Deck 10: Keynesian Macroeconomics and Economic Instability: a Critique of the Self-Regulating Economy

Question 1

Exhibit 10-1
Refer to Exhibit 10-1.At Q₁,

A) TE > TP,and there are decreases in inventory.
B) TP > TE,and there are increases in inventory.
C) TE = TP,and there are no changes in inventory.
D) TE > TP,and there are increases in inventory.

Answer 1

TE > TP,and there are decreases in inventory.

Question 2

Exhibit 10-1
Refer to Exhibit 10-1.At Q₁,there is a tendency for Real GDP to

A) rise.
B) fall.
C) remain unchanged.
D) There is not enough information to answer this question.

Answer 2

rise.

Question 3

If people buy more than has been produced,

A) the economy is in equilibrium.
B) total expenditures are greater than total production.
C) there will be an increase in inventory.
D) there will be a decrease in total output.

Answer 3

total expenditures are greater than total production.

Question 4

When the economy is in equilibrium,

A) there are increases in inventory.
B) there are decreases in inventory.
C) total expenditures equal total production.
D) people want to buy more than will be produced.

Question 5

The classical economists believed __________ determined savings,while Keynes said it was __________.

A) interest rates;income
B) income;investment
C) investment;interest rates
D) interest rates;investment

Question 6

If total production is greater than total expenditures,then business firms

A) have underproduced.
B) will step up production.
C) will lower production.
D) will experience decreases in inventory.
E) a and b

Question 7

When total expenditures are greater than total production,__________ is produced than households want to buy,which leads to __________ in inventory,which signals firms that they have __________,which causes firms to increase production.

A) less;decreases;underproduced
B) more;increases;underproduced
C) less;increases;underproduced
D) more;decreases;overproduced

Question 8

Exhibit 10-1
Refer to Exhibit 10-1.Equilibrium Real GDP occurs at

A) Q₁.
B) Q₂.
C) Q₃.
D) Q₁ and Q₃.
E) none of the above

Question 9

When there is economy-wide equilibrium,there is a tendency for

A) total output to rise.
B) total output to fall.
C) total output to remain unchanged.
D) prices to fall.
E) prices to rise.

Question 10

Exhibit 10-1
Refer to Exhibit 10-1.At Q₂,there is a tendency for Real GDP to

A) rise.
B) fall.
C) remain unchanged.
D) There is not enough information to answer this question.

Question 11

If households purchase $60,000 worth of consumer goods and firms produce $50,000 worth of consumer goods,then

A) inventory changes are -$10,000.
B) inventory changes are +$10,000.
C) new capital goods expenditures (by firms)are $10,000.
D) consumer goods expenditures are $10,000.

Question 12

Consumption and disposable income are

A) indirectly related.
B) directly related.
C) not related.
D) sometimes directly and sometimes indirectly related,depending upon whether consumption is planned or unplanned.

Question 13

Exhibit 10-1
Refer to Exhibit 10-1.At all points on the 45-degree line,

A) TP = Real GDP.
B) TP > Real GDP.
C) TP < Real GDP.
D) all of the above are possible.

Question 14

If total production is less than total expenditures,then business firms

A) have overproduced.
B) will cut back on production.
C) will raise production.
D) will experience increases in inventory.
E) a and d

Question 15

Exhibit 10-1
Refer to Exhibit 10-1.At Q₃,

A) TE > TP,and there are decreases in inventory.
B) TE = TP,and there are no changes in inventory.
C) TP > TE,and there are increases in inventory.
D) TE > TP,and there are increases in inventory.

Question 16

When total production is greater than total expenditures,__________ is produced than households want to buy,which leads to __________ in inventory,which signals firms that they have __________,which causes firms to cut back production.

A) less;decreases;underproduced
B) less;increases;overproduced
C) more;decreases;underproduced
D) more;increases;overproduced

Question 17

According to Keynes,what households plan to save

A) always equals what firms plan to invest.
B) sometimes equals what firms plan to invest.
C) is always greater than what firms plan to invest.
D) is always less than what firms plan to invest.

