Deck 23: The Aggregate Expenditure Model

Question 1

The Keynesian-cross model suggests that increased saving increases the economy's output.

Answer 1

False

Question 2

A change in taxes of a given amount affects an individual's consumption spending by less than that amount,because the marginal propensity to consume is less than 1.

Answer 2

True

Question 3

The expenditure multiplier only considers the impact of consumption changes on aggregate expenditures.

Answer 3

True

Question 4

When all the factors of aggregate expenditure are influenced by income,the multiplier is no longer solely a function of the marginal propensity of consumption.

Question 5

Keynes believed that the economy could stay in period of unemployment for a long time period without self-correcting.

Question 6

If consumption spending is the only variable of aggregate expenditure dependent on income,the multiplier is MPC/(1 - MPC).

Question 7

The marginal propensity to consume is a measure of the additional consumption that results from a one-dollar increase in disposable income.

Question 8

Autonomous determinants of consumption expenditures are dependent on the level of current disposable income.

Question 9

When the Keynesian-cross model is in equilibrium,income equals output and aggregate expenditure equals output.

Question 10

A given change in either someone's income or net taxes would have a greater effect on their consumption spending the greater their MPC.

Question 11

Unplanned inventory decreases prompt firms to cut back on production until equilibrium output is restored.

Question 12

Consumption expenditure tends to increase when consumers have higher levels of debt.

Question 13

If the price level is fixed,then changes in nominal income will be equivalent to changes in real income.

Question 14

The value of the expenditure multiplier depends on the marginal propensity to consume.

Question 15

The expenditure multiplier applies only to changes in government spending.

Question 16

A change in aggregate expenditures for reasons other than the price level will shift the aggregate demand curve.

Question 17

An increase in household debt will lead to an increase in consumption expenditures.

Question 18

The concept of cost-push inflation cannot be explained by the aggregate expenditure model.

Question 19

The Keynesian-cross model implies that changes in aggregate supply cause fluctuations in real GDP.

Question 20

The marginal propensity to consume plus the marginal propensity to save must always equal 1.

Question 21

Keynes emphasized the idea that wages and prices adjusted very rapidly bringing an economy back to the full employment level of output.

Question 22

Bill's disposable income goes from $100,000 in 2010 to $200,000 in 2011,and his consumption spending goes from $80,000 in 2010 to $140,000 in 2011.Which of the following statements about Bill is true?

A) Bill's MPC rose between 2010 and 2011.
B) Bill's MPC is equal to 0.7.
C) Bill's MPC is equal to 0.6.
D) Both (a) and (b) are true.

Question 23

Which of the following changes in taxes would lead to the greatest increase in consumption?

A) a $20,000 decrease in taxes, if MPC equals 0.5
B) a $12,000 decrease in taxes, if MPC equals 0.75
C) a $15,000 decrease in taxes, if MPC equals 0.6
D) a $30,000 decrease in taxes, if MPC equals 0.25

Question 24

Which of the following changes in disposable income would lead to the smallest increase in consumption?

A) a $20,000 increase in disposable income, if MPC equals 0.5
B) a $12,000 increase in disposable income, if MPC equals 0.75
C) a $15,000 increase in disposable income, if MPC equals 0.6
D) a $30,000 increase in disposable income, if MPC equals 0.25

Question 25

Which of the following changes in disposable income would lead to the greatest increase in consumption?

A) a $20,000 increase in disposable income, if MPC equals 0.5
B) a $12,000 increase in disposable income, if MPC equals 0.75
C) a $15,000 increase in disposable income, if MPC equals 0.6
D) a $30,000 increase in disposable income, if MPC equals 0.25

Question 26

If Pat's income increased from $250,000 to $500,000 and his consumption increased from $200,000 to $300,000,what was his marginal propensity to consume?

A) 0.4
B) 0.6
C) 0.8
D) 0.9

Question 27

Exhibit 23-1 Refer to Exhibit 23-1.Which of the following would tend to move consumer spending from A to B?

