Deck 10: Aggregate Demand I

Question 1

The basic IS-LM model takes ______ as exogenous.

A) the price level and national income
B) the price level
C) national income
D) the interest rate

Answer 1

the price level

Question 2

The Keynesian cross shows:

A) determination of equilibrium income and the interest rate in the short run.
B) determination of equilibrium income and the interest rate in the long run.
C) equality of planned expenditure and income in the short run.
D) equality of planned expenditure and income in the long run.

Answer 2

equality of planned expenditure and income in the short run.

Question 3

When planned expenditure is drawn on a graph as a function of income,the slope of the line is:

A) zero.
B) between zero and one.
C) one.
D) greater than one.

Answer 3

between zero and one.

Question 4

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

A) consumption function.
B) interest rate.
C) price level.
D) nominal money supply.

Question 5

In the IS-LM model,which two variables are influenced by the interest rate?

A) supply of nominal money balances and demand for real balances
B) demand for real balances and government purchases
C) supply of nominal money balances and investment spending
D) demand for real money balances and investment spending

Question 6

Use the following to answer questions :
Exhibit: Keynesian Cross

(Exhibit: Keynesian Cross)In this graph,the equilibrium levels of income and expenditure are:

A) Y₁ and PE₁.
B) Y₂ and PE₂.
C) Y₃ and PE₃.
D) Y₃ and PE₄.

Question 7

Planned expenditure is a function of:

A) planned investment.
B) planned government spending and taxes.
C) planned investment,government spending,and taxes.
D) national income and planned investment,government spending and taxes.

Question 8

In the basic Keynesian cross analysis,planned expenditure consists of:

A) planned investment.
B) planned government spending.
C) planned investment and government spending.
D) planned investment,government spending,and consumption expenditures.

Question 9

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis,if income exceeds expenditure,then income is to the ______ of equilibrium income and there is unplanned inventory ______.

A) right; decumulation
B) right; accumulation
C) left; decumulation
D) left; accumulation

Question 10

Use the following to answer questions :
Exhibit: Keynesian Cross

(Exhibit: Keynesian Cross)In this graph,if firms are producing at level Y₁,then inventories will ______ inducing firms to ______ production.

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

Question 11

When firms experience unplanned inventory accumulation,they typically:

A) build new plants.
B) lay off workers and reduce production.
C) hire more workers and increase production.
D) call for more government spending.

Question 12

According to classical theory,national income depends on ______,while Keynes proposed that ______ determined the level of national income.

A) aggregate demand; aggregate supply
B) aggregate supply; aggregate demand
C) monetary policy; fiscal policy
D) fiscal policy; monetary policy

Question 13

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

A) income equals consumption plus investment plus government spending.
B) planned expenditure equals consumption plus planned investment plus government spending.
C) actual expenditure equals planned expenditure.
D) actual saving equals actual investment.

Question 14

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

A) low levels of capital.
B) an untrained labour force.
C) inadequate technology.
D) low aggregate demand.

Question 15

When drawn on a graph with Y along the horizontal axis and E along the vertical axis,the line showing planned expenditures rises to the:

A) right with a slope less than one.
B) right with a slope greater than one.
C) left with a slope less than one.
D) left with a slope greater than one.

Question 16

In the basic Keynesian-cross model,actual expenditures equal:

A) GDP.
B) the money supply.
C) the supply of real balances.
D) unplanned inventory investment.

Question 17

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

A) national income; goods and services
B) the price level; goods and services
C) national income; money
D) the price level; money

Question 18

In the Keynesian-cross model,actual expenditures differ from planned expenditures by the amount of:

A) liquidity preference.
B) the government-purchases multiplier.
C) unplanned inventory investment.
D) real money balances.

Question 19

Two interpretations of the IS-LM model are that the model explains:

A) the determination of income in the short run when prices are fixed,or what shifts the aggregate demand curve.
B) the short-run quantity theory of income,or the short-run Fisher effect.
C) the determination of investment and saving,or what shifts the liquidity preference schedule.
D) changes in government spending and taxes or the determination of the supply of real money balances.

Question 20

According to the analysis underlying the Keynesian cross,when planned expenditure exceeds income:

A) income falls.
B) planned expenditure falls.
C) unplanned inventory investment is negative.
D) prices rise.

Question 21

The tax multiplier indicates how much ______ change(s)in response to a $1 change in taxes.

A) the budget deficit
B) consumption
C) income
D) real balances

Question 22

Use the following to answer questions :
Exhibit: Keynesian Cross

(Exhibit: Keynesian Cross)In this graph,if firms are producing at level Y₃,then inventories will ______ inducing firms to ______ production.

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

Question 23

All of the following items shrink the expenditure multiplier in the Keynesian-cross model except:

A) savings.
B) imports.
C) transfers,such as Canada Pension Plan receipts.
D) taxes.

Question 24

According to the Keynesian-cross analysis,when there is a shift upward in the government-purchases schedule by an amount $\Delta$ G and the planned expenditure schedule by an equal amount,then equilibrium income rises by:

A) one unit.
B) $\Delta$ G.
C) $\Delta$ G divided by the quantity one minus the marginal propensity to consume.
D) $\Delta$ G multiplied by the quantity one plus the marginal propensity to consume.

Question 25

In the Keynesian-cross model,the equilibrium level of income is determined by:

A) the factors of production.
B) the money supply.
C) planned spending.
D) liquidity preference.

Question 26

In the Keynesian-cross model with a given MPC,the government-expenditure multiplier ______ the tax multiplier.

A) is larger than
B) equals
C) is smaller than
D) is the inverse of the

Question 27

In the Keynesian-cross model,fiscal policy has a multiplied effect on income because fiscal policy:

A) increases the amount of money in the economy.
B) changes income,which changes consumption,which further changes income.
C) is government spending and,therefore,more powerful than private spending.
D) changes the interest rate.

Question 28

In the Keynesian-cross model,a realistic value for the expenditure multiplier is:

A) 5.0.
B) 2.5.
C) 1.5.
D) 0.5.

Question 29

According to the Keynesian-cross analysis,if MPC stands for marginal propensity to consume,then a rise in taxes of $\Delta$ T will:

A) decrease equilibrium income by $\Delta$ T.
B) decrease equilibrium income by $\Delta$ T/(1 - MPC).
C) decrease equilibrium income by ( $\Delta$ T)(MPC)/(1 - MPC).
D) not affect equilibrium income at all.

Question 30

In the Keynesian-cross model,if government purchases increase by 250,then the equilibrium level of income:

A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases,but by less than 250.

Question 31

In the Keynesian-cross model,if taxes are reduced by 250,then the equilibrium level of income:

A) increases by 250.
B) increases by more than 250.
C) decreases by 250.
D) increases,but by less than 250.

Question 32

In the Keynesian-cross model,if the MPC equals .75,then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

A) $1 billion; more than $1 billion
B) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion

Question 33

In the Keynesian-cross model,what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

A) planned spending
B) the interest rate
C) production
D) the price level

Question 34

Both Keynesians and supply-siders believe a tax cut will lead to growth:

A) and both agree it works through incentive effects.
B) but Keynesians believe it works through incentive effects whereas supply-siders believe it works through aggregate demand.
C) but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.
D) and both agree it works through aggregate demand.

Question 35

The government-purchases multiplier indicates how much ______ change(s)in response to a $1 change in government purchases.

A) the budget deficit
B) consumption
C) income
D) real balances

Question 36

In the Keynesian-cross model,if the MPC equals .75,then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

A) $1 billion; more than $1 billion
B) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion

Question 37

Tax cuts stimulate ______ by improving worker's incentive and expand ______ by raising households' disposable income.

A) velocity; demand for loanable funds
B) demand for loanable funds; velocity
C) aggregate demand; aggregate supply
D) aggregate supply; aggregate demand

Question 38

In the Keynesian-cross model,if taxes are reduced by 100,then planned expenditures ______ for any given level of income.

A) increase by 100
B) increase by more than 100
C) decrease by 100
D) increase,but by less than 100

Question 39

The Keynesian-cross analysis assumes planned investment:

A) is fixed and so does the IS analysis.
B) depends on the interest rate and so does the IS analysis.
C) is fixed,whereas the IS analysis assumes it depends on the interest rate.
D) depends on the interest rate unlike IS analysis which assumes planned investment is fixed.

Question 40

In the Keynesian-cross model,if government purchases increase by 100,then planned expenditures ______ for any given level of income.

A) increase by 100
B) increase by more than 100
C) decrease by 100
D) increase,but by less than 100

Question 41

If investment does not depend on the interest rate,then the ______ curve is ______.

A) IS; vertical
B) IS; horizontal
C) LM; vertical
D) LM; horizontal

Question 42

Changes in fiscal policy shift the:

A) LM curve.
B) money demand curve.
C) money supply curve.
D) IS curve.

