Chapter 11: The Aggregate Expenditures Model

39. T F Keynes explanation of the Great Depression was partially based on the idea of flexible wages.

F

2. 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

59. T F According to Keynes, the level of economic activity depends on the total spending of the economy.

T

17. Refer to the above table. For the open economy the equilibrium GDP and the multiplier are: A. $300 and 2.5. B. $450 and 5. C. $400 and 4. D. $400 and 5.

D

11. Refer to the above diagram for a private closed economy. At the equilibrium level of GDP, investment and saving are both: A. $50. B. $100. C. $20. D. $40.

A

6. Refer to the above data. At the $370 billion level of DI the APS is approximately: A. 4 percent. B. 7 percent. C. 1 percent. D. 16 percent.

A

20. If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to: A. reduce the rate of domestic inflation. B. increase efficiency in the world economy. C. increase domestic output and employment. D. reduce domestic output and employment.

C

22. Other things equal, 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

29. If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is: A. $5 billion below the full-employment GDP. B. $5 billion above the full-employment GDP. C. $20 billion below the full-employment GDP. D. $20 billion above the full-employment GDP.

C

3. 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

30. The recessionary expenditure gap associated with the recession of 2007-2009 resulted from: A. the government's attempt to control hyperinflation. B. a major increase in personal and corporate taxes. C. a rapid decline in investment spending. D. a rapid increase in imports resulting from large tariff reductions.

C

7. Refer to the above data for a private closed economy. If gross investment is $12 billion, the equilibrium level of GDP will be: A. $380. B. $370. C. $360. D. $350.

C

12. Refer to the above diagram for a private closed economy. The $400 level of GDP is: A. that output at which saving is zero. B. too high for equilibrium because consumption exceeds investment. C. too high for equilibrium because aggregate expenditures exceed GDP. D. too high for equilibrium because aggregate expenditures are less than GDP.

D

16. If the above economy was closed to international trade, the equilibrium GDP and the multiplier would be: A. $300 and 5. B. $350 and 4. C. $400 and 4. D. $350 and 5.

D

19. If the dollar appreciates relative to foreign currencies, we would expect: A. the multiplier to decrease. B. U.S. exports and imports to both fall. C. U.S. net exports to rise. D. U.S. net exports to fall.

D

4. 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

9. If an unintended 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. is too high for equilibrium.

D

35. T F According to Say's Law, "demand creates its own supply."

F

31. In an effort to stop the Great Recession of 2007-2009, the federal government: A. reduced taxes and increased government spending. B. imposed large tariffs on many imported goods to protect domestic jobs. C. raised interest rates to encourage greater business investment. D. avoided Keynesian policies because of the threat of inflation

A

15. Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by: A. $100 billion. B. $50 billion. C. $500 billion. D. $5 billion.

B

18. If net exports decline from zero to some negative amount, the aggregate expenditures schedule would: A. shift upward. B. shift downward. C. not move (net exports do not affect aggregate expenditures). D. become steeper.

B

27. 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

28. A ________ is the amount by which the economy's aggregate expenditures schedule (AD) must shift downward to eliminate demand-pull inflation and still achieve the full-employment GDP: A. Recessionary gap B. Inflationary gap C. Output gap D. Contractionary gap

B

5. Refer to the above data. The MPS is: A. 7/10. B. 3/10. C. 2/5. D. 3/5.

B

13. 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

14. Investment and saving are, respectively: A. income and wealth. B. stocks and flows. C. injections and leakages. D. leakages and injections.

C

21. 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

26. Refer to the above diagram. The impact of the public sector on the equilibrium GDP: A. is expansionary. B. is contractionary. C. is neutral. D. cannot be determined from the information given.

A

10. Refer to the above diagram for a private closed economy. The equilibrium level of GDP is: A. $400. B. $300. C. $200. D. $100.

B

34. T F Classsical macroeconomists denied that the level of spending in an economy could be too low to bring about the purchase of the entire full-employment output.

T

53. T F Keynes' solution to close a recessionary expenditure gap and achieve full- employment GDP was either or increase taxes or reduce government spending.

F

56. T F Overproduction was considered an impossibility by J.M. Keynes.

F

58. T F To avoid a recession or depression, Keynes recommended that government decrease spending or increase taxes.

F

60. T F The classical economists disproved the theory of Keynes by showing that the market economy does not automatically move toward full employment.

