Macroeconomics - CH11

If the multiplier in an economy is 5, a $20 billion increase in net exports will a. increase GDP by $100 billion. b. reduce GDP by $4 billion. c. decrease GDP by $100 billion. d. increase GDP by $20 billion.

a. increase GDP by $100 billion.

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? a. bank panic of 1907 b. Great Depression c. spectacular economic growth during World War 2 d. economic expansion of the 1920s

b. Great Depression

If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion, then a. the multiplier is 2. b. the MPC for this economy is 0.6. c. inflation is occurring. d. the MPS for this economy is 0.6.

b. the MPC for this economy is 0.6.

If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion, then a. the multiplier is 4. b. the MPC for this economy is 0.8. c. the MPC for this economy is 0.6. d. the multiplier is 3.

b. the MPC for this economy is 0.8.

A private closed economy will expand when a. actual GDP is less than potential GDP. b. unplanned decreases in inventories occur. c. aggregate expenditures are less than GDP. d. unplanned increases in inventories occur.

b. unplanned decreases in inventories occur.

If at some level of GDP the economy is experiencing an unintended 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.

d. domestic output will increase.

Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S. GDP, then a. unemployment will decrease domestically. b. U.S. real GDP will fall. c. inflation will occur domestically. d. U.S. real GDP will rise.

b. U.S. real GDP will fall.

In the aggregate expenditures model, an increase in government spending may a. decrease real GDP. b. increase output and employment. c. shift the aggregate expenditures schedule downward. d. reduce the size of the inflationary gap.

b. increase output and employment.

The equilibrium level of GDP is associated with a. an excess of planned investment over saving. b. no unintended changes in inventories. c. an unintended decrease in business inventories. d. an unintended increase in business inventories.

b. no unintended changes in inventories.

Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus, a. saving is $10 billion. b. unplanned decreases in inventories of $10 billion will occur. c. the MPC is 0.80. d. unplanned increases in inventories of $10 billion will occur.

b. unplanned decreases in inventories of $10 billion will occur.

Assume the MPC is 0.8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by a. $100 billion. b. $90 billion. c. $40 billion. d. $50 billion.

c. $40 billion.

The level of aggregate expenditures in a mixed open economy consists of a. Ca + Ig + Xn. b. Ca + Ig + G + T + Xn. c. Ca + Ig + Xn + G. d. Ca + G.

c. Ca + Ig + Xn + G.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because a. government spending is more employment intensive than is either consumption or investment spending. b. government spending increases the money supply and a tax reduction does not. c. a portion of a tax cut will be saved. d. taxes vary directly with income.

c. a portion of a tax cut will be saved.

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. aggregate expenditures and real GDP are equal. d. planned saving and consumption are equal.

c. aggregate expenditures and real GDP are equal.

Other things equal, a serious recession in the economies of U.S. trading partners will a. have no perceptible impact on the U.S. economy. b. cause inflation in the U.S. economy. c. depress real output and employment in the U.S. economy. d. stimulate real output and employment in the U.S. economy.

c. depress real output and employment in the U.S. economy.

Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will a. increase by $100 billion. b. increase by less than $100 billion. c. increase by more than $100 billion. d. fall by $100 billion.

c. increase by more than $100 billion.

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.

c. investment schedule upward.

If an unintended 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.

c. we can expect businesses to lower the level of production.

Which of the following would increase GDP by the greatest amount? a. a $20 billion reduction in taxes b. $20 billion increases in both government spending and taxes c. $20 billion decreases in both government spending and taxes d. a $20 billion increase in government spending

d. a $20 billion increase in government spending

In a private closed economy, when aggregate expenditures exceed GDP, a. GDP will decline. b. business inventories will rise. c. saving will decline. d. business inventories will fall.

d. business inventories will fall.

In the aggregate expenditures model, it is assumed that investment a. automatically changes in response to changes in real GDP. b. changes by less in percentage terms than changes in real GDP. c. does not respond to changes in interest rates. d. does not change when real GDP changes.

d. does not change when real GDP changes.

An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because a. the MPC is smaller in the private sector than it is in the public sector. b. declines in government spending always tend to stimulate private investment. c. disposable income will fall by some amount smaller than the tax increase. d. some of the tax increase will be paid out of income that would otherwise have been saved.

d. some of the tax increase will be paid out of income that would otherwise have been saved.

The aggregate expenditures model is built upon which of the following assumptions? a. Prices are fixed. b. The economy is at full employment. c. Prices are fully flexible. d. Government spending policy has no ability to affect the level of output.

a. Prices are fixed.

If unintended increases in business inventories occur, we can expect a. a decline in GDP and rising unemployment. b. inflation. c. an increase in consumption. d. an offsetting increase in planned investment.

a. a decline in GDP and rising unemployment.

Planned investment plus unintended increases in inventories equals a. actual investment. b. consumption. c. consumption minus saving. d. unintended saving.

a. actual investment.

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to a. decrease by $50 billion. b. decrease by $150 billion. c. remain unchanged since spending on military goods is unproductive and usually wasteful. d. decrease by $25 billion.

a. decrease by $50 billion.

A private closed economy includes a. households, businesses, and government, but not international trade. b. households, businesses, and international trade, but not government. c. households and businesses, but not government or international trade. d. households only.

c. households and businesses, but not government or international trade.

At the equilibrium GDP for a private open economy, a. net exports may be either positive or negative. b. imports will always exceed exports. c. exports will always exceed imports. d. exports and imports will be equal.

a. net exports may be either positive or negative.

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by a. $1 billion. b. $0.75 billion. c. $3 billion. d. $4 billion.

c. $3 billion.

In a mixed open economy, the equilibrium GDP exists where a. Ca + Ig + Xn intersects the 45-degree line. b. Ca + Ig = Sa + T + X. c. Ca + Ig + Xn + G = GDP. d. Ca + Ig + Xn = Sa + T.

c. Ca + Ig + Xn + G = GDP.

If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by a. $1 billion. b. $0.9 billion. c. $10 billion. d. $9 billion.

d.