Question 1

Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $30 billion. These economists would estimate that the marginal propensity to save is:
A) 0.67.
B) 0.33.
C) 0.5.
D) 20.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given that the multiplier is 3 (since $10 billion in government spending increases expenditures by $30 billion), we can set up the equation 1/(1-MPC) = 3. Solving for MPC gives MPC = 0.67. Since MPS (marginal propensity to save) is 1 - MPC, MPS = 0.33.

Question 2

(Figure: Simple Keynesian Model) Based on the figure above, which of the following graphs would best represent the associated saving-investment? 
A)

B)

C)

D)

Accepted Answer

The answer of (Figure: Simple Keynesian Model) Based on the...

Question 3

Which country has the lowest national savings rate?
A) China
B) Germany
C) India
D) Japan

Accepted Answer

The answer of Which country has the lowest national savings...

Question 4

Assume the economy is currently experiencing aggregate expenditure greater than aggregate income. The economy will move toward equilibrium as businesses begin to produce _____, leading to _____ employment, and _____ income.
A) more; less; less
B) less; less; less
C) less; more; more
D) more; more; more

Accepted Answer

When aggregate expenditure is greater than aggregate income, businesses will increase production to meet the higher demand, leading to more employment and higher income as the economy moves toward equilibrium.

Question 5

If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income:
A) increases by $10 billion.
B) increases by $2.5 billion.
C) decreases by $5 billion.
D) decreases by $10 billion.

Accepted Answer

The multiplier effect amplifies changes in spending. With a multiplier of 2, a $5 billion decrease in investment spending leads to a $10 billion decrease in equilibrium income.

Question 6

(Figure: Simple Keynesian Model) In the figure above, equilibrium savings equals _____ when investment is at I_0, and _____ when investment is at I_1. A) -$50; -$200 B) $50; $150 C) $100; $200 D) $0, $0

Accepted Answer

The answer of (Figure: Simple Keynesian Model) In the figure...

Question 7

If the marginal propensity to consume is 0.8, full-employment output is $14 trillion, and current output is $13.5 trillion, then investment spending must _____ to reach full-employment output.
A) increase by $0.5 trillion
B) decrease by $0.5 trillion
C) increase by $0.1 trillion
D) increase by $0.4 trillion

Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. To close the output gap of $0.5 trillion ($14 trillion - $13.5 trillion), investment must increase by $0.5 trillion / 5 = $0.1 trillion.

Question 8

Increases in government spending _____ equilibrium income, and increases in taxes _____ equilibrium income.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

The answer of Increases in government spending _____ equilibrium income,...

Question 9

According to Keynesian analysis, if households intend to save more, they will:
A) ultimately spend more.
B) cause jobs to increase because investment will increase.
C) ultimately cause job losses.
D) cause the GDP to increase because inflation will decrease.

Accepted Answer

According to Keynesian analysis, if households intend to save more, they will decrease their spending on goods and services, which will ultimately decrease the demand for goods and services. As a result, businesses may have to cut production and reduce employment, leading to job losses. Therefore, the correct answer is option C: ultimately cause job losses.

Question 10

The paradox of thrift suggests that when households intend to save more, they will _____ consumption, which will ultimately lead to _____ actual aggregate saving.
A) reduce; lower
B) reduce; higher
C) increase; lower
D) increase; higher

Accepted Answer

According to the paradox of thrift, when households intend to save more, they will reduce consumption, as they will have less income to spend on goods and services. This reduction in consumption will ultimately lead to lower actual aggregate saving, as the decrease in demand will lead to lower economic growth and incomes, which will make it harder for households to save as much as they intended. Therefore, option A is the best choice.

Question 11

If government spending falls and taxes rise:
A) both will lower equilibrium income, but the effects of government spending will be larger.
B) both will lower equilibrium income, but the effects of taxes will be larger.
C) both will raise equilibrium income, but the effects of government spending will be larger.
D) both will raise equilibrium income, but the effects of taxes will be larger.

Accepted Answer

A decrease in government spending and an increase in taxes both reduce aggregate demand, leading to a lower equilibrium income. The government spending multiplier is typically larger than the tax multiplier, so the effect of reduced government spending on equilibrium income is larger.

Question 12

John Maynard Keynes advised U.S. President Franklin Roosevelt to:
A) balance the budget in order to reduce the interest rate.
B) pass the Versailles Treaty in order to eliminate Germany as a competitor.
C) increase government spending in order to stimulate the economy.
D) increase the interest rate to increase savings so investment would be stimulated.

Accepted Answer

Keynes advocated for increased government spending to boost demand and pull the economy out of the Great Depression, a key principle of Keynesian economics.

