Chapter 28
1. John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? Bank panic of 1907 Great Depression Spectacular economic growth during World War II Economic expansion of the 1920s
Great Depression
66. In a mixed open economy, if aggregate expenditures exceed GDP: Ig + X + G = Ca. Ca + Ig + Xn + G < domestic output. Ig > S. Ig + X + G > Sa + M + T.
Ig + X + G > Sa + M + T.
50. If the equilibrium level of GDP in a private open economy is $1000 billion and consumption is $700 billion at that level of GDP, then: saving must be $300 billion. net exports must be $300 billion. S + C must equal $300 billion. Ig+ Xn must equal $300 billion.
Ig+ Xn must equal $300 billion.
105. If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is: $5 billion below the full-employment GDP. $5 billion above the full-employment GDP. $20 billion below the full-employment GDP. $20 billion above the full-employment GDP.
$20 billion below the full-employment GDP.
109. If the MPC is .50 and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap is: $40 billion. $20 billion. $60 billion. $80 billion.
$20 billion.
34. (Advanced analysis) In a private closed economy (a) the marginal propensity to save is 0.25, (b) consumption equals income at $120 billion, and (c) the level of investment is $40 billion. What is the equilibrium level of income? $280 billion $320 billion $262 billion $198 billion
$280 billion
90. If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce consumption by: $1 billion. $.75 billion. $3 billion. $4 billion.
$3 billion.
28. At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be: $138 billion. $126 billion. $38 billion. $180 billion.
$38 billion.
59. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by: $100 billion. $90 billion. $40 billion. $50 billion.
$40 billion.
91. If the MPC in an economy is .9, a $1 billion increase in government spending will ultimately increase consumption by: $1 billion. $.9 billion. $10 billion. $9 billion.
$9 billion.
92. If the marginal propensity to save in a closed economy is 0.25 and a lump-sum tax is imposed, the slope of the economy's aggregate expenditures schedule will be: .25. less than the slope before the tax. greater than the slope before the tax. .75.
.75
20. Actual investment is $62 billion at an equilibrium output level of $620 billion in a private closed economy. The average propensity to save at this level of output is: 0.10. 10.0. 0.62. 0.84.
0.10.
37. (Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is: 3. 4. 5. 10.
4
38. (Advanced analysis) Assume the saving schedule for a private closed economy is S = -20 + 0.2Y, where S is saving and Y is gross domestic product. The multiplier for this economy is: 3. 4. 5. 10.
5
54. In a mixed open economy the equilibrium GDP exists where: Ca + Ig + Xn intersects the 45-degree line. Ca + Ig = Sa + T + X. Ca + Ig + Xn + G = GDP. Ca + Ig + Xn = Sa + T.
Ca + Ig + Xn + G = GDP.
69. The level of aggregate expenditures in a mixed open economy is comprised of: Ca + Ig + Xn. Ca + Ig + G + T + Xn. Ca + Ig + Xn + G. Ca + G.
Ca + Ig + Xn + G.
40. Exports have the same effect on the current size of GDP as: imports. investment. taxes. saving.
investment.
116. (Last Word) In The General Theory of Employment, Interest, and Money: Adam Smith stated his idea of the invisible hand. Thorstein Veblen poked fun at the leisure class. John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself. J. B. Say developed "Say's law."
John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.
114. (Last Word) Say's law and classical macroeconomics were disputed by: Adam Smith. Jeremy Bentham. John Stuart Mill. John Maynard Keynes.
John Maynard Keynes.
79. Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government purchases by $18 billion. On the basis of this information we can say that the: MPS in this economy is .4. MPC in this economy is .4. multiplier does not apply in this economy. multiplier is 3.
MPS in this economy is .4.
63. Which of the following statements is incorrect? Given the economy's MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes. Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4. If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate expenditures of $8 billion. A government surplus is anti-inflationary; a government deficit is expansionary.
Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4.
2. The aggregate expenditures model is built upon which of the following assumptions? Prices are fixed. The economy is at full employment. Prices are fully flexible. Government spending policy has no ability to affect the level of output.
Prices are fixed.
77. Taxes represent: a leakage of purchasing power, like saving. an injection of purchasing power, like investment. an injection of purchasing power, like government spending. a leakage of purchasing power, like government spending.
a leakage of purchasing power, like saving.
