Macro Module 9: Spending and Output in the Short Run

B - rise by 400

Refer to the accompanying figure. Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will ___. A - rise by 1,200 B - rise by 400 C - fall by 600 D - rise by 800

B - 2 Keynesian multiplier = 1/(1-mpc) = 1/(1 - 0.5) = 2. It is also equal to ΔY/ΔPAE = (1200 - 800)/(600 - 400)

Refer to the accompanying figure. Based on the figure, the income-expenditure multiplier equals: A - 0.5 B - 2 C - 5 D - 200

B - there is an expansionary gap

Refer to the figure below. 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

D - decreasing the vertical intercept

A decrease in stock prices alters the consumption function by: A - increasing the slope B - decreasing the slope C - increasing the vertical intercept D - decreasing the vertical intercept

C - reduces; recessionary A recession in the United States can easily spread around the world. In this case, the lower GDP in the United States reduces demand for Canadian goods and services by US consumers and businesses and therefore reduces Canada's exports to the US. Everything else remaining constant, this creates a recessionary gap in Canada.

A recession in the United States ____ 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

D - social security payments

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 to foreigners of domestically-produced goods D - social security payments

B - increases; decreases

Automatic stabilizers are provisions in the law that create 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

D - indirectly, by changing disposable income and, consequently, consumption A $1 million increase in G raises GDP by $1 million directly in the first round. These become additional incomes of individuals throughout the economy. So in the second round consumption expenditures increase by mpc × $1 million. For a tax cut (or an increase in transfer payments) by $1 million, the process works slightly differently. The first round does not increase GDP by $1 million. It only raises GDP by mpc × $1 million. Therefore the tax multiplier is mpc × ​[1/(1-mpc)] = ​[mpc/(1-mpc)] and is less than the government expenditure multiplier = 1/(1-mpc) by 1. You should be easily able to see that the government expenditure multiplier minus the tax multiplier = 1/(1-mpc) minus ​[mpc/(1-mpc)] is equal to 1.

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

A - 0.9

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

D - 5,000

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

B - recessionary output gap

For an economy starting from 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

D - stabilization

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

A - 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 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

B - a recessionary gap

If planned aggregate expenditure (PAE) in an economy equals 2,000 + .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 - decrease by 100

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 10 B - decrease by 100 C - increase by 1000 D - decrease by 1000

C - rise by $111.11

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then taxes must ____ to eliminate any output gap. A - rise by 10 B - fall by more than 100 C - rise by $111.11 D - rise by $100

D - recessionary; increasing government purchases

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 - 290+0.75Y; $1160

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals .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 ___ and the short run equilibrium output equals ___ A - 25Y; $290 B - 320*0.25Y; $1600 C - 0.75Y; $290 D - 290+0.75Y; $1160

A - increased by $1 billion A $1 billion decrease in autonomous consumption shifts the PAE line downward. To shift it back to its original position, government purchases (another type of autonomous expenditures) must be increased by $1 billion.

In a 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

C - planned aggregate expenditure; 45-degree

In the Keynesian cross diagram, the ____ line shows the relationship between planned aggregate expenditure and output, and the ____ line represents the condition that planned aggregate expenditure and output are equal. A - consumption function; 45-degree B - 45-degree; consumption function C - planned aggregate expenditure; 45-degree D - 45-degree; expenditure

D - autonomous expenditures; the mpc

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 - fluctuations in aggregate spending

In the Keynesian model deviations of output from potential are caused by: A - fluctuations in average labor productivity B - random output shocks C - changing asset prices D - fluctuations in aggregate spending

B - a $1 billion increase; a greater than $1 billion increase

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ____ in PAE and a __ in the short-run equilibrium output. A - a $1 billion increase; a $1 billion increase B - a $1 billion increase; a greater than $1 billion increase C - a greater than $1 billion increase; a less than $1 billion increase D - a less than $1 billion increase; a greater than $1 billion increase

D - planned investment is greater than actual investment

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

C - increased by $1.33 billion To offset a recessionary gap of $1 billion, autonomous expenditures must increase by $1 billion. An mpc of 0.75 means that households will spend only 75 percent of any increase in transfers, so the increase in transfers that is needed is $1 billion/ 0.75 = $1.33 billion.

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

D - $20 billion; more than $20 billion If government spending is increased by $20 billion, PAE rises by $20 billion. Tax cuts increase spending but they also increase savings. In order for households to increase planned spending by $20 billion, they need to receive more than $20 billion in tax cuts.

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 - decreased by less than $10 billion

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

A - affects potential output as well as planned aggregate expenditure

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

B - planned spending on final goods and services

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

A - less than; decrease

Refer to the figure below. 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

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

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

D - cost-benefit principle

The decision about 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

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

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 - larger; larger

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

C - for businesses and consumers to borrow money

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 - wealth

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 - autonomous; induced Planned aggregate expenditure comes in two parts: autonomous expenditure and induced expenditure. Autonomous expenditure is independent of output whereas induced expenditure depends on output.

The two parts of planned aggregate expenditure are ____ expenditures and ____ expenditures. A - real; nominal B - inflated; deflated C - autonomous; induced D - positive; normative

A - disposable income; factors other than disposable income

The two parts of the Keynesian consumption function are the induced part of consumption that depends on ____ and the autonomous part of 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

B - 400 Solve for Y=PAE

When PAE = 200 + 0.5Y, short-run equilibrium output equals: A - 1,200 B - 400 C - 600 D - 800