Deck 27: The IS Curve

Question 1

Assume that autonomous consumption equals $200 and disposable income equals $1000.If total consumption equal $800,then the mpc equals

A)0.2.
B)0.6.
C)0.8.
D)1.0.

Answer 1

0.6.

Question 2

If the consumption function is expressed as C = a + mpc × YD,then "mpc" represents

A)autonomous consumer expenditure.
B)the marginal propensity to consume.
C)the expenditure multiplier.
D)disposable income.

Answer 2

the marginal propensity to consume.

Question 3

If the consumption function is expressed as C = a + mpc × YD,then "a" represents

A)autonomous consumer expenditure.
B)the marginal propensity to consume.
C)the expenditure multiplier.
D)disposable income.

Answer 3

autonomous consumer expenditure.

Question 4

Under Keynesian analysis,aggregate demand can be written as

A)Yᵃᵈ = C + I + G + NX.
B)Yᵃᵈ = C + I + G - NX.
C)Yᵃᵈ = C - I - G - NX.
D)Yᵃᵈ = C + I - G - NX.

Question 5

The marginal propensity to consume (mpc)can be defined as the fraction of

A)a change in income that is spent.
B)a change in income that is saved.
C)income that is spent.
D)income that is saved.

Question 6

If the consumption function is C = 20 + 0.8YD,then an increase in disposable income by $100 will result in an increase in consumer expenditure by

A)$58.
B)$64.
C)$80.
D)$100.

Question 7

In the Keynesian model of income determination,consumer expenditure includes spending by

A)consumers on personal computers.
B)businesses on personal computers.
C)governments on personal computers.
D)foreigners on domestic personal computers.

Question 8

Everything else held constant,if disposable income increases by 200 and consumption expenditure increases by 150,the mpc is

A)0.
B)0.15.
C)0.5.
D)0.75.

Question 9

Keynes was especially concerned with explaining the ________ level of output and employment during the ________.

A)low;1920s
B)low;1930s
C)high;1920s
D)high;1930s

Question 10

Assume that disposable income equals $1000 and the mpc equals 0.6.If total consumption equal $800,then autonomous consumption is equal to

A)$0.
B)$200.
C)$800.
D)$1000.

Question 11

If the consumption function is C = 20 + 0.5YD,then an increase in disposable income by $100 will result in an increase in consumer expenditure by

A)$25.
B)$70.
C)$50.
D)$100.

Question 12

Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining

A)the hyperinflations of the 1920s.
B)why the Great Depression occurred.
C)the high unemployment in Great Britain before World War I.
D)the high unemployment in Great Britain after World War II.

Question 13

Keynes was especially concerned with explaining the

A)recession of 1920-21.
B)low levels of output and employment during the Great Depression.
C)strong economic growth of the 1920s.
D)high unemployment in Great Britain during the 1920s.

Question 14

Keynes reasoned that consumer expenditure is most closely related to

A)the level of interest rates.
B)the price level.
C)disposable income.
D)the marginal tax rate.

Question 15

Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

A)aggregate output;wages
B)aggregate output;employment
C)wage rates;wages
D)wage rates;employment

Question 16

Assume that autonomous consumption equals $200 and that the mpc equals 0.8.If disposable income equals $1000,then total consumption equals

A)$80.
B)$200.
C)$800.
D)$1000.

Question 17

Everything else held constant,if total consumption increases from $600 to $800 because of an increase of disposable income of $400,then the mpc is equal to

A)0.2.
B)0.4.
C)0.5.
D)0.6.

Question 18

Everything else held constant,if consumption expenditure increases by 65 for a 100 increase in disposable income,the mpc is

A)0.
B)0.5.
C)0.65.
D)1.

Question 19

In the simple Keynesian model,equilibrium aggregate output is determined by

A)aggregate demand.
B)aggregate supply.
C)the national demand for labor.
D)the price level.

Question 20

His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure,planned investment spending,government spending,and net exports.

A)John Maynard Keynes
B)Sir John Hicks
C)Milton Friedman
D)Paul A.Samuelson

Question 21

Keynes mentioned two factors that influenced planned investment spending

A)interest rates and disposable income.
B)interest rates and business expectations about the future.
C)disposable income and business expectations about the future.
D)interest rates and business expectations about inflation.

