the size of the multiplier can be caused by

A)a decrease in induced expenditures.
B)an increase in the marginal propensity to import.
C)an increase in the MPS.
D)an increase in the MPC.

Question 7

According to Keynesian theory, the typical firm

A)lowers its prices when inventories are decreasing.
B)changes its prices frequently in response to fluctuations in aggregate demand.
C)does not change its prices immediately when aggregate demand fluctuates.
D)lowers its prices if sales exceed production.

Question 8

The relationship between net exports and GDP makes the slope of the aggregate expenditure curve

A)steeper at low levels of GDP and flatter at high levels of GDP.
B)flatter than it would be otherwise.
C)neither flatter nor steeper than it would be otherwise.
D)steeper than it would be otherwise.

Question 9

Suppose that last year the slope of the AE curve was 0.67 and this year the slope of the AE curve changes to 0.8. Which of the following BEST describes what happens to the multiplier?

A)It falls from 1.49 to 1.25.
B)It rises from 1.25 to 1.49.
C)It falls from 5 to 3.
D)It rises from 3 to 5.

Question 10

If real GDP is $13 billion and planned aggregate expenditure is $13.5 billion, inventories will be

A)above their target and real GDP will increase.
B)below their target and real GDP will decrease.
C)above their target and real GDP will decrease.
D)below their target and real GDP will increase.

Question 11

An increase in disposable income

A)results in a movement upward along the saving function.
B)results in a movement downward along the saving function.
C)shifts the saving function downward.
D)shifts the saving function upward.

Question 12

If the price level rises, the purchasing power of wealth

A)does not change.
B)decreases.
C)increases at first but in the long run decreases.
D)increases.

Question 13

consumption is consumption that will occur the level of GDP and disposable income.

A)Autonomous; independent of
B)Induced; independent of
C)Autonomous; depending on
D)None of the above answers is correct.

Question 14

Dissaving

A)is equal to the amount of saving when consumption is less than disposable income.
B)is equal to consumption expenditure when disposable income is greater than zero.
C)is equal to taxation when disposable income is zero.
D)occurs when consumption is greater than disposable income.

Question 15

If prices are fixed, an increase in aggregate expenditures results in an increase in equilibrium GDP that

A)has no necessary relationship to the size of the change in aggregate expenditure.
B)is equal to the change in aggregate expenditure.
C)is less than the change in aggregate expenditure.
D)is greater than the change in aggregate expenditure.

Question 16

Disposable income is

A)income minus taxes plus transfer payments.
B)income minus saving.
C)income plus transfer payments minus consumption expenditure.
D)total income divided by the price level.

Question 17

Consumption expenditures equal disposable income

A)at every point on the saving function.
B)at every point on the 45- degree line.
C)when saving equals disposable income.
D)at every point on the consumption function.

Question 18

Autonomous consumption

A)decreases with income.
B)is independent of income and must be equal to zero.
C)is independent of income.
D)increases with income.

Question 19

Which of the following concerning the marginal propensity to consume and the consumption function is true?
I. The larger the marginal propensity to consume, the greater the amount of autonomous consumption.
II. The larger the marginal propensity to consume, the steeper the consumption function.

A)I
B)II
C)Both I and II are true.
D)Neither I nor II is true.

Question 20

The aggregate expenditure curve shows

A)how planned aggregate expenditure and real GDP are related.
B)a negative relationship between the price level and real GDP.
C)how consumption changes in response to a change in disposable income.
D)Both answers B and C are correct.

Question 21

The schedule that lists aggregate planned expenditure generated at each level of real GDP is the

A)aggregate expenditure schedule.
B)consumption schedule.
C)aggregate demand schedule.
D)equilibrium GDP schedule.

Question 22

In the very short run, the components of aggregate planned expenditure that depend on the level of real GDP are

A)planned investment and planned exports.
B)planned consumption expenditure and planned imports.
C)planned government expenditure on goods and services and planned imports.
D)planned investment and planned imports.

Question 23

The equilibrium in the above figure is shown at point

A)a.
B)b.
C)c.
D)d.

Question 24

In the above figure, if real GDP is below $12 billion, inventories will be

A)below target levels, so firms decrease production.
B)below target levels, so firms increase production.
C)above target levels, so firms increase production.
D)above target levels, so firms decrease production.

