ECO 111 Ch. 11
Based on the Keynesian cross diagram, short-run equilibrium output equals: A. 4,000. B. 4,750. C. 3,250. D. 3,000.
A. 4,000. Short-run equilibrium output occurs where PAE crosses the 45-degree line, which occurs at output level 4,000.
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. Looking at the axes of the Keynesian cross diagram, the horizontal axis is output and the vertical axis is planned aggregate expenditure (PAE). The expenditure line shows the relationship between these two variables.
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. known as meeting demand. B. inconsistent with the key assumption upon which the basic Keynesian model is built. C. exactly the type of behavior that Keynes believed most firms exhibit. D. free from menu costs.
B. inconsistent with the key assumption upon which the basic Keynesian model is built. The basic Keynesian model assumes prices are fixed in the short run.
If consumption increases by $9 when disposable income increases by $10, the marginal propensity to consume (mpc) equals: A. 0.9. B. 0.1. C. 9.0. D. 1.0.
A. 0.9. If consumption increases by $9 in response to a $10 increase in disposable income, then consumption rose $0.90 for every $1 increase in disposable income, making the mpc equal to 0.9.
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. less than $30 billion; less than $30 billion B. $30 billion; more than $30 billion C. more than $30 billion; more than $30 billion D. $30 billion; $30 billion
B. $30 billion; more than $30 billion If government spending is decreased by $30 billion, planned aggregate spending goes down by $30 billion. Tax hikes decrease spending but they also decrease savings. In order for households to decrease planned spending by $30 billion, their net taxes need to rise by more than $30 billion.
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. $2 trillion. B. $35 billion. C. $350 billion. D. $200 billion.
C. $350 billion. Historically, the "wealth effect" has led to a reduction in consumption equal to 3 to 7 percent of the reduction in household wealth. If $5 trillion in wealth were wiped out, consumption might fall as much as 7% of that, or $350 billion.
Based on the figure, when PAE = 600 + 0.5Y, short-run equilibrium output equals: A. 800. B. 400. C. 1,200. D. 600.
C. 1,200. Equilibrium occurs where the 45-degree line intersects the PAE line. In this case, intersection occurs at output equal to 1,200.
Based on the figure, the income-expenditure multiplier equals: A. 0.5. B. 200. C. 2. D. 5.
C. 2. The income-expenditure multiplier is the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output. The diagram reveals that every increase in autonomous expenditures (the vertical intercept) of 200 leads to an increase in short-run equilibrium GDP of 400. This implies an income-expenditure multiplier of 2.
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. 320 + 0.75Y. B. 290 + 0.25Y. C. 290 + 0.75Y. D. 320 + 0.25Y.
C. 290 + 0.75Y. In this case, because C = 100 + 0.75(Y - T), we have PAE = C + I + G + NX = [100 + 0.75(Y - 40)] + 50 + 150 + 20 = 100 + 0.75Y - 30 + 50 + 150 + 20 = 290 + 0.75Y.
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. 290 + 0.75Y. B. 320 + 0.25Y. C. 290. D. 320.
C. 290. Autonomous expenditure is expenditure which is independent of income. In this case, because C = 100 + 0.75(Y - T), we have PAE = C + I + G + NX = [100 + 0.75(Y - 40)] + 50 + 150 + 20 = 100 + 0.75Y - 30 + 50 + 150 + 20 = 290 + 0.75Y. Autonomous expenditure is the vertical intercept of 290.
Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal: Select one: A. 600. B. 1,200. C. 400. D. 800.
C. 400. Autonomous spending is the vertical intercept of PAE. As the curve shifts downward from an intercept of 400 to 200, equilibrium output falls from 800 to 400.
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. half tax cuts and half spending increases; only spending increases B. one-fourth tax cuts and three-fourths spending increases; two-thirds tax cuts and one-third spending increases C. only tax cuts; half tax cuts and half spending increases D. two-thirds tax cuts and one-third spending increases; one-fourth tax cuts and three-fourths spending increases
D. two-thirds tax cuts and one-third spending increases; one-fourth tax cuts and three-fourths spending increases The Bush Administration was more inclined to cut taxes, whereas the Obama Administration was more inclined to increase government spending.
Planned investment may differ from actual investment because of: A. the marginal propensity to consume. B. fluctuations in preset prices C. changes in government purchases and net exports. D. unplanned changes in inventories.
