Deck 9: The Aggregate Expenditures Model

Question 1

Refer to the above diagrams. Curve A:

A) is an investment schedule and curve B is a consumption of fixed capital schedule.
B) is an investment demand curve and curve B is an investment schedule.
C) and B are totally unrelated.
D) shifts to the left when curve B shifts upward.

Answer 1

is an investment demand curve and curve B is an investment schedule.

Question 2

All else equal, a large decline in the real interest rate will shift the:

A) investment-demand curve leftward.
B) investment-demand curve rightward.
C) investment schedule upward.
D) investment schedule downward.

Answer 2

investment schedule upward.

Question 3

Which of the following will cause the investment schedule to shift downward?

A) an increase in the real interest rate
B) a decline in wage rates
C) a significant decline in the real interest rate
D) a new technological advance which cuts the price of steel by one-half

Answer 3

an increase in the real interest rate

Question 4

The equilibrium GDP is the level of domestic output:

A) where consumption equals saving.
B) where actual investment equals consumption.
C) which is sustainable.
D) where full employment exists.

Question 5

Refer to the above diagrams. Other things equal, an interest rate increase will:

A) shift curve A to the right and shift curve B upward.
B) shift curve A to the left and shift curve B downward.
C) leave curve A in place but shift curve B downward.
D) leave curve A in place but shift curve A upward.

Question 6

Refer to the above diagram. Other things equal, an interest rate decrease coupled with a rightward shift in curve A will:

A) shift curve B upward.
B) shift curve B downward.
C) has no effect on curve B
D) reduce GDP.

Question 7

Refer to the above information. If the real interest rate is 20 percent, the equilibrium level of GDP will be:

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

Question 8

Refer to the above information. If the real interest rate is 9 percent, the equilibrium level of GDP will be:

A) $600.
B) $500.
C) $400.
D) $300.

Question 9

Refer to the above diagram, the location of curve B depends on the:

A) level of real GDP.
B) location of curve A only.
C) interest rate only.
D) both interest rate and, the location of curve A

Question 10

Refer to the above diagrams. Other things equal, Curve B will shift upward when:

A) the level of GDP increases.
B) the interest rate increases.
C) curve A shifts to the left.
D) curve A shifts to the right.

Question 11

Refer to the below data. Equilibrium Y = (GDP) is: The letters Y, C, and, I are used to represent GDP, consumption, and, investment respectively.

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

Question 12

In a private closed economy (a) the marginal propensity to save is 0.25, (b) consumption equals income when consumption is $120 billion, and (c) the level of investment is $40 billion. What is the equilibrium level of income?

A) $280 billion
B) $320 billion
C) $262 billion
D) $198 billion

Question 13

Refer to the above information. When the real interest rate is 10 percent, unplanned changes in inventories are equal to:

A) $40.
B) -$30.
C) $20.
D) -$60.

Question 14

Refer to the above diagrams. Other things equal, an interest rate decrease will:

A) shift curve A to the right and shift curve B upward.
B) shift curve A to the left and shift curve B downward.
C) leave curve A in place but shift curve B downward.
D) leave curve A in place but shift curve A upward.

Question 15

In the aggregate expenditures model, it is assumed that the planned investment:

A) automatically changes in response to changes in the current level of real domestic output.
B) changes by less in percentage terms than changes in the level of real domestic output.
C) does not respond to changes in interest rates.
D) does not change when the level of real domestic output changes.

Question 16

For a private closed economy aggregate expenditures consist of:

A) C + I_g.
B) C - I_g.
C) C + S.
D) C - S.

Question 17

The level of aggregate expenditures in the private closed economy is determined by the:

A) expenditures of consumers and businesses.
B) intersection of the saving schedule and the 45-degree line.
C) equality of the MPC and MPS.
D) intersection of the saving and consumption schedules.

Question 18

The relationship between investment and GDP is shown by the:

A) consumption of fixed capital schedule.
B) saving schedule.
C) investment schedule.
D) consumption schedule.

Question 19

Refer to the above information. In this economy a 3 percentage point decrease in the interest rate will:

A) increase equilibrium GDP by $200.
B) increase equilibrium GDP by $100.
C) increase equilibrium GDP by $50.
D) decrease equilibrium GDP by $50.

Question 20

Refer to the data below. If gross investment is $10 at all levels of GDP, the equilibrium GDP will be: The following schedule contains data for a private closed economy. All figures are in billions.

A) $300.
B) $220.
C) $260.
D) $180.

Question 21

Refer to the above diagram for a private closed economy. At the equilibrium level of GDP saving is:

A) $10.
B) $20.
C) $30.
D) $50

Question 22

Refer to the above diagram for a private closed economy. Aggregate saving in this economy will be zero when:

A) C + I_g cuts the 45-degree line.
B) GDP is $180 billion.
C) GDP is $60 billion.
D) GDP is also zero.

Question 23

Refer to the above diagram for a private closed economy. At the $300 level of GDP:

A) aggregate expenditures and GDP are equal.
B) consumption is $250 and planned investment is $50.
C) saving equals investment.
D) all of the above are true.

Question 24

Refer to the above diagram for a private closed economy. At the $200 level of GDP:

A) consumption is $200 and planned investment is $50 so that aggregate expenditures are $250.
B) consumption is $200 and planned investment is $100 so that aggregate expenditures are $300.
C) consumption is $250 and actual investment is $50 so that aggregate expenditures are $300.
D) aggregate expenditures is equal to the GDP.

Question 25

Refer to the above diagram for a private closed economy. At the $400 level of GDP:

A) aggregate expenditures exceed GDP with the result that GDP will rise.
B) consumption is $350 and planned investment is zero so that aggregate expenditures are $350.
C) consumption is $300 and planned investment is $50 so that aggregate expenditures are $350.
D) consumption is $300 and actual investment is $100 so that aggregate expenditures are $400.

Question 26

Investment and saving are, respectively:

A) income and wealth.
B) stocks and flows.
C) injections and leakages.
D) leakages and injections.

Question 27

Refer to the diagram below for a private closed economy. Saving and planned investment are equal:

A) only at the $300 level of GDP.
B) only at the $250 level of GDP.
C) at all levels of GDP.
D) only at the $375 level of GDP.

Question 28

Refer to the above diagram for a private closed economy. The equilibrium level of GDP is:

A) $400.
B) $300.
C) $250.
D) $375

Question 29

Refer to the above diagram which applies to a private closed economy. If gross investment increases from I_g1 to I_g2, the equilibrium GDP will:

A) decrease by KD.
B) increase by HJ.
C) increase by KD.
D) increase by GH.

Question 30

In a private closed economy, aggregate expenditures will equal GDP where:

A) consumption equals investment.
B) consumption plus investment equals aggregate expenditures.
C) planned investment equals saving.
D) disposable income equals consumption minus saving.

Question 31

Refer to the above diagram for a private closed economy. In this economy investment:

A) decreases as GDP increases.
B) increases as GDP increases.
C) is $40 billion at all levels of GDP.
D) is $60 billion at all levels of GDP.

Question 32

Refer to the above diagram for a private closed economy. In this economy, aggregate expenditures:

A) do not change as GDP increases.
B) increase by $2 for every $5 increase in GDP.
C) increase by $2 for every $4 increase in GDP.
D) increase by $2 for every $3 increase in GDP.

Question 33

Achieving aggregate equilibrium in the economy is indicated by:

A) an equality of saving and planned investment.
B) an equality of aggregate expenditures and domestic output.
C) the absence of unplanned investment or disinvestment.
D) all of the above.

Question 34

The equilibrium level of GDP is associated with:

A) an excess of planned investment over saving.
B) no unintended investment in inventories.
C) an unintended decrease in business inventories.
D) an unintended increase in business inventories.

Question 35

In the aggregate expenditures model, equilibrium GDP in a private closed economy is indicated by:

A) the equality of saving and planned investment.
B) the intersection of aggregate expenditures and the 45-degree line.
C) the absence of unplanned changes in inventories.
D) all of the above.

Question 36

The equilibrium level of GDP in a private closed economy is where:

A) MPC = APC.
B) unemployment is about 3 percent of the labor force.
C) planned consumption equals saving.
D) saving equals planned investment.

Question 37

Refer to the above diagram for a private closed economy. The equilibrium level of GDP in this economy:

A) is $60 billion.
B) is $180 billion.
C) is between $60 and $180 billion.
D) cannot be determined from the information given.

Question 38

When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule:

A) exceeds the MPC.
B) is less than the MPC.
C) equals the MPS.
D) equals the MPC.

Question 39

Refer to the above diagram which applies to a private closed economy. If gross investment is I_g1, the equilibrium GDP and the level of consumption will be:

A) H and HB respectively.
B) J and JI respectively.
C) J and JK respectively
D) H and HF respectively.

Question 40

Refer to the above data. If gross investment is $120, the equilibrium level of GDP will be:

A) $380.
B) $370.
C) $360.
D) $400.

Question 41

Assume that in a private closed economy consumption is $240 billion and investment is $50 billion at the $280 billion level of domestic output. Thus:

A) saving is $10 billion.
B) unplanned disinvestment of $10 billion will occur.
C) the MPC is .80.
D) unplanned investment of $10 billion will occur.

Question 42

In a private closed economy _____ investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where _____ investment is equal to saving.

A) planned; actual
B) actual; planned
C) gross; net
D) net; gross

Question 43

Refer to the above diagram for a private closed economy. At the $200 level of GDP:

A) consumption will equal GDP.
B) planned investment will equal saving and unintended investment will be zero.
C) aggregate expenditures will exceed GDP, causing GDP to rise.
D) GDP will exceed aggregate expenditures, causing GDP to fall.

Question 44

Refer to the diagram below for a private closed economy. In equilibrium the level of consumption:

A) will be $100.
B) will be $500.
C) will be $600.
D) cannot be determined from the information given.

Question 45

If an unplanned increase in business inventories occurs at some level of GDP, then GDP:

A) entails a rate of aggregate expenditures in excess of the rate of aggregate production.
B) may be either above or below the equilibrium output.
C) is too low for equilibrium.
D) will decrease.

Question 46

Refer to the above diagram which is for a private closed economy. All figures are in billions of dollars. If gross investment is $15, the equilibrium level of GDP:

A) is $30.
B) is $380.
C) is $300.
D) is $340.

Question 47

Refer to the above diagram for a private closed economy. At the $300 level of GDP:

A) planned investment will exceed saving, but actual investment will be equal to saving.
B) aggregate expenditures will exceed GDP, causing GDP to rise.
C) actual investment will exceed planned investment.
D) households will consume in excess of their incomes.

Question 48

Which of the following statements is correct for a private closed economy?

A) Saving equals planned investment only at the equilibrium level of domestic output.
B) All levels of domestic output where planned investment exceeds saving will be too high for equilibrium.
C) Planned and actual investment are identical at all possible levels of domestic output.
D) Saving equals actual investment only at the equilibrium level of domestic output.

Question 49

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be:

A) $138 billion.
B) $126 billion.
C) $38 billion.
D) $180 billion.

Question 50

Refer to the above diagram which is for a private closed economy. All figures are in billions of dollars. If businesses were willing to invest $30 at each possible level of GDP, the equilibrium level of GDP would be:

A) $462.5.
B) $435.
C) $420.
D) $380.

Question 51

Refer to the above diagram for a private closed economy. At the $100 level of GDP:

A) aggregate expenditures will exceed GDP, causing GDP to fall.
B) planned investment will exceed saving, but actual investment will be equal to saving.
C) households will consume more than their income.
D) saving will be $40.

Question 52

If aggregate expenditures exceed the domestic output in a private closed economy:

A) leakages will exceed injections.
B) planned investment will exceed saving.
C) unplanned investment in inventories will occur.
D) saving will exceed planned investment.

Question 53

Planned investment is $75 billion and saving is $62 billion in a private closed economy. In equilibrium actual investment must be:

A) $13 billion.
B) $75 billion.
C) $62 billion.
D) minus $13 billion.

Question 54

If at some level of GDP the economy is experiencing an unplanned decrease in inventories:

A) the aggregate level of saving will decline.
B) the price level will fall.
C) the business sector will lay off workers.
D) domestic output will increase.

Question 55

If an unplanned increase in business inventories occurs:

A) we can expect aggregate production to be unaffected.
B) we can expect businesses to increase the level of production.
C) we can expect businesses to lower the level of production.
D) aggregate expenditures must exceed the domestic output.

Question 56

Planned investment equals saving:

A) at all levels of GDP.
B) at all below-equilibrium levels of GDP.
C) at all above-equilibrium levels of GDP.
D) only at the equilibrium GDP.

Question 57

In which of the following situations for a private closed economy will the level of GDP expand?

A) when planned investment exceeds saving
B) when planned investment exceeds consumption
C) when saving exceeds consumption
D) when consumption exceeds investment

Question 58

Actual investment is $62 billion at an equilibrium output level of $620 billion in a private closed economy. The average propensity to save at this level of output:

A) is 0.10.
B) is 10.
C) is 0.62.
D) cannot be determined on the basis of the information given.

Question 59

The inequality of saving and planned investment:

A) is attributable to a low MPC.
B) may be of considerable significance because of the subsequent changes in income, employment, and the price level.
C) is of no consequence because a compensating inequality of tax collections and government spending will always occur.
D) is of no consequence because saving and actual investment will always be equal.

Question 60

In a private closed economy, where aggregate expenditures exceed domestic output:

A) domestic output will decline to the break-even level.
B) business inventories will rise.
C) saving exceeds planned investment.
D) planned investment exceeds saving.

Question 61

Refer to the above diagram for a private closed economy. Unplanned investment in inventories will:

A) occur at all levels of GDP in excess of $200.
B) occur at all levels of GDP in excess of $600.
C) occur at all levels of GDP below $600.
D) not occur because the economy is necessarily in equilibrium.

Question 62

At equilibrium real GDP in a private closed economy:

A) the MPC must equal the APC.
B) the slope of the aggregate expenditures schedule equals the MPS.
C) planned and actual investment are equal.
D) planned saving and consumption are equal.

Question 63

Exports have the same macroeconomic effect on GDP as:

A) imports.
B) investment.
C) taxes.
D) saving.

Question 64

Refer to the above diagram, which applies to a private closed economy. If the initial gross investment I_g1 increases to I_g2, the equilibrium GDP will increase by:

A) FE.
B) AB.
C) AD.
D) GE.

Question 65

Refer to the diagram below for a private closed economy. At income level D:

A) planned investment is GH.
B) unplanned investment is GH.
C) unplanned disinvestment is GH.
D) saving equals planned investment.

Question 66

Actual investment may be defined as:

A) gross investment less replacement investment.
B) the ratio of planned to unplanned investment.
C) unintended less planned investment.
D) planned plus unplanned investment.

Question 67

Refer to the diagram below for a private closed economy. The multiplier is:

A) GF/DE.
B) GF/GB.
C) FE/GF.
D) AB/GF.

Question 68

Imports have the same macroeconomic effect on GDP as:

A) exports.
B) investment.
C) consumption.
D) saving.

Question 69

Saving is always equal to:

A) planned less unintended investment.
B) actual investment.
C) planned investment.
D) unintended investment.

Question 70

Unplanned changes in inventories:

A) cause the economy to move away from the equilibrium GDP.
B) must be subtracted from planned investment to determine actual investment.
C) bring actual investment and saving into equality only at the equilibrium level of GDP.
D) bring actual investment and saving into equality at all levels of GDP.

Question 71

Refer to the below diagram, which aggregate expenditure (AE) schedule for a private closed economy implies the largest MPC?

A) AE₄
B) AE₃
C) AE₂
D) AE₁

Question 72

Refer to the information below. The multiplier in this economy is:

A) 4.
B) 5.
C) 1.5.
D) 3.

Question 73

The economy will expand when:

A) actual GDP is less than potential GDP.
B) planned investment exceeds saving.
C) saving exceeds planned investment.
D) unplanned investment occurs.

Question 74

Refer to the information below. The multiplier for this economy:

A) is 2.
B) is 2.5.
C) is 3.
D) is 4.

Question 75

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?

A) a decline in the rate of interest
B) an unplanned accumulation of inventories by businesses
C) a rise in the real GDP
D) the federal budget will automatically move toward a deficit

Question 76

If unplanned investment in business inventories occurs, we can expect:

A) a decline in GDP.
B) inflation.
C) an increase in consumption.
D) an offsetting increase in planned investment.

Question 77

Actual investment equals saving:

A) at all levels of GDP.
B) at all below-equilibrium levels of GDP.
C) at all above-equilibrium levels of GDP.
D) only at the equilibrium GDP.

Question 78

Planned plus unplanned investment equals:

A) actual investment.
B) consumption of fixed capital.
C) consumption minus saving.
D) unintended saving.

Question 79

Refer to the above diagram for a private closed economy. Planned and actual investment will be equal at:

A) all levels of GDP below $200.
B) all levels of GDP above $200.
C) all levels of GDP between $200 and $600.
D) $600 only.

Question 80

For a private closed economy, an unplanned decline in inventories suggests that:

A) aggregate expenditures are less than the business sector expected them to be.
B) planned investment is greater than saving.
C) actual investment exceeds saving.
D) planned investment is greater than consumption.