Deck 20: The Islm Model

Question 1

Keynes was especially concerned with explaining the ________ level of output and employment during the ________.

A)low; 1920s
B)low; 1930s
C)high; 1920s
D)high; 1930s

Answer 1

low; 1930s

Question 2

Which of the following statements concerning Keynesian analysis is false?

A)Keynes's analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure,planned investment spending,government spending,and net exports.
B)Keynes recognized that equilibrium would occur in the economy when total quantity of output supplied equals quantity of output demanded (Y^ad),that is,when Y = Y^ad.
C)Keynes's analysis involves explaining why aggregate output is at a certain level by understanding what factors affect each component of aggregate demand and how the sum of these components could add up to an output smaller than the economy is capable of producing,resulting in less than full employment.
D)Keynes's analysis explains how the price level will change when the total quantity of output supplied changes.

Answer 2

Keynes's analysis explains how the price level will change when the total quantity of output supplied changes.

Question 3

Keynes was especially concerned with explaining the

A)recession of 1920-21.
B)low levels of output and employment during the Great Depression.
C)strong economic growth of the 1920s.
D)high unemployment in Great Britain during the 1920s.

Answer 3

low levels of output and employment during the Great Depression.

Question 4

His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure,planned investment spending,government spending,and net exports.

A)John Maynard Keynes
B)Sir John Hicks
C)Milton Friedman
D)Paul A.Samuelson

Question 5

Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

A)aggregate output; wages
B)aggregate output; employment
C)wage rates; wages
D)wage rates; employment

Question 6

If the consumption function is expressed as C = a + mpc × Y_D,then "a" represents

A)autonomous consumer expenditure.
B)the marginal propensity to consume.
C)the expenditure multiplier.
D)disposable income.

Question 7

Under Keynesian analysis,aggregate demand can be written as

A)Y^ad = C + I + G + NX.
B)Y^ad = C + I + G - NX.
C)Y^ad = C - I - G - NX.
D)Y^ad = C + I - G - NX.

Question 8

In the simple Keynesian model,equilibrium aggregate output is determined by

A)aggregate demand.
B)aggregate supply.
C)the national demand for labor.
D)the price level.

Question 9

Keynes argued that the sum of the components that comprise aggregate demand

A)could add up to an output smaller than the economy is capable of producing,thus resulting in less than full employment.
B)could add up to an output greater than the economy is capable of producing,thus resulting in less than full employment.
C)always equaled the output the economy is capable of producing.
D)equaled the output the economy is capable of producing by definition.

Question 10

Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining

A)the hyperinflations of the 1920s.
B)why the Great Depression occurred.
C)the high unemployment in Great Britain before World War I.
D)the high unemployment in Great Britain after World War II.

Question 11

Which of the following statements concerning Keynesian analysis are true?

A)Keynes's analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure,planned investment spending,federal government spending,and state and local government spending.
B)Keynes recognized that equilibrium would occur in the economy when total quantity of output supplied (aggregate output produced)equals quantity of output demanded (Y^ad),that is,when Y = Y^ad
C)Keynes's analysis involves explaining why wage rates are at a certain level by understanding what factors affect labor demand and why this could cause output to be greater than the economy is capable of producing,resulting in high inflation.
D)Keynes's analysis explains how the price level will change when the total quantity of output supplied changes.

Question 12

Keynes reasoned that consumer expenditure is most closely related to

A)the level of interest rates.
B)the price level.
C)disposable income.
D)the marginal tax rate.

Question 13

The simple Keynesian model illustrates the idea that the economy can come to rest at a level of aggregate output

A)only at the full employment level.
B)below the full employment level.
C)only when the price level is fixed.
D)only when wages are stable.

Question 14

Because inflation was not a serious problem during the Great Depression,Keynes's analysis assumed

A)that unemployment also was not a problem.
B)that the money supply was fixed.
C)that the price level was fixed.
D)that monetary policy is not effective.

Question 15

If the consumption function is C = 20 + 0.5Y_D,then an increase in disposable income by $100 will result in an increase in consumer expenditure by

A)$25.
B)$70.
C)$50.
D)$100.

Question 16

The marginal propensity to consume (mpc)can be defined as the fraction of

A)a change in income that is spent.
B)a change in income that is saved.
C)income that is spent.
D)income that is saved.

