ECON 2010 Ch 11

77. 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.

134. 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

5. 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.

122. In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by $1.33 billion. D. decreased by $1.33 billion.

D. decreased by $1.33 billion.

125. In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, transfers must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by $1.33 billion. D. decreased by $1.33 billion.

D. decreased by $1.33 billion.

32. 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.

40. 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. NEED TABLE

A. 0.9.

59. 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.

74. Refer to the figure above. Based on the Keynesian cross diagram, at short-run equilibrium output autonomous expenditure equals ______ and induced expenditure equals ______. A. 1,000; 3,000 B. 1,000; 4,000 C. 3,000; 4,000 D. 4,000; 2,000 NEED GRAPH

A. 1,000; 3,000

69. Refer to the figure above. Based on the figure, when PAE = 600 + 0.5Y, short-run equilibrium output equals: A. 1,200. B. 400. C. 600. D. 800. NEED GRAPH

A. 1,200.

72. Refer to the figure above. Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will equal: A. 1,200. B. 400. C. 600. D. 800. NEED GRAPH

A. 1,200.

81. Refer to the figure above. Based on the figure and starting from an initial short-run equilibrium where output equals 20,000, if autonomous consumption spending increases by 1,000, then the new short-run equilibrium is at an output (Y) equal to: A. 24,000. B. 6,000. C. 14,000. D. 16,000. NEED GRAPH

A. 24,000.

21. 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.

148. 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.

85. 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.

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

A. consumption.

129. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the mpc equals 0.8, and potential output (Y*) equals 9,000, then transfers must be ______ by approximately ______ to eliminate any output gap. A. decreased; 250 B. decreased; 200 C. increased; 250 D. increased; 200

A. decreased; 250

26. 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

88. For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n): A. expansionary output gap. B. recessionary output gap. C. increase in potential output. D. decrease in potential output.

A. expansionary output gap.

91. For an economy starting at potential output, an increase in planned investment in the short run results in a(n): A. expansionary output gap. B. recessionary output gap. C. increase in potential output. D. decrease in potential output.

A. expansionary output gap.

83. Refer to the figure above. Based on the figure, if the economy is in short-run equilibrium with output equal to 24,000, then there is a(n) ______ gap and a ______ in government spending would return the economy to potential output (Y*). A. expansionary; decrease of 1,000 B. expansionary; decrease of 4,000 C. recessionary; increase of 1,000 D. recessionary; increase of 4,000 NEED GRAPH

A. expansionary; decrease of 1,000

19. 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.

95. House prices in the U.S. increased dramatically _____, and decreased dramatically ______. A. from 2001 to 2006; from 2007 to 2009 B. from 2007 to 2009; from 2001 to 2006 C. from 2001 to 2009; from 2006 to 2007 D. from 2006 to 2009; from 2001 to 2006

A. from 2001 to 2006; from 2007 to 2009

116. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ______ to eliminate any output gap. A. increase by 200 B. increase by 1,000 C. increase by 5,000 D. decrease by 200

A. increase by 200

138. 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.

113. In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by $0.5 billion. D. increased by $2 billion.

A. increased by $1 billion.

29. 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.

16. 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.

100. 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

75. Refer to the figure above. Based on the Keynesian cross diagram, if output equals 5,000, planned aggregate expenditure is ______ output and firms will ______ production. A. less than; decrease B. greater than; decrease C. equal to; not change D. less than; increase NEED GRAPH

A. less than; decrease

22. C + Ip + G + NX equals: A. planned aggregate expenditure. B. potential GDP. C. the output gap. D. the income-expenditure multiplier.

A. planned aggregate expenditure.

63. 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.

117. In the basic Keynesian model, a decrease in government purchases: A. reduces short-run equilibrium output. B. increases short-run equilibrium output. C. reduces potential output. D. increases potential output.

A. reduces short-run equilibrium output.

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

A. reduces short-run equilibrium output.

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

A. reduces short-run equilibrium output.

79. In the basic Keynesian model, a decline in autonomous spending: A. reduces short-run equilibrium output. B. increases short-run equilibrium output. C. reduces potential output. D. increases potential output.

A. reduces short-run equilibrium output.

105. The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional: A. spending. B. autonomous expenditure. C. menu costs. D. cyclical unemployment.

A. spending.

145. 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

102. The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because: A. the direct changes in spending change the income of producers which leads to additional changes in spending. B. multiple deposits are generated when new reserves are produced through fractional reserve banking. C. autonomous spending supports more output than induced spending. D. planned changes in inventories signal producers to adjust the level of output.

