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

Accepted Answer

The basic IS-LM model assumes the price level is exogenous, meaning it is determined outside the model and is constant.

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.

Accepted Answer

The Keynesian cross shows the equality of planned expenditure and income in the short run. The model helps to explain how changes in autonomous expenditures, such as government spending or investment, will affect equilibrium output and income. However, it does not address the long run or the determination of the interest rate.

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.

Accepted Answer

When planned expenditure is drawn on a graph as a function of income, the slope of the line is the marginal propensity to consume (MPC), which is the fraction of an increase in income that is spent on consumption. The MPC is always between zero and one because people tend to save some portion of any increase in their income. Therefore, the line's slope will always lie 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.

Accepted Answer

The interest rate is the variable that links the market for goods and services (represented by the IS curve) and the market for real money balances (represented by the LM curve) in the IS-LM model. The IS curve shows the relationship between output and the interest rate, while the LM curve shows the relationship between the interest rate and the demand for real money balances. The intersection of the IS and LM curves gives the equilibrium values for output and the interest rate, which in turn determine the level of real money balances.

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

Accepted Answer

In the IS-LM model, the interest rate affects the demand for real money balances and investment spending. As the interest rate increases, the demand for real money balances decreases as people opt for higher-yielding investments. Additionally, higher interest rates increase the cost of borrowing for investment, which decreases investment spending. Therefore, the correct answer is 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.

Accepted Answer

The equilibrium levels of income and expenditure are where the 45-degree line intersects the aggregate expenditure function. In this graph, that is at point (Y₂, PE₂).

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.

Accepted Answer

Planned expenditure includes all components that an economy intends to spend in a given period. This encompasses planned investment by businesses, government spending on goods and services, and the impact of taxes on spending. Additionally, national income influences overall spending behavior, as it affects consumer spending and savings, thereby making it a comprehensive function of planned expenditure.

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.

Accepted Answer

In the basic Keynesian cross analysis, planned expenditure consists of planned investment, government spending, and consumption expenditures. Therefore, the best choice is D.

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

Accepted Answer

When income exceeds expenditure, it means that not all goods produced are being sold, leading to an accumulation of unsold goods or inventory. This situation places the economy to the right of the equilibrium income on the graph.

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

Accepted Answer

The answer of Use the following to answer questions :
Exhibit:...

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.

Accepted Answer

Unplanned inventory accumulation occurs when a firm produces more goods than it can sell, leading to excess inventory. To address this issue, firms typically reduce production and lay off workers to decrease the supply of goods and conserve resources. Building new plants or hiring more workers would only exacerbate the problem by increasing the supply of goods. Calling for more government spending is not a viable solution as it is not directly related to the firm's inventory accumulation issue.

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

Accepted Answer

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

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.

Accepted Answer

In the Keynesian-cross analysis, we assume that planned expenditure is a function of income. Therefore, the equilibrium condition occurs when actual expenditure (which equals income) is equal to planned expenditure (which equals consumption plus planned investment plus government spending). Only option C reflects this condition. Options A and B are similar but represent the identity of accounting, not an equilibrium condition. Option D is incorrect because it only reflects an accounting identity, and not an equilibrium condition that describes how the economy behaves.

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.

Accepted Answer

According to Keynes, during economic downturns, low income and high unemployment are caused by low aggregate demand. This means that people are not spending enough money to support the economy, which causes businesses to struggle and workers to lose their jobs. Therefore, the responsibility lies with the lack of consumer spending rather than any of the other options presented.

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.

Accepted Answer

The line showing planned expenditures typically rises to the right with a slope less than one, indicating that as income (Y) increases, planned expenditures (E) also increase but at a decreasing rate.

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.

Accepted Answer

In the basic Keynesian-cross model, actual expenditures equal GDP because GDP measures the total output produced and sold in an economy, which includes consumption, investment, government spending, and net exports. Actual expenditures equal the sum of these components, and therefore, equal GDP.

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

Accepted Answer

The IS curve represents the relationship between the interest rate and national income in the market for goods and services, showing combinations where total spending equals total output.

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.

Accepted Answer

In the Keynesian-cross model, actual expenditures differ from planned expenditures due to unplanned inventory investment. This occurs when firms produce more or less than what was originally planned, resulting in either an accumulation or depletion of inventories. This difference between actual and planned expenditures causes a shift in the equilibrium level of income and output.

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.

Accepted Answer

The IS-LM model explains the determination of income in the short run when prices are fixed. It analyzes the interaction between the investment/saving (IS) curve and the liquidity/money (LM) curve to determine the equilibrium level of income and interest rates. It shows how changes in the money supply, government spending or taxes, and investment spending affect aggregate demand, which shifts the IS curve, and leads to changes in income and interest rates.

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.

Accepted Answer

In the Keynesian cross analysis, when planned expenditure exceeds income, it leads to unplanned inventory depletion (negative unplanned inventory investment) because firms sell more goods than anticipated, reducing their inventories unexpectedly.

Quiz 10: Aggregate Demand I

The basic IS-LM model takes ______ as exogenous.

The Keynesian cross shows:

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

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

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

Use the following to answer questions : Exhibit: Keynesian Cross -(Exhibit: Keynesian Cross) In this graph,the equilibrium levels of income and expenditure are:

Planned expenditure is a function of:

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

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 .

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.

When firms experience unplanned inventory accumulation,they typically:

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

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

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

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:

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

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

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

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

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