110. The recessionary expenditure gap associated with the recession of 2007-2009 resulted from: the government's attempt to control hyperinflation. a major increase in personal and corporate taxes. a rapid decline in investment spending. a rapid increase in imports resulting from large tariff reductions.
a rapid decline in investment spending.
112. The U.S. recession of 2007-2009 provides a good example of: demand-pull inflation. cost-push inflation. a recessionary expenditure gap. the repercussions of hyperinflation.
a recessionary expenditure gap.
55. In a mixed open economy the equilibrium GDP is determined at that point where: Sa + M + T = Ig + X + G. the 45-degree line and the saving schedule intersect. Sa + X + G = Ig + T. Sa + Ig + X = G + T.
Sa + M + T = Ig + X + G.
80. In a mixed open economy, which of the following will affect the equilibrium GDP in the same direction? Ca, Ig, Sa, and M Sa, T, and M Ig, T, and Ca Sa, Ig, and X
Sa, T, and M
27. Which of the following statements is correct for a private closed economy? Saving equals planned investment only at the equilibrium level of GDP. All levels of GDP where planned investment exceeds saving will be too high for equilibrium. Planned and actual investment are identical at all possible levels of GDP. Saving equals actual investment only at the equilibrium level of GDP.
Saving equals planned investment only at the equilibrium level of GDP.
88. Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that: Ig + T > Sa + G. T + G > Sa + Ig. T + Sa > Ig + G. T + Sa < Ig + G.
T + Sa > Ig + G.
47. If the dollar appreciates relative to foreign currencies, we would expect: the multiplier to decrease. a country's exports and imports to both fall. a country's net exports to rise. a country's net exports to fall.
a country's net exports to fall.
45. An upward shift of the aggregate expenditures schedule might be caused by: a decrease in exports, with no change in imports. a decrease in imports, with no change in exports. an increase in exports, with an equal decrease in investment spending. an increase in imports, with no change in exports.
a decrease in imports, with no change in exports.
26. What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources? a decline in the rate of interest an unintended accumulation of inventories by businesses a rise in the real GDP the Federal budget will automatically move toward a deficit
a rise in the real GDP
5. In the aggregate expenditures model, it is assumed that investment: automatically changes in response to changes in real GDP. changes by less in percentage terms than changes in real GDP. does not respond to changes in interest rates. does not change when real GDP changes.
does not change when real GDP changes.
29. Planned investment plus unintended increases in inventories equals: actual investment. consumption. consumption minus saving. unintended saving.
actual investment.
30. Saving is always equal to: planned investment less unintended increases in inventories. actual investment. planned investment. unintended changes in inventories.
actual investment.
25. At equilibrium real GDP in a private closed economy: the MPC must equal the APC. the slope of the aggregate expenditures schedule equals the MPS. aggregate expenditures and real GDP are equal. planned saving and consumption are equal.
aggregate expenditures and real GDP are equal.
44. If net exports are positive: the equilibrium GDP must be greater than the full-employment GDP. imports must exceed exports. aggregate expenditures are greater at each level of GDP than when net exports are zero or negative. some other component of aggregate expenditures must be negative.
aggregate expenditures are greater at each level of GDP than when net exports are zero or negative.
18. For a private closed economy, an unintended decline in inventories suggests that: aggregate expenditures are less than the business sector expected them to be. aggregate expenditures exceed production. actual investment exceeds saving. planned investment is greater than consumption.
aggregate expenditures exceed production.
101. An inflationary expenditure gap is the amount by which: equilibrium GDP falls short of the full-employment GDP. aggregate expenditures exceed any given level of GDP. saving exceeds investment at the full-employment GDP. aggregate expenditures exceed the full-employment level of GDP.
aggregate expenditures exceed the full-employment level of GDP.
70. If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause: a rightward shift in the investment demand schedule. an $8 billion downshift in the consumption schedule. a $4 billion upshift in the consumption schedule. a $12 billion downshift in the consumption schedule.
an $8 billion downshift in the consumption schedule.
8. Other things equal, the slope of the aggregate expenditures schedule will increase as a result of: a decline in the size of the inflationary gap. an increase in the MPC. an increase in the MPS. a decline in the general price level.
an increase in the MPC.
31. Actual investment equals saving: at all levels of GDP. at all below-equilibrium levels of GDP. at all above-equilibrium levels of GDP. only at the equilibrium GDP.
at all levels of GDP.
13. If at some level of GDP the economy is experiencing an unintended decrease in inventories: the aggregate level of saving will decline. the price level will fall. the business sector will lay off workers. domestic output will increase.
domestic output will increase.
76. What do investment and government expenditures have in common? both represent injections to the circular flow both represent leakages from the circular flow neither is subject to the multiplier effect both represent a decline in indebtedness
both represent injections to the circular flow
32. Unintended changes in inventories: cause the economy to move away from the equilibrium GDP. are treated as components of consumption. bring actual investment and saving into equality only at the equilibrium level of GDP. bring actual investment and saving into equality at all levels of GDP.
bring actual investment and saving into equality at all levels of GDP.
10. In a private closed economy, when aggregate expenditures exceed GDP: GDP will decline. business inventories will rise. saving will decline. business inventories will fall.
business inventories will fall.
62. If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the: saving schedule will shift upward by $5 billion. consumption schedule will shift downward by $25 billion. consumption schedule will shift downward by $20 billion. consumption schedule will shift upward by $25 billion.
consumption schedule will shift downward by $20 billion.
4. In the United States from 1929 to 1933, real GDP ____________, and the unemployment rate _______________. declined by 27 percent; rose to 25 percent increased by 21 percent; fell to 2 percent declined by 21 percent; rose to 27 percent declined by 40 percent; rose to 50 percent
declined by 27 percent; rose to 25 percent
96. If government increases its tax revenues by $15 billion and the MPC is 2/3, then we can expect the equilibrium GDP to: decrease by $30 billion. decrease by $45 billion. decrease by $35 billion. decrease by $55 billion.
decrease by $30 billion.
58. 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: decrease by $50 billion. decrease by $150 billion. remain unchanged since spending on military goods is unproductive and usually wasteful. decrease by $25 billion.
decrease by $50 billion.
89. If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift: downward by $24 billion. upward by $24 billion. downward by $16 billion. upward by $16 billion.
downward by $16 billion.
108. If an increase in aggregate expenditures results in no increase in real GDP we can surmise that the: economy is in a deep recession. MPC equals 1. economy is already operating at full employment. price level has fallen.
economy is already operating at full employment.
97. It is true that: equal increases in government spending and taxes do not change the equilibrium GDP. equal increases in government spending and taxes reduce the equilibrium GDP. equal increases in government spending and taxes increase the equilibrium GDP. taxes have a stronger effect upon equilibrium GDP than do government purchases.
equal increases in government spending and taxes increase the equilibrium GDP.
19. When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule: exceeds the MPC. is less than the MPC. equals the MPS. equals the MPC.
equals the MPC.
7. The level of aggregate expenditures in the private closed economy is determined by the: expenditures of consumers and businesses. intersection of the saving schedule and the 45-degree line. equality of the MPC and MPS. intersection of the saving and consumption schedules.
expenditures of consumers and businesses.
33. Investment and saving are, respectively: income and wealth. stocks and flows. injections and leakages. leakages and injections.
injections and leakages.
113. Viewed through the aggregate expenditures model, the U.S. recession of 2007-2009 resulted mainly from: a fall in the average propensity to save. insufficient aggregate expenditures. reduced government spending. increased taxes.
insufficient aggregate expenditures.
6. All else equal, a large decline in the real interest rate will shift the: investment demand curve leftward. investment demand curve rightward. investment schedule upward. investment schedule downward.
investment schedule upward.
49. If the multiplier in an economy is 5, a $20 billion increase in net exports will: increase GDP by $100 billion. reduce GDP by $4 billion. decrease GDP by $100 billion. increase GDP by $20 billion.
increase GDP by $100 billion.
48. If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to: reduce the rate of domestic inflation. increase efficiency in the world economy. increase domestic output and employment. reduce domestic output and employment.
increase domestic output and employment.
46.Other things equal, an increase in an economy's exports will: lower the marginal propensity to import. have no effect on domestic GDP because imports will change by an offsetting amount. decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP. increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.
increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.
82. In the aggregate expenditures model, an increase in government spending may: decrease real GDP. increase output and employment. shift the aggregate expenditures schedule downward. reduce the size of the inflationary gap.
increase output and employment.
81. In the aggregate expenditures model, a reduction in taxes may: increase saving. decrease real GDP. increase unemployment. reduce consumption.
increase saving.
64. Suppose the economy is operating at its full-employment-noninflationary GDP and the MPC is 0.75. The Federal government now finds that it must increase spending on military goods by $21 billion in response to deterioration in the international political situation. To sustain full-employment-noninflationary GDP government must: reduce taxes by $28 billion. reduce transfer payments by $21 billion. increase taxes by $21 billion. increase taxes by $28 billion.
increase taxes by $28 billion.
52. If the United States wants to increase its net exports in the short term, it might take steps to: increase its GDP. reduce existing tariffs and import quotas. decrease the dollar price of foreign currencies. increase the dollar price of foreign currencies.
increase the dollar price of foreign currencies.
99. Equal increases in government purchases and taxes will: increase the equilibrium GDP and the size of that increase varies directly with the size of the MPC. increase the equilibrium GDP and the size of that increase is independent of the size of the MPC. increase the equilibrium GDP and the size of that increase varies inversely with the size of the MPC. decrease the equilibrium GDP and the size of that decrease is independent of the size of the MPC.
increase the equilibrium GDP and the size of that increase is independent of the size of the MPC.
51. An exchange rate: is the ratio of the dollar volume of a nation's exports to the dollar volume of its imports. measures the interest rate ratios of any two nations. is the amount that one nation must export to obtain $1 worth of imports. is the price that the currencies of any two nations exchange for one another.
is the price that the currencies of any two nations exchange for one another.
11. If an unintended increase in business inventories occurs at some level of GDP, then GDP: entails a rate of aggregate expenditures in excess of the rate of aggregate production. may be either above or below the equilibrium output. is too low for equilibrium. is too high for equilibrium.
is too high for equilibrium.
78. In moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes: must be added to gross investment. must be added to saving. must be added to consumption and gross investment. have no impact upon the equilibrium GDP.
must be added to saving.
41. At the equilibrium GDP for a private open economy: net exports may be either positive or negative. imports will always exceed exports. exports will always exceed imports. exports and imports will be equal.
net exports may be either positive or negative.
12. The equilibrium level of GDP is associated with: an excess of planned investment over saving. no unintended changes in inventories. an unintended decrease in business inventories. an unintended increase in business inventories.
no unintended changes in inventories.
67. 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: the MPC is smaller in the private sector than it is in the public sector. declines in government spending always tend to stimulate private investment. disposable income will fall by some amount smaller than the tax increase. some of the tax increase will be paid out of income that would otherwise have been saved.
some of the tax increase will be paid out of income that would otherwise have been saved.
9. In a private closed economy, when aggregate expenditures equal GDP: consumption equals investment. consumption equals aggregate expenditures. planned investment equals saving. disposable income equals consumption minus saving.
planned investment equals saving.
56. Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's budget shows a surplus: Ca + Ig + Xn + G must exceed GDP. planned investment must exceed saving. a recessionary expenditure gap must exist. saving must exceed planned investment.
planned investment must exceed saving.
17. If aggregate expenditures exceed GDP in a private closed economy: leakages will exceed injections. planned investment will exceed saving. unplanned investment in inventories will occur. saving will exceed planned investment.
planned investment will exceed saving.
87. The effect of imposing a lump-sum tax is to: reduce the absolute levels of consumption and saving at each level of GDP and to reduce the size of the multiplier. reduce the absolute levels of consumption and saving at each level of GDP, but to not change the size of the multiplier. reduce the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier. increase the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier.
reduce the absolute levels of consumption and saving at each level of GDP, but to not change the size of the multiplier.
111. In an effort to stop the U.S. recession of 2007-2009, the Federal government: reduced taxes and increased government spending. imposed large tariffs on many imported goods to protect domestic jobs. raised interest rates to encourage greater business investment. avoided Keynesian policies because of the threat of inflation
reduced taxes and increased government spending.
