Test Answers on Chapter 28 Essay

question

1. John Maynard Keynes created the aggregate expenditures model based primarily on what historical event? Bank panic of 1907 Great Depression Spectacular economic growth during World War II Economic expansion of the 1920s
answer

Great Depression
question

2. The aggregate expenditures model is built upon which of the following assumptions? Prices are fixed. The economy is at full employment. Prices are fully flexible. Government spending policy has no ability to affect the level of output.
answer

Prices are fixed.
question

4. In the United States from 1929 to 1933, real GDP ____________, and the unemployment rate _______________. declined by 27 percent; rose to 25 percent increased by 21 percent; fell to 2 percent declined by 21 percent; rose to 27 percent declined by 40 percent; rose to 50 percent
answer

declined by 27 percent; rose to 25 percent
question

5. In the aggregate expenditures model, it is assumed that investment: automatically changes in response to changes in real GDP. changes by less in percentage terms than changes in real GDP. does not respond to changes in interest rates. does not change when real GDP changes.
answer

does not change when real GDP changes.
question

6. All else equal, a large decline in the real interest rate will shift the: investment demand curve leftward. investment demand curve rightward. investment schedule upward. investment schedule downward.
answer

investment schedule upward.
question

7. The level of aggregate expenditures in the private closed economy is determined by the: expenditures of consumers and businesses. intersection of the saving schedule and the 45-degree line. equality of the MPC and MPS. intersection of the saving and consumption schedules.
answer

expenditures of consumers and businesses.
question

8. Other things equal, the slope of the aggregate expenditures schedule will increase as a result of: a decline in the size of the inflationary gap. an increase in the MPC. an increase in the MPS. a decline in the general price level.
answer

an increase in the MPC.
question

9. In a private closed economy, when aggregate expenditures equal GDP: consumption equals investment. consumption equals aggregate expenditures. planned investment equals saving. disposable income equals consumption minus saving.
answer

planned investment equals saving.
question

10. In a private closed economy, when aggregate expenditures exceed GDP: GDP will decline. business inventories will rise. saving will decline. business inventories will fall.
answer

business inventories will fall.
question

11. If an unintended increase in business inventories occurs at some level of GDP, then GDP: entails a rate of aggregate expenditures in excess of the rate of aggregate production. may be either above or below the equilibrium output. is too low for equilibrium. is too high for equilibrium.
answer

is too high for equilibrium.
question

12. The equilibrium level of GDP is associated with: an excess of planned investment over saving. no unintended changes in inventories. an unintended decrease in business inventories. an unintended increase in business inventories.
answer

no unintended changes in inventories.
question

13. If at some level of GDP the economy is experiencing an unintended decrease in inventories: the aggregate level of saving will decline. the price level will fall. the business sector will lay off workers. domestic output will increase.
answer

domestic output will increase.
question

14. If an unintended increase in business inventories occurs: we can expect aggregate production to be unaffected. we can expect businesses to increase the level of production. we can expect businesses to lower the level of production. aggregate expenditures must exceed the domestic output.
answer

we can expect businesses to lower the level of production.
question

16. A private closed economy will expand when: actual GDP is less than potential GDP. unplanned decreases in inventories occur. aggregate expenditures are less than GDP. unplanned increases in inventories occur.
answer

unplanned decreases in inventories occur.
question

17. If aggregate expenditures exceed GDP in a private closed economy: leakages will exceed injections. planned investment will exceed saving. unplanned investment in inventories will occur. saving will exceed planned investment.
answer

planned investment will exceed saving.
question

18. For a private closed economy, an unintended decline in inventories suggests that: aggregate expenditures are less than the business sector expected them to be. aggregate expenditures exceed production. actual investment exceeds saving. planned investment is greater than consumption.
answer

aggregate expenditures exceed production.
question

19. When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule: exceeds the MPC. is less than the MPC. equals the MPS. equals the MPC.
answer

equals the MPC.
question

20. 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. 10.0. 0.62. 0.84.
answer

0.10.
question

24. In the aggregate expenditures model, technological progress will shift the investment schedule: downward and increase aggregate expenditures. downward and decrease aggregate expenditures. upward and increase aggregate expenditures. upward and decrease aggregate expenditures.
answer

upward and increase aggregate expenditures.
question

25. At equilibrium real GDP in a private closed economy: the MPC must equal the APC. the slope of the aggregate expenditures schedule equals the MPS. aggregate expenditures and real GDP are equal. planned saving and consumption are equal.
answer

aggregate expenditures and real GDP are equal.
question

26. What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources? a decline in the rate of interest an unintended accumulation of inventories by businesses a rise in the real GDP the Federal budget will automatically move toward a deficit
answer

a rise in the real GDP
question

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

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

28. At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be: $138 billion. $126 billion. $38 billion. $180 billion.
answer