Question 17

In the Keynesian model of income determination,consumer expenditure includes spending by

A)consumers on personal computers.
B)businesses on personal computers.
C)governments on personal computers.
D)foreigners on domestic personal computers.

Question 18

If the consumption function is expressed as C = a + mpc × Y_D,then "mpc" represents

A)autonomous consumer expenditure.
B)the marginal propensity to consume.
C)the expenditure multiplier.
D)disposable income.

Question 19

In the simple Keynesian model of aggregate output determination,an equilibrium level of output below that necessary to maintain full employment can be explained by

A)minimum wage laws.
B)a generous level of unemployment benefits.
C)relatively low aggregate demand.
D)relatively high prices.

Question 20

Keynes believed that an economy could attain an equilibrium level of output

A)only at the full-employment level of output.
B)below the full-employment level of output.
C)only if the government took a "hands off" approach.
D)only if prices were falling.

Question 21

If unplanned investment is positive,firms will ________ production and output will ________.

A)cut; rise
B)cut; fall
C)increase; rise
D)increase; fall

Question 22

Everything else held constant,if consumption expenditure increases by 65 for a 100 increase in disposable income,the mpc is

A)0.
B)0.5.
C)0.65.
D)1.

Question 23

Everything else held constant,if disposable income increases by 200 and consumption expenditure increases by 150,the mpc is

A)0.
B)0.15.
C)0.5.
D)0.75.

Question 24

Planned investment spending,a component of aggregate demand,is equal to

A)fixed investment plus actual inventory investment.
B)fixed investment plus unplanned inventory investment.
C)fixed investment.
D)fixed investment plus planned inventory investment.

Question 25

Assume that autonomous consumption equals $200 and disposable income equals $1000.If total consumption equal $800,then the mpc equals

A)0.2.
B)0.6.
C)0.8.
D)1.0.

Question 26

A fall in inventories is synonymous with ________ investment.

A)negative fixed
B)positive fixed
C)positive inventory
D)negative inventory

Question 27

Assume that autonomous consumption equals $200 and that the mpc equals 0.8.If disposable income equals $1000,then total consumption equals

A)$80.
B)$200.
C)$800.
D)$1000.

Question 28

There are two types of investment: ________ investment-the spending by business firms on equipment and structures,and planned spending on residential houses-and ________ investment-spending by business firms on additional holdings of raw materials,parts,and finished goods.

A)planned; gross
B)planned; inventory
C)fixed; gross
D)fixed; inventory

Question 29

Aggregate demand in an economy with no government or foreign trade is

A)consumer expenditure plus actual investment.
B)consumer expenditure plus planned investment.
C)consumer expenditure plus inventory investment.
D)consumer expenditure plus fixed investment.

Question 30

If the consumption function is C = 20 + 0.8Y_D,then an increase in disposable income by $100 will result in an increase in consumer expenditure by

A)$58.
B)$64.
C)$80.
D)$100.

Question 31

Everything else held constant,if consumption expenditure falls by 160 when disposable income falls by 200,the mpc is

A)0.
B)0.2.
C)0.4.
D)0.8.

Question 32

In the Keynesian cross diagram,the point at which the aggregate demand function crosses the 45 degree line indicates the

A)level of full employment income.
B)natural level of income.
C)equilibrium level of income.
D)autonomous level of income.

Question 33

Keynes mentioned two factors that influenced planned investment spending:

A)interest rates and disposable income.
B)interest rates and business expectations about the future.
C)disposable income and business expectations about the future.
D)interest rates and business expectations about inflation.

Question 34

Assume that disposable income equals $1000 and the mpc equals 0.6.If total consumption equal $800,then autonomous consumption is equal to

A)$0.
B)$200.
C)$800.
D)$1000.

Question 35

Everything else held constant,if total consumption increases from $600 to $800 because of an increase of disposable income of $400,then the mpc is equal to

A)0.2.
B)0.4.
C)0.5.
D)0.6.

Question 36

It is convenient to separate actual investment into two categories when explaining how the equilibrium level of aggregate output is determined.These two categories are ________ investment and ________ investment.

