Chapter 29 Economics

20. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by: A. $100 billion. B. $90 billion. C. $40 billion. D. $50 billion.

$40 billion.

11. Exports have the same effect on the current size of GDP as: A. imports. B. investment. C. taxes. D. saving.

investment.

28. Taxes represent: A. a leakage of purchasing power, like saving. B. an injection of purchasing power, like investment. C. an injection of purchasing power, like government spending. D. a leakage of purchasing power, like government spending.

a leakage of purchasing power, like saving.

22. 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. government spending is more employment-intensive than is either consumption or investment spending. B. government spending increases the money supply and a tax reduction does not. C. a portion of a tax cut will be saved. D. taxes vary directly with income.

a portion of a tax cut will be saved.

5. 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: A. saving is $10 billion. B. unplanned decreases in inventories of $10 billion will occur. C. the MPC is .80. D. unplanned increases in inventories of $10 billion will occur.

unplanned decreases in inventories of $10 billion will occur.

3. Answer the question on the basis of the following data for a private closed economy. Refer to the data. The MPS is: A. 7/10. B. 3/10. C. 2/5. D. 3/5.

3/10.

27. What do investment and government expenditures have in common? A. Both represent injections to the circular flow. B. Both represent leakages from the circular flow. C. Neither is subject to the multiplier effect. D. Both represent a decline in indebtedness.

Both represent injections to the circular flow.

6. Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when: A. C + Ig cuts the 45-degree line. B. GDP is $180 billion. C. GDP is $60 billion. D. GDP is also zero.

GDP is $60 billion.

2. Refer to the diagrams. Other things equal, curve B will shift upward when: A. the level of GDP increases. B. the interest rate increases. C. curve A shifts to the left. D. curve A shifts to the right.

curve A shifts to the right.

18. Other things equal, a serious recession in the economies of U.S. trading partners will: A. have no perceptible impact on the U.S. economy. B. cause inflation in the U.S. economy. C. depress real output and employment in the U.S. economy. D. stimulate real output and employment in the U.S. economy.

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

21. Other things equal, the multiplier effect associated with a change in government spending is: A. the same as that associated with a change in taxes. B. equal to that associated with a change in investment or consumption. C. less than that associated with a change in investment. D. greater than that associated with a change in investment.

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

17. If the multiplier in an economy is 5, a $20 billion increase in net exports will: A. increase GDP by $100 billion. B. reduce GDP by $4 billion. C. decrease GDP by $100 billion. D. increase GDP by $20 billion.

increase GDP by $100 billion.

19. Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will: A. increase by $100 billion. B. increase by less than $100 billion. C. increase by more than $100 billion. D. fall by $100 billion.

increase by more than $100 billion.

16. If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to: A. reduce the rate of domestic inflation. B. increase efficiency in the world economy. C. increase domestic output and employment. D. reduce domestic output and employment.

increase domestic output and employment.

25. An increase in taxes will have a greater effect on the equilibrium GDP: A. if the tax revenues are redistributed through transfer payments. B. the larger the MPS. C. the smaller the MPC. D. the larger the MPC.

the larger the MPC.

10. Imports have the same effect on the current size of GDP as: A. exports. B. investment. C. consumption. D. saving.

saving.

24. Which of the following is a correct statement of the impacts of a lump-sum tax? A. Disposable income will increase 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. B. 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 multiplier. C. Disposable income will decline by the amount of the tax and consumption at each level of GDP will also decline by the amount of the tax. D. 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.

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.

14. If the dollar appreciates relative to foreign currencies, we would expect: A. the multiplier to decrease. B. a country's exports and imports to both fall. C. a country's net exports to rise. D. a country's net exports to fall.

a country's net exports to fall.

13. An upward shift of the aggregate expenditures schedule might be caused by: A. a decrease in exports, with no change in imports. B. a decrease in imports, with no change in exports. C. an increase in exports, with an equal decrease in investment spending. D. an increase in imports, with no change in exports.

a decrease in imports, with no change in exports.

9. Refer to the diagram for a private closed economy. The upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects: A. an increase in investment expenditures. B. a decrease in consumption expenditures. C. an increase in the MPC. D. an increase in the APS.

an increase in investment expenditures.

15. Other things equal, an increase in an economy's exports will: A. lower the marginal propensity to import. B. have no effect on domestic GDP because imports will change by an offsetting amount. C. decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP. D. increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

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

1. All else equal, a large decline in the real interest rate will shift the: A. investment demand curve leftward. B. investment demand curve rightward. C. investment schedule upward. D. investment schedule downward.

investment schedule upward.

12. At the equilibrium GDP for a private open economy: A. net exports may be either positive or negative. B. imports will always exceed exports. C. exports will always exceed imports. D. exports and imports will be equal.

net exports may be either positive or negative.

4. In a private closed economy, when aggregate expenditures equal GDP: A. consumption equals investment. B. consumption equals aggregate expenditures. C. planned investment equals saving. D. disposable income equals consumption minus saving.

planned investment equals saving.

30. In an effort to stop the U.S. recession of 2007-2009, the federal government: A. reduced taxes and increased government spending. B. imposed large tariffs on many imported goods to protect domestic jobs. C. raised interest rates to encourage greater business investment. D. avoided Keynesian policies because of the threat of inflation.

reduced taxes and increased government spending.

23. 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: A. the MPC is smaller in the private sector than it is in the public sector. B. declines in government spending always tend to stimulate private investment. C. disposable income will fall by some amount smaller than the tax increase. D. some of the tax increase will be paid out of income that would otherwise have been saved.

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

29. A recessionary expenditure gap exists if: A. planned investment exceeds saving at the full-employment GDP. B. the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP. C. the aggregate expenditures schedule intersects the 45-degree line at any level of GDP. D. the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP.

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

7. In the aggregate expenditures model, technological progress will shift the investment schedule: A. downward and increase aggregate expenditures. B. downward and decrease aggregate expenditures. C. upward and increase aggregate expenditures. D. upward and decrease aggregate expenditures.

upward and increase aggregate expenditures.

26. Which of the following would increase GDP by the greatest amount? A. A $20 billion reduction in taxes B. $20 billion increases in both government spending and taxes C. $20 billion decreases in both government spending and taxes D. A $20 billion increase in government spending

A $20 billion increase in government spending

8. Which of the following statements is correct for a private closed economy? A. Saving equals planned investment only at the equilibrium level of GDP. B. All levels of GDP where planned investment exceeds saving will be too high for equilibrium. C. Planned and actual investment are identical at all possible levels of GDP. D. Saving equals actual investment only at the equilibrium level of GDP.

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