Deck 3: Income and Interest Rates: the Keynesian Cross Model and the Is Curve

Question 1

What type of variables have their movements explained by theory?

A)endogenous
B)exogenous
C)autonomous
D)Both B and C

Answer 1

endogenous

Question 2

During recent Global Economic Crises,U.S.household liabilities have

A)increased
B)decreased
C)remained the same
D)quadrupled

Answer 2

decreased

Question 3

Suppose that in producing a GDP of 3000,goods worth 200 go unsold and are unintentionally added to business inventories.These goods

A)are not counted in total expenditure.
B)are part of the investment component of expenditure.
C)are nonetheless part of the consumption component of expenditure.
D)are classified as net exports and are subtracted from total expenditures.

Answer 3

are part of the investment component of expenditure.

Question 4

A fixed or rigid price level implies

A)that income is fixed.
B)real GDP is greater than nominal GDP.
C)nominal GDP is less than real GDP.
D)real GDP equals nominal GDP.

Question 5

Which of these variables remains exogenous throughout Chapter 3?

A)the interest rate
B)investment
C)price level
D)all of the above

Question 6

A variable which is independent of the level of income is

A)endogenous.
B)exogenous.
C)autonomous.
D)irrelevant to any theory of income determination.

Question 7

Stability of the U.S.economy between 1985 and 2007 referred to as

A)Great Moderation.
B)the Great Depression.
C)Automatic Stabilizer.
D)Fiscal Discretion.

Question 8

Figure 3-1

Employing Figure 3-1 above,autonomous consumption expenditures are ________,and the marginal propensity to consume is ________.

A)200;0.75
B)500;1
C)200;0.60
D)0;1

Question 9

During the 20th century,the highest savings rates in the U.S.were observed during

A)the Great Depression.
B)World War II.
C)the late 1980s and 1990s.
D)none of the above.

Question 10

In the simple Keynesian model of the determination of income,planned investment is

A)an endogenous parameter.
B)autonomous and thus an exogenous parameter.
C)explained by the model of income determination.
D)None of the above.

Question 11

In the simplest Keynesian model of the determination of income,interest rates are assumed to be

A)exogenous and to gradually change.
B)endogenous and to gradually change.
C)exogenous and to remain constant.
D)endogenous and to remain constant.

Question 12

In the simple Keynesian model of the determination of income,the price level is assumed to be

A)exogenous and to gradually change.
B)endogenous and to gradually change.
C)exogenous and to remain constant.
D)endogenous and to remain constant.

Question 13

Which of the following is a possible reason for the improved economic performance between 1985 and 2007?

A)Demand Shocks have become smaller and less important.
B)Monetary and fiscal policy have become more effective.
C)Change in conditions that make monetary and/or fiscal policy more powerful.
D)All of the above

Question 14

In the 2000s,low savings rates are attributed to

A)rapid economic growth.
B)stock market boom.
C)declining interest rates and increased refinancing of the mortgages.
D)inefficient monetary policy.

Question 15

In the simplest Keynesian model of the determination of income,interest rates are assumed

A)to be exogenous and to influence desired spending.
B)to be endogenous and not to influence desired spending.
C)to be endogenous and to influence desired spending.
D)to be exogenous and not to influence spending.

Question 16

The multiplier measures the

A)number of steps it takes to move from one equilibrium to another.
B)rise in saving resulting from a rise in income.
C)marginal propensity to invest.
D)rise in equilibrium GDP resulting from a one dollar rise in planned autonomous expenditures.

Question 17

During the worst of the Great Depression,in 1932 and 1933,disposable income was so low that it actually ________ aggregate consumption,so that aggregate saving became ________.

A)rose above,positive
B)rose above,negative
C)fell below,positive
D)fell below,negative

Question 18

If total planned spending (E(p))exceeds GDP,we expect that

A)inventories will be falling.
B)inventories will be rising.
C)GDP will be falling.
D)government expenditures must be rising.

Question 19

As used in this text,"autonomous" variables are

A)spontaneous variables that are completely unpredictable.
B)completely independent of income,although they can be explained by movements in other variables.
C)determined only by income levels.
D)the same as endogenous variables.

Question 20

From 1950 till 2009 the four-quarter growth rate of real GDP has been as high as ________ percent and as low as ________ percent.