Question 18

If total production is greater than total expenditures,

A) there will be an increase in saving.
B) there will be an increase in inventories.
C) firms will then increase production.
D) firms will then increase prices.

Question 19

The two major curves or lines in the TE-TP diagram are:

A) the total expenditure curve and the 45-degree line.
B) the supply and demand curves.
C) the total expenditures and national income curves.
D) the total production and national income curves.

Question 20

Exhibit 10-1
Refer to Exhibit 10-1.At Q₃,there is a tendency for Real GDP to

A) rise.
B) fall.
C) remain unchanged.
D) There is not enough information to answer this question.

Question 21

Keynesian macroeconomists believe that the time it takes for falling wages and prices to eliminate a recessionary gap is __________ enough to say that the economy is __________.

A) long;not self-regulating
B) long;self-regulating
C) short;not self-regulating
D) short;self-regulating

Question 22

The efficiency wage model is an explanation of wage __________ and thus a support for __________ macroeconomics.

A) flexibility;Keynesian
B) flexibility;classical
C) inflexibility;Keynesian
D) inflexibility;classical

Question 23

Total production

A) always equals total expenditures.
B) equals total expenditures in equilibrium.
C) is always greater than total expenditures.
D) is always less than total expenditures.

Question 24

When total production is greater than total expenditures,

A) the economy is in disequilibrium.
B) there are increases in inventory.
C) total output will decrease.
D) all of the above

Question 25

Two economists,Smith and Jones,are discussing the currently high unemployment rate.Smith says that something ought to be done quickly because the economy may not be able to restore itself to full employment.Jones says that it is better to take a "hands-off" approach.Which of the following is most likely to be true?

A) Smith and Jones are most likely both Keynesian economists with a few minor differences of opinion.
B) Smith and Jones are most likely both classical economists with a few minor differences of opinion.
C) Jones is likely to be a Keynesian economist and Smith is likely to be a classical economist.
D) Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist.
E) none of the above.

Question 26

John Maynard Keynes drew many economists ______________ the classical view.The classical view held that a market economy __________ regulate itself to avoid periods of excessive unemployment.

A) toward;can
B) toward;cannot
C) away from;can
D) away from;cannot

Question 27

The horizontal investment curve used to derive the TE curve means investment is

A) directly related to Real GDP.
B) indirectly related to Real GDP.
C) independent of Real GDP.
D) sometimes directly and sometimes indirectly related to Real GDP,depending upon whether it is planned capital or planned inventory investment.

Question 28

Who would be most likely to agree that "People do not always save more as interest rates rise"?

A) a classical economist
B) John Maynard Keynes
C) an efficiency wage theorist
D) a and b
E) a,b,and c

Question 29

Keynes believed that saving is

A) more responsive to changes in income than to changes in interest rates.
B) less responsive to changes in income than to changes in interest rates.
C) equally responsive to changes in income and to changes in interest rates.
D) dependent only on changes in interest rates.

Question 30

Exhibit 10-2
Refer to Exhibit 10-2.Equilibrium Real GDP occurs at

A) $3,000 billion.
B) $1,500 billion.
C) $7,500 billion.
D) $4,000 billion.
E) $4,500 billion.

Question 31

Exhibit 10-2
Refer to Exhibit 10-2.At M,

A) TP = TE.
B) TP > TE.
C) TE > TP.
D) the relationship between TP and TE cannot be determined.

Question 32

Autonomous consumption is

A) the change in consumption that results as a person's (or nation's)income increases or decreases.
B) that portion of total consumption that is dependent upon the level of income.
C) the steady increase in the consumption of goods and services that automatically occurs as a person grows from a child to an adult.
D) that portion of total consumption that is independent of the level of income.

Question 33

The efficiency wage model contains the assumption that labor productivity __________ the wage rate,so that a firm maximizing its profits __________ pay workers an above-market wage rate.