A) increase in debt
B) decrease in interest rates
C) increase in consumer confidence
D) increase in real wealth

Question 28

Exhibit 23-1 Refer to Exhibit 23-1.Which of the following would tend to move consumer spending from A to D?

A) increase in debt
B) decrease in interest rates
C) decrease in consumer confidence
D) stock market decline

Question 29

The marginal propensity to consume (MPC)is defined as:

A) the additional consumption that results from one dollar increase in disposable income.
B) the fraction of total disposable income that households spend on consumption.
C) the fraction of total disposable income that households save.
D) the additional disposable income households earn in a given period.

Question 30

Which of the following changes in taxes would lead to the smallest increase in consumption?

A) a $20,000 decrease in taxes, if MPC equals 0.5
B) a $12,000 decrease in taxes, if MPC equals 0.75
C) a $15,000 decrease in taxes, if MPC equals 0.6
D) a $30,000 decrease in taxes, if MPC equals 0.25

Question 31

A given change in disposable income would have the greatest effect on consumption with which of the following marginal propensities to consume?

A) 0.2
B) 0.4
C) 0.6
D) 0.8

Question 32

A given change in disposable income would have the smallest effect on consumption with which of the following marginal propensities to consume?

A) 0.2
B) 0.4
C) 0.6
D) 0.8

Question 33

Marginal propensity to consume is equal to the change in ____ divided by the change in ____.

A) consumption spending; total income
B) saving; total income
C) saving; disposable income
D) consumption spending; disposable income

Question 34

A given change in disposable income would have the smallest effect on aggregate demand with which of the following marginal propensities to consume?

A) 0.2
B) 0.4
C) 0.6
D) 0.8

Question 35

A given change in disposable income would have the greatest effect on aggregate demand with which of the following marginal propensities to consume?

A) 0.2
B) 0.4
C) 0.6
D) 0.8

Question 36

Which of the following is not an autonomous determinant of consumption expenditures?

A) real wealth
B) the interest rate
C) tastes and preferences
D) current disposable income

Question 37

The Keynesian-cross model is a complete macroeconomic model.

Question 38

When a person's consumption goes from $8,000 to $12,000 when her disposable income goes from $10,000 to $20,000,her MPC equals:

A) 0.4.
B) 0.6.
C) 0.75.
D) 0.8.

Question 39

Which of the following will result as part of the interest rate effect when the price level rises?

A) Households and firms increase their holdings of money.
B) Interest rates will increase.
C) A lower quantity of real GDP will be demanded.
D) All of the above will result as part of the interest rate effect when the price level rises.

Question 40

Marginal propensity to save is equal to the change in ____ divided by the change in ____.

A) consumption spending; total income
B) saving; total income
C) saving; disposable income
D) consumption spending; disposable income

Question 41

If the marginal propensity to consume is 0.60,the marginal propensity to save will be:

A) greater than 0.60.
B) equal to 0.40.
C) equal to 0.60.
D) equal to 0.

Question 42

Which of the following observations concerning the Keynesian model is not true?

A) It is helpful in explaining the events that unfolded in the 1930s.
B) It is less useful in explaining today's economy.
C) It explains the stagflation of the 1970s.
D) It does not incorporate possible shifts in the aggregate supply curve.

Question 43

Keynes believed that:

A) discretionary fiscal policy was needed to stabilize the economy.
B) wages are not flexible particularly in a downward direction.
C) the economy could remain in a period of unemployment for a long time period.
D) all of the above

Question 44

A change in taxes of a given amount shifts the consumption function vertically by ____ than that amount,because the marginal propensity to consume is ____.

A) less; less than 1
B) greater; greater than 1
C) greater; always equal to 1.
D) less; equal to zero.

Question 45

If Oscar's MPC is 0.95 and he earns an additional $2,000,how much would he spend?

A) $100
B) $1,900
C) $2,105
D) $40,000

Question 46

Assume that autonomous expenditures in an economy decreased by $10 billion.What is the change in aggregate demand at a given price level if the MPC is 0.5?

A) increase by $50 billion
B) increase by $10 billion
C) decrease by $20 billion
D) decrease by $10 billion

Question 47

Which of the following is positively related to income?