$38 billion.
question

29. Planned investment plus unintended increases in inventories equals: actual investment. consumption. consumption minus saving. unintended saving.
answer

actual investment.
question

30. Saving is always equal to: planned investment less unintended increases in inventories. actual investment. planned investment. unintended changes in inventories.
answer

actual investment.
question

31. Actual investment equals saving: at all levels of GDP. at all below-equilibrium levels of GDP. at all above-equilibrium levels of GDP. only at the equilibrium GDP.
answer

at all levels of GDP.
question

32. Unintended changes in inventories: cause the economy to move away from the equilibrium GDP. are treated as components of consumption. bring actual investment and saving into equality only at the equilibrium level of GDP. bring actual investment and saving into equality at all levels of GDP.
answer

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

33. Investment and saving are, respectively: income and wealth. stocks and flows. injections and leakages. leakages and injections.
answer

injections and leakages.
question

34. (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 $320 billion $262 billion $198 billion
answer

$280 billion
question

35. If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease: GDP by $20 billion. GDP by $100 billion. saving by $20 billion. consumption by $200 billion.
answer

saving by $20 billion.
question

37. (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: 3. 4. 5. 10.
answer

4
question

38. (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: 3. 4. 5. 10.
answer

5
question

39. Imports have the same effect on the current size of GDP as: exports. investment. consumption. saving.
answer

saving
question

40. Exports have the same effect on the current size of GDP as: imports. investment. taxes. saving.
answer

investment.
question

41. At the equilibrium GDP for a private open economy: net exports may be either positive or negative. imports will always exceed exports. exports will always exceed imports. exports and imports will be equal.
answer

net exports may be either positive or negative.
question

43. If net exports decline from zero to some negative amount, the aggregate expenditures schedule would: shift upward. shift downward. not move (net exports do not affect aggregate expenditures). become steeper.
answer

shift downward.
question

44. If net exports are positive: the equilibrium GDP must be greater than the full-employment GDP. imports must exceed exports. aggregate expenditures are greater at each level of GDP than when net exports are zero or negative. some other component of aggregate expenditures must be negative.
answer

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

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

a decrease in imports, with no change in exports.
question

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

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

47. If the dollar appreciates relative to foreign currencies, we would expect: the multiplier to decrease. a country’s exports and imports to both fall. a country’s net exports to rise. a country’s net exports to fall.
answer

a country’s net exports to fall.
question

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

increase domestic output and employment.
question

49. If the multiplier in an economy is 5, a $20 billion increase in net exports will: increase GDP by $100 billion. reduce GDP by $4 billion. decrease GDP by $100 billion. increase GDP by $20 billion.
answer

increase GDP by $100 billion.
question

50. 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: saving must be $300 billion. net exports must be $300 billion. S + C must equal $300 billion. Ig+ Xn must equal $300 billion.
answer

Ig+ Xn must equal $300 billion.
question

51. An exchange rate: is the ratio of the dollar volume of a nation’s exports to the dollar volume of its imports. measures the interest rate ratios of any two nations. is the amount that one nation must export to obtain $1 worth of imports. is the price that the currencies of any two nations exchange for one another.
answer

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

52. If the United States wants to increase its net exports in the short term, it might take steps to: increase its GDP. reduce existing tariffs and import quotas. decrease the dollar price of foreign currencies. increase the dollar price of foreign currencies.
answer

increase the dollar price of foreign currencies.
question

54. In a mixed open economy the equilibrium GDP exists where: Ca + Ig + Xn intersects the 45-degree line. Ca + Ig = Sa + T + X. Ca + Ig + Xn + G = GDP. Ca + Ig + Xn = Sa + T.
answer

Ca + Ig + Xn + G = GDP.
question

55. In a mixed open economy the equilibrium GDP is determined at that point where: Sa + M + T = Ig + X + G. the 45-degree line and the saving schedule intersect. Sa + X + G = Ig + T. Sa + Ig + X = G + T.
answer