A)8.1;-2.8
B)12.6;-3.9
C)3.2;2.5
D)5;-10

Question 21

Figure 3-2

Refer to the information above.If the level of production in the economy equals 3000,the amount of saving equals ________ and the level of unintended inventory investment equals ________.

A)200;200
B)200;-200
C)1200;600
D)1200;-600

Question 22

If disposable income increases by $100 and saving increased by $25,ceteris paribus,we may conclude that

A)the marginal propensity to consume is 0.25.
B)the marginal propensity to save is 0.25.
C)$15 is autonomous consumption.
D)a change in disposable income is induced by a change in consumption.

Question 23

Figure 3-2

Refer to the information above.What is the level of unintended inventory investment when income is 850?

A)-175
B)175
C)-200
D)200

Question 24

Suppose the only leakages are savings and taxes.The tax rate is 0.2 and the multiplier is 1.92.These values imply that the marginal propensity to consume is

A)0.32.
B)0.60.
C)0.68.
D)0.8.

Question 25

Figure 3-2

Refer to the information above.What will be the equilibrium level of GDP if taxes are reduced by 10?

A)460
B)470
C)510
D)520

Question 26

Figure 3-2

Refer to the information above.What is the level of consumption when the level of income is 850?

A)375
B)425
C)450
D)475

Question 27

Let the marginal leakage rate be 0.5 while the marginal propensity to consume is 0.8.Then a $50 million reduction in autonomous taxes will cause autonomous consumption to ________ and equilibrium income to ________.

A)fall by $50 billion;fall by $100 billion
B)rise by $50 billion;rise by $100 billion
C)fall by $40 billion;fall by $200 billion
D)rise by $40 billion;rise by $80 billion

Question 28

An increase in autonomous taxes

A)increases autonomous planned spending by an equal amount.
B)decreases autonomous planned spending by an equal amount.
C)increases consumption by that amount times the marginal propensity to consume.
D)decreases saving by that amount times the marginal propensity to save.

Question 29

Figure 3-2

Employing the information in Figure 3-2 above,when real disposable income is 1000,savings from households would be ________ and the marginal propensity to save would be ________.

A)300;0.1
B)100;0.2
C)100;0.1
D)500;0.2

Question 30

An increase in the marginal propensity to import will

A)raise imports and raise equilibrium income.
B)lower imports and raise equilibrium income.
C)lower the multiplier and reduce equilibrium income.
D)raise the multiplier and reduce equilibrium income.

Question 31

Assume that the economy is initially at its equilibrium level of GDP.What will happen to the equilibrium level of GDP if planned investment decreases by 20,government spending increases by 30,and taxes increase by 10?

A)GDP will decrease by 60
B)GDP will decrease by 10
C)there will be no change in GDP
D)GDP will increase by 10

Question 32

The size of the multiplier depends in part on the

A)level of autonomous expenditures.
B)change in autonomous consumption.
C)level of consumption.
D)marginal propensity to consume.

Question 33

Figure 3-2

Refer to the information above.What is the equilibrium level of GDP?

A)300
B)400
C)450
D)525

Question 34

In equilibrium,with exports equal to imports it must be the case that

A)leakages equal injections.
B)saving plus taxes equal government expenditures plus investment.
C)total expenditures equal GDP.
D)All of these.

Question 35

An exogenous rise in government expenditures will have the same effect on GDP as an equal rise in either autonomous ________ or autonomous ________.

A)consumption;investment
B)taxes;consumption
C)savings;investment
D)taxes;investment

Question 36

Assuming that there are NO income taxes,if both autonomous taxes,and government expenditures were to rise by $100 million,we would expect equilibrium GDP to

A)rise by $100 million.
B)rise,but by a multiple of $100 million.
C)rise by less than $100 million.
D)remain unaffected because leakages have changed by the same amount.

Question 37

If disposable income increases by $100 and consumption increased by $85,ceteris paribus,we may conclude that

A)the marginal propensity to consume is 0.85.
B)the marginal propensity to consume is 0.15.
C)$15 is autonomous consumption.
D)a change in disposable income is induced by a change in consumption.

Question 38

Figure 3-2

Refer to the information above.What is the equilibrium level of GDP?

A)600
B)1000
C)1500
D)1800

Question 39

Figure 3-2

Refer to the information above.What is the level of consumption when the level of income equals 2000?

