Deck 10: Measuring a Nations Income

Question 1

For the purposes of the Keynesian cross, planned expenditure consists of:

A)planned investment.
B)planned government spending.
C)planned investment and government spending.
D)planned investment, government spending, and consumption expenditures.

Answer 1

D

Question 2

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

A)consumption function.
B)interest rate.
C)price level.
D)nominal money supply.

Answer 2

B

Question 3

Planned expenditure is a function of:

A)planned investment.
B)planned government spending and taxes.
C)planned investment, government spending, and taxes.
D)national income and planned investment, government spending, and taxes.

Answer 3

D

Question 4

According to classical theory, national income depends on , while Keynes proposed that
Determined the level of national income.

A)aggregate demand; aggregate supply
B)aggregate supply; aggregate demand
C)monetary policy; fiscal policy
D)fiscal policy; monetary policy

Question 5

Two interpretations of the IS-LM model are that the model explains:

A)the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.
B)the short-run quantity theory of income, or the short-run Fisher effect.
C)the determination of investment and saving, or what shifts the liquidity preference schedule.
D)changes in government spending and taxes or the determination of the supply of real money balances.

Question 6

The Keynesian cross shows:

A)determination of equilibrium income and the interest rate in the short run.
B)determination of equilibrium income and the interest rate in the long run.
C)equality of planned expenditure and income in the short run.
D)equality of planned expenditure and income in the long run.

Question 7

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

A)low levels of capital.
B)an untrained labor force.
C)inadequate technology.
D)low aggregate demand.

Question 8

When firms experience unplanned inventory accumulation, they typically:

A)build new plants.
B)lay off workers and reduce production.
C)hire more workers and increase production.
D)call for more government spending.

Question 9

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

A)income equals consumption plus investment plus government spending.
B)planned expenditure equals consumption plus planned investment plus government spending.
C)actual expenditure equals planned expenditure.
D)actual saving equals actual investment.

Question 10

In the Keynesian-cross model, actual expenditures equal:

A)GDP.
B)the money supply.
C)the supply of real balances.
D)unplanned inventory investment.

Question 11

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

A)zero.
B)between zero and one.
C)one.
D)greater than one.

Question 12

The government-purchases multiplier indicates how much change(s) in response to a $1 change in government purchases.

A)the budget deficit
B)consumption
C)income
D)real balances

Question 13

The IS curve plots the relationship between the interest rate and that arises in the market for
)

A)national income; goods and services
B)the price level; goods and services
C)national income; money
D)the price level; money

Question 14

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

A)liquidity preference.
B)the government-purchases multiplier.
C)unplanned inventory investment.
D)real money balances.

Question 15

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the of equilibrium income and there is unplanned inventory .

A)right; decumulation
B)right; accumulation
C)left; decumulation
D)left; accumulation

Question 16

The IS-LM model takes as exogenous.

A)the price level and national income
B)the price level
C)national income
D)the interest rate

Question 17

In the IS-LM model, which two variables are influenced by the interest rate?

A)supply of nominal money balances and demand for real balances
B)demand for real balances and government purchases
C)supply of nominal money balances and investment spending
D)demand for real money balances and investment spending

Question 18

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

A)right with a slope less than one.
B)right with a slope greater than one.
C)left with a slope less than one.
D)left with a slope greater than one.

Question 19

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

A)income falls.
B)planned expenditure falls.
C)unplanned inventory investment is negative.
D)prices rise.

Question 20

Exhibit: Keynesian Cross

Reference: Ref 10-1

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y , then inventories will
Inducing firms to production.

A)rise; increase
B)rise; decrease
C)fall; increase
D)fall; decrease

Question 21

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by and increases the equilibrium level of income by
)

A)$1 billion; more than $1 billion
B)$0.75 billion; more than $0.75 billion
C)$0.75 billion; $0.75 billion
D)$1 billion; $1 billion

Question 22

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

A)drop by 4 percent.
B)drop by 2 percent.
C)drop by 1 percent.
D)remain unchanged.

Question 23

a. Use the Keynesian-cross model to illustrate graphically the impact of an increase in the interest rate on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium
values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the increase in the interest rate.

