Question 1

Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop).This type of behavior is ______.

Accepted Answer

A) exactly the type of behavior that Keynes believed most firms exhibit. 
B) known as meeting demand. 
C) inconsistent with the key assumption upon which the basic Keynesian model is built. 
D) free from menu costs.

Question 2

As disposable income increases, consumption:

Accepted Answer

A) increases. 
B) decreases. 
C) may either increase or decrease depending on the wealth effect. 
D) may either increase or decrease depending on the mpc.

Question 3

All of the following would be included in planned aggregate expenditure except:

Accepted Answer

A) spending on consumer durables. 
B) planned changes in inventories. 
C) sales of domestically produced goods to foreigners. 
D) interest paid on the government debt.

Question 4

If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:

Accepted Answer

A) an expansionary gap. 
B) a recessionary gap. 
C) no output gap. 
D) no autonomous expenditure.

Question 5

A recession in the United States ______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada.

Accepted Answer

A) reduces; expansionary 
B) increases; expansionary 
C) reduces; recessionary 
D) increases; recessionary

Question 6

In the short run, with predetermined prices, when output is greater than planned aggregate expenditures:

Accepted Answer

A) potential output is greater than short-run equilibrium output. 
B) potential output is less than short-run equilibrium output. 
C) planned investment is less than actual investment. 
D) planned investment is greater than actual investment.

Question 7

Suppose the stock market crashed, wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends, consumption spending might fall by as much as, but probably not more than:

Accepted Answer

A) $35 billion. 
B) $200 billion. 
C) $350 billion. 
D) $2 trillion.

Question 8

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20.Planned aggregate expenditure equals:

Accepted Answer

A) 290 + 0.25Y. 
B) 320 + 0.25Y. 
C) 320 + 0.75Y. 
D) 290 + 0.75Y.

Question 9

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) ______ gap that can be closed by _________.

Accepted Answer

A) expansionary; decreasing taxes 
B) expansionary; increasing transfer payments 
C) expansionary; decreasing government purchases 
D) recessionary; increasing government purchases

Question 10

Refer to the figure below.  Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal:

Accepted Answer

A) 1,200. 
B) 400. 
C) 600. 
D) 800.

Question 11

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.

Accepted Answer

A) structural 
B) cyclical 
C) productivity 
D) stabilization

Question 12

Refer to the figure below.]  Based on the figure, when PAE = 200 + 0.5Y, short-run equilibrium output equals:

Accepted Answer

A) 1,200. 
B) 400. 
C) 600. 
D) 800.

Question 13

The largest component of planned aggregate expenditure is:

Accepted Answer

A) consumption. 
B) investment. 
C) government purchases. 
D) exports.

Question 14

Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect planned spending _______.

Accepted Answer

A) directly; directly 
B) directly; indirectly 
C) directly; not at all 
D) indirectly; indirectly

Question 15

Refer to the figure below.  Based on the figure, when PAE = 600 + 0.5Y, short-run equilibrium output equals:

Accepted Answer

A) 1,200. 
B) 400. 
C) 600. 
D) 800.

Question 16

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:

Accepted Answer

A) increased by $1 billion. 
B) decreased by $1 billion. 
C) decreased by $0.5 billion. 
D) decreased by $2 billion.

Question 17

As disposable income decreases, consumption:

Accepted Answer

A) increases. 
B) decreases. 
C) may either increase or decrease depending on the mpc. 
D) may either increase or decrease depending on the wealth effect.

Question 18

When real output decreases, planned aggregate expenditures decrease because:

Accepted Answer

A) autonomous expenditures increase. 
B) autonomous expenditures decrease. 
C) induced expenditures increase. 
D) induced expenditures decrease.

Question 19

A fiscal policy action to close an expansionary gap is to:

Accepted Answer

A) increase taxes. 
B) increase transfer payments. 
C) increase government purchases. 
D) increase the marginal propensity to consume.

Question 20

In the basic Keynesian model, a tax increase:

Accepted Answer

A) reduces short-run equilibrium output. 
B) increases short-run equilibrium output. 
C) reduces potential output. 
D) increases potential output.

Exam 11: Spending, Output, and Fiscal Policy

As disposable income increases, consumption:

All of the following would be included in planned aggregate expenditure except:

If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:

A recession in the United States the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) output gap in Canada.

In the short run, with predetermined prices, when output is greater than planned aggregate expenditures:

Suppose the stock market crashed, wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends, consumption spending might fall by as much as, but probably not more than:

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20.Planned aggregate expenditure equals:

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) gap that can be closed by ___.

Refer to the figure below. Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal:

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.

Refer to the figure below.] Based on the figure, when PAE = 200 + 0.5Y, short-run equilibrium output equals:

The largest component of planned aggregate expenditure is:

Changes in government purchases affect planned spending _, and changes in taxes and/or transfers affect planned spending ___.

Refer to the figure below. Based on the figure, when PAE = 600 + 0.5Y, short-run equilibrium output equals:

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:

As disposable income decreases, consumption:

When real output decreases, planned aggregate expenditures decrease because:

A fiscal policy action to close an expansionary gap is to:

In the basic Keynesian model, a tax increase: