Deck 22: Spending, Output, and Fiscal Policy

Question 1

The basic Keynesian model is built on the key assumption that:

A)menu costs are not significant.
B)firms meet the demand for their products at preset prices.
C)firms price their products so as to see a preset quantity of output.
D)prices are prevented from changing frequently by government regulations.

Answer 1

B

Question 2

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year.The company purchases $300,000 worth of new equipment during the year.Sales for the year turn out to be $900,000.Actual investment by Dave's Mirror Company equals ______ and planned investment equals _______.

A)$250,000;$150,000
B)$300,000;$200,000
C)$550,000;$450,000
D)$650,000;$550,000

Answer 2

D

Question 3

The four components of planned aggregate expenditure are:

A)spending on domestic goods,domestic services,foreign goods,and foreign services.
B)spending on durable goods,inventory investment,government debt,and net exports.
C)consumption,planned investment,government transfers,and net interest.
D)consumption,planned investment,government purchases,and net exports.

Answer 3

D

Question 4

Firms do not change prices frequently because:

A)there are legal prohibitions against doing so.
B)it is easier to change the quantity of capital used in production.
C)it is costly to do so.
D)customers will refuse to patronize firms that change prices frequently.

Question 5

All of the following would be included in planned aggregate expenditure EXCEPT:

A)spending on consumer durables.
B)planned changes in inventories.
C)sales of domestically produced goods to foreigners.
D)interest paid on the government debt.

Question 6

The assumption that firms meet the demand for their products at preset prices is the key assumption upon which ______ is built.

A)the basic Keynesian model
B)Okun's Law
C)the supply and demand model
D)quantity equation for money

Question 7

When actual investment is greater than planned investment:

A)firms sold less output than expected.
B)firms sold more output than expected.
C)the quantity of output sold is the amount the firm expected to sell.
D)the economy produces short-run equilibrium output.

Question 8

If firms sell less output than expected,planned investment:

A)is greater than actual investment.
B)is less than actual investment.
C)equals actual investment.
D)equals zero.

Question 9

All of the following would be included in planned aggregate expenditure EXCEPT:

A)purchases of services provided by government employees.
B)planned changes in inventories.
C)sales of domestically produced goods to foreigners.
D)social security payments.

Question 10

If firms sell more output than expected,planned investment:

A)is greater than actual investment.
B)is less than actual investment.
C)equals actual investment.
D)equals zero.

Question 11

The decision whether to change prices frequently or infrequently is an application of the:

A)principle of comparative advantage.
B)scarcity principle.
C)principle of increasing opportunity cost.
D)cost-benefit principle.

Question 12

Menu costs are the costs of:

A)running a restaurant.
B)changing prices.
C)increasing aggregate demand.
D)changing production.

Question 13

In the Keynesian model,it is assumed that,when demand for a firm's product changes,the firm:

A)changes prices to meet the demand.
B)changes production levels to meet the demand.
C)changes prices and production levels to meet demand.
D)changes prices,but hold production levels constant to meet the demand.

Question 14

Planned investment may differ from actual investment because of:

A)changes in government purchases and net exports.
B)the marginal propensity to consume.
C)unplanned changes in inventories.
D)fluctuations in preset prices.

Question 15

Unplanned inventory investment equals zero when

A)planned investment is greater than actual investment.
B)planned investment is less than actual investment.
C)planned investment equals actual investment.
D)expected sales are greater than actual sales.

Question 16

In the basic Keynesian model all of the following are true EXCEPT:

A)planned consumption always equals actual consumption.
B)planned investment always equals actual investment.
C)planned government spending always equals actual government spending.
D)planned net exports always equal actual net exports.

Question 17

When actual investment is less than planned investment:

A)firms sold less output than expected.
B)firms sold more output than expected.
C)the quantity of output sold is the amount the firm expected to sell.
D)the economy produces short-run equilibrium output.

Question 18

If firms sell less than expected,actual investment increases because _____,which is counted as investment.

A)the unsold goods are added to inventory
B)the government buys the unsold goods
C)the unsold goods are distributed to poor households
D)households buy the unsold goods are bargain prices

Question 19

Suppose that the owner of a local ice cream store,knowing that demand for ice cream is higher when the weather is warmer,always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature,measured in Fahrenheit (so that if it is 90 degrees outside,the ice cream is $1.80 per scoop).This type of behavior is ______.

A)exactly the type of behavior that Keynes believed most firms exhibit.
B)known as meeting demand.
C)inconsistent with the key assumption upon which the basic Keynesian model is built.
D)free from menu costs.

Question 20

Planned aggregate expenditure is total:

A)value added in the economy.
B)planned spending on final goods and services.
C)income of households,businesses,governments,and foreigners.
D)revenue from the sale of goods and services.

Question 21

As disposable income decreases,consumption:

A)increases.
B)decreases.
C)may either increase or decrease depending on the mpc.
D)may either increase or decrease depending on the wealth effect.

Question 22

Suppose the stock market crashed,wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends,consumption spending might fall by as much as,but probably not more than,______.

A)$35 billion
B)$200 billion
C)$350 billion
D)$2 trillion

Question 23

Planned aggregate expenditure (PAE)equals:

A)C + I^p + G + NX.
B)C^p + I + G + NX.
C)C + I + G^p + NX.
D)C + I + G + NX^p.

Question 24

The consumption function is relationship between consumption and:

A)planned aggregate expenditure.
B)total spending.
C)investment.
D)its determinants,such as disposable income.

Question 25

If consumption increases by $9 when after-tax disposable income increases by $10,the marginal propensity to consume (mpc)equals:

A)0.1.
B)0.9.
C)1.0.
D)9.0.

Question 26

The tendency of changes in asset prices to affect spending on consumption goods is called the ______ effect.

A)income
B)substitution
C)wealth
D)multiplier

Question 27

C + I^p + G + NX equals:

A)planned aggregate expenditure.
B)potential GDP.
C)the output gap.
D)the income-expenditure multiplier.

Question 28

The two parts of the Keynesian consumption function are consumption that depends on ______ and consumption that depends on _____.

A)disposable income;factors other than disposable income
B)planned spending;unplanned spending
C)real income;nominal income
D)money;wealth

Question 29

In the Keynesian model,consumption depends on:

A)whether the government has a budget surplus or deficit.
B)potential output.
C)the natural rate of unemployment.
D)disposable income.

Question 30

The largest component of planned aggregate expenditure is:

A)consumption.
B)investment.
C)government purchases.
D)exports.

Question 31

The marginal propensity to consume (mpc)is the:

A)amount by which disposable income increases when consumption increases by $1.
B)amount by which consumption increases when disposable income increases by $1.
C)percentage by which consumption increases when disposable income increases by 1%.
D)percentage by which disposable income increases when consumption increases by 1%.

Question 32

If the marginal propensity to consume equals 0.75,then a $100 increase in after-tax disposable income leads to a ______ increase in consumption.

A)$13.33
B)$25
C)$75
D)$133

Question 33

Historically speaking,a one dollar decrease in household wealth will cause consumer spending to fall by:

A)$0.03 to $0.07.
B)$0.30 to $0.70.
C)$3.00 to $7.00.
D)$30.00 to $70.00.

Question 34

The slope of the consumption function:

A)is vertical.
B)is horizontal.
C)equals 1.
D)equals the mpc.

Question 35

When housing prices decrease,household wealth _____,and consumption _____.

A)increases;increases
B)increases;decreases
C)decreases;decreases
D)decreases;increases

Question 36

Changes in autonomous consumption could be the result of:

A)changes in disposable income.
B)changes in inflation.
C)changes in the mpc.
D)changes in housing prices.

Question 37

As disposable income increases,consumption:

A)increases.
B)decreases.
C)may either increase or decrease depending on the wealth effect.
D)may either increase or decrease depending on the mpc.

Question 38

The vertical intercept of the consumption function equals ______ and the slope equals _____.

A)the mpc;autonomous consumption
B)autonomous consumption;the mpc
C)the unplanned component of consumption;the planned component of consumption
D)the planned component of consumption;the unplanned component of consumption

Question 39

A decrease in stock prices alters the consumption function by:

A)increasing the mpc.
B)decreasing the mpc.
C)increasing the constant term.
D)decreasing the constant term.

Question 40

Data on after-tax income and consumption spending for the Adam Smith family are given below: $\begin{array}{cc}\underline { \text { After-tax Income }} & \underline { \text { Consumption Spending }} \\\$ 9,000 & \$ 18,100 \\\$ 14,000 & \$ 22,600 \\\$ 19,000 & \$ 27,100 \\\$ 24,000 & \$ 31,600\end{array}$
Based on these data,the Adam Smith family has a marginal propensity to consume of:

A)0.9.
B)0.8.
C)0.75.
D)0.6.

