Chapter 10: Self- Adjustment or Instability?

If the MPC = 0.90, the total change in spending resulting from an initial $200 increase in aggregate spending will be A. $2,000. B. $200. C. $180. D. $1,800.

A. $2,000.

If the marginal propensity to consume is 0.60, then the multiplier equals A. 2.50. B. 0.60. C. 1.67. D. 0.40.

A. 2.50.

Assuming an upward-sloping AS curve, if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant, then A. A GDP gap emerges. B. The price level increases. C. Output increases. D. The unemployment rate falls.

A. A GDP gap emerges.

Which of the following can eliminate a recessionary GDP gap, ceteris paribus? A. An increase in consumption expenditure. B. A decrease in investment. C. An increase in saving. D. A decrease in government spending.

A. An increase in consumption expenditure.

The consumption function will shift when A. Autonomous consumption changes. B. Induced consumption changes. C. Autonomous or induced consumption changes. D. Investment changes.

A. Autonomous consumption changes.

Assuming an upward-sloping AS curve, if an economy is at full employment and consumption spending decreases while all other levels of spending remaining constant, then A. Increased unemployment results. B. Any GDP gap disappears. C. Inventory levels are less than desired until a new equilibrium is reached. D. Changes in consumption spending have no impact on GDP.

A. Increased unemployment results.

A decrease in sales expectations may shift the AD curve to the A. Left, causing more undesired investment. B. Left, causing less undesired investment. C. Right, causing more undesired investment. D. Right, causing less undesired investment

A. Left, causing more undesired investment.

John Maynard Keynes argued that A. Macro failure is likely to occur, and it isn't likely to go away. B. Macro failure is unlikely to occur. C. Macro failure is likely to occur but will go away quickly. D. None of the choices are correct.

A. Macro failure is likely to occur, and it isn't likely to go away.

Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion. If AD shifts to the left by $10 billion, A. Real output will fall by less than $10 billion. B. Real output will fall by $10 billion. C. The inflationary gap will be eliminated. D. A recessionary gap will be created.

A. Real output will fall by less than $10 billion.

An inflationary spiral can emerge when A. Desired spending at full employment falls short of full-employment output. B. Desired saving falls short of desired investment at full employment. C. Actual investment equals desired investment. D. Desired leakages exceed desired injections

B. Desired saving falls short of desired investment at full employment.

A demand-pull inflation problem can best be solved by A. An increase in production of goods and services. B. A reduction in desired spending. C. An increase in aggregate demand. D. A reduction in aggregate supply.

B. A reduction in desired spending.

Assuming the economy is at full employment, a decrease in aggregate demand will most likely cause a change in which of the following types of unemployment? A. Seasonal. B. Cyclical. C. Frictional. D. Structural.

B. Cyclical.

Classical economists assume that A. Spending leakages exceed spending injections. B. Interest rate adjustment will cause business investment to equal consumer saving. C. The economy might experience persistent macro instability. D. No leakages would occur.

B. Interest rate adjustment will cause business investment to equal consumer saving.

If desired investment exceeds actual investment, then A. A recessionary GDP gap will emerge. B. Inventories are less than the desired level. C. Inventories are accumulating beyond desired levels. D. Cyclical unemployment exists.

B. Inventories are less than the desired level.

If aggregate demand shifts to the left by $400 billion and aggregate supply is upward-sloping, then real output will decrease by A. $400 billion, and the price level will not change. B. Less than $400 billion, and the price level will fall. C. $400 billion, and the price level will fall. D. More than $400 billion, and the price level will not change.

B. Less than $400 billion, and the price level will fall.

The output level at which the aggregate demand curve intersects the aggregate supply is always the level at which A. Saving is zero. B. Macro equilibrium is reached. C. Full employment is sustainable by the economy. D. Micro equilibrium is achieved.

B. Macro equilibrium is reached.

According to Keynes, if injections equal leakages, A. The economy will always stabilize at full employment. B. Macroeconomic equilibrium will occur. C. Macroeconomic equilibrium will not occur. D. Microeconomic instability will persist.

B. Macroeconomic equilibrium will occur.

The multiplier process can occur when a decrease in investment spending A. Increases household saving, causing consumers to buy more goods and services. B. Reduces household incomes, causing consumers to buy fewer goods and services. C. Increases household incomes, causing consumers to buy fewer goods and services. D. Reduces household incomes, causing consumers to buy more goods and services.

B. Reduces household incomes, causing consumers to buy fewer goods and services.

To illustrate the ultimate impact of the multiplier process when investment spending falls, we should A. Shift the AD curve rightward once. B. Shift the AD curve leftward twice, once for the autonomous change and second for the multiplier effect. C. Shift the AD curve leftward and then rightward. D. Shift the AD curve leftward and then shift the AS curve leftward.