A) is independent of;may
B) is independent of;will never
C) depends on;may
D) depends on;will never

Question 34

Keynes believed that investment is

A) dependent on a number of factors,including business expectations.
B) mainly determined by changes in interest rates.
C) unrelated to business expectations.
D) related to business expectations only during recessionary periods.

Question 35

Exhibit 10-2
Refer to Exhibit 10-2.If autonomous investment decreases,the TE curve will shift ____________ and the new level of equilibrium Real GDP will be ___________ than $4,500.

A) downward;greater
B) downward;less
C) upward;less
D) upward;greater

Question 36

According to the efficiency wage model,firms tend to pay workers

A) the market-clearing wage that efficiently equates labor supplied and demanded.
B) in excess of the market-clearing wage to provide an incentive for productivity and efficiency.
C) less than the market-clearing wage to assure themselves a pool of workers ready to replace workers who quit.
D) less than the market-clearing wage to minimize labor cost per unit of production.

Question 37

In a recessionary gap,the implications of downward wage inflexibility are that there will be

A) further leftward shifts of AD that worsen unemployment.
B) no further leftward shifts of AD,allowing the shifts in SRAS to close the gap.
C) no further leftward shifts of SRAS,allowing the shifts in AD to close the gap.
D) no rightward shifts of SRAS,allowing for persistent high unemployment.

Question 38

Exhibit 10-2
Refer to Exhibit 10-2.Which of the following is correct about point M?

A) TE is $4,500 billion and TP is only $1,500 billion.
B) TP is $4,500 billion and TE is only $1,500 billion.
C) TE is $7,500 and TP is only $5,500 billion.
D) TP is only $7,500 billion and TE is only $5,500 billion.
E) TE is $3,000 billion and TP is only $1,500 billion.

Question 39

Exhibit 10-2
Refer to Exhibit 10-2.If autonomous consumption increases,the TE curve will shift ____________ and the new level of equilibrium Real GDP will be ___________ than $4,500.

A) downward;greater
B) downward;less
C) upward;less
D) upward;greater

Question 40

Keynes's major work,The General Theory of Employment,Interest and Money,was published during the

A) late 1800s.
B) mid-1700s.
C) 1930s.
D) Panic of 1907.

Question 41

Here is a consumption function: C = C₀ + MPC(Y_d).If C₀ = $200,then we know that

A) if Y_d is zero,C will be $200.
B) when Y_d rises,C rises by $200.
C) when Y_d falls,C falls by MPC times C₀.
D) C will always equal C_0.

Question 42

The marginal propensity to consume plus the marginal propensity to save is

A) equal to zero.
B) greater than zero but less than one.
C) equal to one.
D) greater than one.

Question 43

On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line exceeds the vertical distance to the 45-degree line.This Real GDP is __________ its equilibrium level,with __________.

A) above;TE > TP
B) above;TE < TP
C) below;TE > TP
D) below;TE < TP

Question 44

The larger the marginal propensity to save,

A) the smaller the multiplier.
B) the larger the multiplier.
C) the smaller the change in Real GDP,given a change in autonomous consumption.
D) a and c
E) none of the above

Question 45

The ratio of the change in consumption to the change in income is called the

A) marginal utility of consumption.
B) average utility of consumption.
C) marginal propensity to consume.
D) average propensity to consume.

Question 46

Keynes believed that

A) Say's law would hold in a laissez-faire economy.
B) the economy would always be near or on its production possibilities frontier.
C) wages and prices are often inflexible in the downward direction.
D) the equilibrium level of output will always be at the full-employment level of output.

Question 47

If autonomous consumption rises by $60 and,as a result,Real GDP rises by $240,then the marginal propensity to consume is

A) 0.25.
B) 0.75.
C) 0.05.
D) 0.95.
E) none of the above

Question 48

Suppose the MPC = 0.60 and government purchases increase by $40 billion.In Keynesian theory,which of the following is true?

A) The TE curve shifts downward by $40 billion and Real GDP decreases by $40 billion.
B) The TE curve shifts upward by $40 billion,and Real GDP increases by $40 billion.
C) The TE curve shifts downward by $40 billion,and Real GDP decreases by $100 billion.
D) The TE curve shifts upward by $40 billion,and Real GDP increases by $100 billion.

