econ
historically speaking, a one dollar decrease in household wealth will cause consumer spending to fall by
$0.03 to $0.07
In econland autonomous consumption equals 700, Slope of expenditure line=
.80
In the Keynesian cross diagram the vertical intercept of the expenditure line equals __ and the slope of the expenditure line equals __
autonomous expenditures, the mpc
The basic Keynesian model is built on the key assumption that
firms meet the demand for their products at preset prices
The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, disruptions in the financial market made it difficult:
for businesses and consumers to borrow money.
House prices in the U.S. increased dramatically _____, and decreased dramatically ______.
from 2001 to 2006; from 2007 to 2009
In Macroland autonomous consumption equals 100...slope of expenditure line is
0.75
Short-run equilibrium output is the level of output at which actual output
equals planned aggregate expenditure
the slope of the consumption funciton
equals the mpc
An economic expansion in the U.S. ______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico.
expands; expansionary
Government policy actions intended to increase planned spending and output are called ______ policies.
expansionary
For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):
expansionary gap
For an economy starting at potential output, an increase in planned investment in the short run results in a(n):
expansionary output gap
Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects ______ as well as aggregate demand and fiscal policy is _______.
potential output; not flexible enough
When prices are predetermined the level of output that equals planned aggregate expenditure is called __ output
short run equilibrium
The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:
the direct changes in spending change the income of producers which leads to additional changes in spending
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 _____.
$20 billion; more than $20 billion
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 _____.
$30 billion; more than $30 billion
planned aggregate expenditure PAE=
C + p + G +NX
C + p + G + NX =
Planned aggregate expenditure
In the Keynesian cross diagram, the 45° line represents the short-run equilibrium condition that:
Y=PAE
In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output.
a greater than $1 billion increase
In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.
a greater than $5 billion decrease
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 recessionary gap
the 2 parts of PAE are __ and __
autonomous and induced expenditures
The vertical intercept of the consumption function equals __ and the slope equals __
autonomous consumption; the mps
One drawback in using fiscal policy as a stabilization tool is that fiscal policy:
affects potential output as well as planned aggregate expenditure.
The marginal propensity to consume (mpc) is the
amount by which consumption increases when disposable income increases by $1
If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:
an expansionary gap
Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines are called:
automatic stabilizers.
The portion of planned aggregate expenditure that is independent of output it called _____ expenditure
autonomous
Regarding the fiscal policy responses to the 2007-2009 recession, the Congressional Budget Office (CBO) found that:
both the Bush Administration's fiscal policy and the Obama Administration's fiscal policy worked.
The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____.
businesses and households; downward
In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm
changes production levels at meet the demand
menu costs are the costs of
changing prices
changes in autonomous consumption could be the result of
changes in housing prices
the 4 components of planned aggregate expenditure
consumption, planned investment, government purchases and net exports
Government policy actions intended to decrease planned spending and output are called ______ policies.
contradictory
the decision whether to change prices frequently or infrequently is an application of the
cost-benefit principle
as disposable consumption decreases, consmption
decreases
raising ice cream prices based on temperature, this behavior is:
inconsistent with the key assumption that the basic Keynesian model is built
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.
increase by 200
A fiscal policy action to close a recessionary gap is to:
increase government purchases.
Refer to the figure above. Based on the figure, if the economy is in short-run equilibrium with output equal to 16,000, then there is a(n) ______ gap and a ______ in autonomous expenditures could return the economy to potential output (Y*).
recessionary; increase of 1,000
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 _________.
recessionary; increasing government purchases
in the short run with predetermined prices when output is greater than PAE firms will
reduce production
In Macroland, autonomous consumption equals 100...induced expenditure equals
0.75 Y
In econland autonomous consumption equals 700, induced expenditure equals
0.80Y
Based on these data, the Adam Smith family has a marginal propensity to consume of
0.9
if consumption increases by $9...
0.9
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
1000
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 taxes must be increased by approximately ______ to eliminate any output gap.
111
Refer to the figure above. Based on the figure, and starting from an initial short-run equilibrium where output equals 20,000, if autonomous consumption spending decreases by 1,000, then the new short-run equilibrium is at an output (Y) equal to:
16,000
Refer to the figure above. Based on the figure, the income expenditure multiplier equals:
2
Refer to the figure above. 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 is at an output (Y) equal to:
24,000
In Macroland autonomous consumption equals 100...vertical intercept of expenditure line is
290
In Macroland consumption equals 100...autonomous expenditure equals
290
In macroland autonomous consumption equals 100...PAE equals
290 +0.75Y
Stock market crashed wiping out $5 trillion of household wealth...
350 billion
Refer to the figure above. Based on the figure, the income-expenditure multiplier in the economy illustrated equals:
4
Refer to the figure above. Based on the figure, when PAE = 200 + 0.5Y, short-run equilibrium output equals:
400
Dave's mirror Company...
650,000 & 550,000
If the marginal propensity to consume equals 0.75...