A) consumption
B) investment
C) government expenditures
D) all of the above

Question 48

Which of the following allows us to determine the value of average consumption spending?

A) leading economic indicators
B) representative household analysis
C) indexing
D) ratio analysis

Question 49

Unplanned inventory decreases:

A) tend to result in a decrease in income.
B) tend to result in an increase in real output.
C) tend to further reduce production.
D) signal that demand was weaker than expected.

Question 50

If government spending increased by $100 billion and the MPS within the economy was 0.25,what would be the total impact on real GDP?

A) $25 billion increase
B) $75 billion increase
C) $133 billion increase
D) $400 billion increase

Question 51

When all the factors of aggregate expenditure are influenced by income,the multiplier becomes a function of the:

A) marginal propensity of government purchases.
B) marginal propensity to consume out of disposable income.
C) marginal propensity of aggregate expenditure.
D) marginal propensity to import.

Question 52

For an economy in equilibrium,the Keynesian model suggests that the plot of aggregate expenditure against RGDP:

A) is a vertical line.
B) has slope lesser than 1.
C) has slope equal to 1.
D) is a horizontal line.

Question 53

The Keynesian-cross model is based on the idea that the ____ must equal total output.

A) components of consumption
B) components of aggregate supply
C) components of aggregate demand
D) net exports

Question 54

When resources are at full capacity,output is less responsive to changes in ____ and the price level is ____.

A) prices; stable
B) prices; less responsive
C) aggregate demand; highly responsive
D) aggregate demand; less responsive

Question 55

If government spending increased by $50 billion and the MPC within the economy was 0.8,what would be the total impact on real GDP?

A) $62.5 billion decrease
B) $62.5 billion increase
C) $250 billion decrease
D) $250 billion increase

Question 56

Which of the following is not true with regard to the aggregate expenditure model?

A) It explains short-run business cycles.
B) It explains inflation.
C) It assumes that consumption spending is the primary determinant of aggregate demand.
D) It includes investment, government spending, and net exports.

Question 57

If autonomous expenditures increased by $10 billion,what is the change in aggregate demand at a given price level if the MPC to consume is 0.8?

A) increase by $50 billion
B) increase by $100 billion
C) decrease by $100 billion
D) decrease by $10 billion

Question 58

Unplanned inventory increases:

A) tend to result in an increase in income.
B) tend to result in an increase in real output.
C) result in an increase in production.
D) signal that demand was weaker than expected.

Question 59

The slope of the consumption function is equal to:

A) the MPC.
B) the MPS.
C) 1/(1 - MPC).
D) MPC - MPS.

Question 60

If government spending increased by $200 billion and the MPC within the economy was 0.9,what would be the total impact on real GDP?

A) $180 billion increase
B) $222 billion increase
C) $380 billion increase
D) $2.0 trillion increase

Question 61

If George's MPS is 0.75 and he earns an additional $1,000,how much would he spend?

A) $250
B) $750
C) $1,333
D) $4,000

Question 62

In the simplest Keynesian expenditure model,which of the following is fixed to allow for easy evaluation of changes in demand due to real income?

A) the price level
B) interest rates
C) tastes and preferences
D) future expectations

Question 63

Will MPC plus MPS always equal one? Explain why or why not.

Question 64

Explain the effects of the following actions on equilibrium income.
1.Government purchases rise by $20 billion.
2.Taxes fall by $20 billion.

Question 65

Which of the following is the primary determinant of aggregate demand in the simplest Keynesian expenditure model?

A) consumption spending
B) net exports
C) investments
D) government purchases

Question 66

If consumption were a direct function of disposable income,how would a decrease in personal taxes or an increase in transfer payments affect consumption?

Question 67

Explain the concept of autonomous consumption.

Question 68

Identify factors that would cause consumption spending to increase.What effect would that have on aggregate demand?

Question 69

If the ____ is/are fixed,a change in nominal income is equivalent to a change in real income.

A) price level
B) interest rates
C) tastes and preferences
D) future expectations