Deck 8: Aggregate Expenditures

Question 1

One reason so many people focus on the trade deficit is that if a county imports more goods and services, equilibrium income will rise, ceteris paribus.

Answer 1

False

Question 2

Which expenditure component decreased the most between 1929 and 1933?

A) consumption
B) government spending
C) investment
D) net exports

Answer 2

investment

Question 3

Which statement is correct?

A) Keynesian economics is unrelated to the events of the Great Depression.
B) Classical economics approaches the economy as three separate but interrelated sectors, while Keynesian economics looks at the economy as a whole.
C) Keynesian economics was developed by the Scholastic School at Salamanca in the late medieval period.
D) The classical school of economics was developed during the classical age of Greece.

Answer 3

Classical economics approaches the economy as three separate but interrelated sectors, while Keynesian economics looks at the economy as a whole.

Question 4

The balanced budget multiplier does not depend on the marginal propensity to consume.

Question 5

At equilibrium, when a tax is put in place, income falls more than the tax multiplied by the multiplier since consumers pay for the tax in part by reducing their savings.

Question 6

If John's Clean Clones builds a factory that costs $1 billion, and the marginal propensity to consume is 0.75, how much does the macroeconomic equilibrium increase by?

A) $0
B) $1 billion
C) $4 billion
D) $10 billion

Question 7

If the marginal propensity to consume is 0.85, the value of the spending multiplier will be

A) 0.15.
B) 1.17.
C) 5.1.
D) 6.67.

Question 8

The expenditures approach to calculating GDP includes measures of consumer spending, business investment spending, government spending, and net foreign spending.

Question 9

In the Keynesian framework, increments of spending, including investments, government spending, and exports, are known as

A) withdrawals.
B) injections.
C) leakages
D) infusions.

Question 10

In Keynesian macroeconomic equilibrium, there are pressures on the economy to move to a different income level.

Question 11

Negative saving, by definition, is impossible.

Question 12

Assume that the MPC is 0.75, full employment is considered to be at a GDP level of $500 billion, and the GDP is $600 billion. What should the government do to achieve full employment?

A) reduce spending by $25 billion
B) reduce spending by $100 billion
C) increase spending by $25 billion
D) increase spending by $10 billion

Question 13

Tax changes generally have less of an impact on equilibrium income than do changes in government spending.

Question 14

If the marginal propensity to consume increases, the spending multiplier _____ and the balanced budget multiplier _____.

A) increases; increases
B) decreases; decreases
C) increases; remains the same
D) decreases; remains the same

Question 15

The average propensity to consume is

A) always stable.
B) equal to consumption divided by income.
C) equal to income divided by consumption.
D) the increase in consumption derived from an increase in income.

Question 16

In the nation of Economia, the economy is overheating and there is danger of inflation. The chief economist estimates that current income is $50 billion, the optimal level is $40 billion, and the multiplier is 4. If government wants to close the inflationary gap, it should reduce government spending by

A) $2.5 billion.
B) $7.5 billion.
C) $10 billion.
D) $40 billion.

Question 17

Aggregate expenditures are equal to consumption plus business investment in the simple private sector model.

Question 18

If aggregate expenditures equal $6,200 and aggregate income equals $5,800, businesses will produce

A) more, raising both employment and income.
B) less, lowering both employment and income.
C) more, raising employment and lowering income.
D) less, lowering employment and raising income.

Question 19

The spending reduction necessary to bring an overheated economy back to full employment is called the

A) recessionary gap.
B) GDP gap.
C) inflationary gap.
D) gap analysis.

Question 20

In an economy with three sectors (household, business, and government), government spending is $5 billion, taxes are $4 billion, and investment is $4 billion. If the economy is in equilibrium, then saving is

A) $1 billion.
B) $4 billion.
C) $5 billion.
D) $9 billion.

Question 21

Spending by the government (federal, state, and local) is more than 60% of GDP today.

Question 22

Keynes emphasized income as the main determinant of consumption and savings.

Question 23

A tax increase has a smaller impact on the economy than does a decrease in government spending of the same magnitude because

A) Congress is slow in passing tax increases.
B) consumers pay for part of the tax increase by reducing their savings.
C) tax changes have more of a direct impact on income than does an equivalent change in government spending.
D) fiscal policy is weaker than monetary policy.

Question 24

From 2008 to 2009, the falling stock market reduced the wealth of U.S. households, causing the United States to

A) move down along its consumption schedule.
B) shift its consumption schedule downward.
C) move up along its consumption schedule.
D) shift its consumption schedule upward.

Question 25

If income is $5,000 per month and consumption spending is $4,500 per month, what is the average propensity to consume?

A) -500
B) 0.9
C) 1.11
D) 500

Question 26

If Justin spends $35,000 when his income is $60,000, what is his average propensity to save?

A) 0.3
B) 0.42
C) 0.58
D) 0.7

Question 27

According to Keynesian analysis, if households intend to save more, they will

A) ultimately spend more.
B) cause jobs to increase because investment will increase.
C) ultimately cause job losses.
D) cause the GDP to increase because inflation will decrease.