Question 22

Planned investment spending,a component of aggregate demand,is equal to

A)fixed investment plus actual inventory investment.
B)fixed investment plus unplanned inventory investment.
C)fixed investment.
D)fixed investment plus planned inventory investment.

Question 23

Planned investment spending is higher

A)when real interest rate is higher.
B)during financial frictions.
C)when businesses are optimistic.
D)all of the above.
E)A and C.

Question 24

If unplanned investment is negative,firms will ________ production and output will ________.

A)cut;rise
B)cut;fall
C)increase;rise
D)increase;fall

Question 25

A fall in inventories is synonymous with ________ investment.

A)negative fixed
B)positive fixed
C)positive inventory
D)negative inventory

Question 26

Economists define investment as the purchase of

A)a new physical asset such as a new machine or a new house.
B)any physical asset,whether new or not,used by business to increase production.
C)any physical asset used by business to increase production and the repurchase of common stock.
D)business spending on capital and household spending on durable goods.

Question 27

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to lower production.

A)below;negative
B)above;negative
C)below;positive
D)above;positive

Question 28

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to raise production.

A)below;negative
B)above;negative
C)below;positive
D)above;positive

Question 29

A difference between inventory investment and fixed investment is that

A)fixed investment is never unplanned.
B)fixed investment is never planned.
C)inventory investment is never unplanned.
D)unplanned inventory investment is always zero.

Question 30

If unplanned investment is positive,firms will ________ production and output will ________.

A)cut;rise
B)cut;fall
C)increase;rise
D)increase;fall

Question 31

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain positive and firms will continue to ________ production.

A)below;lower
B)above;lower
C)below;raise
D)above;raise

Question 32

In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain negative,firms will continue to ________ production,and output will continue to ________.

A)lower;fall
B)lower;rise
C)raise;fall
D)raise;rise

Question 33

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________,firms will continue to raise production,and output will continue to rise.

A)below;negative
B)above;negative
C)below;positive
D)above;positive

Question 34

In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.

A)negative;lower
B)negative;raise
C)positive;lower
D)positive;raise

Question 35

Everything else held constant,if consumption expenditure falls by 160 when disposable income falls by 200,the mpc is

A)0.
B)0.2.
C)0.4.
D)0.8.

Question 36

In the Keynesian framework,as long as output is above the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.

A)negative;lower
B)negative;raise
C)positive;lower
D)positive;raise

Question 37

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain negative and firms will continue to ________ production.

A)below;lower
B)above;lower
C)below;raise
D)above;raise

Question 38

There are two types of investment: ________ investment-the spending by business firms on equipment and structures,and planned spending on residential houses-and ________ investment-spending by business firms on additional holdings of raw materials,parts,and finished goods.

A)planned;gross
B)planned;inventory
C)fixed;gross
D)fixed;inventory

Question 39

Aggregate demand in an economy with no government or foreign trade is

A)consumer expenditure plus actual investment.
B)consumer expenditure plus planned investment.
C)consumer expenditure plus inventory investment.
D)consumer expenditure plus fixed investment.

Question 40

Factors that influenced planned investment spending include

A)real interest rates.
B)financial frictions.
C)emotional waves of optimism and pessimism.
D)all of the above.
E)A and C.

Question 41

When the level of unplanned inventory investment is equal to zero,the economy is

A)in disequilibrium.
B)in a recession.
C)in equilibrium.
D)overheating

Question 42

Situation 20-1
Assume a closed economy with no government.Suppose that autonomous consumption equals $400,planned investment equals $500,and the mpc equals 0.9.
Using the information in Situation 20-1,the equilibrium level of aggregate output is

A)$900
B)$8,000
C)$9,000
D)$10,000

Question 43

An increase in unplanned inventory investment for the entire economy equals the excess of

A)output over aggregate supply.
B)output over aggregate demand.
C)aggregate supply over output.
D)aggregate demand over output.

Question 44

If actual output is less than equilibrium output,firms will ________ output to keep from ________ inventories.