D. unplanned changes in inventories. Businesses make investment plans every year, but when the business cycle changes, sometimes a firm has too much (or too little) inventory.
Induced expenditure is the portion of planned aggregate expenditure that: A. depends on output. B. equals planned spending. C. equals autonomous expenditure. D. equals aggregate output.
A. depends on output. The portion of planned aggregate expenditure that depends on output (Y) is called "induced expenditure."
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 + 0.80Y. B. 990 + 0.20Y. C. 900 + 0.80Y. D. 940 + 0.80Y.
C. 900 + 0.80Y. In this case, because C = 700 + 0.80(Y - T), we have PAE = C + I + G + NX = [700 + 0.80(Y - 50)] + 100 + 100 + 40 = 700 + 0.80Y - 40 + 100 + 100 + 40 = 900 + 0.80Y.
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 output (Y) is equal to: Select one: A. 14,000. B. 6,000. C. 16,000. D. 24,000.
D. 24,000. Short-run equilibrium output (Y) occurs where the PAE line intersects the 45-degree line, which is 24,000 for the PAE line 6,000 + 0.75Y.
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. 900. B. 990. C. 940. D. 890.
A. 900. Autonomous expenditure is the expenditure which is independent of income. In this case, because C = 700 + 0.80(Y - T), we have PAE = C + I + G + NX = [700 + 0.80(Y - 50)] + 100 + 100 + 40 = 700 + 0.80Y - 40 + 100 + 100 + 40 = 900 + 0.80Y. Autonomous expenditure is 900.
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 businesses and consumers to borrow money. B. to fight inflation. C. to shift the PAE line downward. D. for government to finance deficit spending.
A. for businesses and consumers to borrow money. After the housing bubble burst, many loans went bad and banks and other lenders reduced availability of loans.
In the basic Keynesian model, a tax cut: A. increases short-run equilibrium output. B. reduces short-run equilibrium output. C. reduces potential output. D. increases potential output.
A. increases short-run equilibrium output. A tax cut stimulates the economy by increasing consumption, which increases short-run equilibrium output.
Firms do not change prices frequently because: A. it is costly to do so. B. it is easier to change the quantity of capital used in production. C. customers will refuse to patronize firms that change prices frequently. D. there are legal prohibitions against doing so.
A. it is costly to do so. In addition to the menu costs of changing prices, changing prices too often can lead to dissatisfied customers.
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. smaller; smaller C. smaller; larger D. larger; smaller
A. larger; larger As the mpc gets larger, so does the income-expenditure multiplier and the final effects of changes in autonomous spending.
Based on the Keynesian cross diagram, if output equals 5,000, planned aggregate expenditure is ________ output, and firms will ________ production in response. A. less than; decrease B. less than; increase C. greater than; decrease D. equal to; not change
A. less than; decrease Short-run equilibrium output occurs where PAE crosses the 45-degree line, which occurs at output level 4,000. If output is 5,000, PAE is 1,000 + (0.75 × 5,000) = 4,750, so output equal to 250 goes unsold. As firms notice unplanned increases in their inventories, they will decrease production.
Contractionary policies are government stabilization policies intended to decrease: A. planned spending. B. average labor productivity. C. unemployment. Incorrect D. population.
A. planned spending. "Contractionary policies" are government stabilization policies intended to decrease planned spending and output.
For an economy starting at potential output, a decrease in planned investment in the short run results in a(n): A. recessionary output gap. B. increase in potential output. C. expansionary output gap. D. decrease in potential output.
A. recessionary output gap. A decrease in planned investment shifts the PAE line downward, which results in lower equilibrium output. For an economy with output equal to its potential, a decrease in short-run equilibrium output creates a recessionary output gap.
In the basic Keynesian model, a decrease in government purchases: A. reduces short-run equilibrium output. B. increases potential output. C. reduces potential output. D. increases short-run equilibrium output.
A. reduces short-run equilibrium output. A decrease in government purchases shifts the aggregate expenditures line downward, which reduces short-run equilibrium output.
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. Correct A decline in autonomous spending causes the PAE curve to shift downward, which causes the intersection with the 45-degree line to move down and to the left, reducing short-run equilibrium output.