Question 43

One argument in favour of tax cuts over spending on infrastructure to increase production is that:

A) tax cuts increase the MPC by a larger amount than spending on infrastructure.
B) tax cuts increase planned spending,but spending on infrastructure offsets private spending.
C) the tax multiplier is larger than the government spending multiplier.
D) it takes longer to implement spending on infrastructure than to implement tax cuts.

Question 44

In the Keynesian-cross model,a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

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

Question 45

A given increase in taxes shifts the IS curve more to the left the:

A) larger the marginal propensity to consume.
B) smaller the marginal propensity to consume.
C) larger the government spending.
D) smaller the government spending.

Question 46

An increase in the interest rate:

A) reduces planned investment,because the interest rate is the cost of borrowing to finance investment projects.
B) increases planned investment,because people who make money from interest have more money to invest.
C) has no effect on investment.
D) may be caused by a drop in investment demand.

Question 47

An interpretation of why the IS curve slopes downward and to the right is that as income rises,national saving rises,and this increase drives the interest rate:

A) down,thereby decreasing investment.
B) down,thereby increasing investment.
C) up,thereby decreasing investment.
D) up,thereby increasing investment.

Question 48

An increase in taxes shifts the IS curve,drawn with income along the horizontal axis and the interest rate along the vertical axis:

A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.

Question 49

An IS curve shows combinations of:

A) taxes and government spending.
B) nominal money balances and price levels.
C) interest rates and income that bring equilibrium in the market for real balances.
D) interest rates and income that bring equilibrium in the market for goods and services.

Question 50

When drawn with the interest rate on the vertical axis and income on the horizontal axis,the IS curve will be steeper the:

A) larger the level of government spending.
B) smaller the level of government spending.
C) greater the sensitivity of investment spending to the interest rate.
D) smaller the sensitivity of investment spending to the interest rate.

Question 51

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis,the IS curve generally:

A) is vertical.
B) is horizontal.
C) slopes upward and to the right.
D) slopes downward and to the right.

Question 52

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services:

A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances

Question 53

Along any given IS curve:

A) tax rates are fixed,but government spending varies.
B) government spending is fixed,but tax rates vary.
C) both government spending and tax rates vary.
D) both government spending and tax rates are fixed.

Question 54

The slope of the IS curve depends on:

A) the interest sensitivity of investment and the amount of government spending.
B) the interest sensitivity of investment and the marginal propensity to consume.
C) the interest sensitivity of investment and the tax rates.
D) tax rates and government spending.

Question 55

Based on the Keynesian model,one reason to support spending increases over tax cuts as measures to increase output is that:

A) government spending increases the MPC more than tax cuts.
B) the government-spending multiplier is larger than the tax multiplier.
C) government-spending increases do not lead to unplanned changes in inventories,but tax cuts do.
D) increases in government spending increase planned spending,but tax cuts reduce planned spending.

Question 56

An increase in government spending generally shifts the IS curve,drawn with income along the horizontal axis and the interest rate along the vertical axis:

A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.

Question 57

An explanation for the slope of the IS curve is that as the interest rate increases,the quantity of investment ______,and this shifts the expenditure function ______,thereby decreasing income.

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

Question 58

The simple investment function shows that investment ______ as ______ increases.

A) decreases; the interest rate
B) increases; the interest rate
C) decreases; government spending
D) increases; government spending

Question 59

Along an IS curve all of the following are always true except:

A) planned expenditures equal actual expenditures.
B) planned expenditures equal income.
C) the demand for real balances equals the supply of real balances.
D) demand and supply of loanable funds are equal.

Question 60

The IS curve shifts when all of the following economic variables change except:

A) the interest rate.
B) government spending.
C) tax rates.
D) the marginal propensity to consume.

Question 61

Use the following to answer questions :
Exhibit: Keynesian Cross and Loanable Funds

(Exhibit: Keynesian Cross and Loanable Funds)Both graphs illustrate the inverse relationship between the equilibrium interest rate and the equilibrium level of income.The economy moves from equilibrium A to equilibrium B in the Keynesian-cross diagram as a result of a(n)______ that shifts planned expenditures.

A) increase in income
B) decrease in income
C) increase in the interest rate
D) decrease in the interest rate

Question 62

The IS curve may be interpreted as showing the:

A) interest rate that equates money supply and demand for given income.
B) income level that equates money supply and demand for given interest rate.
C) interest rate that equilibrates the market for loanable funds for given income.
D) amount of loanable funds that will be demanded for given interest rate and income.

