Question 1

Tax cuts stimulate ______ by improving workers' 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

Accepted Answer

Tax cuts stimulate aggregate supply by improving workers' incentive to work harder and expand aggregate demand by raising households' disposable income, which increases purchasing power and therefore demand for goods and services. Additionally, tax cuts can also incentivize businesses to invest and expand, further contributing to increased aggregate supply.

Question 2

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.

Accepted Answer

Keynesians believe that a tax cut will increase disposable income and lead to higher consumer spending, which in turn will increase aggregate demand and stimulate economic growth. Supply-siders, on the other hand, believe that a tax cut will provide incentives for individuals and businesses to work and invest more, which in turn will increase the supply of goods and services and stimulate economic growth. Both agree that a tax cut can lead to growth, but they have different explanations for why it works. Choice C accurately reflects this difference in perspective.

Question 3

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

Accepted Answer

In the Keynesian-cross model, government purchases directly increase aggregate expenditures (AE), which is the sum of consumption, investment, and government purchases. Therefore, an increase in government purchases by 100 will directly increase planned expenditures by 100 for any given level of income.

Question 4

In the Keynesian-cross model, if the MPC equals 0.75, 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) $0.75 billion; more than $0.75 billion
C) $0.75 billion; $0.75 billion
D) $1 billion; $1 billion

Accepted Answer

A decrease in taxes would increase disposable income, and with an MPC of 0.75, 75% of that increase would be spent, leading to an increase in planned expenditures of $0.75 billion. This increase in planned expenditures would shift the aggregate expenditures line upward, causing an increase in equilibrium income. The size of the increase in equilibrium income would be the multiplier effect of the initial change in planned expenditures, which is greater than 1 in the Keynesian-cross model. Therefore, the increase in equilibrium income would be more than $0.75 billion.

Question 5

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

Accepted Answer

The government-expenditure multiplier in the Keynesian-cross model is larger than the tax multiplier because government expenditure directly increases aggregate demand, whereas taxes reduce disposable income and therefore indirectly reduce aggregate demand through the MPC. Therefore, a given change in government expenditure will have a larger impact on output and income compared to a given change in taxes.

Question 6

In the Keynesian-cross model, if the MPC equals 0.75, 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) $0.75 billion; more than $0.75 billion
C) $0.75 billion; $0.75 billion
D) $1 billion; $1 billion

Accepted Answer

In the Keynesian-cross model, an increase in government spending directly increases planned expenditures by the same amount. With an MPC (marginal propensity to consume) of 0.75, the multiplier effect is 1/(1-MPC) = 4, meaning a $1 billion increase in government spending increases the equilibrium level of income by $4 billion, which is more than $1 billion.

Question 7

After the Kennedy tax cut in 1964, real GDP:
A) fell and unemployment rose.
B) rose and unemployment fell.
C) and unemployment both rose.
D) and unemployment both fell.

Accepted Answer

The Kennedy tax cut in 1964 was designed to stimulate economic growth and increase consumer spending. As a result, real GDP rose as businesses expanded and hired more workers to meet demand. This led to a reduction in unemployment, as more people were able to find work. Therefore, the best choice is B, which states that real GDP rose and unemployment fell.

Question 8

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.

Accepted Answer

In the Keynesian-cross model, the equilibrium level of income is determined by planned spending, which includes consumption spending, investment spending, government spending, and net exports. Therefore, choice C, planned spending, is the correct answer. The factors of production (choice A) and liquidity preference (choice D) are important concepts in Keynesian economics, but they do not directly determine the equilibrium level of income in the Keynesian-cross model. The money supply (choice B) is not explicitly included in the model, although changes in the money supply can affect the level of planned spending through changes in interest rates and borrowing costs.

Question 9

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.

Accepted Answer

Fiscal policy in the Keynesian-cross model works through changes in income. An increase in government spending (or decrease in taxes) leads to an increase in income. This increase in income then leads to an increase in consumption, which further increases income. This process continues through multiple rounds, hence the multiplied effect on income.

