Question 1

In the simple Keynesian model,if the equilibrium level of income is $300 billion,the MPC is 0.75,and government expenditures increase by 20 billion.What is the new equilibrium level of income?
A)$320 billion
B)$380 billion
C)$220 billion
D)$520 billion

Accepted Answer

In the simple Keynesian model, the multiplier (M) is calculated as 1/(1-MPC). Given an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. An increase in government expenditures of $20 billion, multiplied by the multiplier of 4, results in an increase in the equilibrium level of income by $80 billion ($20 billion * 4). Therefore, the new equilibrium level of income is $300 billion + $80 billion = $380 billion.

Question 2

Which of the following are equilibrium conditions in the simple Keynesian model? A)I_r = I B)G = T C)S + T = I + G D)Y = C + I + G E)A,c,and d

Accepted Answer

In the simple Keynesian model, the equilibrium conditions include the equality of savings and investment (S = I), government spending equaling tax revenue (G = T), and the national income identity (Y = C + I + G). Choices A and B are not standard representations of equilibrium conditions in this model, making E (which includes C and D) the correct answer.

Question 3

In the circular flow model,injections and leakages are associated with
A)saving and investment.
B)consumption and investment.
C)realized investment and desired investment.
D)saving and taxes.

Accepted Answer

In the circular flow model, injections refer to additions to the economy through investment, government spending, and exports, while leakages refer to savings, taxes, and imports. Saving and investment are directly related to these concepts as savings are a leakage and investments are an injection.

Question 4

Which of the following does not impact aggregate demand in the Keynesian model?
A)Changes in the supply of labor
B)Net exports
C)Household consumption
D)Desired business investment demand
E)Government purchases of goods and services

Accepted Answer

In the Keynesian model, changes in the supply of labor generally do not directly impact aggregate demand. Aggregate demand is determined by the level of consumption, investment, government spending, and net exports. While changes in the supply of labor may indirectly affect these factors, they do not directly affect aggregate demand in the way that the other options listed do.

Question 5

According to Keynes,the consumption-income relationship is shown as C = a + bY_D.Therefore,the saving-income relationship is A)S = a + (1 − b)Y_D. B)S = − a + (1 − b)Y_D. C)S = a + (1 − b)/Y_D. D)S = − a + (1− b)/Y_D.

Accepted Answer

Savings is defined as income minus consumption (S = Y - C). Given the consumption function C = a + bY, substituting this into the savings function gives S = Y - (a + bY) = Y - a - bY = -a + (1 - b)Y, which matches choice B.

Question 6

An increase in the demand for our exports
A)increases aggregate demand and income by the amount of the investment multiplier.
B)increases imports as well,having no impact on aggregate demand.
C)increases aggregate demand and income by less than the amount of the investment multiplier.
D)does not impact aggregate demand because this is consumption by foreign countries.

Accepted Answer

An increase in the demand for exports leads to an increase in the aggregate demand for goods and services, which in turn increases the level of income. This is because when exports increase, the domestic production of goods and services also increases, leading to an increase in the level of employment and output. As a result, the aggregate demand for goods and services increases by the amount of the investment multiplier.

Question 7

Assuming that C + I_r + G < C + I + G,then A)there is an unintended inventory accumulation. B)there is an unintended inventory shortfall. C)aggregate demand is less than output. D)Both b and c

Accepted Answer

The inequality C + I_r + G < C + I + G implies that I_r < I, which means that investment spending is less than planned. This could be due to a decrease in overall aggregate demand, which would lead to a shortfall in output and unintended inventory accumulation. Therefore, both options B and C are correct.

Question 8

Assume that people experience a one-time 50 unit increase in their consumption .In this case
A)equilibrium income will rise by 50 units times the investment multiplier.
B)equilibrium income will rise by 50 units.
C)equilibrium income will rise by 50 units times the tax multiplier.
D)equilibrium income will not change because this increase is temporary.

Accepted Answer

According to the investment multiplier formula, equilibrium income will rise by the initial change in spending multiplied by the investment multiplier. Therefore, equilibrium income will rise by 50 units times the investment multiplier, assuming there are no leakages (such as taxes or imports).

Question 9

In the Keynesian model,changes in aggregate supply
A)are the primary determinant of inflation.
B)could only destabilize the economy.
C)are ignored.
D)None of the above

Accepted Answer

In the Keynesian model, the focus is on aggregate demand as the primary driver of economic activity. Therefore, changes in aggregate supply are often ignored in this model. Inflation is primarily seen as a result of excess demand, rather than changes in supply.

Question 10

Both Keynesians and supply-siders believe that tax cuts
A)will increase income by increasing aggregate supply.
B)will increase income by increasing aggregate demand.
C)will increase income but for different reasons.
D)will increase income in the Keynesian model but decrease income in the Supply-side model.

Accepted Answer

Keynesians believe that tax cuts will increase income by stimulating aggregate demand, as people will have more disposable income to spend. Supply-siders believe that tax cuts will increase income by incentivizing individuals and businesses to work harder and invest more, leading to an increase in aggregate supply. While the reasons for the increase in income may differ, both agree that tax cuts can have a positive impact on the economy.

Question 11

When firms incur unplanned inventories,they typically
A)build new plants.
B)call for more government spending.
C)hire more workers and increase production.
D)lay off workers and reduce production.

Accepted Answer

When firms incur unplanned inventories, it means that they have more inventory than demand, which leads to increased storage costs and reduced profits. To avoid such a situation, firms usually lay off workers and reduce production to match the demand.