Question 49

If income rises from $1,000 to $1,400 and consumption rises from $1,100 to $1,440,the marginal propensity to save (MPS)is

A) 0.15.
B) 0.85.
C) 0.25.
D) 0.20.

Question 50

Here is a consumption function: C = C₀ + MPC(Y_d).The C₀ term is usually defined as

A) autonomous consumption.
B) point-zero consumption.
C) mandatory consumption.
D) propensitory consumption.
E) none of the above

Question 51

Here is a consumption function: C = C₀ + MPC(Y_d).If MPC is 0.80,then we know that

A) as Y_d rises by $1,Co rises by $0.80.
B) as Y_d rises by $1,C rises by $0.80.
C) Y_d rises by $0.80.
D) as C₀ rises by $0.80,Y_d rises by $1.

Question 52

According to the Keynesian consumption function,an increase in disposable income will result in

A) a decrease in consumption.
B) an increase in consumption.
C) a decrease in investment.
D) an increase in investment.

Question 53

Keynes believed that

A) the internal structure of the economy is extremely competitive and that wage-price flexibility exists.
B) monopolistic elements in the economy prevent immediate and sharp price declines in response to falling demand.
C) even though there are monopolistic elements in the economy,wage-price flexibility exists.
D) in spite of the competitiveness of the economy,wage-price flexibility does not exist.

Question 54

On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line is less than the vertical distance to the 45-degree line.This Real GDP is __________ its equilibrium level,with __________.

A) above;TE > TP
B) above;TE < TP
C) below;TE > TP
D) below;TE < TP

Question 55

Which statement is consistent with what Keynes believed about consumption and disposable income?

A) Consumption depends upon disposable income and falls as disposable income rises.
B) Consumption rises by the same amount as disposable income rises.
C) Consumption rises by less than disposable income rises.
D) Disposable income depends upon consumption.

Question 56

Which of the following statements is false?

A) Keynes believed that monopolistic elements in the economy will prevent immediate price declines.
B) Keynes believed that during periods of high unemployment,labor unions will prevent wages from falling fast enough to restore full employment.
C) Keynes believed that interest rate flexibility will ensure that saving is equal to investment.
D) Keynes did not believe in Say's law.

Question 57

If income rises from $1,000 to $1,400 and consumption rises from $800 to $1,168,the marginal propensity to consume is __________ percent.

A) 8
B) 85
C) 15
D) 92

Question 58

The total expenditure (TE)curve has the same slope as the __________ curve.

A) C (consumption)
B) I (investment)
C) G (government purchases)
D) NE (net exports)

Question 59

Considering both the Keynesian and the aggregate demand-supply frameworks,if households as a group experience an increase in wealth at a given price level,then the TE curve shifts __________,the AD curve shifts __________,and Real GDP __________.

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

Question 60

The consumption function is a function showing the relationship between consumption and

A) disposable income.
B) exports.
C) interest rates.
D) investment.

Question 61

Exhibit 10-4
Refer to Exhibit 10-4.Marginal propensity to consume is equal to

A) AF divided by C₀A.
B) C₀A divided by AF.
C) AF divided by C₀F.
D) C₀F divided by AF.
E) none of the above

Question 62

When the MPC = 0.6,the multiplier is

A) 0.40.
B) 2.50.
C) 1.67.
D) 6.00.

Question 63

Keynes assumed consumption is

A) inversely related to the rate of interest.
B) directly related to disposable income.
C) directly related to investment.
D) less than disposable income.
E) both b and d

Question 64

Exhibit 10-5
Refer to Exhibit 10-5 When TE is $700 billion,what state is the economy in?

A) TE < TP,individuals are buying less output than firms produce.
B) TE > TP,individuals are buying more output than firms produce.
C) TE = TP,the economy is in equilibrium.
D) TE < TP,individuals are buying more output than firms produce.
E) TE > TP,individuals are buying less output than firms produce.