75
In econland autonomous consumption equals 700, autonomous expenditures equals
900
In econland autonomous consumption equals 700, vertical intercept equals
900
In econland autonomous consumption equals 700, PAE equals
900 +0.80Y
planned aggregate expenditure is total
planned spending on final goods and services
The assumption that firms meet the demand for their products at at preset prices is the key assumption upon which ____ is built
The basic Keynesian model
the largest component of PAE is
consumption
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.
decrease by 100
A fiscal policy action to close an expansionary gap is to:
decrease government purchases.
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, taxes must be:
decreased by $1.33 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:
decreased by $1.33 billion.
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:
decreased by 1 billion
In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:
decreased by less than 10 billion
when housing prices decrease, household wealth __ and consumption __
decreases and decreases
a decrease in stock prices alters the consumption function by
decreasing the constant term
induced expenditure is the portion of planned aggregate expenditure that
depends on output
Changes in government purchases affect planned spending:
directly, by changing autonomous expenditures.
Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect planned spending _______.
directly; indirectly
IN the Keynesian model, consumption depends on
disposable income
the two parts of the Keynesian consumption function are consumption that depends on ___and consumption that depends on
disposable income and factors other than disposable income
Refer to the figure above. Based on the figure, if the economy is in short-run equilibrium with output equal to 24,000, then there is a(n) ______ gap and a ______ in government spending would return the economy to potential output (Y*).
expansionary; decrease of 1,000
If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) ______ gap that can be closed by _________.
expansionary; decreasing government purchases
in the Keynesian cross diagram, the ___ line related PAE to output and the __ line represents the condition that PAE equals short-run equilibrium output
expenditure, 45 degrees
when actual investment is greater than planned investment
firms sold less output than expected
when actual investment is less than planned investment
firms sold more output than expected
in the short run with predetermined prices, when output is less than PAE firms will
increase production
A fiscal policy action to close an expansionary gap is to:
increase taxes.
A fiscal policy action to close a recessionary gap is to:
increase transfer payments.
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:
increased by $1.33 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, taxes must be:
increased by $1.33 billion.
In the 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:
increased by 1 billion
In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:
increased by less than 1 billion
The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:
increased the level of uncertainty about the future.
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 taxes must be ______ by approximately ______ to eliminate any output gap.
increased; 250
as disposable income increases, consumption
increases
In the basic Keynesian model, an increase in government purchases:
increases short-run equilibrium output
In the basic Keynesian model, a tax cut:
increases short-run equilibrium output.
In the basic Keynesian model, an increase in transfer payments:
increases short-run equilibrium output.
Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or ______ in taxes when real output declines.
increases; decreases
Changes in taxes and transfers affect planned spending:
indirectly, by changing disposable income and, consequently, consumption.
when real output decreases, PAE decreases because
induced expenditures decrease
when real input increases, PAE increases because
induced expenditures increase
if firms sell more output then expected, planned investment
is greater than actual investment
autonomous expenditure is the portion of planned aggregate expenditure that
is independent of output
firms do not change prices frequently because
it is costly to do so
the consumption function is relationship between consumption and
its determinants such as disposable income
The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.
larger,larger
if firms sell less output then expected, planned investment is
less than actual investment
Refer to the figure above. Based on the Keynesian cross diagram, if output equals 5,000, planned aggregate expenditure is ______ output and firms will ______ production.
less than and decrease
If planned aggregate expenditure (PAE) in an economy equals 3,000 + 0.75Y and potential output (Y*) equals 12,000, then this economy has:
no output gap.
In the basic Keynesian model all of the following are true except
planned investment always equals actual investment
unplanned inventory equals zero when
planned investment equals actual invetment
in the short run with predetermined prices, when output is less than PAE
planned investment is greater than actual investment
in the short run with predetermined prices, when output is greater than PAE
planned investment is less than actual investment
Contractionary policies are government stabilization policy actions intended to decrease:
planned spending
Expansionary policies are government stabilization policy actions intended to increase:
planned spending
For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n):
recessionary output gap
In the basic Keynesian model, a decrease in government purchases:
reduces short tun equilibrium output
In the basic Keynesian model, a decline in autonomous spending:
reduces short-run equilibrium output.
In the basic Keynesian model, a tax increase:
reduces short-run equilibrium output.
An economic 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.
reduces; recessionary
An economic recession in the U.S. ______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada.
reduces; recessionary
The expenditure line in the Keynesian cross diagram represents the:
relationship between planned expenditure and output.
The smaller the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.
smaller, smaller
The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:
spending
all of the following would be included in planned aggregate expenditure (except)
spending on consumer durables, planned changes in inventories, sales of domestically produced goods to foreigners (not interest paid on the government debt, social security checks)
Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.
stabliization
One potential problem with using fiscal policy to close recessionary output gaps is that:
sustained government deficits can be harmful to long-run economic growth.
The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output is called:
the income-expenditure multiplier
if firms sell less than expected, actual investment increases because ___, which is counts as invetment
the unsold goods are added to inventory
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 ______.
two-thirds tax cuts and one-third spending increases; one-fourth tax cuts and three-fourths spending increases
Planned investment may differ from actual investment because of
unplanned changes in inventories
the tendency of changes in asset prices to affect spending on consumption goods is called the __effect
wealth