Question 41

When prices are predetermined,the level of output that equals planned aggregate expenditure is called ______ output.

A)the natural rate of
B)potential
C)short-run equilibrium
D)induced

Question 42

The portion of planned aggregate expenditure that is independent of output is called ______ expenditure.

A)potential
B)planned
C)actual
D)autonomous

Question 43

Short-run equilibrium output is the level of output at which actual output:

A)equals potential output.
B)maximizes firm profits.
C)equals real GDP per capita.
D)equals planned aggregate expenditure.

Question 44

In Econland autonomous consumption equals 700,the marginal propensity to consume equals 0.80,net taxes are fixed at 50,planned investment is fixed at 100,government purchases are fixed at 100,and net exports are fixed at 40.The vertical intercept of the Expenditure Line is:

A)890.
B)900.
C)940.
D)990.

Question 45

In Econland autonomous consumption equals 700,the marginal propensity to consume equals 0.80,net taxes are fixed at 50,planned investment is fixed at 100,government purchases are fixed at 100,and net exports are fixed at 40.Planned aggregate expenditure equals:

A)990 + 0.20Y.
B)900 + 0.80Y.
C)940 + 0.80Y.
D)990 + 0.80Y.

Question 46

The two parts of planned aggregate expenditure are ______ expenditures and ______ expenditures.

A)real;nominal
B)inflated;deflated
C)autonomous;induced
D)positive;normative

Question 47

In Econland autonomous consumption equals 700,the marginal propensity to consume equals 0.80,net taxes are fixed at 50,planned investment is fixed at 100,government purchases are fixed at 100,and net exports are fixed at 40.Autonomous expenditure equals:

A)990.
B)940.
C)900.
D)890.

Question 48

When real output decreases,planned aggregate expenditures decrease because:

A)autonomous expenditures increase.
B)autonomous expenditures decrease.
C)induced expenditures increase.
D)induced expenditures decrease.

Question 49

In Econland autonomous consumption equals 700,the marginal propensity to consume equals 0.80,net taxes are fixed at 50,planned investment is fixed at 100,government purchases are fixed at 100,and net exports are fixed at 40.The slope of the Expenditure Line is:

A)0.20.
B)0.80.
C)0.90.
D)0.99.

Question 50

Autonomous expenditure is the portion of planned aggregate expenditure that:

A)equals aggregate output.
B)equals planned spending.
C)equals induced expenditure.
D)is independent of output.

Question 51

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.The vertical intercept of the Expenditure Line is:

A)0.25.
B)0.75.
C)290.
D)320.

Question 52

When real output increases,planned aggregate expenditures increase because:

A)autonomous expenditures increase.
B)autonomous expenditures decrease.
C)induced expenditures increase.
D)induced expenditures decrease.

Question 53

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.Induced expenditure equals:

A)0.25Y.
B)320 + 0.25Y.
C)0.75Y.
D)290 + 0.75Y.

Question 54

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.Autonomous expenditure equals:

A)320.
B)320 + 0.25Y.
C)290.
D)290 + 0.75Y.

Question 55

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:

A)1,000.
B)1,160.
C)1,280.
D)1,440.

Question 56

Data on output and planned aggregate expenditure in Macroland are given below. $$\begin{array} { c c } & \underline{ \text { Planned Aggregate } } \\ \underline{\text { Output (Y) }} & \underline{ \text { Expenditure (PAE) } } \\ 2,000 & 2,300 \\3,000 & 3,200 \\4,000 & 4,100 \\5,000 & 5,000 \\6,000 & 5,900\end{array}$$
Based on these data,the short-run equilibrium level of output is _____.

A)2,000
B)3,200
C)4,100
D)5,000

Question 57

In Econland autonomous consumption equals 700,the marginal propensity to consume equals 0.80,net taxes are fixed at 50,planned investment is fixed at 100,government purchases are fixed at 100,and net exports are fixed at 40.Induced expenditure equals:

A)0.20Y.
B)990 + 0.20Y.
C)0.80Y.
D)900 + 0.80Y.

Question 58

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.Planned aggregate expenditure equals:

A)290 + 0.25Y.
B)320 + 0.25Y.
C)320 + 0.75Y.
D)290 + 0.75Y.