A. the direct changes in spending change the income of producers which leads to additional changes in spending.

13. 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

50. 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. The slope of the Expenditure Line is: A. 0.25. B. 0.75. C. 290. D. 320.

B. 0.75.

55. In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The slope of the Expenditure Line is: A. 0.20. B. 0.80. C. 0.90. D. 0.99.

B. 0.80.

38. 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.

80. Refer to the figure above. Based on the figure, and starting from an initial short-run equilibrium where output equals 20,000, if autonomous consumption spending decreases by 1,000, then the new short-run equilibrium is at an output (Y) equal to: A. 24,000. B. 16,000. C. 14,000. D. 22,000. NEED GRAPH

B. 16,000.

70. Refer to the figure above. Based on the figure, the income expenditure multiplier equals: A. 0.5. B. 2. C. 5. D. 200. NEED GRAPH

B. 2.

84. Refer to the figure above. Based on the figure, the income-expenditure multiplier in the economy illustrated equals: A. 0.75 B. 4 C. 4,000 D. 1,000 NEED GRAPH

B. 4

67. Refer to the figure above. Based on the figure, when PAE = 200 + 0.5Y, short-run equilibrium output equals: A. 1,200. B. 400. C. 600. D. 800. NEED GRAPH

B. 400.

71. Refer to the figure above. Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal: A. 1,200. B. 400. C. 600. D. 800. NEED GRAPH

B. 400.

54. In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Planned aggregate expenditure equals: A. 990 + 0.20Y. B. 900 + 0.80Y. C. 940 + 0.80Y. D. 990 + 0.80Y.

B. 900 + 0.80Y.

56. In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The vertical intercept of the Expenditure Line is: A. 890. B. 900. C. 940. D. 990.

B. 900.

103. In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output. A. a $1billion increase B. a greater than $1 billion increase C. no change D. a $1 billion decrease

B. a greater than $1 billion increase

104. In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output. A. a $5 billion increase B. a greater than $5 billion decrease C. no change D. a $5 billion decrease

B. a greater than $5 billion decrease

86. 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.

37. 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.

147. 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.

28. 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

96. 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

4. 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.

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

B. changing prices.

115. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ______ to eliminate any output gap. A. increase by 100 B. decrease by 100 C. increase by 1,000 D. decrease by 1,000

B. decrease by 100

114. In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be: A. increased by $1 billion. B. decreased by $1 billion. C. decreased by $0.5 billion. D. decreased by $2 billion.

B. decreased by $1 billion.

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

B. decreases.

119. 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

94. An economic expansion in the U.S. ______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico. A. reduces; expansionary B. increases; expansionary C. reduces; recessionary D. increases; recessionary

B. increases; expansionary

2. The basic Keynesian model is built on the key assumption that: A. menu costs are not significant. B. firms meet the demand for their products at preset prices. C. firms price their products so as to see a preset quantity of output. D. prices are prevented from changing frequently by government regulations.

B. firms meet the demand for their products at preset prices.

20. When actual investment is less 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.

B. firms sold more output than expected.

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

B. increase production.

137. 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.

118. In the basic Keynesian model, an increase in government purchases: 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.

130. 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.

132. 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.

146. 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

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

B. is less than actual investment.

14. In the basic Keynesian model all of the following are true EXCEPT: A. planned consumption always equals actual consumption. B. planned investment always equals actual investment. C. planned government spending always equals actual government spending. D. planned net exports always equal actual net exports.

B. planned investment always equals actual investment.

8. 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.

144. Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects ______ as well as aggregate demand and fiscal policy is _______. A. consumption; too flexible B. potential output; not flexible enough C. consumption; offset by automatic stabilizers D. potential output; offset by automatic stabilizers

B. potential output; not flexible enough

89. For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n): A. expansionary output gap. B. recessionary output gap. C. increase in potential output. D. decrease in potential output.

B. recessionary output gap.

90. For an economy starting at potential output, a decrease in planned investment in the short run results in a(n): A. expansionary output gap. B. recessionary output gap. C. increase in potential output. D. decrease in potential output.

B. recessionary output gap.

78. 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.

76. Refer to the figure above. Based on the Keynesian cross diagram, at short-run equilibrium output, A. there is a recessionary gap. B. there is an expansionary gap. C. output equals potential output. D. firms will be producing more than they can sell. NEED GRAPH

B. there is an expansionary gap.

33. 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

39. 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

47. 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.

52. In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Induced expenditure equals: A. 0.20Y. B. 990 + 0.20Y. C. 0.80Y. D. 900 + 0.80Y.

C. 0.80Y.

126. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the mpc equals 0.9, and potential output (Y*) equals 9,000, then taxes must be increased by approximately ______ to eliminate any output gap. A. 90 B. 100 C. 111 D. 1,000

C. 111

127. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the mpc equals 0.9, and potential output (Y*) equals 9,000, then transfers must be decreased by approximately ______ to eliminate any output gap. A. 90 B. 100 C. 111 D. 1,000

C. 111

48. 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. Autonomous expenditure equals: A. 320. B. 320 + 0.25Y. C. 290. D. 290 + 0.75Y.

C. 290.

51. 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. The vertical intercept of the Expenditure Line is: A. 0.25. B. 0.75. C. 290. D. 320.

C. 290.

73. Refer to the figure above. Based on the Keynesian cross diagram, short-run equilibrium output equals: A. 3,000. B. 3,250. C. 4,000. D. 4,750. NEED GRAPH

C. 4,000.

53. In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Autonomous expenditure equals: A. 990. B. 940. C. 900. D. 890.

C. 900.

44. 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

143. Regarding the fiscal policy responses to the 2007-2009 recession, the Congressional Budget Office (CBO) found that: A. the Bush Administration's fiscal policy worked, but the Obama Administration's did not. B. the Obama Administration's fiscal policy worked, but the Bush Administration's did not. C. both the Bush Administration's fiscal policy and the Obama Administration's fiscal policy worked. D. neither the Bush Administration's fiscal policy nor the Obama Administration's fiscal policy worked.

C. both the Bush Administration's fiscal policy and the Obama Administration's fiscal policy worked.

139. 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.

36. When housing prices decrease, household wealth _____, and consumption _____. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

C. decreases; decreases

121. Changes in government purchases affect planned spending: A. only when there is an expansionary gap. B. autonomously. C. directly, by changing autonomous expenditures. D. indirectly, by changing induced expenditures.

C. directly, by changing autonomous expenditures.

123. In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by $1.33 billion. D. decreased by $1.33 billion.

C. increased by $1.33 billion.

141. If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) ______ gap that can be closed by _________. A. expansionary; decreasing taxes B. expansionary; increasing transfer payments C. expansionary; decreasing government purchases D. recessionary; increasing government purchases

C. expansionary; decreasing government purchases

65. In the Keynesian cross diagram, the ______ line relates planned aggregate expenditure to output and the ______ line represents the condition that planned aggregate expenditure equals short-run equilibrium output. A. consumption function; 45° B. 45°; consumption function C. expenditure; 45° D. 45°; expenditure

C. expenditure; 45°

97. The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, disruptions in the financial market made it difficult: A. for government to finance deficit spending. B. to fight inflation. C. for businesses and consumers to borrow money. D. to shift the PAE line downward.

C. for businesses and consumers to borrow money.

3. 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.

136. 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.

124. In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by $1.33 billion. D. decreased by $1.33 billion.

C. increased by $1.33 billion.

98. The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis: A. made it difficult for government to finance deficit spending. B. led to widespread inflation. C. increased the level of uncertainty about the future. D. shifted the PAE line upward.

C. increased the level of uncertainty about the future.

128. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the mpc equals 0.8, and potential output (Y*) equals 9,000, then taxes must be ______ by approximately ______ to eliminate any output gap. A. decreased; 250 B. decreased; 200 C. increased; 250 D. increased; 200

C. increased; 250

45. When real output increases, planned aggregate expenditures increase because: A. autonomous expenditures increase. B. autonomous expenditures decrease. C. induced expenditures increase. D. induced expenditures decrease.

C. induced expenditures increase.

7. Firms do not change prices frequently because: A. there are legal prohibitions against doing so. B. it is easier to change the quantity of capital used in production. C. it is costly to do so. D. customers will refuse to patronize firms that change prices frequently.

C. it is costly to do so.

87. If planned aggregate expenditure (PAE) in an economy equals 3,000 + 0.75Y and potential output (Y*) equals 12,000, then this economy has: A. an expansionary gap. B. a recessionary gap. C. no output gap. D. no autonomous expenditure.

C. no output gap.

18. 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.

61. 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.

82. Refer to the figure above. Based on the figure, if the economy is in short-run equilibrium with output equal to 16,000, then there is a(n) ______ gap and a ______ in autonomous expenditures could return the economy to potential output (Y*). A. expansionary; decrease of 1,000 B. expansionary; decrease of 4,000 C. recessionary; increase of 1,000 D. recessionary; increase of 4,000 NEED GRAPH

C. recessionary; increase of 1,000

92. An economic recession in the U.S. ______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada. A. reduces; expansionary B. increases; expansionary C. reduces; recessionary D. increases; recessionary

C. reduces; recessionary

93. An economic recession in Japan ______ the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) ______ output gap in the East Asian countries. A. reduces; expansionary B. increases; expansionary C. reduces; recessionary D. increases; recessionary

C. reduces; recessionary

58. When prices are predetermined, the level of output that equals planned aggregate expenditure is called ______ output. A. the natural rate of B. potential C. short-run equilibrium D. induced

C. short-run equilibrium

101. The smaller 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

C. smaller; smaller

142. In response to the 2007-2009 recession, the Economic Stimulus Act of 2008, under President Bush, was composed of approximately _____; the American Recovery and Reinvestment Act, under President Obama, was composed of approximately ______. A. one-fourth tax cuts and three-fourths spending increases; two-thirds tax cuts and one-third spending increases B. half tax cuts and half spending increases; only spending increases C. two-thirds tax cuts and one-third spending increases; one-fourth tax cuts and three-fourths spending increases D. only tax cuts; half tax cuts and half spending increases

C. two-thirds tax cuts and one-third spending increases; one-fourth tax cuts and three-fourths spending increases

12. 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.

31. 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

135. 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

15. 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

49. 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. Planned aggregate expenditure equals: A. 290 + 0.25Y. B. 320 + 0.25Y. C. 320 + 0.75Y. D. 290 + 0.75Y.

D. 290 + 0.75Y.

60. 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 NEED TABLE

D. 5,000

Refer to the figure above. Based on the figure, when PAE = 400 + 0.5Y, short-run equilibrium output equals: A. 1,200. B. 400. C. 600. D. 800. NEED GRAPH

D. 800.

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

D. contractionary

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

D. autonomous

66. In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ______ and the slope of the expenditure line equals _____. A. induced expenditures; autonomous expenditures B. autonomous expenditures; induced expenditures C. planned spending; unplanned spending D. autonomous expenditures; the mpc

D. autonomous expenditures; the mpc

34. Changes in autonomous consumption could be the result of: A. changes in disposable income. B. changes in inflation. C. changes in the mpc. D. changes in housing prices.

D. changes in housing prices.

9. 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.

112. 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.

35. A decrease in stock prices alters the consumption function by: A. increasing the mpc. B. decreasing the mpc. C. increasing the constant term. D. decreasing the constant term.

D. decreasing the constant term.

43. Induced expenditure is the portion of planned aggregate expenditure that: A. equals aggregate output. B. equals planned spending. C. equals autonomous expenditure. D. depends on output.

D. depends on output.

25. In the Keynesian model, consumption depends on: A. whether the government has a budget surplus or deficit. B. potential output. C. the natural rate of unemployment. D. disposable income.

D. disposable income.

57. 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.

27. The slope of the consumption function: A. is vertical. B. is horizontal. C. equals 1. D. equals the mpc.

D. equals the mpc.

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

D. expansionary

111. 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.

120. Changes in taxes and transfers affect planned spending: A. only when there is an expansionary gap. B. autonomously. C. directly, by changing induced expenditures. D. indirectly, by changing disposable income and, consequently, consumption.

D. indirectly, by changing disposable income and, consequently, consumption.

46. When real output decreases, planned aggregate expenditures decrease because: A. autonomous expenditures increase. B. autonomous expenditures decrease. C. induced expenditures increase. D. induced expenditures decrease.

D. induced expenditures decrease.

10. All of the following would be included in planned aggregate expenditure EXCEPT: A. spending on consumer durables. B. planned changes in inventories. C. sales of domestically produced goods to foreigners. D. interest paid on the government debt.

D. interest paid on the government debt.

42. Autonomous expenditure is the portion of planned aggregate expenditure that: A. equals aggregate output. B. equals planned spending. C. equals induced expenditure. D. is independent of output.

D. is independent of output.

24. The consumption function is relationship between consumption and: A. planned aggregate expenditure. B. total spending. C. investment. D. its determinants, such as disposable income.

D. its determinants, such as disposable income.

62. In the short run with predetermined prices, when output is less 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.

D. planned investment is greater than actual investment.

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

D. planned spending.

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

D. planned spending.

140. If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ______ gap that can be closed by _________. A. recessionary; increasing taxes B. expansionary; increasing transfer payments C. expansionary; increasing government purchases D. recessionary; increasing government purchases

D. recessionary; increasing government purchases

11. All of the following would be included in planned aggregate expenditure EXCEPT: A. purchases of services provided by government employees. B. planned changes in inventories. C. sales of domestically produced goods to foreigners. D. social security payments.

D. social security payments.

106. 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

99. 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.