A)increase;accumulating
B)increase;depleting
C)decrease;depleting
D)decrease;accumulating

Question 45

Situation 20-1
Assume a closed economy with no government.Suppose that autonomous consumption equals $400,planned investment equals $500,and the mpc equals 0.9.
Using the information in Situation 20-1,if aggregate output is equal to $10,000,then unplanned inventory investment equals

A)-$1000
B)-$100
C)$0
D)$100

Question 46

Situation 20-1
Assume a closed economy with no government.Suppose that autonomous consumption equals $400,planned investment equals $500,and the mpc equals 0.9.
Using the information in Situation 20-1,if aggregate output equals $8,000,the unplanned inventory investment equals

A)-$100
B)$0
C)$100
D)$500

Question 47

Situation 20-1
Assume a closed economy with no government.Suppose that autonomous consumption equals $400,planned investment equals $500,and the mpc equals 0.9.
Using the information contained in Situation 20-1,if autonomous consumption increases by $100,then equilibrium aggregate output will change by

A)-$1,000.
B)-$100.
C)$100.
D)$1,000.

Question 48

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________,firms will continue to lower production,and output will continue to fall.

A)below;negative
B)above;negative
C)below;positive
D)above;positive

Question 49

If aggregate demand falls short of current output,business firms will ________ production to ________ inventories.

A)cut;keep from accumulating
B)expand;keep from accumulating
C)cut;build up
D)expand;build up

Question 50

If aggregated demand is less than actual output,unplanned inventory ________ will cause output to ________.

A)accumulation;rise
B)depletion;fall
C)depletion;rise
D)accumulation;fall

Question 51

Situation 20-1
Assume a closed economy with no government.Suppose that autonomous consumption equals $400,planned investment equals $500,and the mpc equals 0.9.
Using the information contained in Situation 20-1,if planned investment decreases by $100,the equilibrium aggregate output will change by

A)-$1,000.
B)$-100.
C)$100.
D)$1,000.

Question 52

The Keynesian framework indicates that government can play an important role in determining aggregate output by

A)changing the level of government spending or taxes.
B)raising consumer confidence.
C)raising investor confidence.
D)changing the money supply and interest rates.

Question 53

A tax cut initially

A)increases consumption expenditure by an amount greater than the tax cut.
B)increases consumption expenditure by an amount equal to the tax cut.
C)increases consumption expenditure by an amount that is less than the value of the tax cut.
D)has no effect on consumption expenditure.
E)reduces consumption expenditure by an amount that is less than the value of the tax cut.

Question 54

Keynes believed that changes in autonomous spending were dominated by changes in

A)consumer expenditure.
B)autonomous consumer expenditure.
C)investment spending.
D)taxes.
E)none of the above.

Question 55

In the simple Keynesian framework,declines in planned investment spending that produce high unemployment can be offset by raising

A)taxes.
B)government spending.
C)consumer confidence.
D)business confidence.

Question 56

If aggregate demand is less than the level of aggregate output,then ________ inventory investment will be ________.

A)planned;positive
B)actual;positive
C)actual;negative
D)planned;negative

Question 57

If aggregate demand equals output,

A)the economy is in a recession.
B)output will increase.
C)output will fall.
D)the economy is at its equilibrium level.

Question 58

Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________,which are influenced by emotional waves of optimism and pessimism-factors he referred to as "animal spirits."

A)unplanned investment spending
B)actual investment spending
C)planned investment spending
D)autonomous consumer expenditures

Question 59

A decrease in unplanned inventory investment for the entire economy equals the excess of

A)output over aggregate supply.
B)output over aggregate demand.
C)aggregate supply over output.
D)aggregate demand over output.

Question 60

If actual output is greater than equilibrium output,firms will ________ output to keep from ________ inventories.

A)increase;accumulating
B)increase;depleting
C)decrease;depleting
D)decrease;accumulating

Question 61

If the interest rate falls,other things being equal,investment spending will

A)fall.
B)rise.
C)either rise,fall,or remain unchanged.
D)not be affected.

Question 62

Assume equilibrium at full employment for an economy characterized by the simple Keynesian model.If the government raises taxes to eliminate a budget deficit,then

A)the rate of unemployment will increase.
B)the level of aggregate output will increase.
C)the price level will increase.
D)the rate of interest will fall.

Question 63

Situation 20-2
Assume a closed economy.Suppose that autonomous consumption equals $400,planned investment equals $500,government expenditure equals $200,net taxes equals $50,and the mpc equals 0.9.
Using the information in Situation 20-2,if taxes increase by $10,then the equilibrium aggregate output will change by

A)-$90.
B)-$10.
C)$10.
D)$90.

Question 64

Equilibrium output is reduced by an increase in

A)planned investment.
B)taxes.
C)government spending.
D)net exports.

Question 65

When the interest rate rises

A)planned investment falls.
B)planned investment rises.
C)planned investment will be unaffected.
D)equilibrium income increases.

Question 66

In a closed economy,aggregate demand is the sum of

A)consumer expenditure,actual investment spending,and government spending.
B)consumer expenditure,planned investment spending,and government spending.
C)consumer expenditure,actual investment spending,government spending,and net exports.
D)consumer expenditure,planned investment spending,government spending,and net exports.

Question 67

Aggregate output is increased by a decrease in

A)autonomous consumption.
B)government spending.
C)planned investment.
D)net taxes.

Question 68

Situation 20-2
Assume a closed economy.Suppose that autonomous consumption equals $400,planned investment equals $500,government expenditure equals $200,net taxes equals $50,and the mpc equals 0.9.
Using the information in situation 20-2,if government increases their spending by $50 and increases net taxes by 50,then equilibrium aggregate output will change by

A)-$100.
B)-$50.
C)$50.
D)$100.

Question 69

If net exports increase by 100 and the mpc is 0.75,equilibrium aggregate output increases by

A)100.
B)250.
C)400.
D)750.

Question 70

Situation 20-2
Assume a closed economy.Suppose that autonomous consumption equals $400,planned investment equals $500,government expenditure equals $200,net taxes equals $50,and the mpc equals 0.9.
Using the information in situation 20-2,if government spending increases by $100,then the equilibrium aggregate output will change by

A)-$1,000.
B)-$100.
C)$100.
D)$1,000.

Question 71

If net exports decrease by 250 and the mpc is 0.75,equilibrium aggregate output

A)increases by 1000.
B)increases by 750.
C)decreases by 750.
D)decreases by 1000.

Question 72

In an open economy,aggregate demand is the sum of

A)consumer expenditure,actual investment spending,and government spending.
B)consumer expenditure,planned investment spending,and government spending.
C)consumer expenditure,actual investment spending,government spending,and net exports.
D)consumer expenditure,planned investment spending,government spending,and net exports.

Question 73

Aggregate output is ________ related to autonomous consumer expenditure,and is ________ related to the level of taxes.

A)negatively;negatively
B)negatively;positively
C)positively;negatively
D)positively;positively

Question 74

Keynes believed that unstable investment caused the Great Depression.Using the simple Keynesian model,explain how a fall in investment affects equilibrium output.

Question 75

When interest rates fall in the United States (with the price level fixed),the value of the dollar ________,domestic goods become ________ expensive,and net exports ________.

A)falls;less;fall
B)falls;less;rise
C)falls;more;fall
D)rises;less;fall

Question 76

Aggregate output is ________ related to autonomous consumer expenditure,and is ________ related to planned investment spending.

A)negatively;negatively
B)negatively;positively
C)positively;negatively
D)positively;positively

Question 77

When interest rates rise in the United States (with the price level fixed),the value of the dollar ________,domestic goods become ________ expensive,and net exports ________.

A)falls;less;fall
B)falls;more;rise
C)rises;more;fall
D)rises;less;fall

Question 78

An increase in interest rates

A)increases the value of the dollar,net exports,and equilibrium output.
B)increases the value of the dollar,reducing net exports and equilibrium output.
C)reduces the value of the dollar,net exports,and equilibrium output.
D)reduces the value of the dollar,increasing net exports and equilibrium output.

Question 79

When the interest rate is ________,________ investments in physical capital will earn more than the cost of borrowed funds,so planned investment spending is ________.

A)high;few;high
B)high;few;low
C)low;few;high
D)low;many;low
E)high;many;high

Question 80

If net exports increase by 250 and the mpc is 0.75,equilibrium aggregate output increases by

A)250.
B)500.
C)750.
D)1000.