Chapter 10 Test banks

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy. S=-20+0.4Y Ig=25-3i where S is saving, Ig is gross investment, i is the real interest rate, and Y is GDP. Refer to the above information. If the real interest rate is 5 (percent), investment will be:

$10 and the equilibrium GDP will be $75.

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy. S=-20+0.4Y Ig=25-3i where S is saving, Ig is gross investment, i is the real interest rate, and Y is GDP. Refer to the above information. Refer to the above information. In equilibrium the level of saving will be:

$10.

For a private closed economy, an unintended decline in inventories suggests that:

aggregate expenditures exceed production.

An inflationary expenditure gap is the amount by which:

aggregate expenditures exceed the full-employment level of GDP.

What do investment and government expenditures have in common?

both represent injections to the circular flow

Unintended changes in inventories:

bring actual investment and saving into equality at all levels of GDP.

In a private closed economy, when aggregate expenditures exceed GDP:

business inventories will fall.

If net exports decline from zero to some negative amount, the aggregate expenditures schedule would:

shift downward.

In an aggregate expenditures diagram, a lump-sum tax (T) will:

shift the C + Ig + Xn line downward by an amount equal to T × MPC.

In an aggregate expenditures diagram equal increases in government spending and in lump-sum taxes will:

shift the aggregate expenditures line upward.

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:

some of the tax increase will be paid out of income that would otherwise have been saved.

If an unintended increase in business inventories occurs:

we can expect businesses to lower the level of production.

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

If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is:

$20 billion below the full-employment GDP.

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:

$20 billion.

The following schedule contains data for a private closed economy. All figures are in billions. Use these data in answering the question. GDP: C $140 $150 180 180 220 210 260 240 300 270 Refer to the above data. If gross investment is $10 at all levels of GDP, the equilibrium GDP will be:

$220.

(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

If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce consumption by:

$3 billion.

(Advanced analysis) Answer the question on the basis of the following information for a private open economy: C=40+0.80Y Ig=Ig=40 X=X=20 M=M=30 Refer to the above information. In equilibrium, saving is:

$30.

(Advanced analysis) Answer the question on the basis of the following data for a private closed economy. The letters Y, C, S, and I are used to represent real GDP, consumption, saving, and investment respectively. GDP: $0 100 200 300 400 500 Consumption: $60 120 180 240 300 360 Investment: $30 40 50 60 70 80 Refer to the above data. Equilibrium Y (= GDP) is:

$300.

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). Ig=Ig=80 S=-80+0.4Y Refer to the above information. In equilibrium consumption will be:

$320.

(Advanced analysis) Answer the question on the basis of the following information for a private open economy: C=40+0.80Y Ig=Ig=40 X=X=20 M=M=30 The equilibrium GDP (=Y) in the above economy is:

$350.

possible levels of domestic output and income: $320 330 340 350 360 370 380 Consumption: $320 327 334 341 348 355 362 Refer to the above data for a private closed economy. If gross investment is $12 billion, the equilibrium level of GDP will be:

$360.

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be:

$38 billion.

Refer to the above information. If the economy's tax schedule was T = 0.2Y rather than T = T0 = 30, the equilibrium GDP would be:

$387.5.

Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by:

$40 billion.

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy where C is consumption, Y is the gross domestic product, Ig is gross investment, and i is the interest rate: C= 40 +0.8Y Ig= 60-2i i=i=10 Refer to the above information. Given that the interest rate is 10 (percent), the amount that businesses will want to invest will be:

$40.

(Advanced analysis) Answer the question on the basis of the following information for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports respectively. Figures are in billions of dollars. C=26+0.75Y Ig=60 X=24 M=10 The equilibrium GDP for the above open economy is:

$400

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy where C is consumption, Y is the gross domestic product, Ig is gross investment, and i is the interest rate: C= 40 +0.8Y Ig= 60-2i i=i=10 Refer to the above information. The equilibrium level of GDP in this economy is:

$400.

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). Ig=Ig=80 S=-80+0.4Y Refer to the above information. The equilibrium GDP will be:

$400.

(Advanced analysis) If S = -60 + .25Y and Ig = 60, where S is saving, Ig is gross investment, and Y is gross domestic product (GDP), then the equilibrium level of GDP is:

$480.

Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:

$50 billion.

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Ca=25+0.75(Y-T) Ig=Ig=50 Xn=Xn=10 G=G=70 T=T=30 Refer to the above information. The equilibrium level of GDP for this economy is:

$530.

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy. S=-20+0.4Y Ig=25-3i where S is saving, Ig is gross investment, i is the real interest rate, and Y is GDP. Refer to the above information. Refer to the above information. In equilibrium the level of consumption will be:

$65.

(Advanced analysis) Answer the question on the basis of the following information for a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). Ig=Ig=80 S=-80+0.4Y Refer to the above information. In equilibrium saving will be:

$80.

If the MPC in an economy is .9, a $1 billion increase in government spending will ultimately increase consumption by:

$9 billion.

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:

.75.

If the marginal propensity to consume in an economy is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be:

.8.

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.

(Advanced analysis) Answer the question on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars. C = 60 + .6Y I = I0 = 30 Refer to the above data. In equilibrium the level of consumption spending will be:

195.

(Advanced analysis) Answer the question on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars. C = 60 + .6Y I = I0 = 30 Refer to the above data. The equilibrium level of income (Y) is:

225.

possible levels of domestic output and income: $320 330 340 350 360 370 380 Consumption: $320 327 334 341 348 355 362 Refer to the above data. The MPS is:

3/10.

(Advanced analysis) Answer the question on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars. C = 60 + .6Y I = I0 = 30 Refer to the above data. In equilibrium the level of saving will be:

30.

possible levels of domestic output and income: $320 330 340 350 360 370 380 Consumption: $320 327 334 341 348 355 362 Refer to the above data. At the $370 billion level of DI the APS is approximately:

4 percent.

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Ca=25+0.75(Y-T) Ig=Ig=50 Xn=Xn=10 G=G=70 T=T=30 Refer to the above information. The multiplier for this economy is:

4.

(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:

4.

(Advanced analysis) Answer the question on the basis of the following information for a private open economy. The letters Y, C, Ig, X, and M stand for GDP, consumption, gross investment, exports, and imports respectively. Figures are in billions of dollars. C=26+0.75Y Ig=60 X=24 M=10 The multiplier for the above economy is:

4.0.

(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:

5.

(Advanced analysis) Answer the question on the basis of the following data for a private closed economy. The letters Y, C, S, and I are used to represent real GDP, consumption, saving, and investment respectively. GDP: $0 100 200 300 400 500 Consumption: $60 120 180 240 300 360 Investment: $30 40 50 60 70 80 The equation representing the consumption schedule for the above economy is:

C = 60 + .6Y.

In a mixed open economy the equilibrium GDP exists where:

Ca + Ig + Xn + G = GDP.

The level of aggregate expenditures in a mixed open economy is comprised of:

Ca + Ig + Xn + G.

Which of the following is a correct statement of the impacts of a lump-sum tax?

Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC.

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion:

GDP will remain at $400 billion unless aggregate expenditures change.

The following schedule contains data for a private closed economy. All figures are in billions. Use these data in answering the question. GDP: C $140 $150 180 180 220 210 260 240 300 270 Refer to the above data. If a lump-sum tax of $20 is imposed, the consumption schedule will become:

GDP: C: $140 $130 180 160 220 190 260 220 300 250

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Great Depression

(Advanced analysis) Answer the question on the basis of the following data for a private closed economy. The letters Y, C, S, and I are used to represent real GDP, consumption, saving, and investment respectively. GDP: $0 100 200 300 400 500 Consumption: $60 120 180 240 300 360 Investment: $30 40 50 60 70 80 The equation representing the investment schedule for the above economy is:

I = 30 + .1Y.

In a mixed open economy, if aggregate expenditures exceed GDP:

Ig + X + G > Sa + M + T.

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:

Ig + Xn must equal $300 billion.

(Last Word) In The General Theory of Employment, Interest, and Money:

John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.

(Last Word) Say's law and classical macroeconomics were disputed by:

John Maynard Keynes.

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.

Which of the following statements is incorrect?

Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4.

The aggregate expenditures model is built upon which of the following assumptions?

Prices are fixed.

In a mixed open economy the equilibrium GDP is determined at that point where:

Sa + M + T = Ig + X + G.

In a mixed open economy, which of the following will affect the equilibrium GDP in the same direction?

Sa, T, and M

Which of the following statements is correct for a private closed economy?

Saving equals planned investment only at the equilibrium level of GDP.

actual investment

Saving is always equal to:

Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that:

T + Sa > Ig + G.

Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S. GDP, then:

U.S. real GDP will fall.

Which of the following would reduce GDP by the greatest amount?

a $20 billion decrease in government spending

Which of the following would increase GDP by the greatest amount?

a $20 billion increase in government spending

If the dollar appreciates relative to foreign currencies, we would expect:

a country's net exports to fall.

If unintended increases in business inventories occur, we can expect:

a decline in GDP and rising unemployment.

An upward shift of the aggregate expenditures schedule might be caused by:

a decrease in imports, with no change in exports.

Taxes represent:

a leakage of purchasing power, like saving.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because:

a portion of a tax cut will be saved.

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from:

a rapid decline in investment spending.

The U.S. recession of 2007-2009 provides a good example of:

a recessionary expenditure gap.

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?

a rise in the real GDP

(Advanced analysis) Answer the question on the basis of the following information for a private open economy: C=40+0.80Y Ig=Ig=40 X=X=20 M=M=30 Refer to the above information. This nation is incurring:

a trade deficit.

If net exports are positive:

aggregate expenditures are greater at each level of GDP than when net exports are zero or negative.