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

56. 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: Ca + Ig + Xn + G must exceed GDP. planned investment must exceed saving. a recessionary expenditure gap must exist. saving must exceed planned investment.
answer

planned investment must exceed saving.
question

58. 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. decrease by $150 billion. remain unchanged since spending on military goods is unproductive and usually wasteful. decrease by $25 billion.
answer

decrease by $50 billion.
question

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

$40 billion.
question

61. 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 when Sa + T + M exceeds Ig + G + X when GDP exceeds Ca + Ig + G + Xn when Ig + M + T exceeds Ca + X + S
answer

when Ig + X + G exceeds Sa + M + T
question

62. If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the: saving schedule will shift upward by $5 billion. consumption schedule will shift downward by $25 billion. consumption schedule will shift downward by $20 billion. consumption schedule will shift upward by $25 billion.
answer

consumption schedule will shift downward by $20 billion.
question

63. Which of the following statements is incorrect? Given the economy’s MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes. Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4. If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate expenditures of $8 billion. A government surplus is anti-inflationary; a government deficit is expansionary.
answer

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

64. 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: reduce taxes by $28 billion. reduce transfer payments by $21 billion. increase taxes by $21 billion. increase taxes by $28 billion.
answer

increase taxes by $28 billion.
question

66. In a mixed open economy, if aggregate expenditures exceed GDP: Ig + X + G = Ca. Ca + Ig + Xn + G S. Ig + X + G > Sa + M + T.
answer

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

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

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

69. The level of aggregate expenditures in a mixed open economy is comprised of: Ca + Ig + Xn. Ca + Ig + G + T + Xn. Ca + Ig + Xn + G. Ca + G.
answer

Ca + Ig + Xn + G.
question

70. If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause: a rightward shift in the investment demand schedule. an $8 billion downshift in the consumption schedule. a $4 billion upshift in the consumption schedule. a $12 billion downshift in the consumption schedule.
answer

an $8 billion downshift in the consumption schedule.
question

71. In a mixed closed economy: government purchases and saving are injections, while investment and taxes are leakages. taxes and government purchases are leakages, while investment and saving are injections. taxes and savings are leakages, while investment and government purchases are injections. taxes and investment are injections, while saving and government purchases are leakages.
answer

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

72. An increase in taxes will have a greater effect on the equilibrium GDP: if the tax revenues are redistributed through transfer payments. the larger the MPS. the smaller the MPC. the larger the MPC.
answer

the larger the MPC.
question

73. A lump-sum tax causes the after-tax consumption schedule: and the before-tax consumption schedule to coincide. to be steeper than the before-tax consumption schedule. to be flatter than the before-tax consumption schedule. to be parallel to the before-tax consumption schedule.
answer

to be parallel to the before-tax consumption schedule.
question

76. What do investment and government expenditures have in common? both represent injections to the circular flow both represent leakages from the circular flow neither is subject to the multiplier effect both represent a decline in indebtedness
answer

both represent injections to the circular flow
question

77. Taxes represent: a leakage of purchasing power, like saving. an injection of purchasing power, like investment. an injection of purchasing power, like government spending. a leakage of purchasing power, like government spending.
answer

a leakage of purchasing power, like saving.
question

78. In moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes: must be added to gross investment. must be added to saving. must be added to consumption and gross investment. have no impact upon the equilibrium GDP.
answer

must be added to saving.
question

79. 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. MPC in this economy is .4. multiplier does not apply in this economy. multiplier is 3.
answer

MPS in this economy is .4.
question

80. In a mixed open economy, which of the following will affect the equilibrium GDP in the same direction? Ca, Ig, Sa, and M Sa, T, and M Ig, T, and Ca Sa, Ig, and X
answer

Sa, T, and M
question

81. In the aggregate expenditures model, a reduction in taxes may: increase saving. decrease real GDP. increase unemployment. reduce consumption.
answer

increase saving.
question

82. In the aggregate expenditures model, an increase in government spending may: decrease real GDP. increase output and employment. shift the aggregate expenditures schedule downward. reduce the size of the inflationary gap.
answer

increase output and employment.
question

83. If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion then: the multiplier is 2. the MPC for this economy is .6. inflation is occurring. the MPS for this economy is .6.
answer

the MPC for this economy is .6.
question

84. If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion then: the multiplier is 4. the MPC for this economy is .8. the MPC for this economy is .6. the multiplier is 3.
answer

the MPC for this economy is .8.
question

87. The effect of imposing a lump-sum tax is to: reduce the absolute levels of consumption and saving at each level of GDP and to reduce the size of the multiplier. reduce the absolute levels of consumption and saving at each level of GDP, but to not change the size of the multiplier. reduce the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier. increase the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier.
answer

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

88. Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that: Ig + T > Sa + G. T + G > Sa + Ig. T + Sa > Ig + G. T + Sa < Ig + G.
answer

T + Sa > Ig + G.
question

89. If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift: downward by $24 billion. upward by $24 billion. downward by $16 billion. upward by $16 billion.
answer

downward by $16 billion.
question

90. If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce consumption by: $1 billion. $.75 billion. $3 billion. $4 billion.
answer

