Econ Exam Chapter 8

If AE = $7,600 and Y = $8,000, businesses will produce:

less, lowering both employment and income.

The reason business investment is sensitive to interest rates is that:

most funds used for investment are borrowed, so firms incur an interest charge

The idea of the spending multiplier is that:

one person's spending becomes another person's income, which stimulates more spending

Which of the following is NOT a determinant of investment?

past stock and bond prices

Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment?

reduce spending by $25 billion

The paradox of thrift suggests that when households intend to save more, they will ________ consumption, which will ultimately lead to ____________ actual aggregate

reduce; lower

In the simple Keynesian model the economy is in equilibrium when:

Y = C + I and S = I.

Investment is defined as spending by

business that adds to the productive capacity of the economy.

If aggregate expenditures are less than current output

businesses will cut back on output.

If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will:

rise by $2 billion.

When the economy is in equilibrium in the simple Keynesian model:

saving is equal to investment.

In the simple Keynesian model, the only two things you can do with your income are:

spend it and save it.

Between 1929 and 1933, government spending _____ and net exports _____.

stayed the same; declined

The factors that would shift the savings and consumption schedule include all of the following EXCEPT:

tastes and preferences from durable goods to nondurable goods.

Keynes's insight during the Great Depression was that:

the economy can be in both equilibrium and high unemployment.

Personal consumption expenditures:

can be found by subtracting saving from disposable income.

The multiplier effect shows that a change in aggregate spending:

causes output to change even more than the change in aggregate spending

If the interest rate increases, investment will:

decrease.

Decreases in government spending ____ equilibrium income, and increases in taxes ____ equilibrium income

decrease; decrease

Income rises when desired investment is:

greater than desired savings.

When the consumption schedule lies above the 45-degree reference line, consumption spending is ________ than income and saving is ___________.

greater; negative

In the simple Keynesian model, if desired investment is greater than desired saving:

income and output will rise.

Disposable income equals:

income minus taxes.

In the Keynesian model, the principal determinant of saving is:

income.

Keynes believed that saving is a function of:

income.

(Figure: Aggregate Expenditures) The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100?

Total spending exceeds income; firms expand production; workers are hired; and incomes rise until equilibrium is reached.

Suppose full employment real GDP is $12 trillion, current real GDP is $11 trillion, and the marginal propensity to consume is 0.8. The recessionary gap is:

$0.2 trillion.

If the marginal propensity to consume is 0.8, by how much will total income increase after an initial $200 is spent?

$1,000

In the simple Keynesian model with no government and foreign sectors, suppose that initially the economy is in equilibrium at an output of $10 trillion with a marginal propensity to consume of 0.8. If investment spending increases by $0.5 trillion, what is the new equilibrium output level?

$12.5 trillion

Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by:

$20 billion.

The following table shows data on consumption at various levels of income. Investment spending is $500 for all levels of income. Income Consumption $0 $500 $1,000 $1,250 $2,000 $2,000 $3,000 $2,750 $4,000 $3,500

$4,000.

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

$900

If the amount of spending in an economy declines by $1,000 and the marginal propensity to consume is 0.8, the effect on the economy is a change of _____ in income or output.

-$5,000

If $1,000 of additional spending occurs (from investment, say) and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.

5,000

If the marginal propensity to consume is 0.85, how much is the spending multiplier?

6.67

Which of the following equations is NOT true at equilibrium in the simple Keynesian model?

AE > Y

Assume that the marginal propensity to consume is 0.75. John's Clean Clones builds a factory that costs $1 billion. How much does the macroeconomic equilibrium increase?

$4 billion

If there is no government and no foreign sector in the economy:

GDP = C + I.

Income Consumption $0 $500 $1,000 $1,250 $2,000 $2,000 $3,000 $2,750 $4,000 $3,500 (Table) The table shows data on consumption at various levels of income. The value of the APS at equilibrium is:

0

If disposable income increases from $250 to $300 and saving increases from $40 to $50, how much is the average propensity to save?

0.167

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion, the marginal propensity to save is:

0.25.

Disposable Income Consumption $1,000 $1,200 $1,200 $1,300 $1,400 $1,400 $1,600 $1,500 $1,800 $1,600 (Table) When disposable income increases from $1,000 to $1,200, what is the value of the marginal propensity to save?

0.5

If income rises from $10,000 to $20,000 and savings increases from $9,000 to $16,000, then the marginal propensity to save is:

0.70.

Income Consumption $0 $250 $500 $700 $1,000 $1,150 $1,500 $1,600 $2,000 $2,050 $2,500 $2,500 (Table) The table shows data on consumption at various levels of income. The value of the marginal propensity to consume is:

0.9.

Income Consumption $0 $500 $1,000 $1,250 $2,000 $2,000 $3,000 $2,750 $4,000 $3,500 (Table ) The table shows data on consumption at various levels of income. The value of the average propensity to consume at equilibrium is:

1

The slope of the saving schedule is:

1 minus the marginal propensity to consume

The formula for the simple spending multiplier is:

1/(1 - MPC).

Which country has changed from being a high-saving country to a low-saving one?

Japan

Equilibrium in the full Keynesian model requires that:

all injections (I + G + X) must equal all withdrawals (S + T + M).

If the marginal propensity to consume (MPC) rises, the multiplier:

also rises.

(Figure: Savings, Investment, and Aggregate Expenditures) Savings and investment are at equilibrium at point:

b.

The balanced budget multiplier is:

equal to 1.

Assume that the economy is at equilibrium at $10 trillion, with a marginal propensity to consume of 0.75. If exports rise by $0.5 trillion and imports increase by $0.7 trillion, equilibrium income will:

fall by $0.8 trillion.

When household debt levels rise:

families are less able to spend in the current period.

Because the private and foreign sectors of the economy were in a deep slump during the Great Depression of the 1930s, Keynes suggested an increase in:

government spending.

If the government spends $1 billion to create a wetlands preserve, taxes increase $1 billion to pay for it, and the marginal propensity to consume is 0.75, GDP:

increases by $1 billion.

If the marginal propensity to consume increases, the spending multiplier _______ and the balanced budget multiplier ___________.

increases; remains the same.

In the simple Keynesian model, equilibrium exists when:

investment spending equals saving.

The marginal propensity to consume:

is the change in consumption associated with a change in income.

According to Keynesian analysis, if households intend to save more, they will:

ultimately cause job losses.

A depression economy has considerable slack, so:

unemployment is high.