Question 24

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

A)2,000.
B)1,800.
C)1,600.
D)1,400.

Question 25

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

A)not change.
B)be smaller.
C)be bigger.
D)be equal to 1.

Question 26

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, "When people have more money, they can spend it on goods and services."
a. In the IS-LM model, will a tax cut change the money supply in the economy?
Does a change in the money supply shift the IS or the LM curve?
b. In the IS-LM model, does a tax cut shift the IS or the LM curve?
c.Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS-LM model?

Question 27

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

A)one unit.
B)∆G.
C)∆G divided by the quantity one minus the marginal propensity to consume.
D)∆G multiplied by the quantity one plus the marginal propensity to consume.

Question 28

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures
For any given level of income.

A)increase by 100
B)increase by more than 100
C)decrease by 100
D)increase, but by less than 100

Question 29

Consider a closed economy to which the Keynesian-cross analysis applies. Consumption is given by the equation C = 200 + 2/3(Y - T). Planned investment is 300, as are government spending and taxes.
a. If Y is 1,500, what is planned spending? What is inventory accumulation or decumulation? Should equilibrium Y be higher or lower than 1,500?
b. What is equilibrium Y? (Hint: Substitute the values of equations for planned consumption, investment, and government spending into the equation Y = C + I
+ G and then solve for Y.)
c. What are equilibrium consumption, private saving, public saving, and national saving?
d. How much does equilibrium income decrease when G is reduced to 200? What is the multiplier for government spending?

Question 30

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

A)increases the amount of money in the economy.
B)changes income, which changes consumption, which further changes income.
C)is government spending and, therefore, more powerful than private spending.
D)changes the interest rate.

Question 31

a. Graphically illustrate the impact of an open-market purchase by the Federal Reserve on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the open-market purchase.

Question 32

Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P
equals 800.
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the LM curve only relating Y and r; substitute out M/P.)
b. What is the slope of the LM curve?
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?
d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?
e. If M increases and P is constant, does the LM curve shift upward and to the left or downward and to the right?
f. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?

Question 33

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

A)increase saving by the decrease in the intercept.
B)lead to no change in saving.
C)decrease saving by the decrease in the intercept.
D)lead to an increase in investment.

Question 34

a. Suppose Congress passes legislation that significantly reduces taxes. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in taxes on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the tax cut and the time horizon appropriate for this analysis.

Question 35

a. As an economy moves into a recession, income falls. Illustrate graphically the impact of a decrease in income on the equilibrium interest rate using the theory of liquidity preference and the market for
real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.

Question 36

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

A)lower equilibrium income by the decrease in the intercept multiplied by the multiplier.
B)lower equilibrium income by the decrease in the intercept.
C)raise equilibrium income by the decrease in the intercept.
D)raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

Question 37

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is
Percent.

A)2
B)4
C)6
D)8

Question 38

Assume that the consumption function is given by C = 200 + 0.5(Y - T) and the investment function is
I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.
a. What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G
in the equation Y = C + I + G and then write an equation for Y as a function of r
or r as a function of Y.) Express the equation two ways.
b. What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient of Y when the IS curve is written expressing r as a function of Y.)
c. If r is one percent, what is I? what is Y? If r is 3 percent, what is I? what is Y? If
r is 5 percent, what is I? what is Y?
d. If G increases, does the IS curve shift upward and to the right or downward and to the left?

Question 39

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

A)increases by 250.
B)increases by more than 250.
C)decreases by 250.
D)increases, but by less than 250.

Question 40

a. Suppose Congress decides to reduce the budget deficit by cutting government spending. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.

Question 41

The IS-LM model simultaneously determines equilibrium in two markets. a. Which two markets?
b. What two variables adjust to bring equilibrium in the markets?

Question 42

a. The interest rate affects which variable in the market for goods and services versus the market for real money balances?
b. The level of income affects which variable in the market for goods and services versus the market for real money balances?

Question 43

a. Graphically illustrate how an increase in income affects the equilibrium levels of saving, investment, and the interest rate in the loanable funds model. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium levels of saving, investment, and the interest rates as a result of the increase in income.