ECON 2010 Exam 3 - CHAPTER 11

In the Keynesian cross diagram, the 45° line represents the short-run equilibrium condition that: A. Y = PAE. B. PAE = C + Ip + G + NX. C. I ≠ Ip. D. Y* = Y.

A. Y=PAE

In the short-run Keynesian model, if the mpc equals 0.8, then to increase planned aggregate spending by $20 billion at any output level, government spending must be increased by ______ or net taxes must be decreased by _____. A. $20 billion; $20 billion B. more than $20 billion; more than $20 billion C. less than $20 billion; less than $20 billion D. $20 billion; more than $20 billion

D. $20 billion; more than $20 billion

Government policy actions intended to decrease planned spending and output are called ______ policies. A. aggregate B. monetary C. fiscal D. contractionary

D. contractionary

The decision whether to change prices frequently or infrequently is an application of the: A. principle of comparative advantage. B. scarcity principle. C. principle of increasing opportunity cost. D. cost-benefit principle.

D. cost-benefit principle

Government policy actions intended to increase planned spending and output are called ______ policies. A. aggregate B. monetary C. fiscal D. expansionary

D. expansionary

Historically speaking, a one dollar decrease in household wealth will cause consumer spending to fall by: A. $0.03 to $0.07. B. $0.30 to $0.70. C. $3.00 to $7.00. D. $30.00 to $70.00.

A. $0.03 to $0.07.

Data on after-tax income and consumption spending for the Adam Smith family are given below: Based on these data, the Adam Smith family has a marginal propensity to consume of: A. 0.9. B. 0.8. C. 0.75. D. 0.6.

A. 0.9

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals: A. 1,000. B. 1,160. C. 1,280. D. 1,440.

A. 1,000

Planned aggregate expenditure (PAE) equals: A. C + Ip + G + NX. B. Cp + I + G + NX. C. C + I + Gp + NX. D. C + I + G + NXp.

A. C + Ip + G + NX.

One drawback in using fiscal policy as a stabilization tool is that fiscal policy: A. affects potential output as well as planned aggregate expenditure. B. effects are frequently offset by automatic stabilizers. C. is too flexible to use to close output gaps. D. is not useful for dealing with prolonged episodes of recession.

A. affects potential output as well as planned aggregate expenditure.

If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has: A. an expansionary gap. B. a recessionary gap. C. no output gap. D. no autonomous expenditure.

A. an expansionary gap

The largest component of planned aggregate expenditure is: A. consumption. B. investment. C. government purchases. D. exports.

A. consumption

The two parts of the Keynesian consumption function are consumption that depends on ______ and consumption that depends on _____. A. disposable income; factors other than disposable income B. planned spending; unplanned spending C. real income; nominal income D. money; wealth

A. disposable income; factors other than disposable income

When actual investment is greater than planned investment: A. firms sold less output than expected. B. firms sold more output than expected. C. the quantity of output sold is the amount the firm expected to sell. D. the economy produces short-run equilibrium output.

A. firms sold less output than expected

A fiscal policy action to close an expansionary gap is to: A. increase taxes. B. increase transfer payments. C. increase government purchases. D. increase the marginal propensity to consume.

A. increase taxes

As disposable income increases, consumption: A. increases. B. decreases. C. may either increase or decrease depending on the wealth effect. D. may either increase or decrease depending on the mpc.

A. increases

If firms sell more output than expected, planned investment: A. is greater than actual investment. B. is less than actual investment. C. equals actual investment. D. equals zero.

A. is greater than actual investment

The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output. A. larger; larger B. larger; smaller C. smaller; smaller D. smaller; larger

A. larger; larger

In the short run with predetermined prices, when output is greater than planned aggregate expenditure, firms will: A. reduce production. B. increase production. C. increase planned aggregate expenditure. D. decrease planned aggregate expenditure.

A. reduce production

One potential problem with using fiscal policy to close recessionary output gaps is that: A. sustained government deficits can be harmful to long-run economic growth. B. decreased government spending can cause inflationary pressure to build. C. reductions in interest rates can reduce savings and, therefore, investment. D. it may be offset by automatic stabilizers.