Question 25

Aggregate expenditure equals

A)C + I + G.
B)C + I + G + M - X.
C)C + I + G + X - M.
D)C + I + G + X.

Question 26

The aggregate demand curve slopes downward because of

A)import and taxation effects.
B)the wealth and substitution effects.
C)the MPC.
D)the multiplier.

Question 27

Saving equals

A)consumption expenditure minus disposable income.
B)disposable income minus consumption expenditure.
C)disposable income plus consumption expenditure.
D)disposable income minus taxes.

Question 28

In the above figure, an increase in autonomous expenditure is depicted by the movement from point E to

A)point F.
B)point G.
C)point H.
D)point I.

Question 29

Business cycle turning points are

A)brought about by changes in autonomous expenditures that are then subject to the multiplier effect.
B)easy to predict.
C)unaffected by, and unrelated to, the multiplier.
D)None of the above answers is correct.

Question 30

In the above figure the economy is initially at point A on the aggregate expenditure curve AE₀. Suppose firms expect profits to increase and decide to increase investment. As a result

A)there is a movement along AE₁ to a point such as B.
B)the AE curve shifts upward to a curve such as AE₂.
C)there is a movement along AE₁ to a point such as C.
D)the AE curve shifts downward to a curve such as AE₁.

Question 31

The marginal propensity to consume refers to

A)the additional consumption expenditure that occurs out of an additional dollar of investment.
B)the additional saving that occurs out of an additional dollar of disposable income.
C)total consumption expenditure divided by total disposable income.
D)the additional consumption expenditure that occurs out of an additional dollar of disposable income.

Question 32

In an economy with no income taxes or imports, the multiplier equals

A)1/MPS.
B)1/(MPC + MPS).
C)1/MPC.
D)1/(1 - MPS).

Question 33

The slope of the aggregate expenditure curve increases when the marginal propensity to consume
Or the marginal propensity to import _.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 34

In the short run, a factor that leads to changes in Australian imports is

A)Australian exports.
B)Australian real GDP.
C)the level of income in foreign nations.
D)the real interest rate.

Question 35

The graph of the consumption function has consumption expenditure on the vertical axis and

A)disposable income on the horizontal axis.
B)the Consumer Price Index on the horizontal axis.
C)time on the horizontal axis.
D)the interest rate on the horizontal axis.

Question 36

Suppose the price level is fixed. If investment increases by $1 billion and the aggregate expenditure curve is shown in the figure above, in response equilibrium expenditure increases by .

A)$3 billion
B)$1 billion
C)less than $1 billion
D)None of the above answers is correct.

Question 37

Because of changes in the , the long- run effect of a $10 increase in investment on real GDP equals _ .

A)money wage rate and price level; $10
B)interest rate; zero
C)money wage rate and price level; zero
D)interest rate; $10

Question 38

Equilibrium expenditure occurs where the aggregate expenditure curve crosses the

A)45- degree line.
B)vertical axis.
C)horizontal axis.
D)consumption function.

Question 39

When autonomous expenditure changes, the horizontal distance by which the aggregate demand curve shifts

A)is determined by the inverse of the multiplier.
B)depends on the size of the wealth effect.
C)depends on the size of the multiplier.
D)is increased by the existence of automatic stabilisers.

Question 40

When the economy is at full employment and investment increases, in the long run the price level will and, if potential GDP does not change, in the long run real GDP will .

A)increase; not change
B)decrease; not change
C)increase; increase
D)decrease; decrease

Question 41

Disposable income is equal to

A)aggregate income minus taxes plus transfer payments.
B)aggregate income plus transfer payments.
C)aggregate income minus taxes plus government expenditures on goods and services.
D)consumption expenditure minus taxes plus transfer payments.

Question 42

The marginal propensity to import reflects the relationship between changes in imports and changes in

A)real GDP.
B)consumption expenditure.
C)investment spending.
D)exports.

Question 43

The slope of the AE curve is 0.9. Investment decreases by $100 million and the price level is constant. Real GDP

A)decreases by $10 million.
B)increases by $90 million.
C)increases by $1 billion.
D)decreases by $1 billion.

Question 44

An increase in shifts the AE curve and an increase in shifts the aggregate demand curve .

