Deck 19: The Keynesian Model in Action

Question 1

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.

Answer 1

D

Question 2

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 2

D

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

D

Question 4

If exports are $10 trillion and imports are $10.5 trillion, adding net exports to the aggregate expenditures (AE) line that includes consumption, investment, and government spending will cause the AE line to:

A) start at the same point on the vertical axis but will have a flatter slope.
B) start at the same point on the vertical axis but will have a steeper slope.
C) shift up by $0.5 trillion and the new line will be parallel to the original line.
D) shift down by $0.5 trillion and the new line will be parallel to the original line.

Question 5

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 6

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 7

If imports and exports are equal, the net export line:

A) is horizontal at $0.
B) is vertical at $0.
C) is horizontal at the value of imports.
D) slopes upward starting at the value of exports.

Question 8

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 9

On the graph of GDP, government spending and net exports are:

A) horizontal lines because they are autonomous expenditures.
B) vertical lines because the level of spending is fixed.
C) upward sloping because they increase as GDP increases.
D) downward sloping because they decrease as GDP increases.

Question 10

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 11

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 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

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 14

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 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 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 18

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

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

Question 19

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 20

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 21

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 22

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 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:

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 24

If actual real GDP is greater than the equilibrium level of real GDP (i.e., the aggregate expenditures function is below the 45-degree line), what happens to restore equilibrium to the economy?

Question 25

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.

Question 26

​ Within the simple Keynesian Cross model, equilibrium takes place:

A) ​ at full employment.
B) ​when aggregate spending equals real disposable income.
C) ​when the money interest rate and real interest rate are equal.
D) ​when actual and expected rates of inflation are equal.

Question 27

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

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

Question 28

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 29

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 30

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 31

Exhibit 9-3 Keynesian aggregate expenditures model
​

As shown in Exhibit 9-3, equilibrium GDP is:

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

Question 32

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 33

The relationship between aggregate expenditures and disposable income is shown by the:

A) ​ aggregate expenditures curve.
B) ​consumption function.
C) ​investment curve.
D) ​saving-disposable personal income curve.

Question 34

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.

Question 35

Exhibit 9-8 Keynesian aggregate expenditures model
​

In Exhibit 9-8, an increase in aggregate expenditures of 100 causes real GDP to rise by:

A) $100.
B) $200.
C) $300.
D) $400.

Question 36

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.

Question 37

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 38

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 39

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 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.

Question 41

If the economy spends 80 percent of any increase in real GDP, then an increase in investment of $1 billion would result ultimately in an increase in real GDP of:

A) $0.
B) $0.8 billion.
C) $1.0 billion.
D) $5.0 billion.

Question 42

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 43

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 44

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 45

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

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

Question 46

If the marginal propensity to consume (MPC) is 0.75, a $50 decrease in government spending, other things being equal, would cause equilibrium real GDP to:

A) increase by $50.
B) decrease by $50.
C) increase by $200.
D) decrease by $200.

Question 47

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 48

A $500 increase in investment will shift the aggregate expenditures curve up by:

A) exactly $500 and will increase the equilibrium level of real GDP by exactly $500.
B) exactly $500 and will increase the equilibrium level of real GDP by less than $500.
C) exactly $500 and will increase the equilibrium level of real GDP by more than $500.
D) more than $500 and will increase the equilibrium level of real GDP by more than $500.

Question 49

Suppose real GDP is $800 billion when the MPC is 0.80, and people decide to increase their saving by $30 billion. Before this change, the economy was in equilibrium with people intending to save $100 billion and producers intending to invest $100 billion. The new equilibrium level of real GDP is:

A) $600 billion.
B) $650 billion.
C) $680 billion.
D) $730 billion.

Question 50

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 51

A $2,000 decrease in investment will shift the aggregate expenditures curve down by:

A) exactly $2,000 and will decrease the equilibrium level of real GDP by exactly $2,000.
B) exactly $2,000 and will decrease the equilibrium level of real GDP by less than $2,000.
C) exactly $2,000 and will decrease the equilibrium level of real GDP by more than $2,000.
D) less than $2,000 and will decrease the equilibrium level of real GDP by less than $2,000.

Question 52

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 53

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 54

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 55

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 56

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.

Question 57

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 58

Assume the marginal propensity to save is 0.10. Firms become optimistic and increase investment spending by $10 billion. Other things being equal, real GDP will:

A) increase by $1 billion.
B) not change.
C) increase by $10 billion.
D) increase by $100 billion.

Question 59

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.

Question 60

Suppose equilibrium real GDP is currently at $800 billion and investment is $100 billion. If an increase in the interest rate reduces investment from $100 billion to $75 billion, and the MPC is 0.8, the new level of equilibrium real GDP will be:

A) $500 billion.
B) $600 billion.
C) $675 billion.
D) $775 billion.