A)planned; fixed
B)financial; structural
C)planned; unplanned
D)planned; structural

Question 37

A difference between inventory investment and fixed investment is that

A)fixed investment is never unplanned.
B)fixed investment is never planned.
C)inventory investment is never unplanned.
D)unplanned inventory investment is always zero.

Question 38

Economists define investment as the purchase of

A)a new physical asset such as a new machine or a new house.
B)any physical asset,whether new or not,used by business to increase production.
C)any physical asset used by business to increase production and the repurchase of common stock.
D)business spending on capital and household spending on durable goods.

Question 39

If unplanned investment is negative,firms will ________ production and output will ________.

A)cut; rise
B)cut; fall
C)increase; rise
D)increase; fall

Question 40

Actual investment spending is comprised of two components:

A)fixed investment and actual inventory investment.
B)planned investment and fixed investment.
C)unplanned investment and inventory investment.
D)fixed business investment and fixed housing investment.

Question 41

In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.

A)negative; lower
B)negative; raise
C)positive; lower
D)positive; raise

Question 42

When the level of unplanned inventory investment is equal to zero,the economy is

A)in disequilibrium.
B)in a recession.
C)in equilibrium.
D)overheating

Question 43

If aggregate demand is less than the level of aggregate output,then ________ inventory investment will be ________.

A)planned; positive
B)actual; positive
C)actual; negative
D)planned; negative

Question 44

Use the following situation (20-1) to answer the question : Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information in Situation 20-1,if aggregate output is equal to $10,000,then unplanned inventory investment equals

A)-$1000
B)-$100
C)$0
D)$100

Question 45

In the Keynesian framework,as long as output is above the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.

A)negative; lower
B)negative; raise
C)positive; lower
D)positive; raise

Question 46

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain positive and firms will continue to ________ production.

A)below; lower
B)above; lower
C)below; raise
D)above; raise

Question 47

If aggregate demand falls short of current output,business firms will ________ production to ________ inventories.

A)cut; keep from accumulating
B)expand; keep from accumulating
C)cut; build up
D)expand; build up

Question 48

If actual output is greater than equilibrium output,firms will ________ output to keep from ________ inventories.

A)increase; accumulating
B)increase; depleting
C)decrease; depleting
D)decrease; accumulating

Question 49

If actual output is less than equilibrium output,firms will ________ output to keep from ________ inventories.

A)increase; accumulating
B)increase; depleting
C)decrease; depleting
D)decrease; accumulating

Question 50

A decrease in unplanned inventory investment for the entire economy equals the excess of

A)output over aggregate supply.
B)output over aggregate demand.
C)aggregate supply over output.
D)aggregate demand over output.

Question 51

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________,firms will continue to lower production,and output will continue to fall.

A)below; negative
B)above; negative
C)below; positive
D)above; positive

Question 52

In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain negative,firms will continue to ________ production,and output will continue to ________.

A)lower; fall
B)lower; rise
C)raise; fall
D)raise; rise

Question 53

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to lower production.

A)below; negative
B)above; negative
C)below; positive
D)above; positive

Question 54

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________,firms will continue to raise production,and output will continue to rise.

A)below; negative
B)above; negative
C)below; positive
D)above; positive

Question 55

Use the following situation (20-1) to answer the question : Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information in Situation 20-1,if aggregate output equals $8,000,the unplanned inventory investment equals

A)-$100
B)$0
C)$100
D)$500

Question 56

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain negative and firms will continue to ________ production.

A)below; lower
B)above; lower
C)below; raise
D)above; raise

Question 57

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to raise production.

A)below; negative
B)above; negative
C)below; positive
D)above; positive

Question 58

If aggregate demand equals output,

A)the economy is in a recession.
B)output will increase.
C)output will fall.
D)the economy is at its equilibrium level.

Question 59

An increase in unplanned inventory investment for the entire economy equals the excess of

A)output over aggregate supply.
B)output over aggregate demand.
C)aggregate supply over output.
D)aggregate demand over output.

Question 60

If aggregated demand is less than actual output,unplanned inventory ________ will cause output to ________.

A)accumulation; rise
B)depletion; fall
C)depletion; rise
D)accumulation; fall

Question 61

The expenditure multiplier is the ratio of the change in ________ to a change in the ________.