Question 65

Exhibit 10-5
Refer to Exhibit 10-5.When TE is $300 billion,what will firms most likely firms do next?

A) Firms will increase production to increase inventories to their optimum levels.
B) Firms will neither increase nor decrease production since the economy is in equilibrium.
C) Firms will cut back production to reduce inventories to their optimum levels.
D) It is impossible to determine what firms are likely to do based on this information.

Question 66

Exhibit 10-4
Refer to Exhibit 10-4.If the present level of disposable income is Yd₁,autonomous consumption is equal to

A) C₀.
B) C₁.
C) C₂.
D) C₁ - C₀.
E) C₂ - C₁.

Question 67

Exhibit 10-5
Refer to Exhibit 10-5 When TE is $200 billion,what state is the economy in?

A) TE < TP,individuals are buying less output than firms produce.
B) TE > TP,individuals are buying more output than firms produce.
C) TE = TP,the economy is in equilibrium.
D) TE < TP,individuals are buying more output than firms produce.
E) TE > TP,individuals are buying less output than firms produce.

Question 68

How is the multiplier expressed in terms of the MPS?

A) 1 - MPS
B) 1/MPS
C) 1/(1 - MPS)
D) 1/(1 + MPS)

Question 69

When the MPC = 0.9,the multiplier is

A) 0.20.
B) 1.25.
C) 2.50.
D) 5.00.
E) 10.00.

Question 70

Exhibit 10-5
Refer to Exhibit 10-5.When TE is $700 billion,what will firms most likely do next?

A) Firms will increase production to increase inventories to their optimum levels.
B) Firms will neither increase nor decrease production since the economy is in equilibrium.
C) Firms will cut back production to reduce inventories to their optimum levels.
D) It is impossible to determine what firms are likely to do based on this information.

Question 71

Keynes argued that

A) monopolistic elements in the economy will prevent an immediate sharp fall in prices as a result of decreasing demand.
B) wages and prices are not flexible in a downward direction.
C) a and b
D) none of the above

Question 72

Exhibit 10-5
Refer to Exhibit 10-5.When TE is $300 billion,what happens to inventories?

A) Inventories are at their optimum levels.
B) Inventories will fall,then rise above their optimum levels.
C) Inventories will fall below optimum levels.
D) Inventories will rise above optimum levels.

Question 73

A rise in MPC makes the total expenditures (TE)curve __________ and __________ the multiplier.

A) steeper;raises
B) steeper;lowers
C) flatter;raises
D) flatter;lowers

Question 74

If we graph the consumption function such that it starts above the origin,this is because we are assuming that

A) the MPC is positive.
B) the MPS is positive.
C) autonomous consumption is positive.
D) induced consumption is positive.

Question 75

Exhibit 10-5
Refer to Exhibit 10-5 above.The equilibrium level of Real GDP is

A) $200 billion.
B) $400 billion.
C) $600 billion.
D) $800 billion.

Question 76

If an economy consumes 75 percent of any increase in income,then an increase in autonomous investment of $1 billion could result in an increase in Real GDP of as much as

A) $1.0 billion..
B) $4.0 billion.
C) $5.0 billion.
D) $1.8 billion.
E) $6.0 billion.

Question 77

When the MPC = 0.80,the multiplier is

A) 5.00.
B) 0.25.
C) 4.00.
D) 7.50.

Question 78

Which of the following is not an aspect of Keynesian economics?

A) Wages and prices tend to be inflexible downward.
B) Supply does not necessarily generate its own demand.
C) The interest rate is important in determining the level of investment,but not as important as other variables.
D) Unemployment above natural unemployment is always a temporary phenomenon.

Question 79

If the multiplier is 5,then the MPC must be

A) 1/5.
B) 1/6.
C) 3/4.
D) 4/5.
E) 2/3.

Question 80

Exhibit 10-4
Refer to Exhibit 10-4.Let Yd₁ denote the present level of disposable income.An increase in disposable income is likely to,ceteris paribus,cause a movement to point

A) A.
B) B.
C) F.
D) D.
E) E.