$3 billion.
question

91. If the MPC in an economy is .9, a $1 billion increase in government spending will ultimately increase consumption by: $1 billion. $.9 billion. $10 billion. $9 billion.
answer

$9 billion.
question

92. 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: .25. less than the slope before the tax. greater than the slope before the tax. .75.
answer

.75
question

96. 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. decrease by $45 billion. decrease by $35 billion. decrease by $55 billion.
answer

decrease by $30 billion.
question

97. It is true that: equal increases in government spending and taxes do not change the equilibrium GDP. equal increases in government spending and taxes reduce the equilibrium GDP. equal increases in government spending and taxes increase the equilibrium GDP. taxes have a stronger effect upon equilibrium GDP than do government purchases.
answer

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

98. In an aggregate expenditures diagram equal increases in government spending and in lump-sum taxes will: shift the aggregate expenditures line downward. shift the aggregate expenditures line upward. leave the aggregate expenditures line unchanged. reduce the equilibrium GDP.
answer

shift the aggregate expenditures line upward.
question

99. Equal increases in government purchases and taxes will: increase the equilibrium GDP and the size of that increase varies directly with the size of the MPC. increase the equilibrium GDP and the size of that increase is independent of the size of the MPC. increase the equilibrium GDP and the size of that increase varies inversely with the size of the MPC. decrease the equilibrium GDP and the size of that decrease is independent of the size of the MPC.
answer

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

100. 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 real income and the price level will both remain unchanged. the equilibrium level of income will remain unchanged. the equilibrium level of income will rise to $420. the equilibrium level of income will rise to $430.
answer

the equilibrium level of income will rise to $430.
question

101. An inflationary expenditure gap is the amount by which: equilibrium GDP falls short of the full-employment GDP. aggregate expenditures exceed any given level of GDP. saving exceeds investment at the full-employment GDP. aggregate expenditures exceed the full-employment level of GDP.
answer

aggregate expenditures exceed the full-employment level of GDP.
question

102.A recessionary expenditure gap is: the amount by which the full-employment GDP exceeds the level of aggregate expenditures. the amount by which equilibrium GDP falls short of the full-employment GDP. the amount by which investment exceeds saving at the full-employment GDP. the amount by which aggregate expenditures exceed the full-employment level of GDP.
answer

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

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

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

105. If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is: $5 billion below the full-employment GDP. $5 billion above the full-employment GDP. $20 billion below the full-employment GDP. $20 billion above the full-employment GDP.
answer

$20 billion below the full-employment GDP.
question

108. If an increase in aggregate expenditures results in no increase in real GDP we can surmise that the: economy is in a deep recession. MPC equals 1. economy is already operating at full employment. price level has fallen.
answer

economy is already operating at full employment.
question

109. 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: $40 billion. $20 billion. $60 billion. $80 billion.
answer

$20 billion.
question

110. The recessionary expenditure gap associated with the recession of 2007-2009 resulted from: the government’s attempt to control hyperinflation. a major increase in personal and corporate taxes. a rapid decline in investment spending. a rapid increase in imports resulting from large tariff reductions.
answer

a rapid decline in investment spending.
question

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

reduced taxes and increased government spending.
question

112. The U.S. recession of 2007-2009 provides a good example of: demand-pull inflation. cost-push inflation. a recessionary expenditure gap. the repercussions of hyperinflation.
answer

a recessionary expenditure gap.
question

113. Viewed through the aggregate expenditures model, the U.S. recession of 2007-2009 resulted mainly from: a fall in the average propensity to save. insufficient aggregate expenditures. reduced government spending. increased taxes.
answer

insufficient aggregate expenditures.
question

114. (Last Word) Say’s law and classical macroeconomics were disputed by: Adam Smith. Jeremy Bentham. John Stuart Mill. John Maynard Keynes.
answer

John Maynard Keynes.
question

115.(Last Word) Classical macroeconomics was dealt severe blows by: the Great Depression and Keynes’s macroeconomic theory. the Second World War and the writings of Milton Friedman. Adam Smith and his idea of the invisible hand. the strong recovery after the Second World War and Alvin Hansen’s stagnation thesis.
answer

the Great Depression and Keynes’s macroeconomic theory.
question

116. (Last Word) In The General Theory of Employment, Interest, and Money: Adam Smith stated his idea of the invisible hand. Thorstein Veblen poked fun at the leisure class. John Maynard Keynes attacked the classical economist’s contention that recession or depression will automatically cure itself. J. B. Say developed “Say’s law.”
answer

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

Get instant access to
all materials

Become a Member