Chapter 11

The slope of the consumption function

equals the mpc

If the marginal propensity to consume equals 0.75, then a $100 increase in after-tax disposable income leads to a _____ increase in consumption

$75

Upon examining data on after-tax income and consumption spending for the Adam Smith family, you find that when the family's after-tax income is $9,000 their consumption spending is $18,100 and when the family's after tax income is $14,000 their consumption is $22,600. Based on these data the Adam Smith family has a marginal propensity to consume of

.9

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals .75, tax receipts 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

1,160

If planned aggregate expenditure in an economy can be written as PAE = 1,000 + .9 Y, what is the short-run equilibrium level of output in this economy?

10,000

In the fixed price model, a credit crunch will cause the equilibrium output to

Decrease

In the fixed price model, a decrease in consumer confidence will cause the equilibrium output to

Decrease

In the fixed price model, an increase in the exchange rate (in the form of foreign currency per units of home currency) will cause the equilibrium output to

Decrease

In the fixed price model, a decrease in the price of capital will cause the equilibrium output to

Increase

In the fixed price model, a tax cut will cause the equilibrium output to

Increase

Planned aggregate expenditure is total

planned spending on final goods and services.

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending

An unplanned increase in inventories results from

actual investment that is greater than planned investment

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

There was an unplanned increase in inventories equal to $2 million

Which of the following will decrease aggregate expenditure in the United States?

a decrease in government purchases

If planned aggregate expenditure (PAE) in an economy equals 2,000 + .8Y and potential output (Y*) equals 11,000, then this economy has

a recessionary gap

If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?

an increase in wealth

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a/an __________ gap that can be closed by _________.

expansionary; decreasing government purchases

A fiscal policy action to close an expansionary gap is to

increase taxes

In the basic Keynesian model an increase in government purchases

increases short-run equilibrium output

Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or _______ in taxes when real output declines.

increases; decreases

An increase in the real interest rate will

most likely lower consumers' purchases of durable goods.

In the short run with predetermined prices, when output is less than planned aggregate expenditure

planned investment is greater than actual investment

In the short run with predetermined prices, when output is greater than planned aggregate expenditure, firms will

reduce production

Planned investment may differ from actual investment because of

unplanned changes in inventories