A)600
B)1000
C)1600
D)2000

Question 40

A fall in the government's budget deficit will lower

A)equilibrium GDP and consumption.
B)consumption and saving.
C)saving and GDP.
D)All of the above are correct.

Question 41

Which element of total planned expenditure is NOT included in "autonomous planned spending"?

A)cY
B)-cT
C)NX
D)Ip
E)a

Question 42

The saving function is

A)cY.
B)Y - T.
C)(1 - C)(Y -T).
D)-a + (1 - c)(Y -

Question 43

In the consumption function,suppose a = 60,c = 0.75,Y = 3000,and T = 800.Consumption expenditure is

A)2910.
B)2245.
C)1710.
D)1590.
E)1510.

Question 44

On a diagram of the consumption function and the 45-degree line,saving at each level of disposable income is the vertical distance

A)from the horizontal axis to the intersection point of the consumption line and the 45-degree line.
B)from the horizontal axis to the 45-degree line.
C)between the consumption and the 45-degree lines.
D)from the horizontal axis to where the consumption line intersects the vertical axis.

Question 45

If Y = $200 billion,c = 0.75,autonomous consumption = $10 billion,and T = $20 billion,induced saving is

A)$25 billion.
B)$50 billion.
C)$75 billion.
D)$150 billion.

Question 46

In the saving function,autonomous saving is

A)-a + (1 - c)(Y -T).
B)(1 - C)Y.
C)-a.
D)-Y - T.

Question 47

Suppose a = 50,c = 0.8,and T = 410.How much is saved out of a total income of 1230?

A)706
B)606
C)278
D)196
E)114

Question 48

In the consumption function C = a + c(Y -T), "autonomous consumption" appears as

A)a
B)c
C)cY.
D)-cT.
E)c(Y - T).

Question 49

Figure 3-5

In Figure 3-5 above,saving is zero at

A)point J.
B)point K.
C)point L.
D)none of the above because saving is never equal to zero under the conditions described in the graph.

Question 50

In the consumption function C = a + c(Y -T),induced consumption is

A)a + c(Y -T).
B)a + cY.
C)cY.
D)c(Y - T).

Question 51

Figure 3-5

In Figure 3-5 above,the marginal propensity to save is

A)0.20.
B)0.80.
C)0.05.
D)0.02.

Question 52

Saving is positive for all levels of disposable income

A)above zero.
B)above where the consumption line intersects the 45-degree line.
C)below where the consumption line intersects the 45-degree line.
D)above where the consumption function intersects the vertical axis.
E)above autonomous consumption.

Question 53

Where the planned expenditure and the 45-degree lines intersect,the economy is ________ equilibrium,with unplanned inventory investment equal to ________.

A)in,zero
B)out of,zero
C)in,planned inventory investment
D)in,autonomous planned expenditure
E)out of,autonomous planned expenditure

Question 54

In our consumption function,when disposable income is zero,consumption is

A)a.
B)-cT.
C)cT.
D)-a.

Question 55

When stock prices fall significantly,people may feel less wealthy and thus decide to consume less of their current flow of disposable income.In our consumption function,this can be represented by a

A)fall in (Y -T).
B)rise in T.
C)rise in c.
D)fall in a.

Question 56

If Y = $200 billion,c = 0.75,autonomous consumption = $10 billion,and T = $20 billion,induced consumption expenditure is

A)$135 billion.
B)$200 billion.
C)$180 billion.
D)$150 billion.

Question 57

Assume that the marginal propensity to consume equals 0.8,the income tax rate equals 0.3,and the marginal propensity to import equals 0.2.The marginal leakage rate is ________ and the size of the multiplier is ________.

A)0.70;3.33
B)0.60;2.5
C)0.64;1.56
D)0.50;2.0

Question 58

The slope of the planned expenditure line is

A)autonomous consumption.
B)the marginal propensity to save.
C)autonomous planned spending.
D)the marginal propensity to consume.

Question 59

Figure 3-5

In Figure 3-5 above,the saving function is

A)100 + 0.8(Y -T).
B)-100 + 0.05(Y -T).
C)0.2Y - 100.
D)100 + Y - T.

Question 60

Total income is always equal to ________ expenditures;but only in equilibrium is it equal to ________ expenditures,producing in equilibrium ________ on income to change.