Question 61

Using the aggregate expenditure-output model, assume the aggregate expenditures (AE) line is below the 45-degree line at full-employment GDP. This vertical distance is called a(n):

A) inflationary gap.
B) recessionary gap.
C) negative GDP gap.
D) marginal propensity to consume gap.

Question 62

If an increase in investment of $50 causes an increase in real GDP of $250, the value of the spending multiplier is:

A) 5.
B) 0.20.
C) 0.80.
D) 10.

Question 63

Exhibit 9-8 Keynesian aggregate expenditures model
​

In Exhibit 9-8, an increase in aggregate expenditures causes:

A) a movement down the aggregate demand curve from equilibrium real GDP $600 to equilibrium real GDP $1,000.
B) a movement up the aggregate demand curve from equilibrium real GDP $1,200 to equilibrium real GDP $1,000.
C) a shift of the aggregate demand curve to the right, causing equilibrium real GDP to increase from $600 to $1,000.
D) a shift of the aggregate demand curve to the left, causing equilibrium real GDP to decrease from $1,200 to $1,000.

Question 64

When there is a shift in autonomous expenditure, why is there a multiple expansion of income and real GDP? Trace the multiplier effect through the first four rounds when there is an increase in autonomous expenditure of $40 billion and the marginal propensity to consume is 0.75.

Question 65

Within the framework of the Keynesian Cross model, if an economy is operating at a real GDP less than full-employment real GDP:

A) a recessionary gap exists
B) an inflationary gap exists
C) aggregate expenditures will rise
D) the general level of prices will rise

Question 66

Assume that an economy's real GDP multiplier is 2 and that this economy is in equilibrium at $500 billion. If the government wants to move this economy to full-employment at $600 billion, while maintaining a balanced budget, it must choose which of the following options?

A) Increase government spending and taxes by $100 billion
B) Decrease government spending and taxes by $100 billion
C) Increase government spending and taxes by $200 billion
D) Decrease government spending and taxes by $200 billion

Question 67

If the spending multiplier is equal to 4, then a $25 initial increase in investment spending will lead to a:

A) $100 increase in real GDP.
B) $1 decrease in real GDP.
C) $1 increase in real GDP.
D) $100 decrease in real GDP.

Question 68

If the MPS = .25, and investment falls from $100 to $75, real GDP will decrease by:

A) $75.
B) $100.
C) $125.
D) $150.

Question 69

Assume that an economy's real GDP multiplier is 4. If this economy is in equilibrium at $2,000 billion, then which one of the following actions will bring it to a full employment equilibrium of $1,500 billion?

A) $500 billion spending cut.
B) $500 billion spending increase.
C) $125 billion spending cut.
D) $125 billion spending increase.

Question 70

Given full-employment output = $2,800, equilibrium output = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of national output?

A) $300 decrease in taxes.
B) $75 increase in government spending.
C) $75 decrease in taxes.
D) $300 increase in government spending.

Question 71

Which of the following options could be used to eliminate a recessionary gap?

A) Increase government spending.
B) Decrease government spending.
C) Decrease investment.
D) Increase taxes.

Question 72

Answer the following questions:
a. If aggregate expenditures falls by $5 million, and the MPC is 0.80, explain the process that will drive the economy to a new equilibrium level.
b. What will be the final result of this initial change?

Question 73

If MPC = 0.80, how much should government spending change to increase real GDP by $500?

A) − 100.
B) +80.
C) − 80.
D) +100.

Question 74

A recessionary gap is the amount by which aggregate expenditures ____ the amount required to achieve full-employment equilibrium GDP.

A) exceed
B) equal
C) fall short of
D) are greater than

Question 75

Exhibit 9-8 Keynesian aggregate expenditures model
​

In Exhibit 9-8, the value of the spending multiplier is:

A) 3.
B) 4.
C) 5.
D) 2.

Question 76

If the MPC = .80, and investment rises from $100 to $150, real GDP will increase by:

A) $50.
B) $125.
C) $200.
D) $250.

Question 77

If the MPC = 1, the spending multiplier is:

A) infinite.
B) zero.
C) 10.
D) 1.

Question 78

Exhibit 9-6 Keynesian aggregate expenditure model when the MPC is 2/3
​

In Exhibit 9-6, the spending multiplier for this economy is equal to:

A) 1 2/3.
B) 2 1/2.
C) 3.
D) 5.

Question 79

A new major league baseball expansion team is moving to your town. It will inject consumer spending worth $40 million into your local economy initially. The Chamber of Commerce predicts that this will generate a total of $500 million in additional spending for your town. The team owners think that this is an underestimate. What do you need to know to figure out who is right? Explain.

Question 80

​ Which of the following options could be used to eliminate a recessionary gap?

A) Decrease government spending
B) ​Decrease consumption
C) Decrease investment
D) ​Decrease taxes