Question 59

Induced expenditure is the portion of planned aggregate expenditure that:

A)equals aggregate output.
B)equals planned spending.
C)equals autonomous expenditure.
D)depends on output.

Question 60

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.The slope of the Expenditure Line is:

A)0.25.
B)0.75.
C)290.
D)320.

Question 61

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)an expansionary gap.
B)a recessionary gap.
C)no output gap.
D)no autonomous expenditure.

Question 62

If planned aggregate expenditure (PAE)in an economy equals 1,000 + 0.9Y and potential output (Y*)equals 9,000,then this economy has:

A)an expansionary gap.
B)a recessionary gap.
C)no output gap.
D)no autonomous expenditure.

Question 63

In the Keynesian cross diagram,the ______ line relates planned aggregate expenditure to output and the ______ line represents the condition that planned aggregate expenditure equals short-run equilibrium output.

A)consumption function;45°
B)45°;consumption function
C)expenditure;45°
D)45°;expenditure

Question 64

In the basic Keynesian model,a decline in autonomous spending:

A)reduces short-run equilibrium output.
B)increases short-run equilibrium output.
C)reduces potential output.
D)increases potential output.

Question 65

In the short run with predetermined prices,when output is less than planned aggregate expenditure:

A)potential output is greater than short-run equilibrium output.
B)potential output is less than short-run equilibrium output.
C)planned investment is less than actual investment.
D)planned investment is greater than actual investment.

Question 66

In the short run with predetermined prices,when output is less than planned aggregate expenditure,firms will:

A)reduce production.
B)increase production.
C)increase planned aggregate expenditure.
D)decrease planned aggregate expenditure.

Question 67

In the short run with predetermined prices,when output is greater than planned aggregate expenditure:

A)potential output is greater than short-run equilibrium output.
B)potential output is less than short-run equilibrium output.
C)planned investment is less than actual investment.
D)planned investment is greater than actual investment.

Question 68

For an economy starting at potential output,a decrease in planned investment in the short run results in a(n):

A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.

Question 69

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.

A)reduces;expansionary
B)increases;expansionary
C)reduces;recessionary
D)increases;recessionary

Question 70

In the short run with predetermined prices,when output is greater than planned aggregate expenditure,firms will:

A)reduce production.
B)increase production.
C)increase planned aggregate expenditure.
D)decrease planned aggregate expenditure.

Question 71

In the Keynesian cross diagram,the vertical intercept of the expenditure line equals ______ and the slope of the expenditure line equals _____.

A)induced expenditures;autonomous expenditures
B)autonomous expenditures;induced expenditures
C)planned spending;unplanned spending
D)autonomous expenditures;the mpc

Question 72

If planned aggregate expenditure (PAE)in an economy equals 3,000 + 0.75Y and potential output (Y*)equals 12,000,then this economy has:

A)an expansionary gap.
B)a recessionary gap.
C)no output gap.
D)no autonomous expenditure.

Question 73

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.

A)reduces;expansionary
B)increases;expansionary
C)reduces;recessionary
D)increases;recessionary

Question 74

House prices in the U.S.increased dramatically _____,and decreased dramatically ______.

A)from 2001 to 2006;from 2007 to 2009
B)from 2007 to 2009;from 2001 to 2006
C)from 2001 to 2009;from 2006 to 2007
D)from 2006 to 2009;from 2001 to 2006

Question 75

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.

A)reduces;expansionary
B)increases;expansionary
C)reduces;recessionary
D)increases;recessionary

Question 76

For an economy starting at potential output,a decrease in autonomous expenditure in the short run results in a(n):

A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.

Question 77

For an economy starting at potential output,an increase in autonomous expenditure in the short run results in a(n):

A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.

Question 78

In the Keynesian cross diagram,the 45° line represents the short-run equilibrium condition that:

A)Y = PAE.
B)PAE = C + I^p + G + NX.
C)I ≠ I^p.
D)Y* = Y.

Question 79

For an economy starting at potential output,an increase in planned investment in the short run results in a(n):

A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.

Question 80

The expenditure line in the Keynesian cross diagram represents the:

A)equilibrium condition that Y = PAE.
B)relationship between planned expenditure and output.
C)relationship between consumption and after-tax disposable income.
D)equilibrium condition that Y = Y*.