The effect on short-run equilibrium output of a one-unit increase in autonomous expenditure is called: A. average labor productivity. B. the income-expenditure multiplier. C. the marginal propensity to consume. D. Okun's law.
B. the income-expenditure multiplier. The "income-expenditure multiplier" is the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output.
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. $300,000; $200,000 B. $650,000; $550,000 C. $250,000; $150,000 D. $550,000; $450,000
B. $650,000; $550,000 Actual investment is planned investment plus unplanned investment. Planned investment includes the planned increase in inventory (planned production minus expected sales, or $1,250,000 - $1,000,000 = $250,000) and the purchase of new equipment ($300,000), which sum to $550,000. Unplanned investment is the unexpected increase in inventory, which is equal to the amount by which actual sales fall short of expected sales, or $1,000,000 - $900,000 = $100,000.
If the marginal propensity to consume is 0.75, then a $100 increase in disposable income leads to a ________ increase in consumption. A. $25 B. $75 C. $13.33 D. $133
B. $75 If the marginal propensity to consume is 0.75, then a $100 increase in disposable income leads to a $75 increase in consumption because 0.75 ×$100 = $75.
Data on after-tax income and consumption spending for the Adam Smith family are given below: After-tax consump spend. 9,000 18,100 14,000 22,600 19,000 27,100 24,000 31,600 Based on these data, the Adam Smith family has a marginal propensity to consume equal to: A. 0.8. B. 0.9. C. 0.75. D. 0.6.
B. 0.9. From row to row, the increase in after-tax (or disposable) income is $5,000. For each of these $5,000 increases in after-tax income, consumption spending increases by $4,500. The marginal propensity to consume, therefore, is $4,500 ÷ $5,000 = 0.9.
Based on the Keynesian cross diagram, at short-run equilibrium output autonomous expenditure equals ________ and induced expenditure equals ________. A. 3,000; 4,000 B. 1,000; 3,000 C. 1,000; 4,000 D. 4,000; 2,000
B. 1,000; 3,000 Short-run equilibrium output occurs where PAE crosses the 45-degree line, which occurs at output level 4,000. At that output, autonomous expenditure equals 1,000 (the vertical intercept of PAE) and induced expenditure equals the rest, or 0.75 × 4,000 = 3,000.
Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will equal: A. 600. B. 1,200. C. 800. D. 400.
B. 1,200. Autonomous spending is the vertical intercept of PAE. As the curve shifts upward from an intercept of 400 to 600, equilibrium output rises from 800 to 1,200.
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. 1,000 B. 111 C. 90 D. 100
B. 111 There is an expansionary gap of 1,000, the amount by which equilibrium output exceeds Y*. An mpc of 0.9 means that households will reduce autonomous spending by only 90 percent of any decrease in transfers. To close the output gap, autonomous expenditure must decrease by 1,000 ÷ 10 = 100, so the decrease in transfers that is needed is 100 ÷ 0.90 ≈ 111.
In the Keynesian cross diagram, the 45-degree line represents the short-run equilibrium condition that: A. I ≠ I* . B. Y = PAE. C. Y* = Y. D. PAE = C + I* + G + NX.
B. Y = PAE. The 45-degree line is the set of all possible equilibrium points. This is where output equals planned aggregate expenditure, or Y = PAE.
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. no autonomous expenditure. B. a recessionary gap. C. no output gap. D. an expansionary gap.
B. a recessionary gap. Equilibrium occurs where PAE equals Y. In this economy, (2,000 + 0.8Y) = Y, so Y = 10,000. Since Y* = 11,000 and actual output falls short of potential output, there is a recessionary gap.
The largest component of planned aggregate expenditure is: A. exports. B. consumption. C. government purchases. D. investment.
B. consumption Empirically, consumption is always the largest component of planned aggregate expenditure.
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. increased; 200 B. decreased; 250 C. increased; 250 D. decreased; 200
B. decreased; 250 There is an expansionary gap of 1,000, the amount by which equilibrium output exceeds Y*. An mpc of 0.8 means that households will reduce autonomous spending by only 80 percent of any decrease in transfers. To close the output gap, autonomous expenditure must decrease by 1,000 ÷ 5 = 200, so the decrease in transfers that is needed is 200 ÷ 0.80 = 250.
As disposable income decreases, consumption: A. may either increase or decrease depending on the mpc. B. decreases. C. increases. D. may either increase or decrease depending on the wealth effect.