Question 63

Use the following to answer questions :
Exhibit: Keynesian Cross and Loanable Funds

(Exhibit: Keynesian Cross and Loanable Funds)Both graphs illustrate the inverse relationship between the equilibrium interest rate and the equilibrium level of income.Planned expenditures increase in the Keynesian-cross model as a result of ______,and saving increases in the loanable funds model as a result of ______.

A) an increase in taxes; an increase in real money balances
B) a decrease in the interest rate; an increase in income
C) a decrease in velocity; an increase in government spending
D) an increase in the interest rate; a decrease in income

Question 64

In the loanable funds model,a decrease in income ______ national saving and ______ the equilibrium interest rate.

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

Question 65

In the Keynesian-cross model,as the interest rate increases,the equilibrium level of income ______,whereas in the loanable funds model,as the level of income increases,the equilibrium level of the interest rate ______.

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

Question 66

The theory of liquidity preference implies that:

A) as the interest rate rises,the demand for real balances will fall.
B) as the interest rate rises,the demand for real balances will rise.
C) the interest rate will have no effect on the demand for real balances.
D) as the interest rate rises,income will rise.

Question 67

If the interest rate is above the equilibrium value,the:

A) demand for real balances exceeds the supply.
B) supply of real balances exceeds the demand.
C) market for real balances clears.
D) demand for real balances increases.

Question 68

Use the following to answer questions :
Exhibit: Market for Real Money Balances

(Exhibit: Market for Real Money Balances)Based on the graph,if the interest rate is r₁,then people will ______ bonds and the interest rate will ______.

A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall

Question 69

Use the following to answer questions :
Exhibit: Market for Real Money Balances

(Exhibit: Market for Real Money Balances)Based on the graph,if the interest rate is r₃,then people will ______ bonds and the interest rate will ______.

A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall

Question 70

The IS curve generally determines:

A) income.
B) the interest rate.
C) both income and the interest rate.
D) neither income nor the interest rate.

Question 71

According to the theory of liquidity preference,if the demand for real money balances exceeds the supply of real money balances,individuals will:

A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C) purchase fewer goods and services.
D) be content with their portfolios.

Question 72

According to the theory of liquidity preference,the supply of nominal money balances:

A) is chosen by the central bank.
B) depends on the interest rate.
C) varies with the price level.
D) changes as the level of income changes.

Question 73

If investment demand is infinite below some certain r (e.g.,r**)and zero above r**,then the IS curve is ______ and ______ policy has no effect on output.

A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal

Question 74

A rise in government spending shifts the IS curve because it ______ national saving for any given level of income,and this ______ the interest rate for any given level of income.

A) reduces; reduction lowers
B) reduces; reduction raises
C) increases; increase raises
D) increases; increase lowers

Question 75

When the LM curve is drawn,the quantity that is held fixed is:

A) the nominal money supply.
B) the real money supply.
C) government spending.
D) the tax rate.

Question 76

Use the following to answer questions :
Exhibit: Market for Real Money Balances

(Exhibit: Market for Real Money Balances)Based on the graph,the equilibrium levels of interest rates and real money balances are:

A) r₁ and M₁/P₁.
B) r₂ and M₂/P₂.
C) r₃ and M₂/P₂.
D) r₃ and M₃/P₃.

Question 77

According to the theory of liquidity preference,if the supply of real money balances exceeds the demand for real money balances,individuals will:

A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C) purchase more goods and services.
D) be content with their portfolios.

Question 78

Use the following to answer questions :
Exhibit: Keynesian Cross and Loanable Funds

(Exhibit: Keynesian Cross and Loanable Funds)Both graphs illustrate the inverse relationship between the equilibrium interest rate and the equilibrium level of income.The economy moves from equilibrium A to equilibrium B in the Loanable Funds diagram as a result of a(n)______ that shifts saving.

A) increase in income
B) decrease in income
C) increase in the interest rate
D) decrease in the interest rate

Question 79

According to the theory of liquidity preference,the supply of real money balances:

A) decreases as the interest rate increases.
B) increases as the interest rate increases.
C) increases as income increases.
D) is fixed.

Question 80

If neither investment nor consumption depends on the interest rate,then the IS curve is ______ and ______ policy has no effect on output.

A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal