Deck 9: The Keynesian Model in Action

Question 1

Within the framework of the aggregate expenditures model, which of the following is true ?

A)When spending on goods and services exceeds the level business decision makers anticipated, inventories will rise.
B)Equilibrium will always occur at the full-employment level of output.
C)A nation's imports will decline as the nation's disposable income increases.
D)When spending on goods and services exceeds the level of aggregate output, inventories will fall.

Answer 1

When spending on goods and services exceeds the level of aggregate output, inventories will fall.

Question 2

Using C to represent consumption, I to represent investment, G to represent government spending, S to represent saving, X to represent exports, and M to represent imports, aggregate expenditures can be represented by:

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

Answer 2

C + I + G + (X - M).

Question 3

According to the Keynesian aggregate expenditures model equilibrium and full employment:

A)always occur at the same income level of real GDP.
B)may differ, but there is an automatic mechanism that directs the economy toward full-employment equilibrium.
C)could never occur at the same level of real GDP.
D)do not necessarily occur at the same level of real GDP.

Answer 3

do not necessarily occur at the same level of real GDP.

Question 4

When the spending of consumers, businesses, government, and foreigners (net exports)is less than the aggregate output level of the economy, the Keynesian model result is that:

A)output will rise.
B)output will fall.
C)prices will rise.
D)inventories will tend to decline.

Question 5

The sum of consumption (C), investment (I), government spending (G), and net exports (X-M)is called:

A)autonomous spending.
B)aggregate expenditures.
C)Keynesian income
D)wealth.

Question 6

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

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

Question 7

In the aggregate expenditures model, equilibrium occurs if:

A)aggregate expenditures (AE)are greater than GDP.
B)aggregate expenditures (AE)are less than GDP.
C)there is no unplanned inventory depletion or accumulation.
D)consumption equals investment.

Question 8

Using the Keynesian aggregate expenditures model, which of the following is true?

A)Macro equilibrium may occur at levels of real GDP other than full-employment real GDP.
B)At any macro equilibrium, the actual rate of unemployment must equal the natural rate of unemployment.
C)If an economy is operating below full employment capacity, the Keynesian model indicates that lower wage rates will automatically adjust the economy back to full employment.
D)All of these are correct.

Question 9

In the Keynesian model, if aggregate expenditures exceed aggregate output and inventories of firms fall, then the aggregate output and the business sector could be expected to:

A)increase output.
B)decrease output.
C)decrease investment.
D)hire fewer workers.

Question 10

Within the Keynesian aggregate expenditures model, if the economy is below equilibrium, then there will be:

A)an increase the demand for goods and services.
B)an increase in real GDP.
C)lower interest rates, which will stimulate aggregate demand and keep the economy at full employment.
D)a lower price level, which will quickly guide the economy to full-employment equilibrium.

Question 11

Suppose consumers and business decision makers become more optimistic about the future, and aggregate expenditures increase. The most likely result is that:

A)real GDP and employment and income to decline.
B)real GDP and employment rise.
C)real GDP rises and employment falls.
D)real GDP falls and employment rises.

Question 12

If consumption expenditures are $200 billion, total investment is $50 billion, government purchases are $40 billion, exports are $45 billion, imports are $40 billion, aggregate expenditures must be:

A)$275 billion.
B)$295 billion.
C)$320 billion.
D)$395 billion.

Question 13

Which of the following most completely describes the workings of the aggregate expenditures model?

A)If aggregate expenditures are less than aggregate output, then there is unplanned inventory accumulation, and real GDP will decrease.
B)If aggregate expenditures are greater than aggregate output, then there is unplanned inventory depletion, and real GDP will increase.
C)Aggregate output generates an equal amount of aggregate spending.
D)Both a. and b. above are correct.

Question 14

Within the Keynesian aggregate expenditure-output model, if an economy operates below full employment:

A)a reduction in wage rates and resource prices will soon restore full-employment equilibrium.
B)a reduction in the real interest rate will soon restore full-employment equilibrium.
C)an increase in the real interest rate will soon restore full-employment equilibrium.
D)the economy may remain below full employment unless aggregate expenditures increase.

Question 15

In the Keynesian aggregate expenditures model, "aggregate expenditures" refer to:

A)the amount of GDP that could be produced if unemployment were zero.
B)the combined expenditures of consumers, businesses, governments, and foreigners (net exports).
C)the amount of demand for consumer goods that would arise if all citizens had all the income they wanted.
D)consumer spending measured in constant prices.

Question 16

Within the framework of the Keynesian model, if aggregate expenditures exceed aggregate output, then:

A)the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels.
B)the inventories of firms would increase, and the firms would reduce output until inventories were cut back to the desired level.
C)the current level of income would persist in the future.
D)firms would reduce their investment, and the economy would fall into a recession.

Question 17

The four components of the aggregate expenditures model are:

A)consumption, investment, inventories, and government purchases.
B)consumption, planned investment, unplanned changes in inventory, and exports.
C)consumption, investment, government purchases, and net exports.
D)consumption, investment, exports, and imports.

Question 18

Using the aggregate expenditures model, if aggregate expenditures (aggregate demand)is $10 trillion and aggregate output is $10.3 trillion:

A)businesses will accumulate inventories, and output will decline.
B)real output will increase if the full-employment capacity of the economy is greater than $10.3 trillion.
C)inflation will be a problem if the full-employment capacity of the economy exceeds $10.3 trillion.
D)both b and c are correct.

Question 19

At the equilibrium level of real GDP, which of the following is true ?

A)Unplanned inventory investment is positive.
B)Unplanned inventory investment is negative.
C)Aggregate output equals aggregate expenditures.
D)Aggregate output plus consumption spending equals aggregate expenditures.

Question 20

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

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 21

Exhibit 9-1 GDP and consumption data As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net exports are - $0.5 trillion, and GDP is $7 trillion, then GDP will:

A)remain unchanged.
B)increase by $2 trillion.
C)decrease by $2 trillion.
D)increase by $4 trillion.
E)decrease by $4 trillion.

Question 22

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

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

Question 23

Exhibit 9-1 GDP and consumption data
As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net exports are - $0.5 trillion, and GDP is $2 trillion, then GDP will:

A)remain unchanged.
B)increase by $1 trillion.
C)decrease by $1 trillion.
D)increase by $2 trillion.
E)decrease by $2 trillion.

Question 24

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

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

Question 25

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

A)unplanned inventory depletion.
B)an increase in GDP.
C)a decrease in employment.
D)an increase in employment.

Question 26

Exhibit 9-1 GDP and consumption data
 
As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net exports are - $0.5 trillion, and GDP is $2 trillion, then:

A)inventory depletion is - $1.5 trillion.
B)inventory accumulation is - $2.0 trillion.
C)inventory depletion is - $0.5 trillion.
D)inventory accumulation is $0.5 trillion.

Question 27

Exhibit 9-1 GDP and consumption data

As shown in Exhibit 9-1, if equilibrium GDP is $5 trillion, then the total of investment, government spending, and net exports is:

A)$1 trillion.
B)$2 trillion.
C)$3 trillion.
D)$4 trillion.
E)$6 trillion.

Question 28

In the aggregate expenditures model, if aggregate expenditures (AE)equal $4 trillion and GDP equals $3 trillion, then:

A)inventory depletion equals - $1 trillion.
B)inventory accumulation equals $1 trillion.
C)investment equals - $1 trillion.
D)investment equals $1 trillion.

Question 29

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

A)unplanned inventory depletion.
B)an increase in GDP.
C)an increase in employment.
D)a decrease in GDP.

Question 30

In the aggregate expenditures model, if an economy operates below equilibrium GDP, there will be:

A)unplanned inventory depletion.
B)unplanned inventory accumulated.
C)a decrease in GDP.
D)a decrease in employment.

Question 31

In the aggregate expenditures model, if aggregate expenditures (AE)equal $6 trillion and GDP equals $7 trillion, then:

A)inventory depletion equals - $1 trillion.
B)inventory accumulation equals $1 trillion.
C)investment equals $1 trillion.
D)investment equals - $1 trillion.

Question 32

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

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

Question 33

Exhibit 9-1 GDP and consumption data  
As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net exports are - $0.5 trillion, and GDP is $7 trillion, then:

A)inventory depletion is - $1.0 trillion.
B)inventory accumulation is $1.0 trillion.
C)inventory depletion is - $2.0 trillion.
D)inventory accumulation is $2.0 trillion.

Question 34

Exhibit 9-2 Keynesian aggregate-expenditures model As shown in Exhibit 9-2, equilibrium GDP is:

A)$1 trillion.
B)$3 trillion.
C)$5 trillion.
D)$6 trillion.
E)$7 trillion.

Question 35

Which one of the following are the components of aggregate expenditures?

A)Household consumption, business investment, government spending for goods and services, and net exports.
B)Household consumption, business investment, government transfer payments, and net exports.
C)Household consumption, business investment, government spending for goods and services, and exports.
D)Household consumption, business investment, government spending for goods and services, and saving.
E)Household consumption, business inventories, government spending for goods and services, and net exports.

Question 36

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

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

Question 37

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

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

Question 38

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

A)unplanned inventory accumulation.
B)unplanned inventory depletion.
C)an increase in GDP.
D)an increase in employment.

Question 39

Exhibit 9-2 Keynesian aggregate-expenditures model As shown in Exhibit 9-2, if GDP is $3 trillion, the economy experiences unplanned inventory:

A)depletion of $1 trillion.
B)depletion of $2 trillion.
C)accumulation of $1 trillion.
D)accumulation of $2 trillion.

Question 40

Exhibit 9-1 GDP and consumption data As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, and net exports are - $0.5 trillion, then equilibrium GDP is:

A)$2 trillion.
B)$3 trillion.
C)$4 trillion.
D)$5 trillion.
E)$6 trillion.

Question 41

If aggregate expenditures (AE)are less than aggregate output (real GDP), then firms will:

A)have unplanned inventory accumulation.
B)earn above-average profits.
C)expand production and hire more workers.
D)be raising their prices.

Question 42

If a nation imports more than it exports, then its net exports are:

A)positive.
B)negative.
C)zero.
D)unstable.

Question 43

At the equilibrium level of real GDP, total production equals total:

A)saving.
B)investment.
C)net exports.
D)spending.

Question 44

In the Keynesian model, investment, government spending, and net exports are treated as autonomous expenditures, which means they are independent of:

A)expectations.
B)the price level.
C)political processes.
D)real GDP.

Question 45

In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will be:

A)unplanned inventory accumulation.
B)a decrease in GDP.
C)a decrease in employment.
D)all of the above.

Question 46

Exhibit 9-3 Keynesian aggregate-expenditures model As shown in Exhibit 9-3, if GDP is $6 trillion, the economy experiences unplanned inventory:

A)depletion of $2 trillion.
B)depletion of $6 trillion.
C)accumulation of $2 trillion.
D)accumulation of $6 trillion.
E)none of these.

Question 47

Exhibit 9-4 Keynesian aggregate expenditures model When real GDP is $2,000 billion in Exhibit 9-4, the economy experiences inventory:

A)accumulation of $500 billion.
B)accumulation of $700 billion.
C)depletion of $700 billion.
D)depletion of $500 billion.

Question 48

Exhibit 9-3 Keynesian aggregate-expenditures model As shown in Exhibit 9-3, if GDP is $14 trillion, the economy experiences unplanned inventory:

A)accumulation of $12 trillion.
B)depletion of $14 trillion.
C)accumulation of $2 trillion.
D)depletion of $4 trillion.

Question 49

Exhibit 9-2 Keynesian aggregate-expenditures model As shown in Exhibit 9-2, if GDP is $7 trillion, the economy experiences unplanned inventory:

A)depletion of $1 trillion.
B)depletion of $2 trillion.
C)accumulation of $1 trillion.
D)accumulation of $2 trillion.

Question 50

Exhibit 9-3 Keynesian aggregate-expenditures model As shown in Exhibit 9-3, equilibrium GDP is:

A)$2 trillion.
B)$6 trillion.
C)$10 trillion.
D)$12 trillion.
E)$14 trillion.

Question 51

Which of the following correctly describes the spending multiplier?

A)The initial change in consumption, investment, government spending, or net exports divided by the change in equilibrium GDP.
B)An initial increase in aggregate expenditures divided by the equilibrium GDP.
C)An initial increase in aggregate expenditures divided by the change in equilibrium GDP.
D)The ratio of the change in real GDP to an initial change in any component of aggregate expenditures.

Question 52

Exhibit 9-4 Keynesian aggregate expenditures model In Exhibit 9-4, equilibrium real GDP is:

A)$500 billion.
B)$800 billion.
C)$900 billion.
D)$1,000 billion.

Question 53

If aggregate expenditures exceed real GDP, then:

A)employment falls.
B)the economy will have deflation.
C)firms are depleting their inventories.
D)the money supply will increase.

Question 54

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:

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

Question 55

The impact of the multiplier effect is to:

A)smooth out the up and down swings of the business cycle.
B)promote price stability.
C)magnify small changes in spending into much larger changes in real GDP.
D)reduce the impact of an increase in investment on output and employment.

Question 56

Which of the following correctly describes the mechanics of the spending multiplier?