B. decreases. The consumption function describes a positive relationship between consumption and disposable income. This means that disposable income and consumption move in the same direction.
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 Changes in government purchases affect planned spending directly because the purchases are part of aggregate expenditure. Changes in taxes and/or transfers indirectly affect spending because they inspire households to make changes to their planned expenditures as disposable income changes.
The two parts of the Keynesian consumption function are consumption that depends on ________ and consumption that depends on ________. A. planned spending; unplanned spending B. disposable income; factors other than disposable income C. real income; nominal income D. money; wealth
B. disposable income; factors other than disposable income The slope of the consumption function is based on disposable income, whereas the vertical intercept of the consumption function is based on other factors (e.g., wealth and expectations).
Government policies intended to increase planned spending and output are called ________ policies. A. monetary B. expansionary C. fiscal D. aggregate
B. expansionary "Expansionary policies" are government stabilization policies intended to increase planned spending and output.
The basic Keynesian model is built on the key assumption that: A. firms price their products so as to see a preset quantity of output. B. firms meet the demand for their products at preset prices. C. prices are prevented from changing frequently by government regulations. D. menu costs are not significant.
B. firms meet the demand for their products at preset prices. The basic Keynesian model assumes prices are fixed in the short run.
A fiscal policy action to close a recessionary gap is to: Select one: A. increase the marginal propensity to consume. B. increase government purchases. C. decrease transfer payments. D. increase taxes.
B. increase government purchases. To close a recessionary gap, planned aggregate expenditures need to rise. Increased government purchases will increase planned aggregate expenditures.
When real output increases, planned aggregate expenditures increase because: A. autonomous expenditures increase. B. induced expenditures increase. C. induced expenditures decrease. D. autonomous expenditures decrease.
B. induced expenditures increase. Induced expenditures increase as a result of higher output. Autonomous expenditures are independent of output.
If firms sell more output than expected, planned investment: A. is less than actual investment. B. is greater than actual investment. C. equals zero. D. equals actual investment.
B. is greater than actual investment. When firms sell more than expected, their inventories fall below expected levels. This means that actual investment falls below planned investment.
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. no output gap. C. a recessionary gap. D. no autonomous expenditure.
B. no output gap. Equilibrium occurs where PAE equals Y. In this economy, (3,000 + 0.75Y) = Y, so Y = 12,000. Since Y* = 12,000 and actual output equals potential output, there is no output gap.
In the basic Keynesian model, a tax increase: A. increases short-run equilibrium output. B. reduces short-run equilibrium output. C. reduces potential output. D. increases potential output.
B. reduces short-run equilibrium output. A tax increase slows down the economy by decreasing consumption, which reduces short-run equilibrium output.
The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional: A. autonomous expenditure. B. spending. C. cyclical unemployment. D. menu costs.
B. spending. Spending by one person provides income for a second person, which then results in greater spending by the second person, and so on.
The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because: A. planned changes in inventories signal producers to adjust the level of output. B. the direct changes in spending change the income of producers which leads to additional changes in spending. C. autonomous spending supports more output than induced spending. D. multiple deposits are generated when new reserves are produced through fractional reserve banking.
B. the direct changes in spending change the income of producers which leads to additional changes in spending. The income-expenditure multiplier gets its name because a one-time infusion of spending gets re-spent many times before the final effects are realized.
Planned aggregate expenditure (PAE) equals: A. C + I + G + NXp . B. C* + I + G + NX. C. C + I* + G + NX. D. C + I + Gp + NX.
C. C + Ip*+ G + NX. "Planned aggregate expenditure" (PAE) is defined as total planned spending on final goods and services. The equation for this is: PAE = C + Ip + G + NX.
Provisions in the law that automatically increase government spending or decrease taxes when real output declines are called: A. autonomous stabilizers. B. the marginal propensity to consume. C. automatic stabilizers. D. the income-expenditure multiplier.
C. automatic stabilizers. "Automatic stabilizers" are provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines.
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. planned spending; unplanned spending C. autonomous expenditures; the mpc
C. autonomous expenditures; the mpc The total amount of expenditures has two parts: the autonomous part (shown by the vertical intercept), which is independent of output, and the induced part, which depends on output. In the basic Keynesian model, only consumption has an induced component, and the mpc shows the rate at which expenditure rises when output rises.