Question 28

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

A) $100
B) $900
C) $1,000
D) $11,000

Question 29

(Figure: Aggregate Expenditures) The figure shows the aggregate expenditures for an economy. Which is the proper sequence of events if income was originally at $100?

A) Total spending exceeds income, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached.
B) Total income exceeds spending, firms expand production, workers are hired, and incomes rise until equilibrium is reached.
C) Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached.
D) Total income exceeds spending, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached.

Question 30

(Table) When disposable income is $1,200, what is the value of the average propensity to save?

A) -1.5
B) -1.083
C) -0.5
D) -0.083

Question 31

Which factor is NOT a determinant of investment?

A) business expectations
B) past stock and bond prices
C) technological innovations
D) the amount of existing capital goods

Question 32

The increase in aggregate spending needed to bring an economy back to full employment is called

A) goal-oriented spending.
B) the inflationary gap.
C) gap closure spending.
D) the recessionary gap.

Question 33

Which statement(s) is/are TRUE regarding the paradox of thrift? I. People intend to save less but their actions actually lead to an increase in savings.
II) For the paradox of thrift to occur, investment must be positively related to income.
III) The increased savings of households leads to more consumption, income, and output, increasing investment and aggregate savings.

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

Question 34

The full Keynesian model illustrates the importance of spending in an economy whose investment, government spending, and exports all increase income, while savings, taxes, and imports reduce it.

Question 35

When withdrawals equal injections, the economy

A) is losing money.
B) still has to adjust to bring both down to zero.
C) is in a recession.
D) is in equilibrium.

Question 36

A depression economy has considerable slack; therefore

A) unemployment is high.
B) there is no excess plant capacity.
C) all resources are being used efficiently.
D) there is an increase in aggregate price levels.

Question 37

If the interest rate increases, investment will

A) decrease.
B) increase.
C) not be affected.
D) fall to zero.

Question 38

Assume that the MPC is 0.8, full employment is considered to be at a GDP level of $500 billion, and the current GDP is $400 billion. The government is committed to a balanced budget. To achieve full employment, the government should _____ taxes by _____ and increase government spending by _____.

A) decrease; $100 billion; $100 billion
B) increase; $20 billion; $100 billion
C) increase; $25 billion; $100 billion
D) increase; $100 billion; $100 billion

Question 39

If the marginal propensity to consume is 0.65, the spending multiplier is

A) 1.33.
B) 1.54.
C) 2.86.
D) 4.

Question 40

The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment.

Question 41

The marginal propensity to consume is equal to the change in consumption divided by the change in income.

Question 42

Classical economists claim that _____ is the primary determinant of saving, and Keynes claimed that _____ is the primary determinant of saving.

A) the interest rate; income
B) income; the interest rate
C) taxes; government spending
D) GDP; disposable income

Question 43

The GDP gap divided by the multiplier yields the

A) optimal level of government spending.
B) inflationary or recessionary gap.
C) equilibrium level of injections and withdrawals.
D) full-employment level of income.

Question 44

Income rises when desired investment is

A) greater than desired savings.
B) less than desired savings.
C) equal to desired savings.
D) less than required investment.

Question 45

In the Keynesian framework, the way to fight a recession is to

A) cut taxes and/or increase government spending.
B) reduce interest rates.
C) increase the population with more immigration.
D) do nothing and wait for the economy to return to full employment on its own.

Question 46

If the marginal propensity to consume is 0.6; full employment income is $1,000; and the current equilibrium is $750, a(n) _____ gap exists, such that a(n) _____ in spending equal to _____ is needed to close the gap.

A) inflationary; decrease; $100
B) inflationary; decrease; $250
C) recessionary; increase; $100
D) recessionary; increase; $250

Question 47

If the marginal propensity to save is 0.25 and income increases by $7,540, what is the increase in consumption?

A) $1,885
B) $5,655
C) $10,053
D) $30,160

Question 48

When taxes are reduced, disposable income _____ and consumption spending _____ by the marginal propensity to consume multiplied by the change in disposable income.

A) rises; rises
B) falls; falls
C) rises; falls
D) falls; rises

Question 49

With respect to income, the investment schedule in the short run is

A) perfectly elastic.
B) perfectly inelastic.
C) relatively elastic.
D) relatively inelastic.

Question 50

The factors that shift the savings and consumption schedule include all of these EXCEPT

A) household debt.
B) tastes and preferences from durable goods and nondurable goods.
C) wealth.
D) taxes.

Question 51

In the simple Keynesian model with no government or foreign sectors, assume that full employment occurs at an output level of $10,000. With a marginal propensity to consume of 0.5 and equilibrium output at $9,600, by how much will investment spending have to increase to move the economy to full employment?

A) $50
B) $100
C) $200
D) $400

Question 52

Aggregate expenditures are equal to

A) the total of consumption plus investment plus government expenditures plus exports minus imports.
B) the total of consumption plus investment plus government expenditures.
C) the total of consumption plus investment plus government expenditures plus imports minus exports.
D) consumption alone in a simplified Keynesian model.