A)autonomous expenditure; upward; the price level; leftward
B)the price level; upward; autonomous expenditure; leftward
C)the price level; downward; autonomous expenditure; rightward
D)autonomous expenditure; upward; the price level; rightward

Question 45

Which of the following makes the multiplier larger?

A)An increase in the marginal propensity to import
B)An increase in the marginal propensity to consume
C)An increase in the marginal propensity to save
D)An increase in the tax rate

Question 46

In the above figure, if the marginal propensity to consume increases, the slope of the AE curve would

A)decrease.
B)increase.
C)stay the same but the AE curve would shift upwards.
D)stay the same but the AE curve would shift downwards.

Question 47

Australia's consumption function

A)has a positive slope.
B)has shifted upward over time.
C)has a slope of about 0.75.
D)All of the above answers are correct.

Question 48

The size of the multiplier

A)is unaffected by the amount of time that elapses.
B)is constant in the long run.
C)increases in the long run.
D)decreases in the long run.

Question 49

The figure shows Tropical Isle's aggregate planned expenditure curve. When aggregate planned expenditure is $2 billion, aggregate planned expenditure is _ than real GDP, firms' inventories , and firms _ their production.

A)less; increase; decrease
B)greater; decrease; increase
C)less; decrease; increase
D)greater; increase; decrease

Question 50

In the above figure, when disposable income is greater than $12 billion, then

A)the MPC is greater than 1.
B)the MPS is negative.
C)savings are positive.
D)savings are negative.

Question 51

In the above figure, a change in autonomous consumption to $4 billion with no change to the MPC
Would cause the consumption function to

A)shift downward.
B)shift upward.
C)become steeper.
D)become flatter.

Question 52

The positive slope of the consumption function indicates that

A)when prices fall consumers spend more.
B)the amount of household wealth is subject to change.
C)consumers increase their total consumption expenditure when disposable income increases.
D)consumers spend less out of each extra dollar of income.

Question 53

Aggregate planned expenditure

A)is always less than actual aggregate expenditure.
B)is always greater than actual aggregate expenditure.
C)always equals actual aggregate expenditure.
D)equals actual aggregate expenditure at the equilibrium level of real GDP.

Question 54

If consumption expenditures for a household increase from $1000 to $1800 when disposable income rises from $1000 to $2000, the marginal propensity to consume is

A)0.8.
B)0.3.
C)0.2.
D)0.18.

Question 55

Suppose the consumption function is given by the equation C = 100 + 0.8YD, where YD is disposable income. What is the marginal propensity to consume?

A)100
B)0.2
C)0.8
D)2.0

Question 56

If firms set prices and then keep them fixed for a period of time, their fixed prices imply that

A)the aggregate price level is fixed and that aggregate demand determines the quantity of goods and services sold.
B)prices are set by aggregate demand and supply.
C)the aggregate price level is fixed and that aggregate supply determines the quantity of goods and services sold.
D)the aggregate price level adjusts continuously.

Question 57

Planned saving equals

A)planned consumption expenditure plus disposable income.
B)planned consumption expenditure minus disposable income.
C)disposable income minus planned consumption expenditure.
D)zero when disposable income is less than planned consumption expenditure.

Question 58

When real GDP exceeds aggregate planned expenditure,

A)GDP will decrease.
B)the circular flow will increase.
C)actual inventories decrease below their target.
D)a higher level of equilibrium income will prevail.

Question 59

Which of the following is INCORRECT?

A)The multiplier dampens the increase in income that occurs during expansions and brings the economy to a new equilibrium GDP.
B)Firms experience unplanned decreases in inventories as expansions begin.
C)Firms increase production in response to unplanned decreases in inventories.
D)Expansions usually begin with an increase in autonomous spending.

Question 60

The part of aggregate planned expenditure that does not vary with real GDP .

A)equals zero
B)equals equilibrium expenditure
C)is autonomous expenditure
D)is induced expenditure

Question 61

The value of the marginal propensity to consume is

A)between 1 per cent and 10 per cent.
B)between 0 and 1.
C)between 1 and 10.
D)between - 1 and +1.

Question 62

The marginal propensity to save is

A)total saving divided by the change in disposable income.
B)the change in saving divided by the change in disposable income.
C)the change in saving divided by the change in consumption expenditure.
D)total saving divided by total disposable income.