Government policies intended to decrease planned spending and output are called ________ policies. A. fiscal B. aggregate C. contractionary D. monetary
C. contractionary "Contractionary policies" are government stabilization policies intended to decrease planned spending and output.
Changes in government purchases affect planned spending: A. indirectly, by changing induced expenditures. B. autonomously. C. directly, by changing autonomous expenditures. D. only when there is an expansionary gap.
C. directly, by changing autonomous expenditures. Changes in government purchases affect planned spending directly because government purchases are a component of aggregate expenditures.
For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n): A. recessionary output gap. B. increase in potential output. C. expansionary output gap. D. decrease in potential output.
C. expansionary output gap. An increase in autonomous expenditure shifts the PAE line upward, which results in higher equilibrium output. For an economy with output equal to its potential, an increase in short-run equilibrium output creates an expansionary output gap.
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 5,000 B. decrease by 200 C. increase by 200 D. increase by 1,000
C. increase by 200 If the multiplier is 5, a 200-unit increase in government purchases results in a 1,000-unit increase in output. This closes the recessionary output gap of 1,000.
A fiscal policy action to close an expansionary gap is to: A. increase government purchases. B. increase the marginal propensity to consume. C. increase taxes. D. increase transfer payments.
C. increase taxes. To close an expansionary gap, planned aggregate expenditures need to fall. Increased taxes will decrease household disposable income and planned consumption expenditures, which will decrease planned aggregate expenditures.
A fiscal policy action to close a recessionary gap is to: A. decrease government purchases. B. decrease the marginal propensity to consume. C. increase transfer payments. D. increase taxes.
C. increase transfer payments. Correct To close a recessionary gap, planned aggregate expenditures need to rise. Increased transfer payments will increase household disposable income and planned consumption expenditures, which will increase planned aggregate expenditures.
Changes in taxes and transfers affect planned spending: A. directly, by changing induced expenditures. B. autonomously. C. indirectly, by changing disposable income and, consequently, consumption. D. only when there is an expansionary gap.
C. indirectly, by changing disposable income and, consequently, consumption. Changes in taxes and/or transfers indirectly affect spending because they inspire households to make changes to their planned expenditures as disposable income changes.
When real output decreases, planned aggregate expenditures decrease because: A. induced expenditures increase. B. autonomous expenditures decrease. C. induced expenditures decrease. D. autonomous expenditures increase.
C. induced expenditures decrease. Induced expenditures decrease as a result of lower output. Autonomous expenditures are independent of output
C + I* + G + NX equals: A. potential GDP. B. the output gap. C. planned aggregate expenditure. D. the income-expenditure multiplier.
C. planned aggregate expenditure. "Planned aggregate expenditure" (PAE) is defined as total planned spending on final goods and services. The equation for this is: PAE = C + Ip + G + NX.
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. When a firm hits its target inventory, its unplanned investment equals zero.
In the short run, with predetermined prices, when output is less than planned aggregate expenditure: A. planned investment is less than actual investment. B. potential output is less than short-run equilibrium output. C. planned investment is greater than actual investment. D. potential output is greater than short-run equilibrium output.
C. planned investment is greater than actual investment. In this case, planned aggregate expenditure is greater than output so inventories are shrinking. That means actual investment, due to falling inventory, is less than planned investment.
Planned aggregate expenditure is total: A. revenue from the sale of goods and services. B. income of households, businesses, governments, and foreigners. C. planned spending on final goods and services. D. value added in the economy.
C. planned spending on final goods and services. "Planned aggregate expenditure" (PAE) is defined as total planned spending on final goods and services.
Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy can affect ________ as well as aggregate demand and that fiscal policy is ________. A. potential output; offset by automatic stabilizers B. consumption; too flexible C. potential output; not flexible enough D. consumption; offset by automatic stabilizers
C. potential output; not flexible enough Fiscal policy can affect potential output because incentives to work are often reduced when tax rates or transfer payments increase. Also, fiscal policy requires governmental approval which often takes a long time.
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. stabilization D. productivity
C. stabilization "Stabilization policies" are government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps. The two major tools of stabilization policy are monetary policy and fiscal policy.