Question 53

In Keynesian macroeconomic equilibrium, AE = Y and C = S.

Question 54

In the simple Keynesian model, equilibrium occurs when there are no net pressures pushing the economy to move to a higher or lower level of income and output.

Question 55

If income rises from $10,000 to $20,000 and consumption increases from $9,000 to $16,000, then the marginal propensity to consume is

A) 0.10.
B) 0.30.
C) 0.70.
D) 0.80.

Question 56

John Maynard Keynes advised U.S. President Franklin Roosevelt to

A) balance the budget in order to reduce the interest rate.
B) pass the Treaty of Versailles in order to eliminate Germany as a competitor.
C) increase government spending in order to stimulate the economy.
D) increase the interest rate to increase savings so investment would be stimulated.

Question 57

In the simple Keynesian model, equilibrium exists when

A) investment spending equals saving.
B) quantity supplied equals quantity demanded.
C) consumption equals investment.
D) the price accepted by demanders equals the price offered by suppliers.

Question 58

Consumption expenditures play a minor role in the U.S. economy.

Question 59

After the acceptance of Keynesian analysis, the government

A) played a role in setting the interest rate only.
B) took actions toward macroeconomic policy that grew significantly.
C) reduced its role in the economy.
D) turned to communism as the only solution to the Great Depression.

Question 60

When the consumption schedule lies below the 45-degree reference line, saving

A) must be negative.
B) is zero.
C) is positive.
D) is negatively sloped.

Question 61

In the full aggregate expenditures model with net exports included

A) C + G + X = S + T + M.
B) C + G + M = S + T + X.
C) I + G + M = S + T + X.
D) I + G + X = S + T + M.

Question 62

If $1,000 of additional spending occurs and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.

A) $800
B) $1,000
C) $5,000
D) $8,000

Question 63

The balanced budget multiplier changes according to the values of the marginal propensity to consume and the marginal propensity to save.

Question 64

If consumption falls from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will

A) fall by $25 billion.
B) fall by $125 billion.
C) rise by $25 billion.
D) rise by $125 billion.

Question 65

In both the simple Keynesian model and the full Keynesian model, the sum of injections of spending must equal the sum of withdrawals at equilibrium.

Question 66

If aggregate expenditures are less than current output

A) businesses will cut back on output.
B) businesses will produce more.
C) employment will rise.
D) inflation results.

Question 67

How large was the unemployment rate during the Great Depression?

A) 15%
B) 25%
C) 32%
D) 55%

Question 68

Keynes believed that the economy is self-correcting.

Question 69

The slope of the consumption function is equal to the multiplier.

Question 70

The idea of the spending multiplier is that

A) one person's spending becomes another person's income, which stimulates more spending.
B) people spend money on some items, such as food and toiletries, multiple times.
C) people tend to spend a greater amount than they originally intended.
D) when a person saves money in a bank, the bank lends it out to another person to be spent.

Question 71

The Keynesian conclusion that total injections equal total withdrawals in equilibrium is consistent with the circular flow model.

Question 72

If disposable income is $3,000 and saving is $1,200, how much is consumption?

A) -$1,200
B) $1,800
C) $2,100
D) $4,200

Question 73

If consumption rises from $500 billion to $575 billion and income rises from $600 billion to $700 billion, the marginal propensity to save is

A) 0.2.
B) 0.25.
C) 0.75.
D) 1.17.

Question 74

Which group of economists believed that economic downturns were self-correcting such that the forces of supply and demand would naturally bring the economy back to equilibrium?

A) Keynesians
B) classical economists
C) interventionists
D) Marxists

Question 75

Assume that the economy is at equilibrium at $10 trillion, with a marginal propensity to consume of 0.75. If exports rise by $0.5 trillion and imports increase by $0.7 trillion, equilibrium income will

A) fall by $0.2 trillion.
B) fall by $0.8 trillion.
C) rise by $2 trillion.
D) not change.

Question 76

Keynes's insight during the Great Depression was that

A) investment spending was too great to support high employment.
B) consumption spending is detrimental to the economy.
C) the economy can be in equilibrium and also have high unemployment.
D) the unemployment rate is not a good indicator of the true state of the economy.

Question 77

A tax decrease has more of an impact on income, employment, and output than does an equivalent increase in government spending.

Question 78

When Tyson's income was $50,000 per year, his consumption was $47,500, and his saving was $2,500. Tyson recently got a $5,000 raise. He raised his consumption to $51,500 and his saving to $3,500. After the raise, Tyson's average propensity to consume is

A) 0.05.
B) 0.50.
C) 0.80.
D) 0.95.

Question 79

The multiplier for imports is larger than the multiplier for exports.

Question 80

In the simple Keynesian model of the private economy, which of these is assumed?

A) The consumer price index can rise or fall.
B) Households and firms are savers.
C) The aggregate price level can change.
D) There is considerable slack in the economy.