Question 12

Keynes believed that the instability in income was caused by variability in
A)investment.
B)taxes.
C)consumption and savings.
D)government spending.

Accepted Answer

Keynes argued that investment spending is the most volatile component of aggregate demand because it is highly sensitive to changes in interest rates and business expectations, leading to fluctuations in overall economic income.

Question 13

In the simple Keynesian model,total savings equals
A)total investment minus the budget deficit.
B)total planned and unplanned investment.
C)planned investment.
D)planned investment plus the budget deficit.
E)none of the above.

Accepted Answer

The answer of In the simple Keynesian model,total savings equals
A)total...

Question 14

An increase in the interest rate
A)reduces planned investment but increases unplanned investment by increasing inventories.
B)reduces planned investment as well as unexplained investment by reducing inventories.
C)has no impact on planned investment because it is autonomous.
D)changes inventories in a way that cannot be predicted.

Accepted Answer

An increase in the interest rate reduces planned investment because it makes borrowing more expensive, but it can increase unplanned investment by increasing inventories. When interest rates increase, firms may postpone their investment plans, which results in unplanned inventory accumulation.

Question 15

According to Keynes,the level of consumer expenditures was a stable function of
A)national income.
B)gross income.
C)disposable income.
D)net income.
E)None of the above

Accepted Answer

According to Keynes, the level of consumer expenditures was a stable function of disposable income, meaning the income that is left over after taxes and necessary expenses are subtracted. This is known as the "marginal propensity to consume." Therefore, the correct option is C - disposable income.

Question 16

Total planned expenditure is composed as
A)planned investment.
B)planned government spending and taxes.
C)total investment,total consumption,and government spending.
D)planned investment,planned government spending,and planned taxes.

Accepted Answer

Total planned expenditure is composed of planned investment, planned government spending, and planned taxes. These three components make up the entire planned expenditure for an economy. Option A only includes planned investment, while option B includes planned government spending and taxes but does not account for planned investment. Option C includes total investment and consumption, but does not include planned government spending and planned taxes separately. Therefore, option D is the correct answer.

Question 17

The most important determinant of any multiplier in the Keynesian model is
A)the level of planned investment.
B)the level of unemployment.
C)the marginal propensity to consume.
D)the level of excess demand.

Accepted Answer

The marginal propensity to consume (MPC) is the most important determinant of any multiplier in the Keynesian model. MPC is the fraction of additional income that consumers will spend, and the higher the MPC, the higher the multiplier effect. This is because a higher MPC means that consumers will spend a larger proportion of any additional income received, which leads to a greater increase in aggregate demand and ultimately increases the multiplier effect. Therefore, any change in the MPC will have a direct impact on the size of the multiplier. The other options may also have an impact on the multiplier, but they are not as crucial as the MPC.

Question 18

An increase in taxes
A)reduces income by more than the total fall in consumption.
B)reduces income by the same amount as the total fall in consumption.
C)reduces income and consumption by the same amount as taxes fall.
D)reduces income by the amount of the initial fall in consumption.

Accepted Answer

If taxes increase, people have less disposable income to spend on consumption. This reduces consumption, which in turn reduces aggregate demand and causes a decrease in national income. Therefore, the reduction in income will be equal to the total fall in consumption.

Question 19

The marginal propensity to consume is
A)the change in consumption associated with a change in income.
B)equal to the marginal propensity to save minus 1.
C)equal to 1 minus the marginal tax rate.
D)the change in consumption associated with a change in wealth.

Accepted Answer

The marginal propensity to consume (MPC) is defined as the change in consumption associated with a change in income. It measures how much of an increase in income is spent on consumption. If the MPC is 0.6, for example, it means that for every $1 increase in income, $0.60 will be spent on consumption.

Question 20

In the Keynesian consumption function
A)consumption is a constant fraction of income.
B)the marginal propensity to consume is constant.
C)disposable income determines consumption.
D)All of the above
E)None of the above

Accepted Answer

The Keynesian consumption function states that consumption is a function of disposable income, and that the marginal propensity to consume (MPC) is constant. Specifically, the function is C = a + MPC(Yd), where C is consumption, a is autonomous consumption (consumption that occurs even when income is zero), MPC is the marginal propensity to consume, and Yd is disposable income. Therefore, all three options (A, B, and C) are true for the Keynesian consumption function, making D the best choice.

Quiz 5: Keynesian System I: the Role of Aggregate Demand

In the simple Keynesian model,if the equilibrium level of income is $300 billion,the MPC is 0.75,and government expenditures increase by 20 billion.What is the new equilibrium level of income?

Which of the following are equilibrium conditions in the simple Keynesian model?

In the circular flow model,injections and leakages are associated with

Which of the following does not impact aggregate demand in the Keynesian model?

According to Keynes,the consumption-income relationship is shown as C = a + bYD.Therefore,the saving-income relationship is

An increase in the demand for our exports

Assuming that C + Ir + G < C + I + G,then

Assume that people experience a one-time 50 unit increase in their consumption .In this case

In the Keynesian model,changes in aggregate supply

Both Keynesians and supply-siders believe that tax cuts

When firms incur unplanned inventories,they typically

Keynes believed that the instability in income was caused by variability in

In the simple Keynesian model,total savings equals

An increase in the interest rate

According to Keynes,the level of consumer expenditures was a stable function of

Total planned expenditure is composed as

The most important determinant of any multiplier in the Keynesian model is

An increase in taxes

The marginal propensity to consume is

In the Keynesian consumption function

According to Keynes,the consumption-income relationship is shown as C = a + bY_D.Therefore,the saving-income relationship is

Assuming that C + I_r + G < C + I + G,then