One potential problem with using fiscal policy to close recessionary output gaps is that: Select one: A. it may be offset by automatic stabilizers. B. decreased government spending can cause inflationary pressure to build. C. sustained government deficits can be harmful to long-run economic growth. D. reductions in interest rates can reduce savings and, therefore, investment.
C. sustained government deficits can be harmful to long-run economic growth. If government uses expansionary fiscal policy, deficits and debt will mount up. This public dissaving reduces future rates of growth.
The tendency of changes in asset prices to affect spending on consumption goods is called the ________ effect. A. income B. multiplier C. wealth D. substitution
C. wealth The "wealth effect" refers to the tendency of changes in asset prices to affect households' wealth and thus their consumption spending.
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. 900 + 0.80Y. D. 0.80Y.
D. 0.80Y. Induced expenditure is expenditure which is directly related to income. In this case, because C = 700 + 0.80(Y - T), we have PAE = C + I + G + NX = [700 + 0.80(Y - 50)] + 100 + 100 + 40 = 700 + 0.80Y - 40 + 100 + 100 + 40 = 900 + 0.80Y. Induced expenditure is 0.80Y.
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. 1,440. B. 1,000. C. 1,280. D. 1,160.
D. 1,160. PAE = C + I + G + NX = [100 + 0.75(Y - 40)] + 50 + 150 + 20 = 100 + 0.75Y - 30 + 50 + 150 + 20 = 290 + 0.75Y. Short-run equilibrium output occurs when Y equals PAE. The only value for Y in the answer choices that would also be equal to 290 + 0.75Y is 1,160.
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. 320. B. 0.25. C. 0.75. D. 290.
D. 290. C = 100 + 0.75(Y - T), we have PAE = C + I + G + NX = [100 + 0.75(Y - 40)] + 50 + 150 + 20 = 100 + 0.75Y - 30 + 50 + 150 + 20 = 290 + 0.75Y. The vertical intercept (which is equal to autonomous expenditure) equals 290.
Based on the figure, the income-expenditure multiplier in the economy illustrated equals: A. 1,000 B. 4,000 C. 0.75 D. 4
D. 4 The income-expenditure multiplier is the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output. The diagram reveals that every increase in autonomous expenditures (the vertical intercept) of 1,000 leads to an increase in short-run equilibrium GDP of 4,000. This implies an income-expenditure multiplier of 4.
Data on output and planned aggregate expenditure in Macroland are given below. Output PAE 2,000 2,300 3,000 . 3,200 4,000 4,100 5,000 5,000 6,000 5,900 Based on these data, the short-run equilibrium level of output is: A. 3,200. B. 2,000. C. 4,100. D. 5,000.
D. 5,000. Short-run equilibrium occurs at the level of output where Y equals PAE. The PAE line and 45-degree line cross at that point.
Based on the figure, when PAE = 400 + 0.5Y, short-run equilibrium output equals: A. 400. B. 1,200. C. 600. D. 800.
D. 800. Equilibrium occurs where the 45-degree line intersects the PAE line. In this case, intersection occurs at output equal to 800.
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: Select one: A. 890. B. 940. C. 990. D. 900.
D. 900. In this case, because C = 700 + 0.80(Y - T), we have PAE = C + I + G + NX = [700 + 0.80(Y - 50)] + 100 + 100 + 40 = 700 + 0.80Y - 40 + 100 + 100 + 40 = 900 + 0.80Y. The vertical intercept (which is equal to autonomous expenditure) is 900.
In the Keynesian model, a $1 billion increase in autonomous consumption leads to ________ in short-run equilibrium output. A. no change B. a $1 billion increase C. a $1 billion decrease D. a greater than $1 billion increase
D. a greater than $1 billion increase Due to the income-expenditure multiplier, a $1 billion increase in autonomous consumption results in a final increase in output greater than $1 billion.
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 $5 billion decrease C. no change. D. a greater than $5 billion decrease
D. a greater than $5 billion decrease Due to the income-expenditure multiplier, a $5 billion decrease in autonomous consumption results in a final decrease in output greater than $5 billion.
Based on the figure, if the economy is in short-run equilibrium with output equal to 16,000, then there is ________, and ________ could return the economy to potential output (Y*). A. an expansionary gap; a decrease in autonomous expenditures of 4,000 B. an expansionary gap; a decrease in autonomous expenditures of 1,000 C. a recessionary gap; an increase in autonomous expenditures of 4,000 D. a recessionary gap; an increase in autonomous expenditures of 1,000
D. a recessionary gap; an increase in autonomous expenditures of 1,000 There is a recessionary gap because Y* is greater than equilibrium output of 16,000. An upward shift of the PAE line by 1,000 would move the short-run equilibrium output to 20,000, or Y*.