Question 10

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

Accepted Answer

In the Keynesian-cross model, equilibrium is reached when production (or GDP) equals planned spending. Therefore, following a change in exogenous planned spending, production will adjust to move the economy to equilibrium. The interest rate may also adjust, but this is not the primary mechanism for reaching equilibrium in this model. The price level is not directly related to the Keynesian-cross model.

Question 11

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.

Accepted Answer

In the Keynesian-cross model, an increase in government purchases will increase aggregate demand, shifting the expenditure line upward. This will lead to an increase in equilibrium income. The magnitude of the increase in equilibrium income will depend on the size of the multiplier. Assuming a marginal propensity to consume of 0.8, the multiplier would be 5 (1/(1-0.8)). Therefore, an increase in government purchases of 250 would lead to an increase in equilibrium income of 1,250 (250 x 5). Thus, the correct answer is B, as the equilibrium level of income increases by more than 250.

Question 12

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

Accepted Answer

The tax multiplier measures the change in aggregate income (GDP) resulting from a change in taxes.

Question 13

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 expenditure and so does the IS analysis.

Accepted Answer

The Keynesian-cross analysis assumes that planned investment is fixed, regardless of the interest rate. In contrast, the IS (Investment-Saving) analysis assumes that planned investment depends on the interest rate, with higher rates discouraging investment and lower rates encouraging it.

Question 14

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

Accepted Answer

The government-purchases multiplier measures the change in income that results from a change in government purchases, assuming all other factors remain constant. Therefore, the correct choice is income. The other options (budget deficit, consumption, and real balances) are not directly related to the government-purchases multiplier.

Question 15

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.

Accepted Answer

In the Keynesian-cross analysis, an increase in government spending leads to an increase in equilibrium income by a multiplier effect. The multiplier is defined as 1/(1 - MPC), where MPC is the marginal propensity to consume. Therefore, the increase in equilibrium income is the initial increase in spending divided by (1 - MPC), making option C correct.

Question 16

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.

Accepted Answer

In the Keynesian-cross model, a reduction in taxes will increase disposable income, which in turn will increase consumption spending. This increase in consumption spending will lead to a multiplied increase in aggregate demand and national income. Therefore, the equilibrium level of income will increase by more than the initial reduction in taxes, making option (B) the correct answer.

Question 17

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.

Accepted Answer

According to the Keynesian-cross analysis, a rise in taxes decreases disposable income, which in turn reduces consumption. Since the marginal propensity to consume (MPC) is the fraction of additional income that is consumed, the decrease in equilibrium income due to a tax increase is given by the tax increase multiplied by the MPC, divided by (1 - MPC). This accounts for the multiplier effect of the initial decrease in consumption on the overall economy.

Question 18

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

Accepted Answer

In the Keynesian-cross model, a reduction in taxes increases disposable income, leading to an increase in consumption and thus planned expenditures. However, the increase in planned expenditures is less than the tax cut due to the marginal propensity to consume being less than 1.

Question 19

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

Accepted Answer

If firms are producing at a level above the equilibrium (where aggregate demand equals aggregate supply), inventories will rise because goods are not being sold as expected. This accumulation of unsold goods will induce firms to decrease production to adjust for the lower than anticipated demand.

Question 20

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

Accepted Answer

The simple investment function typically posits that investment decreases as the interest rate increases, because higher interest rates make borrowing more expensive, thereby reducing the amount of investment undertaken by businesses.

Quiz 11: Aggregate Demand I: Building the Is-Lm Model

Tax cuts stimulate by improving workers' incentive and expand by raising households' disposable income.

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

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

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by and increases the equilibrium level of income by .

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

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by and increases the equilibrium level of income by .

After the Kennedy tax cut in 1964, real GDP:

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

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

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

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

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

The Keynesian-cross analysis assumes planned investment:

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

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:

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

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

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

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.

The simple investment function shows that investment as increases.