39. Imports have the same effect on the current size of GDP as: exports. investment. consumption. saving.
saving
35. If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease: GDP by $20 billion. GDP by $100 billion. saving by $20 billion. consumption by $200 billion.
saving by $20 billion.
43. If net exports decline from zero to some negative amount, the aggregate expenditures schedule would: shift upward. shift downward. not move (net exports do not affect aggregate expenditures). become steeper.
shift downward.
98. In an aggregate expenditures diagram equal increases in government spending and in lump-sum taxes will: shift the aggregate expenditures line downward. shift the aggregate expenditures line upward. leave the aggregate expenditures line unchanged. reduce the equilibrium GDP.
shift the aggregate expenditures line upward.
71. In a mixed closed economy: government purchases and saving are injections, while investment and taxes are leakages. taxes and government purchases are leakages, while investment and saving are injections. taxes and savings are leakages, while investment and government purchases are injections. taxes and investment are injections, while saving and government purchases are leakages.
taxes and savings are leakages, while investment and government purchases are injections.
115.(Last Word) Classical macroeconomics was dealt severe blows by: the Great Depression and Keynes's macroeconomic theory. the Second World War and the writings of Milton Friedman. Adam Smith and his idea of the invisible hand. the strong recovery after the Second World War and Alvin Hansen's stagnation thesis.
the Great Depression and Keynes's macroeconomic theory.
83. If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion then: the multiplier is 2. the MPC for this economy is .6. inflation is occurring. the MPS for this economy is .6.
the MPC for this economy is .6.
84. If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion then: the multiplier is 4. the MPC for this economy is .8. the MPC for this economy is .6. the multiplier is 3.
the MPC for this economy is .8.
103. A recessionary expenditure gap exists if: planned investment exceeds saving at the full-employment GDP. the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP. the aggregate expenditures schedule intersects the 45-degree line at any level of GDP. the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP.
the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.
102.A recessionary expenditure gap is: the amount by which the full-employment GDP exceeds the level of aggregate expenditures. the amount by which equilibrium GDP falls short of the full-employment GDP. the amount by which investment exceeds saving at the full-employment GDP. the amount by which aggregate expenditures exceed the full-employment level of GDP.
the amount by which the full-employment GDP exceeds the level of aggregate expenditures.
100. Assume in a private closed economy that the equilibrium level of income is $380 and the MPS is 0.25. Now suppose government collects taxes of $50 and spends the entire amount. As a result: the equilibrium level of real income and the price level will both remain unchanged. the equilibrium level of income will remain unchanged. the equilibrium level of income will rise to $420. the equilibrium level of income will rise to $430.
the equilibrium level of income will rise to $430.
72. An increase in taxes will have a greater effect on the equilibrium GDP: if the tax revenues are redistributed through transfer payments. the larger the MPS. the smaller the MPC. the larger the MPC.
the larger the MPC.
73. A lump-sum tax causes the after-tax consumption schedule: and the before-tax consumption schedule to coincide. to be steeper than the before-tax consumption schedule. to be flatter than the before-tax consumption schedule. to be parallel to the before-tax consumption schedule.
to be parallel to the before-tax consumption schedule.
16. A private closed economy will expand when: actual GDP is less than potential GDP. unplanned decreases in inventories occur. aggregate expenditures are less than GDP. unplanned increases in inventories occur.
unplanned decreases in inventories occur.
24. In the aggregate expenditures model, technological progress will shift the investment schedule: downward and increase aggregate expenditures. downward and decrease aggregate expenditures. upward and increase aggregate expenditures. upward and decrease aggregate expenditures.
upward and increase aggregate expenditures.
14. If an unintended increase in business inventories occurs: we can expect aggregate production to be unaffected. we can expect businesses to increase the level of production. we can expect businesses to lower the level of production. aggregate expenditures must exceed the domestic output.
we can expect businesses to lower the level of production.
61. In which of the following situations for a mixed open economy will the level of GDP expand? when Ig + X + G exceeds Sa + M + T when Sa + T + M exceeds Ig + G + X when GDP exceeds Ca + Ig + G + Xn when Ig + M + T exceeds Ca + X + S
when Ig + X + G exceeds Sa + M + T