A. sustained government deficits can be harmful to long-run economic growth.

The assumption that firms meet the demand for their products at preset prices is the key assumption upon which ______ is built. A. the basic Keynesian model B. Okun's Law C. the supply and demand model D. quantity equation for money

A. the basic Keynesian model

If firms sell less than expected, actual investment increases because _____, which is counted as investment. A. the unsold goods are added to inventory B. the government buys the unsold goods C. the unsold goods are distributed to poor households D. households buy the unsold goods are bargain prices

A. the unsold goods are added to inventory

If consumption increases by $9 when after-tax disposable income increases by $10, the marginal propensity to consume (mpc) equals: A. 0.1. B. 0.9. C. 1.0. D. 9.0.

B. 0.9

If planned aggregate expenditure (PAE) in an economy equals 2,000 + 0.8Y and potential output (Y*) equals 11,000, then this economy has: A. an expansionary gap. B. a recessionary gap. C. no output gap. D. no autonomous expenditure.

B. a recessionary gap

The marginal propensity to consume (mpc) is the: A. amount by which disposable income increases when consumption increases by $1. B. amount by which consumption increases when disposable income increases by $1. C. percentage by which consumption increases when disposable income increases by 1%. D. percentage by which disposable income increases when consumption increases by 1%.

B. amount by which consumption increases when disposable income increases by $1

Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines are called: A. autonomous stabilizers. B. automatic stabilizers. C. the marginal propensity to consume. D. the income-expenditure multiplier.

B. automatic stabilizers

The vertical intercept of the consumption function equals ______ and the slope equals _____. A. the mpc; autonomous consumption B. autonomous consumption; the mpc C. the unplanned component of consumption; the planned component of consumption D. the planned component of consumption; the unplanned component of consumption

B. autonomous consumption; the mpc

The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____. A. businesses and households; upward B. businesses and households; downward C. government and businesses; downward D. government and businesses; upward

B. businesses and households; downward

Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or ______ in taxes when real output declines. A. increases; increases B. increases; decreases C. no change; no change D. decreases; decreases

B. increases; decreases

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm: A. changes prices to meet the demand. B. changes production levels to meet the demand. C. changes prices and production levels to meet demand. D. changes prices, but hold production levels constant to meet the demand.

B. changes production levels to meet the demand

Menu costs are the costs of: A. running a restaurant. B. changing prices. C. increasing aggregate demand. D. changing production.

B. changing prices

Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect planned spending _______. A. directly; directly B. directly; indirectly C. directly; not at all D. indirectly; indirectly

B. directly; indirectly

A fiscal policy action to close a recessionary gap is to: A. increase taxes. B. increase transfer payments. C. decrease government purchases. D. decrease the marginal propensity to consume.

B. increase transfer payments

In the basic Keynesian model, an increase in transfer payments: A. reduces short-run equilibrium output. B. increases short-run equilibrium output. C. reduces potential output. D. increases potential output.

B. increases short-run equilibrium output

In the basic Keynesian model, a tax cut: A. reduces short-run equilibrium output. B. increases short-run equilibrium output. C. reduces potential output. D. increases potential output.

B. increases short-run equilibrium output.

Planned aggregate expenditure is total: A. value added in the economy. B. planned spending on final goods and services. C. income of households, businesses, governments, and foreigners. D. revenue from the sale of goods and services.

B. planned spending on final goods and services

The expenditure line in the Keynesian cross diagram represents the: A. equilibrium condition that Y = PAE. B. relationship between planned expenditure and output. C. relationship between consumption and after-tax disposable income. D. equilibrium condition that Y = Y*.

B. relationship between planned expenditure and output

Suppose the stock market crashed, wiping out $5 trillion of household wealth. Consistent with economic models based on historical trends, consumption spending might fall by as much as, but probably not more than, ______. A. $35 billion B. $200 billion C. $350 billion D. $2 trillion

C. $350 billion

If the marginal propensity to consume equals 0.75, then a $100 increase in after-tax disposable income leads to a ______ increase in consumption. A. $13.33 B. $25 C. $75 D. $133

C. $75

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Induced expenditure equals: A. 0.25Y. B. 320 + 0.25Y. C. 0.75Y. D. 290 + 0.75Y.