Question 13

Disposable income equals:
A) income minus government spending.
B) income minus taxes.
C) income plus government spending.
D) income plus taxes.

Accepted Answer

Disposable income is the amount of money that households have available for spending and saving after taxes have been accounted for.

Question 14

According to Keynes, as income grows:
A) consumption spending alone grows.
B) saving alone grows.
C) saving falls.
D) both consumption spending and saving grow.

Accepted Answer

According to Keynes, as income grows, both consumption spending and saving grow. This is known as the consumption function, which states that as disposable income increases, consumption spending increases, but not at the same rate as the increase in income. As a result, savings also increase as a function of income but at a lesser rate than consumption spending.

Question 15

Which of the following is (are) true regarding the paradox of thrift? I. People intend to save less but their actions actually lead to an increase in savings.
II) For the paradox of thrift to occur, investment must be positively related to income.
III) The increased savings of households leads to more consumption, income, and output, increasing investment and aggregate savings.
A) I and II only
B) II only
C) II and III only
D) I, II and III

Accepted Answer

The paradox of thrift suggests that when everyone tries to save more, overall savings may not increase because reduced consumption leads to lower income and output. For the paradox to occur, investment must be positively related to income, as stated in II.

Question 16

Decreases in government spending _____ equilibrium income, and increases in taxes _____ equilibrium income.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

Decreases in government spending reduce aggregate demand, leading to a decrease in equilibrium income. Similarly, increases in taxes reduce disposable income, leading to a decrease in consumption and thus a decrease in equilibrium income.

Question 17

Which of the following illustrates the paradox of thrift?
A) Consumer uncertainty causes people to save less; consumption rises; equilibrium income and production falls; savings decrease because income is lower.
B) Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decreases because income is lower.
C) The government encourages saving by raising interest rates; higher interest rates reduce investment spending, which lowers equilibrium income and causes production to fall; savings decreases because income is lower.
D) As businesses save more, interest rates fall, thus reducing household savings.

Accepted Answer

The paradox of thrift suggests that when everyone tries to save more during a recession, aggregate demand falls, leading to lower total savings in the economy because of reduced income and production.

Question 18

Which is true about differences in savings rates across groups of people?
A) Older people and higher-income people tend to save less.
B) Older people and lower-income people tend to save less.
C) Younger people and higher-income people tend to save less.
D) Younger people and lower-income people tend to save less.

Accepted Answer

Younger people and lower-income people tend to save less due to factors like lower earnings, higher expenses, and less financial stability compared to older or higher-income individuals.

Question 19

Which two countries currently have the highest savings rates?
A) China and India
B) China and Japan
C) China and the United States
D) Japan and the United States

Accepted Answer

The answer of Which two countries currently have the highest...

Question 20

(Figure: Simple Keynesian Model) In the figure above, investment has increased from I₀ to I₁. The multiplier equals: A) 0.6. B) 2.5. C) 5.0. D) 0.4.

Accepted Answer

The answer of (Figure: Simple Keynesian Model) In the figure...

Quiz 8: Aggregate Expenditures

Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $30 billion. These economists would estimate that the marginal propensity to save is:

(Figure: Simple Keynesian Model) Based on the figure above, which of the following graphs would best represent the associated saving-investment?

Which country has the lowest national savings rate?

Assume the economy is currently experiencing aggregate expenditure greater than aggregate income. The economy will move toward equilibrium as businesses begin to produce ___, leading to _ employment, and ___ income.

If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income:

(Figure: Simple Keynesian Model) In the figure above, equilibrium savings equals _____ when investment is at I_0, and _____ when investment is at I_1.

If the marginal propensity to consume is 0.8, full-employment output is $14 trillion, and current output is $13.5 trillion, then investment spending must _____ to reach full-employment output.

Increases in government spending _ equilibrium income, and increases in taxes _ equilibrium income.

According to Keynesian analysis, if households intend to save more, they will:

The paradox of thrift suggests that when households intend to save more, they will _ consumption, which will ultimately lead to _ actual aggregate saving.

If government spending falls and taxes rise:

John Maynard Keynes advised U.S. President Franklin Roosevelt to:

Disposable income equals:

According to Keynes, as income grows:

Decreases in government spending _ equilibrium income, and increases in taxes _ equilibrium income.

Which of the following illustrates the paradox of thrift?

Which is true about differences in savings rates across groups of people?

Which two countries currently have the highest savings rates?

(Figure: Simple Keynesian Model) In the figure above, investment has increased from I₀ to I₁. The multiplier equals: