Question 1

Which of the following could be a cause of consumption increasing?

Accepted Answer

A)  Income decreases. 
B)  Interest rates increase. 
C)  Wealth increases. 
D)  Expected future income decreases.

Question 2

One of the major insights by economist John Maynard Keynes about production was that:

Accepted Answer

A)  firms may not produce all they can at a given price, but what they can sell. 
B)  firms generally produce as much as they can at a given price. 
C)  government spending needs to be kept in check in order for the economy to operate efficiently. 
D)  household spending patterns don't really influence the health of the economy.

Question 3

If the MPC = 0.75 and a household obtains $50,000 more dollars then how much would the household spend of the additional $50,000?

Accepted Answer

A)  $50,000 
B)  $12,500 
C)  $37,500 
D)  $40,000

Question 4

One of the major insights by economist John Maynard Keynes about inventories and demand was that if planned inventories:

Accepted Answer

A)  > actual inventories then demand was higher than anticipated. 
B)   actual inventories then demand was lower than anticipated.

Question 5

Using Figure 3 above, suppose that the economy was at Y1. This level of GDP would be considered:

Accepted Answer

A)  inflationary. 
B)  recessionary. 
C)  a long run level of output. 
D)  a natural rate of output.

Question 6

Actual investment is the:

Accepted Answer

A)  spending households engage in based on forecasted budget. 
B)  amount that firms actually allocate to inventory accumulation. 
C)  investment a firm makes into stocks and bonds in order to generate profit. 
D)  amount that firms really allocated to new capital resources and inventory accumulation.

Question 7

Over time in the long run we expect unplanned inventory expenditure to:

Accepted Answer

A)  equal zero as planned inventories should equal actual inventories. 
B)  increase because firms have a hard time figuring out what consumers want. 
C)  be negative as firms will tend to reduce production is they think people won't purchase their product. 
D)  be positive as on average firms tend to be optimistic about sales, but if they don't sell product they store it.

Question 8

The amount by which consumption increases when after-tax income increases by $1 is called the:

Accepted Answer

A)  marginal propensity to consume. 
B)  marginal consumption revenue. 
C)  variable propensity to consume. 
D)  consumption multiplier effect.

Question 9

The marginal propensity to consume:

Accepted Answer

A)  is the amount by which consumption increases when after-tax income increases by $1. 
B)  is closely linked to the multiplier effect of government spending. 
C)  is a value between 0 and 1. 
D)  All of these are true.

Question 10

When we say investment in economics we are talking about:

Accepted Answer

A)  stocks. 
B)  bonds. 
C)  physical capital. 
D)  None of these are examples of investment in economics.

Question 11

In general economic environments that correspond to lower levels of planned aggregate expenditure for a given level of Y have PAE curves that are:

Accepted Answer

A)  higher on the expenditure diagram. 
B)  lower on the expenditure diagram. 
C)  at multiple points on the diagram. 
D)  equivalent at point in the diagram.

Question 12

The economist in the 1930s who is credited with key insights into causes of economic downturns was:

Accepted Answer

A)  John Maynard Keynes 
B)  Ben Bernanke 
C)  Adam Smith 
D)  David Ricardo

Question 13

In Figure 1 above the Keynesian equilibrium occurs at what output level?

Accepted Answer

A)  Y1 
B)  Y2 
C)  Y3 
D)  it does not occur at any output level in the graph.

Question 14

In Figure 1 above if the economy were at Y1 then we would expect there to be:

Accepted Answer

A)  a reduction in inventories. 
B)  an increase in inventories. 
C)  no change in inventories. 
D)  an increase in consumption spending.

Question 15

If the business taxes decreased for a firm, then we might expect investment spending to:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain constant. 
D)  there is not enough information to determine what would happen.

Question 16

When we compare PAE and actual output (Y) the macroeconomic variable we generally use to directly assess their equivalence is:

Accepted Answer

A)  unemployment. 
B)  interest rates. 
C)  inventories. 
D)  capital expenditure.

Question 17

If the government wishes to decrease GDP by $2,000b, and the MPC is 0.6, it should:

Accepted Answer

A)  increase its spending by $1,200b. 
B)  decrease its spending by $1,200b. 
C)  increase its spending by $800b. 
D)  decrease its spending by $800b.

Question 18

Suppose that someone has a disposable annual income of $50,000 and an MPC=0.8. They allocate $10,000 of that for necessities. The remainder of the income is both spent and saved. Based on this information autonomous consumption is:

Accepted Answer

A)  $10,000. 
B)  $40,000. 
C)  $32,000. 
D)  $50,000.

Question 19

If the government wishes to increase GDP by $1,200b, and the MPC is 0.8, it should:

Accepted Answer

A)  increase its spending by $240b. 
B)  decrease its spending by $240b. 
C)  increase its spending by $960b. 
D)  decrease its spending by $960b.

Question 20

Suppose that John allocates $10,000 of his disposable income for necessities. Any additional income beyond that is both spent and saved. Assume he has a disposable annual income of $50,000 and an MPC=0.8. Based on this information the amount of money John should save would be:

Accepted Answer

A)  $10,000. 
B)  $40,000. 
C)  $12,000. 
D)  $8,000.

Exam 11: Aggregate Expenditure