Planned investment plus unintended increases in inventories equals:

actual investment.

In a private closed economy _____ investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where _____ investment is equal to saving.

actual; planned

At equilibrium real GDP in a private closed economy:

aggregate expenditures and real GDP are equal.

If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause:

an $8 billion downshift in the consumption schedule.

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of:

an increase in the MPC.

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment?

an increase of $15 billion

Actual investment equals saving:

at all levels of GDP.

If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the:

consumption schedule will shift downward by $20 billion.

In the United States from 1929 to 1933, real GDP ____________, and the unemployment rate _______________.

declined by 27 percent; rose to 25 percent

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.

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.

her things equal, serious recession in the economies of U.S. trading partners will:

depress real output and employment in the U.S. economy.

In the aggregate expenditures model, it is assumed that investment:

does not change when real GDP changes.

If at some level of GDP the economy is experiencing an unintended decrease in inventories:

domestic output will increase.

If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift:

downward by $16 billion.

If an increase in aggregate expenditures results in no increase in real GDP we can surmise that the:

economy is already operating at full employment.

It is true that:

equal increases in government spending and taxes increase the equilibrium GDP.

Other things equal, the multiplier effect associated with a change in government spending is:

equal to that associated with a change in investment or consumption.

When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule:

equals the MPC.

The level of aggregate expenditures in the private closed economy is determined by the:

expenditures of consumers and businesses.

Which of the following statements concerning the equilibrium level of GDP is incorrect?

full employment will necessarily be realized

(Advanced analysis) Answer the question on the basis of the following information for a private open economy: C=40+0.80Y Ig=Ig=40 X=X=20 M=M=30 Refer to the above information. International trade in this case:

has a contractionary effect on GDP.

A private closed economy includes:

households and businesses, but not government or international trade.

If the multiplier in an economy is 5, a $20 billion increase in net exports will:

increase GDP by $100 billion.

If MPC = .5, a simultaneous increase in both taxes and government spending of $20 will:

increase GDP by $20.

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to:

increase by $45 billion.

Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will:

increase by more than $100 billion.

If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to:

increase domestic output and employment.

Other things equal, an increase in an economy's exports will:

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

In the aggregate expenditures model, an increase in government spending may:

increase output and employment.

In the aggregate expenditures model, a reduction in taxes may:

increase saving.

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:

increase taxes by $28 billion.

If the United States wants to increase its net exports in the short term, it might take steps to:

increase the dollar price of foreign currencies.

Equal increases in government purchases and taxes will:

increase the equilibrium GDP and the size of that increase is independent of the size of the MPC.

Investment and saving are, respectively:

injections and leakages.

Viewed through the aggregate expenditures model, the U.S. recession of 2007-2009 resulted mainly from:

insufficient aggregate expenditures

Exports have the same effect on the current size of GDP as:

investment

All else equal, a large decline in the real interest rate will shift the:

investment schedule upward.

An exchange rate:

is the price that the currencies of any two nations exchange for one another.

If an unintended increase in business inventories occurs at some level of GDP, then GDP:

is too high for equilibrium.

In moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes:

must be added to saving.

At the equilibrium GDP for a private open economy:

net exports may be either positive or negative.

The equilibrium level of GDP is associated with:

no unintended changes in inventories.

In a private closed economy, when aggregate expenditures equal GDP:

planned investment equals saving.

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:

planned investment must exceed saving.

If aggregate expenditures exceed GDP in a private closed economy:

planned investment will exceed saving.

Refer to the above information. If government desired to raise the equilibrium GDP to $650, it could:

raise G by $30 or reduce T by $40.

The effect of imposing a lump-sum tax is to:

reduce the absolute levels of consumption and saving at each level of GDP, but to not change the size of the multiplier.

In an effort to stop the U.S. recession of 2007-2009, the Federal government:

reduced taxes and increased government spending.

If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease:

saving by $20.

Imports have the same effect on the current size of GDP as:

saving.

In a mixed closed economy:

taxes and savings are leakages, while investment and government purchases are injections.

(Last Word) Classical macroeconomics was dealt severe blows by:

the Great Depression and Keynes's macroeconomic theory.

If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion then:

the MPC for this economy is .6.

If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion then:

the MPC for this economy is .8.

A recessionary expenditure gap exists if:

the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.

A recessionary expenditure gap is:

the amount by which the full-employment GDP exceeds the level of aggregate expenditures.

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 income will rise to $430.

An increase in taxes will have a greater effect on the equilibrium GDP:

the larger the MPC.

A lump-sum tax means that:

the same amount of tax revenue is collected at each level of GDP.

A lump-sum tax causes the after-tax consumption schedule:

to be parallel to the before-tax consumption schedule.

A private closed economy will expand when:

unplanned decreases in inventories occur.

Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus:

unplanned decreases in inventories of $10 billion will occur.

In the aggregate expenditures model, technological progress will shift the investment schedule:

upward and increase aggregate expenditures.