Question 63

The larger the slope of the AE curve, the

A)more likely that the multiplier will be inconsequential.
B)larger the value of the multiplier.
C)smaller the value of the multiplier.
D)less likely that the multiplier will be affected.

Question 64

In the above figure, at the equilibrium, induced expenditure is

A)$8 billion.
B)$12 billion.
C)$4 billion.
D)some amount not given in the above answers.

Question 65

The marginal propensity to import is the that is spent on imports.

A)fraction of an increase in potential GDP
B)total amount of potential GDP
C)fraction of an increase in real GDP
D)total amount of real GDP

Question 66

The presence of income taxes and imports makes the slope of the aggregate expenditure curve

A)flatter than it would be without income taxes and imports.
B)steeper than it would be without income taxes and imports.
C)the same as it would be without income taxes and imports.
D)probably different to what it would be without income taxes and imports, but income taxes make it steeper while imports make it flatter.

Question 67

Which of the following shifts the aggregate demand curve rightward?

A)An increase in government expenditure
B)A decrease in investment
C)An increase in the price level
D)An increase in the income tax rate

Question 68

You are given the following information about the Australian economy: consumption function of C
= 15 + 0.7Y, investment equal to 8, government expenditure equal to 12, exports equal to 20, and an import function of M = 0.2Y. What is consumption expenditure in equilibrium in this economy?

A)35
B)62
C)92
D)77

Question 69

In the above figure, at point d firms would find themselves with inventories their target level and so would _ production.

A)increasing above; increase
B)decreasing below; increase
C)decreasing below; decrease
D)increasing above; decrease

Question 70

Because of the multiplier, a one- time change in expenditure will

A)have little secondary effect on real GDP.
B)decrease saving and investment activity and thereby decrease future real GDP.
C)expand real GDP by an infinite amount.
D)generate more additional real GDP than the initial change in expenditure.

Question 71

In an economy, the multiplier is 3. If government expenditure increases by $1 million, then in the short run, the price level and real GDP $3 million.

A)rises; increases by less than
B)rises; equals
C)rises; decreases by less than
D)falls; decreases by less than

Question 72

In general, an increase in autonomous expenditure that is NOT created by a change in the price level results in a

A)rightward shift of the AD curve.
B)movement downward along the AD curve.
C)movement upward along the AD curve.
D)leftward shift of the AD curve.

Question 73

A change in imports caused by rising Australian incomes is

A)a decrease in autonomous expenditure.
B)an increase in induced exports.
C)a change in induced expenditure.
D)an increase in autonomous expenditure.

Question 74

In the above table, C is consumption expenditure, I is investment, G is government expenditure, and X - M is net exports. All entries are in dollars. The equilibrium level of real GDP is

A)$2,500.
B)$2,300.
C)$2,200.
D)$2,400.

Question 75

The intertemporal substitution effect of a change in the price level results from a

A)change in the purchasing power of wealth.
B)change in the price of foreign goods relative to domestic goods.
C)change in the price of current goods relative to future goods.
D)Both answers B and C are correct.

Question 76

The slope of the aggregate expenditure curve equals the change in

A)autonomous expenditure divided by the change in real GDP.
B)real GDP divided by the change in planned expenditure.
C)planned expenditure divided by the change in real GDP.
D)government expenditure divided by the change in real GDP.

Question 77

An increase in the price level decreases planned expenditure because

A)current prices rise relative to future prices, increasing expenditure.
B)the real interest rate rises, increasing consumption expenditure.
C)domestic prices rise relative to foreign prices, increasing net exports.
D)real wealth decreases, thus decreasing expenditure.

Question 78

Induced expenditure includes .

A)induced consumption and government expenditure
B)induced consumption expenditure and exports
C)all autonomous expenditure
D)induced consumption expenditure and imports

Question 79

As a nation's GDP increases, that nation's

A)autonomous consumption decreases.
B)imports increase.
C)exports increase.
D)autonomous consumption increases.

Question 80

If the marginal propensity to import increases, then the

A)multiplier will increase in value.
B)multiplier will not change in value.
C)multiplier will decrease in value.
D)effect on the multiplier will depend on what happens to exports.