Menu costs are the costs of: A. running a restaurant. B. changing production. C. increasing aggregate demand. D. changing prices.
D. changing prices. The costs of changing prices are known as "menu costs" in economics.
A fiscal policy action to close an expansionary gap is to: A. increase the marginal propensity to consume. B. increase transfer payments. C. decrease taxes. D. decrease government purchases.
D. decrease government purchases. To close an expansionary gap, planned aggregate expenditures need to fall. Decreased government purchases will decrease planned aggregate expenditures.
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. decreased by $2 billion. B. decreased by $0.5 billion. C. increased by $1 billion. D. decreased by $1 billion.
D. decreased by $1 billion. A $1 billion increase in autonomous consumption shifts the PAE curve upward. To shift it back down to its original position, government purchases (another type of autonomous expenditures) must be decreased by $1 billion.
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 $1.33 billion. B. decreased by $1 billion. C. increased by $1 billion. D. decreased by $1.33 billion.
D. decreased by $1.33 billion. To offset an expansionary gap of $1 billion, autonomous expenditures must decrease by $1 billion. An mpc of 0.75 means that households will reduce autonomous spending by only 75 percent of any decrease in transfers, so the decrease in transfers that is needed is $1 billion ÷ 0.75 = $1.33 billion.
The consumption function is relationship between consumption and: A. investment. B. planned aggregate expenditure. C. total spending. D. disposable income.
D. disposable income. The "consumption function" shows the relationship between consumption spending and its determinants, in particular, disposable income.
Short-run equilibrium output is the level of output at which actual output: A. equals real GDP per capita. B. maximizes firm profits. C. equals potential output. D. equals planned aggregate expenditure.
D. equals planned aggregate expenditure. When the economy is in short-run equilibrium, the aggregate planned expenditure curve intersects the 45-degree line, which shows where actual output and planned expenditures are equal.
The slope of the consumption function: A. equals 1. B. is vertical. C. is horizontal. D. equals the marginal propensity to consume.
D. equals the marginal propensity to consume. Marginal propensity to consume (mpc) is the change in consumption divided by the change in income. Graphically, this is the rise divided by the run of the consumption function, which is its slope.
If firms sell less output than expected, planned investment: A. is greater than actual investment. B. equals zero. C. equals actual investment. D. is less than actual investment.
D. is less than actual investment. When firms sell less than expected, their inventories rise above expected levels. This means that actual investment rises above planned investment.
In the basic Keynesian model all of the following are true except: A. planned consumption always equals actual consumption. B. planned net exports always equal actual net exports. C. planned government spending always equals actual government spending. D. planned investment always equals actual investment.
D. planned investment always equals actual investment. Investment is the only component of aggregate expenditure in the basic Keynesian model where planned spending sometimes differs from actual spending. This is due to inventory changes.
For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n): A. increase in potential output. B. expansionary output gap. C. decrease in potential output. D. recessionary output gap.
D. recessionary output gap. A decrease in autonomous expenditure shifts the PAE line downward, which results in lower equilibrium output. For an economy with output equal to its potential, a decrease in short-run equilibrium output creates a recessionary output gap.
A 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; recessionary C. increases; expansionary D. reduces; recessionary
D. reduces; recessionary A recession in Japan can easily spread to its neighbors. In this case, Japan's lower incomes result in reduced purchases from the East Asian countries and creates a recessionary output gap in those countries.
Based on the figure, if the economy is in short-run equilibrium with output equal to 24,000, then there is ________, and ________ could return the economy to potential output (Y*). A. an expansionary gap; a decrease in autonomous expenditures of 1,000 B. a recessionary gap; an increase in autonomous expenditures of 1,000 C. a recessionary gap; an increase in autonomous expenditures of 4,000 D. an expansionary gap; a decrease in autonomous expenditures of 4,000
There is an expansionary gap because Y* is less than the equilibrium output of 16,000. A downward shift of the PAE line by 1,000 would move the short-run equilibrium output to 20,000, or Y*.