A)An initial increase in aggregate expenditures, such as an increase in government spending, shifts the aggregate expenditures curve upward vertically.
B)After the expenditures curve shifts upwards, the economy is not in equilibrium because aggregate expenditures now exceed aggregate output, leading to inventory depletion.
C)Real GDP increases in response to inventory depletion, eventually leading to a new higher level equilibrium real GDP.
D)All of the above answers are correct.

Question 57

According to the Keynesian model, an economy will have persistent, high unemployment if:

A)the government runs a budget deficit.
B)markets operate freely.
C)its total spending is too low.
D)firms make too many investments.

Question 58

Which of the following explains why a $100 billion reduction in consumption spending might decrease equilibrium real GDP by more than $100 billion?

A)Say's law.
B)The quantity theory of money.
C)Flexible resource prices.
D)The multiplier principle.

Question 59

Exhibit 9-4 Keynesian aggregate expenditures model At a real GDP of $500 billion in Exhibit 9-4, the economy experiences inventory:

A)depletion of $100 billion.
B)depletion of $250 billion.
C)accumulation of $100 billion.
D)accumulation of $250 billion.

Question 60

The spending multiplier indicates that:

A)changes in investment, government, or consumption spending trigger much larger changes in real GDP.
B)an autonomous increase in saving will cause output to rise by a multiple of the additional saving.
C)a market economy will be more stable than classical economists thought.
D)the marginal propensity to consume is greater than one.

Question 61

If the marginal propensity to consume (MPC)is 0.50, the value of the spending multiplier is:

A)5
B)1
C)2

Question 62

If the MPC equals 0.80 then:

A)the MPS equals 1.20.
B)the multiplier equals 0.20.
C)the multiplier equals 1 divided by 0.80.
D)the multiplier equals 5.
E)none of these.

Question 63

If the marginal propensity to save (MPS)is 0.25, the value of the spending multiplier is:

A)1.
B)2.
C)4.
D)9.

Question 64

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?

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

Question 65

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

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

Question 66

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

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

Question 67

If the marginal propensity to consume (MPC)is 0.60, what is the expenditure multiplier?

A)0.4.
B)0.6.
C)2.5.
D)6.0.

Question 68

If the marginal propensity to consume (MPC)is 0.96, the value of the spending multiplier is:

A)25.
B)40.
C)96.
D)100.

Question 69

If the marginal propensity to save (MPS)is 0.50, the value of the spending multiplier is:

A)1.
B)2.
C)4.
D)9.

Question 70

As the marginal propensity to consume (MPC)decreases, the spending multiplier:

A)increases.
B)decreases.
C)remains constant.
D)becomes indefinable.

Question 71

Mathematically, the value of the spending multiplier in terms of the marginal propensity to consume (MPC)is given by the formula:

A)MPC - 1.
B)(MPC - 1)\ MPC.
C)1 \ MPC.
D)1 \ (1 - MPC).

Question 72

Suppose business decision makers become more optimistic about the future and, as a result, increase their investment spending by $20 billion. If the economy's marginal propensity to consume is 0.75, the equilibrium level of aggregate real GDP will increase by:

A)$15 billion.
B)$20 billion.
C)$50 billion.
D)$80 billion.

Question 73

The formula to compute the spending multiplier is:

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

Question 74

Suppose that consumers become more pessimistic about the future and, as a result, reduce their consumption by $10 billion. If the marginal propensity to consume is 0.80, how will this $10 billion reduction in consumption affect the equilibrium level of real GDP?

A)Real GDP will decrease by $8 billion.
B)Real GDP will decrease by $10 billion.
C)Real GDP will decrease by $40 billion.
D)Real GDP will decrease by $50 billion.

Question 75

If the marginal propensity to consume (MPC)is 0.80, the value of the spending multiplier is:

A)2.
B)5.
C)8.
D)10.

Question 76

A $1 million increase in investment spending will raise equilibrium output (real GDP)by:

A)less than $1 million.
B)exactly $1 million.
C)between $0.5 and $1.5 million.
D)more than $1 million.

Question 77

As the marginal propensity to consume (MPC)increases, the spending multiplier:

A)increases.
B)decreases.
C)remains constant.
D)becomes indefinable.

Question 78

If the marginal propensity to save (MPS)is 0.10, the value of the spending multiplier is:

A)1.
B)9.
C)10.
D)90.

Question 79

The ratio of the change in GDP to an initial change in aggregate expenditures (AE)is the:

A)spending multiplier.
B)permanent income rate.
C)marginal expenditure rate.
D)marginal propensity to consume.

Question 80

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

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.