F

32. T F The classical economists dominated economic thinking prior to the 1930s. They concluded that, over time, the economy will automatically adjust to operate at full employment.

T

37. T F J. M. Keynes attacked Say's Law by noting that during an economic downturn not all income need be spent on goods and services. In fact, businesses will slash investment spending and a lot of saving will not be put into productive use.

T

36. T F The Great Depression of the 1930s called into question the optimistic economic conclusions of the classical economists.

T

43. T F Changes in aggregate expenditures (demand) will cause the equilibrium real GDP to change in the same direction by an amount greater than the initial change in aggregate expenditures. The reason for this greater change is the multiplier effect.

T

1. John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? A. Bank panic of 1907 B. Great Depression of the 1930s C. Spectacular economic growth during World War II D. Economic expansion of the 1920s

B

23. 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

24. In a mixed closed economy: A. government purchases and saving are injections, while investment and taxes are leakages. B. taxes and government purchases are leakages, while investment and saving are injections. C. taxes and savings are leakages, while investment and government purchases are injections. D. taxes and investment are injections, while saving and government purchases are leakages.

C

25. Refer to the above diagram. The sizes of the multipliers associated with changes in investment and government spending in this economy are: A. 2.5 and 1.5 respectively. B. 3 and 2 respectively. C. both 2.5. D. 2 and 3 respectively.

C

8. In a private closed economy, when aggregate expenditures (AD) equal GDP (AS): A. consumption equals investment. B. consumption equals aggregate expenditures. C. planned investment equals saving. D. disposable income equals consumption minus saving.

C

47. T F If there is an increase in incomes in other nations that trade with the United States, American firms will sell less goods abroad. This decreases U.S. net exports and results in decreases in real GDP for the United States.

F

48. T F A depreciation in the exchange value of the U.S. dollar will decrease the purchasing power of foreign currency. As a result, U.S. net exports will decrease and real GDP will fall.

F

44. T F The equilibrium real GDP in a private open economy means real GDP is equal to consumption plus investment plus net exports.

T

40. T F Keynes developed the aggregate expenditures (demand) model during the 1930s when there was high unemployment and underutilized capital. Prices in such an economy were fixed or stuck because the oversupply of productive resources kept prices low. Thus, the aggregate expenditures model assumes constant prices.

T

41. T F In the aggregate expenditures model, the equilibrium real GDP occurs at that point where aggregate expenditures (demand) equal real GDP (aggregate supply). In graphical terms, the aggregate expenditures schedule crosses the 45-degree line.

T

46. T F An increase in net exports will increase the equilibrium real GDP with a multiplier effect. A decrease in net exports will do the opposite.

T

49. T F Household taxes decrease consumption and the aggregate expenditures (demand) schedule by the amount of the tax times the MPC.

T

50. T F Government purchases of goods and services add to the aggregate expenditures (demand) schedule and increase equilibrium real GDP. An increase in these purchases has a multiplier effect on equilibrium real GDP.

T

51. T F If the equilibrium real GDP is less than the real GDP consistent with full- employment real GDP, there exists an inflationary gap (inflationary expenditure gap).

T

52. T F The size of a recessionary gap (recessionary expenditure gap) equals the amount by which the aggregate expenditures schedule must shift upward to increase real GDP to its full-employment level.

T

55. T F An inflationary gap (inflationary expenditure gap) results from excess spending and will increase the price level, creating demand-pull inflation.

T

57. T F Keynes argued that prices and wages were inflexible in a downward direction due to the market power of big businesses and labor unions.

T

33. T F The classical economists believed that active government intervention is needed in the economy if the economy is to achieve full employment of resources.

F

38. T F In contrast to the more laissez-faire view of Keynes, the classical economists argued that government should play an active role in stabilizing the economy.

F

42. T F At below-equilibrium levels of GDP, aggregate expenditures (demand) is less than aggregate supply. Thus, there occurs unintended investment through increased business inventories.

F

45. T F The net exports schedule can be positive or negative. The schedule is positive when imports are greater than exports—a balance of trade deficit occurs. The schedule is negative when exports are greater than imports—a balance of trade surplus occurs.

F

54. T F The Great Recession of 2007-2009 was an example of an inflationary gap.

F