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

Question 1

If the consumption function is given by C = 100 + .6(Y-T)and planned investment is 150,government spending is 50,and T is 100,then equilibrium income is

A)600
B)750
C)400
D)350

Answer 1

A

Question 2

If the government wishes to increase its spending on goods and services by $10 billion without increasing the overall level of aggregate demand,it should

A)increase taxes by $10 billion.
B)decrease taxes by $10 billion.
C)increase taxes by more than $10 billion.
D)increase taxes,but by less than $10 billion.
E)leave tax receipts unchanged.

Answer 2

C

Question 3

In the Keynesian model,exogenous variables include

A)planned investment.
B)taxes.
C)planned inventories and government spending.
D)planned investment and government spending.
E)all of the above

Answer 3

E

Question 4

Compared to the closed economy Keynesian model,the open economy model in which imports are a function of income has an investment multiplier that is

A)smaller.
B)larger.
C)equal.
D)equal to 1.

Question 5

If a fall in investment demand of 100 units causes equilibrium income to fall by 150 units in the simple Keynesian model,then the marginal propensity to save must be

A).25.
B)1.5.
C).5.
D)1/3.
E)2/3.

Question 6

Assume that a government increases both government spending and taxes by $200 billion so that the budget balance remains unchanged.What will happen to aggregate income? Explain the intuition behind this result.

Question 7

Discuss the role of the price level and interest rates in the simple model of aggregate demand developed in this chapter.How do Keynesians justify this behavior?

Question 8

If the marginal propensity to save is equal to 0.5 in the simple Keynesian model,then a 10-unit increase in government spending will cause output to rise by

A)5 units.
B)10 units.
C)20 units.
D)25 units.
E)40 units.

Question 9

The short-run refers to a period

A)of a few days.
B)when prices and wages cannot fully adjust.
C)of a few years.
D)during which trend cannot change.
E)of analysis used in the classical model

Question 10

If the marginal propensity to consume is 0.8 and if government spending (G)rises by 50 while investment (I)falls by 20,by how much will equilibrium income rise?

A)12
B)10
C)30
D)120
E)150

Question 11

In the equation Y = (1/1 - b + v)(a + I + G + X − u),the term (1/1 - b + v)is referred to as the

A)level of autonomous expenditures.
B)autonomous expenditure multiplier.
C)balanced budget multiplier.
D)tax multiplier.

Question 12

Using the simple Keynesian model,consider the case where taxes are lump-sum.Compared to the model without taxes,the investment multiplier in this model will

A)not change.
B)be larger.
C)be smaller.
D)be equal to 1.

Question 13

In the simple Keynesian model,if there is an autonomous investment falls by $20 billion and the MPC (b)is 0.60,the equilibrium income level will increase by

A)$13.3 billion.
B)$20 billion.
C)$50 billion.
D)$100 billion.

Question 14

Assume that b = .75 and autonomous investment increases by $500 billion.By how much does equilibrium income increase? How much would this increase in investment increase income if b = .80 instead?

Question 15

If an increase in government spending of 40 units accompanied by an equal increase in taxes caused equilibrium income to rise by 40 units,the autonomous expenditure multiplier must be

A)10.
B)1.
C)4.
D)not enough information is given to calculate the multiplier.

Question 16

In the simple Keynesian model (no money market)assume that equilibrium output falls short of potential output by 300 units and the MPC = 0.8.The size of the tax cut needed to reach full employment is

A)30.
B)60.
C)75.
D)300.

Question 17

Discuss two fiscal policies that a government could adopt that would increase both interest rates and aggregate income.

Question 18

Let C = 200 + .8(Y-T),planned investment equals 150,and T equals 200.If the equilibrium level of income is 2,000,then the level of government spending needed to make this true is

A)210.
B)250.
C)50.
D)10.
E)none of the above.

Question 19

Keynes believed that an important source of instability in the economy was instability

A)of private investment demand.
B)in the marginal propensity to consume (b).
C)of expectations.
D)in tax collections.
E)Both a and c

Question 20

In the equation Y = C + I + G,

A)only I is an exogenous variable determined by factors outside the model.
B)only G is an exogenous variable determined by factors outside the model.
C)C is an endogenous variable determined by factors inside the model.
D)I and G are exogenous variables determined by factors outside the model.
E)A,b,and c

Question 21

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

Question 22

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

Question 23

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.

Question 24

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

Question 25

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.

Question 26

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.

Question 27

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

Question 28

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.

Question 29

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

Question 30

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.

Question 31

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.

Question 32

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

A)investment.
B)taxes.
C)consumption and savings.
D)government spending.

Question 33

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.

Question 34

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.

Question 35

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

Question 36

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.

Question 37

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.

Question 38

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.