A)actual,planned,pressure
B)actual,planned,no pressure
C)planned,actual,pressure
D)planned,actual,no pressure

Question 61

In 2005 real personal saving has decreased to ________ of personal disposable income.

A)3.5
B)4.8
C)11.2
D)1.4

Question 62

Figure 3-6

In Figure 3-6 above,at point J

A)there is unplanned inventory investment.
B)there is unplanned inventory disinvestment.
C)there is no change in inventory levels.
D)intended and unintended inventory investment are equal.

Question 63

A 45-degree line on a graph with expenditures,E,on the vertical axis and production,Y,on the horizontal axis,represents

A)the line of disequilibrium levels of income.
B)all possible equilibrium levels of production and expenditures.
C)some of the equilibrium levels of production and expenditures.
D)None of the above.

Question 64

When an economy is in equilibrium,

A)planned expenditures exceed production and income.
B)there is no savings nor investment.
C)government tax revenues equal planned government expenditures.
D)production and income equal planned expenditures.

Question 65

The "equilibrating mechanism," the reason the economy tends toward equilibrium in the simple Keynesian model,is primarily

A)autonomous but flexible prices.
B)production responses to unplanned inventory changes.
C)exogenous inventory changes.
D)endogenous price changes.

Question 66

If Ep is 3500 and Y is 3000,then

A)planned inventory accumulation is 500.
B)planned inventory depletion is 500.
C)unplanned inventory accumulation is 500.
D)unplanned inventory depletion is 500.

Question 67

Figure 3-6

In Figure 3-6 above,income and planned expenditure are equal at

A)point J.
B)point K.
C)point L.
D)all of the above.

Question 68

When an economy is not in equilibrium,

A)planned expenditures exceed production and income.
B)there is no savings nor investment.
C)government tax revenues equal planned government expenditures.
D)production and income equal planned expenditures.

Question 69

If planned autonomous investment is 500,autonomous consumption 300,induced consumption 2500,savings 500,and government spending and taxes zero,then

A)Ep is 3300 and the economy is in equilibrium.
B)Ep is 3300 and the economy is out of equilibrium.
C)Ep is 3500 and the economy is in equilibrium.
D)Ep is 3500 and the economy is out of equilibrium.

Question 70

Figure 3-5

In Figure 3-5 above,saving is positive at

A)point J.
B)point K.
C)point L.
D)all of the above.

Question 71

If Ep is 3500 and Y is 3000,then companies will

A)reduce orders and production by 500.
B)increase orders and production by 500.
C)wait for final sales to increase but continue to produce at existing level in the future.
D)wait for final sales to decrease but reduce the level of production in the future.

Question 72

Figure 3-7

In Figure 3-7 above,when autonomous planned spending is $250,the equilibrium income level is

A)$1000.
B)$1250.
C)$1500.
D)$2500.

Question 73

In equilibrium,

A)income = planned expenditures.
B)unplanned inventory investment is zero.
C)Ep (planned expenditures)crosses the 45-degree income line.
D)all of the above.

Question 74

If Ep is 2500 and Y is 3000,then companies will

A)reduce orders and production by 500.
B)increase orders and production by 500.
C)wait for final sales to increase.
D)wait for final sales to decrease.

Question 75

If Ep is 2500 and Y is 3000,then

A)planned inventory accumulation is 500.
B)planned inventory depletion is 500.
C)unplanned inventory accumulation is 500.
D)unplanned inventory decumulation is 500.

Question 76

Figure 3-6

In Figure 3-6 above,income and actual expenditures are equal at

A)point J.
B)point K.
C)point L.
D)all of the above.

Question 77

Total planned expenditures are

A)C + Ip.
B)Ep + C.
C)Ep - Ip.
D)None of the above.

Question 78

Figure 3-7

In Figure 3-7 above,the marginal propensity to save is

A)1.
B)5.
C)0.5.
D)0.2.

Question 79

Figure 3-6

In Figure 3-6 above,unplanned inventory decreases occur at

A)point J.
B)point K.
C)point L.
D)all income levels.

Question 80

One way to view equilibrium in the simple Keynesian model without government spending and taxes is that:

A)saving equals planned investment.
B)saving equals planned expenditures.
C)saving equals planned autonomous spending.
D)None of the above.