A)equilibrium output; monetary base.
B)the money supply; monetary base.
C)the money supply; autonomous expenditure.
D)equilibrium output; autonomous expenditure.

Question 62

The Keynesian framework indicates that government can play an important role in determining aggregate output by

A)changing the level of government spending or taxes.
B)raising consumer confidence.
C)raising investor confidence.
D)changing the money supply and interest rates.

Question 63

The multiplier effect means that a given change in ________ expenditures will change equilibrium ________ by an amount ________ than the initial change in autonomous expenditures.

A)autonomous; income; greater
B)autonomous; income; less
C)induced; income; greater
D)induced; income; less

Question 64

For every dollar increase in planned investment spending,aggregate output increases by ________.

A)one dollar
B)less than one dollar
C)more than one dollar
D)two dollars.

Question 65

Keynes believed that changes in autonomous spending were dominated by changes in

A)consumer expenditure.
B)autonomous consumer expenditure.
C)investment spending.
D)taxes.
E)none of the above.

Question 66

In the simple Keynesian framework,declines in planned investment spending that produce high unemployment can be offset by raising

A)taxes.
B)government spending.
C)consumer confidence.
D)business confidence.

Question 67

If the marginal propensity to consume is .9,the value of the multiplier is

A)0.
B)1.
C)9.
D)10.

Question 68

Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________,which are influenced by emotional waves of optimism and pessimism-factors he referred to as "animal spirits."

A)unplanned investment spending
B)actual investment spending
C)planned investment spending
D)autonomous consumer expenditures

Question 69

Assume equilibrium at full employment for an economy characterized by the simple Keynesian model.If the government raises taxes to eliminate a budget deficit,then

A)the rate of unemployment will increase.
B)the level of aggregate output will increase.
C)the price level will increase.
D)the rate of interest will fall.

Question 70

If the income multiplier is 4,the value of the marginal propensity to consume is

A)0.2.
B)0.5.
C)0.75.
D)1.

Question 71

A tax cut initially

A)increases consumption expenditure by an amount greater than the tax cut.
B)increases consumption expenditure by an amount equal to the tax cut.
C)increases consumption expenditure by an amount that is less than the value of the tax cut.
D)has no effect on consumption expenditure.
E)reduces consumption expenditure by an amount that is less than the value of the tax cut.

Question 72

Use the following situation (20-1) to answer the question : Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information contained in Situation 20-1,if planned investment decreases by $100,the equilibrium aggregate output will change by

A)-$1,000.
B)$-100.
C)$100.
D)$1,000.

Question 73

For a marginal propensity to consume of 0.75,the value of the multiplier is

A)0.25.
B)3.00.
C)3.75.
D)4.00.

Question 74

Use the following situation (20-2) to answer the question : Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.
Using the information in situation 20-2,if government spending increases by $100,then the equilibrium aggregate output will change by

A)-$1,000.
B)-$100.
C)$100.
D)$1,000.

Question 75

Use the following situation (20-1) to answer the question : Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information in Situation 20-1,the equilibrium level of aggregate output is

A)$900
B)$8,000
C)$9,000
D)$10,000

Question 76

If the income multiplier is 2,the value of the marginal propensity to consume is

A)0.2.
B)0.5.
C)0.75.
D)1.

Question 77

The ratio of the change in aggregate output to a change in planned investment spending is called

A)the marginal propensity to consume.
B)autonomous consumer expenditure.
C)the expenditure multiplier.
D)unplanned inventory accumulation.

Question 78

Use the following situation (20-1) to answer the question : Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.
Using the information contained in Situation 20-1,if autonomous consumption increases by $100,then equilibrium aggregate output will change by

A)-$1,000.
B)-$100.
C)$100.
D)$1,000.

Question 79

If you know the value of the multiplier and the amount of a change in autonomous investment,you can calculate

A)the change in the interest rate.
B)the change in the money supply.
C)the change in money demand.
D)the change in equilibrium output.

Question 80

After witnessing the events in the Great Depression,Keynes took the view that an economy would continually suffer major output fluctuations because of the volatility of

A)autonomous spending,particularly planned investment spending.
B)induced spending,particularly consumer expenditures.
C)autonomous spending,particularly consumer expenditures.
D)autonomous spending,particularly government expenditures.