Question 39

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.

Question 40

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

Question 41

Which of the following is FALSE?

A)As the interest rate falls,planned expenditure must be greater than actual expenditure.
B)As the interest rate falls,planned expenditure rises.
C)As the interest rate falls,the IS curve shifts to the right.
D)As the interest rate falls,planned expenditure can be greater than actual expenditure.

Question 42

In the Keynesian aggregate expenditure graph (Figure 5-5),the 45 degree line is meant to indicate that:

A)planned aggregate expenditure always equals aggregate income.
B)savings must equal investment.
C)actual aggregate expenditure must equal aggregate income.
D)actual income must equal planned income.
E)none of the above.

Question 43

If the consumption function is C = 120 +_.8(Y-T)in the basic Keynesian model,then in the government spending multiplier is:

A)5.
B)4.
C)1.25.
D).8

Question 44

In the open-economy Keynesian model,it always has to be true that

A)planned savings equals planned investment.
B)planned savings is greater than planned investment.
C)planned savings is less than planned investment.
D)none of the above.

Question 45

Income has risen in the simple Keynesian model.This could be the result of:,

A)an equal increase in government spending and taxes.
B)an increase in unplanned investment.
C)an increase in taxes
D)a decrease in autonomous consumption.
E)none of the above

Question 46

Within the simple Keynesian model with lump-sum taxes,if the MPC (b)were 0.75 then if taxes rise by $200 then income

A)rises by $800.
B)falls by $200.
C)falls by $800.
D)rises by $200.
E)falls by $800.

Question 47

At equilibrium income:

A)planned and actual expenditure are equal.
B)GDP will remained unchanged until an exogenous shock occurs.
C)unplanned inventories are equal to zero.
D)all of the above.

Question 48

According to Keynes,the least variable component of aggregate expenditures is

A)consumption.
B)inventories.
C)total investment.
D)imports

Question 49

A increase in net exports

A)shifts the aggregate demand schedule upward
B)shifts the aggregate demand schedule downward.
C)does not shift the aggregate demand schedule.
D)decreases saving.

Question 50

The equation for the balanced budget multiplier can be written as

A)(1/1 - b)- (b/1 - b).
B)(1/1 + b)+ (− b/1 - b).
C)(1/1 - b)+ (b/1 + b).
D)(1/1 + b)- (b/1 + b).

Question 51

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

Question 52

An increase in the interest rate leads to:

A)an increase in planned inventories.
B)an increase in GDP.
C)an increase in unplanned inventories.
D)an increase in consumption.
E)none of the above.

Question 53

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

A)aggregate demand exceeds than output.
B)unplanned inventories are negative.
C)there is an unintended inventory accumulation.
D)Both a and c
E)None of the above

Question 54

When comparing the autonomous expenditure multiplier in a closed-economy model to the autonomous expenditure multiplier in an open-economy model it can be concluded that

A)the multiplier in the open-economy model will be larger than in the closed-economy model.
B)the multiplier in the open-economy model will be smaller than in the closed-economy model.
C)both multipliers are the same.
D)None of the above.

Question 55

In the simple Keynesian model,equilibrium exists when

A)actual investment equals realized investment.
B)exports equal imports.
C)savings is equal to government spending plus desired investment minus taxes.
D)national product is equal to consumption minus desired investment plus government spending.
E)None of the above

Question 56

Which of the following equations illustrates the equilibrium level of income with respect to the simple Keynesian closed-economy model?

A)Y = [1/(1 − b)](a − bT − I + G)
B)Y = [1/(1 − b)](a + bT + I + G)
C)Y = [1/(1 + b)](a − bT − I − G)
D)Y = [1/(1 − b)](a − bT + I + G)
E)Y = (1 − b)(a + bT + I + G)

Question 57

The Keynesian explanation of the Great Depression focuses on

A)large rises in government spending.
B)large increases in taxes
C)large increases in planned investment.
D)an increase in expectations.

Question 58

If the government decreases spending and taxes by 1,000 units and the marginal propensity to consume is .9,then

A)more information is needed.
B)output will decrease by 900.
C)output will decrease by 10,000.
D)output will increase by 10,000.

Question 59

Which of the following statements is (are)incorrect?

A)Consumption plays a central role in the Keynesian theory of income determination
B)Consumer expenditure is the largest component of aggregate demand
C)In recent years,consumption has totaled between 60 and 70 percent of GDP
D)Keynes believed that investment was largely determined by expectations
E)all of the above are correct

Question 60

If policy makers desire a $30 increase in output and the consumption function is C = 100 + .75(Y-T),then they must

A)increase government spending by $8.
B)increase taxes by $10.
C)cut government spending and taxes by $10.
D)decrease taxes by $10.