B. Shift the AD curve leftward twice, once for the autonomous change and second for the multiplier effect.

If consumers spend 90 cents out of every extra dollar received, the A. MPS is 0.90. B. The MPC is 0.90. C. Multiplier is 0.90. D. Multiplier is 9.

B. The MPC is 0.90.

Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion. If aggregate demand increases by a total of $50 billion, A. The recessionary GDP gap will be eliminated. B. The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output. C. The resulting equilibrium GDP will be greater than full-employment GDP because of demand-pull inflation. D. Cyclical unemployment will increase.

B. The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output.

If the MPC = 0.60, the total change in spending resulting from an initial $500 decrease in aggregate spending will be A. $300. B. $800. C. $1,250. D. $833.

C. $1,250.

Calculate the total change in spending because of an initial $100 increase in aggregate demand, given that the MPC = 0.60. A. $100 increase. B. $100 decrease. C. $250 increase. D. $60 increase.

C. $250 increase.

Given C = 200 + 0.75YD, the multiplier is A. 0.25. B. 0.75. C. 4. D. 1.33.

C. 4.

Investment represents A. A leakage from the circular flow, similar to saving. B. A leakage from the circular flow, similar to taxes. C. An injection into the circular flow, similar to government spending. D. An injection into the circular flow, similar to imports.

C. An injection into the circular flow, similar to government spending.

Keynes believed that abrupt changes in spending behavior A. Have no effect on the economy. B. Help stabilize the economy. C. Cause recurring business cycles. D. Move the economy to full employment.

C. Cause recurring business cycles.

Given the MPS = 0.40, with no government and no foreign trade, a $10 billion increase in investment will eventually result in an increase in A. Consumption by $40 billion. B. Total spending by $15 billion. C. Consumption by $15 billion. D. Total spending by $2.5 billion.

C. Consumption by $15 billion.

Which of the following is an example of the multiplier at work as a result of an increase in consumption expenditures? A. Consumers compete with the government by increasing their expenditures, causing businesses to increase their investments to satisfy the increased demand. B. Consumption expenditures increase inflation, which reduces real incomes; consumer expenditures and investment decline, which reduces aggregate spending. C. Households and businesses receive income from consumption expenditures; they spend a portion of this new income; these expenditures, in turn, generate income for other businesses and households, which in turn spend a portion of the new income, and so on. D. Consumption expenditures stimulate investment in new plants and equipment to produce goods and services for the government, which provides fewer jobs and decreases incomes.

C. Households and businesses receive income from consumption expenditures; they spend a portion of this new income; these expenditures, in turn, generate income for other businesses and households, which in turn spend a portion of the new income, and so on.

Disposable income is less than GDP due to A. Taxes by governments along with exports. B. Income held by businesses. C. Taxes by governments and income held back as saving by businesses. D. Taxes by governments along with imports.

C. Taxes by governments and income held back as saving by businesses.

If leakages exceed injections, A. The economy will stabilize at full employment. B. Interest rates will rise. C. The economy is contracting. D. Microeconomic instability will persist.

C. The economy is contracting.

If the MPC = 0.80, the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be A. $150. B. $187.5. C. $500. D. $750.

D. $750.

With a consumption function of the form C = a + bYD, which of the following would best measure how much a recession will spread? A. Parameter a. B. Parameter b. C. Variable YD. D. 1 ÷ (1 - b).

D. 1 ÷ (1 - b).

Suppose an economy can be described by the consumption function C = 250 + 0.90YD and I = $300. What is the multiplier? A. 0.1. B. 0.9. C. 3. D. 10.

D. 10.

A decline in household income that sets off a multiplier process causes A. An increase in AS. B. A decrease in AS. C. An increase in AD. D. A decrease in AD.

D. A decrease in AD.

Desired saving equals desired investment in an economy with no government and no foreign trade A. At the full-employment level of income. B. At the income where desired investment equals output. C. By definition. D. At the equilibrium level of income.

D. At the equilibrium level of income.

If investment spending decreases and all other levels of spending remain constant, then aggregate A. Supply increases. B. Supply decreases. C. Demand increases. D. Demand decreases.

D. Demand decreases.

If leakages are less than injections, equilibrium output will be A. Less than full-employment output, and a recessionary gap will occur. B. More than full-employment output, and a recessionary gap will occur. C. Less than full-employment output, and an inflationary gap will occur. D. More than full-employment output, and an inflationary gap will occur.

D. More than full-employment output, and an inflationary gap will occur.