C. 0.75Y

The two parts of planned aggregate expenditure are ______ expenditures and ______ expenditures. A. real; nominal B. inflated; deflated C. autonomous; induced D. positive; normative

C. autonomous; induced

A fiscal policy action to close an expansionary gap is to: A. decrease taxes. B. increase transfer payments. C. decrease government purchases. D. increase the marginal propensity to consume.

C. decrease government purchases

Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop). This type of behavior is ______. A. exactly the type of behavior that Keynes believed most firms exhibit. B. known as meeting demand. C. inconsistent with the key assumption upon which the basic Keynesian model is built. D. free from menu costs.

C. inconsistent with the key assumption upon which the basic Keynesian model is built

A fiscal policy action to close a recessionary gap is to: A. increase taxes. B. decrease transfer payments. C. increase government purchases. D. increase the marginal propensity to consume.

C. increase government purchases

Unplanned inventory investment equals zero when A. planned investment is greater than actual investment. B. planned investment is less than actual investment. C. planned investment equals actual investment. D. expected sales are greater than actual sales.

C. planned investment equals actual investment

In the short run with predetermined prices, when output is greater than planned aggregate expenditure: A. potential output is greater than short-run equilibrium output. B. potential output is less than short-run equilibrium output. C. planned investment is less than actual investment. D. planned investment is greater than actual investment.

C. planned investment is less than actual investment

Planned investment may differ from actual investment because of: A. changes in government purchases and net exports. B. the marginal propensity to consume. C. unplanned changes in inventories. D. fluctuations in preset prices.

C. unplanned changes in inventories

The tendency of changes in asset prices to affect spending on consumption goods is called the ______ effect. A. income B. substitution C. wealth D. multiplier

C. wealth

In the short-run Keynesian model, if the mpc equals 0.8, then to decrease planned aggregate spending by $30 billion at any output level, government spending must be decreased by ______ or net taxes must be increased by _____. A. $30 billion; $30 billion B. more than $30 billion; more than $30 billion C. less than $30 billion; less than $30 billion D. $30 billion; more than $30 billion

D. $30 billion; more than $30 billion

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year. The company purchases $300,000 worth of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals ______ and planned investment equals _______. A. $250,000; $150,000 B. $300,000; $200,000 C. $550,000; $450,000 D. $650,000; $550,000

D. $650,000; $550,000

Data on output and planned aggregate expenditure in Macroland are given below. Based on these data, the short-run equilibrium level of output is _____. A. 2,000 B. 3,200 C. 4,100 D. 5,000

D. 5,000

The portion of planned aggregate expenditure that is independent of output is called ______ expenditure. A. potential B. planned C. actual D. autonomous

D. autonomous

The four components of planned aggregate expenditure are: A. spending on domestic goods, domestic services, foreign goods, and foreign services. B. spending on durable goods, inventory investment, government debt, and net exports. C. consumption, planned investment, government transfers, and net interest. D. consumption, planned investment, government purchases, and net exports.

D. consumption, planned investment, government purchases, and net exports.

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be: A. increased by $10 billion. B. decreased by $10 billion. C. increased by more than $10 billion. D. decreased by less than $10 billion.

D. decreased by less than $10 billion

Short-run equilibrium output is the level of output at which actual output: A. equals potential output. B. maximizes firm profits. C. equals real GDP per capita. D. equals planned aggregate expenditure.

D. equals planned aggregate expenditure

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by more than $1 billion. D. increased by less than $1 billion.

D. increased by less than $1 billion.

Contractionary policies are government stabilization policy actions intended to decrease: A. population. B. unemployment. C. average labor productivity. D. planned spending.

D. planned spending

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies. A. structural B. cyclical C. productivity D. stabilization

D. stabilization

The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output is called: A. the marginal propensity to consume. B. average labor productivity. C. Okun's law. D. the income-expenditure multiplier.

D. the income-expenditure multiplier