Question 1

Which of the following statements is false?

Accepted Answer

MPC, or Marginal Propensity to Consume, is defined as the ratio of the change in consumption to the change in disposable income, not the change in saving.

Question 2

If consumption is $1,230 when disposable income is $1,420, and consumption is $1,400 when disposable income is $1,620, then the marginal propensity to consume (MPC) is

Accepted Answer

The formula for MPC is (change in consumption/change in income).

Substituting the values given:

MPC = (1400-1230)/(1620-1420)

MPC = 170/200

MPC = 0.85

Therefore, the answer is D) 0.85.

Question 3

Inventory levels unexpectedly fall and as a result firms increase the quantity of goods and services they produce. Which of the following is consistent with these two occurrences?

Accepted Answer

When inventory levels unexpectedly fall, it indicates that actual sales (Total Expenditures, TE) were higher than what firms anticipated, leading them to produce less than what was demanded (Total Production, TP). Thus, TP is less than TE.

Question 4

If total production (TP) is greater than total expenditures (TE), it follows that

Accepted Answer

When total production exceeds total expenditures, it means that the amount produced is more than what is bought or consumed, leading to an increase in actual inventory levels as the surplus goods accumulate.

Question 5

The economy is in equilibrium, TP = TE, and Real GDP is $4,000 billion. The MPC is 0.70, the multiplier is operative, and idle resources exist at each expenditure round. Government purchases fall by $17 billion. As a result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________.

Accepted Answer

The TE curve shifts downward due to a decrease in government purchases. Inventory levels unexpectedly rise as demand falls. Business firms decrease production in response to lower demand, and Real GDP falls. The change in GDP is calculated using the multiplier effect: Change in GDP = Multiplier × Change in Government Spending. With an MPC of 0.70, the multiplier is 1/(1-MPC) = 1/(1-0.70) = 3.33. Thus, a $17 billion decrease in government spending results in a $56.7 billion decrease in Real GDP (3.33 × $17 billion).

Question 6

The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the quantity of good and services they produce.

Accepted Answer

If net exports fall, then the total spending on domestic goods and services (TE) will also fall. This will cause the TE curve to shift downward. Additionally, since businesses were not expecting a decrease in net exports, their inventory levels will unexpectedly rise as they produce more than what is being demanded. To adjust to this, businesses will decrease the quantity of goods and services they produce, resulting in a decrease in TP. This scenario is represented by a downward shift in the TE curve and a movement along the TP curve to the left, resulting in a new equilibrium at a lower level of output and income.

Question 7

Which of the following statements is true?

Accepted Answer

None of the statements are true. TP and TE can be equal at any level of output, not just at natural real GDP. Inventory levels can rise or fall for many reasons, not just when TE is greater or less than TP respectively.

Question 8

The economy is in equilibrium, TP = TE, and Real GDP is $4,555 billion. The MPC is 0.80, the multiplier is operative, and idle resources exist at each expenditure round. Government purchases rise by $10 billion. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, business firms ___________ the quantity of goods and services they produce, and Real GDP __________ by __________.

Accepted Answer

When government purchases rise by $10 billion, it directly affects the TE (Total Expenditure) curve. As a result, the TE curve shifts upward. This increase in demand causes inventory levels to fall, which prompts firms to increase production to meet the demand. This increase in production raises Real GDP. The multiplier is operative, so Real GDP increases by a multiple of the initial increase in government expenditure, which in this case is $50 billion (0.8/0.2 = 4, and 4 x $10 billion = $40 billion). Therefore, Real GDP increases by $50 billion ($10 billion + $40 billion = $50 billion). Thus, the correct answer is C.

Question 9

If consumption is greater than disposable income, it follows that

Accepted Answer

Consumption greater than disposable income means that people are spending more than what they earn, resulting in negative saving.

Question 10

Which of the following statements is false?

Accepted Answer

Keynes argued that wages are sticky downwards, meaning they do not fall quickly in response to a recessionary gap. Instead, he believed that wages tend to be rigid or inflexible downwards due to factors like contracts, minimum wage laws, and worker resistance to wage cuts.

Question 11

The change in disposable income is $200 and the change in saving is $50.What is the marginal propensity to consume (MPC)?

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in disposable income. If the change in saving is $50, and the total change in disposable income is $200, then the change in consumption must be $150 ($200 - $50). Therefore, MPC = $150 / $200 = 0.75.

Question 12

Inventory levels unexpectedly rise and as a result firms reduce the level of production. Which of the following is consistent with these two occurrences?

Accepted Answer

The answer of Inventory levels unexpectedly rise and as a...

Question 13

The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result, __________ rises, the __________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the quantity of goods and services they produce.

Accepted Answer

With autonomous consumption rising, total expenditures (TE) will also rise. This means the TP=TE equilibrium point will shift upward. However, since the increase in consumption was unexpected, inventories will fall as firms struggle to keep up with demand. In response, firms will increase the quantity of goods and services they produce in order to replenish their inventories.

Question 14

Here is a consumption function: C = C₀ + MPC(Y_d). Which of the following is true about the consumption function?

Accepted Answer

The consumption function C = C₀ + MPC(Y_d) shows that consumption (C) is a function of autonomous consumption (the constant term) and the marginal propensity to consume (MPC) times disposable income. A) is true because both autonomous consumption and disposable income directly increase consumption. D) is true because a $1 increase in autonomous consumption (the constant term) directly increases consumption by $1, maintaining the proportionality. Choices B and C contain inaccuracies regarding the effects of MPC and autonomous consumption on the overall consumption.

Question 15

Government purchases rise by $100 billion and the MPC equals 0.75. Assuming that idle resources exist at each expenditure round, and the multiplier is operative, the change in Real GDP equals

Accepted Answer

The change in Real GDP can be calculated using the multiplier effect formula: Change in GDP = Multiplier * Initial Change in Spending. The multiplier is calculated as 1/(1-MPC), so with an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, the change in Real GDP = 4 * $100 billion = $400 billion.

Question 16

The economy is in equilibrium, TP = TE, and Real GDP is $4,000 billion. The MPC is 0.60, the multiplier is operative, and idle resources exist at each expenditure round. Autonomous investment spending rises by $13 billion. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________.

Accepted Answer

Autonomous investment spending is a component of Aggregate Expenditure (AE), so it will increase AE by the full amount of the increase in investment spending, which is $13 billion. Because of the multiplier effect, the increase in AE will lead to a larger increase in Real GDP. The formula for the multiplier is 1/(1-MPC), or 1/(1-0.60) = 2.5. Therefore, the total increase in Real GDP will be $13 billion x 2.5 = $32.5 billion. The increase in AE will cause a shift upward in the TE curve, businesses will increase the quantity of goods and services they produce, and inventory levels will unexpectedly rise.

Question 17

If total production (TP) is less than total expenditures (TE), it follows that

Accepted Answer

If TP < TE, it indicates that demand (reflected by expenditures) exceeds supply (production), suggesting firms have underproduced (B) and would likely increase production (C) to meet demand.

Question 18

Which of the following is true?

Accepted Answer

The multiplier is calculated as 1/(1-MPC) or 1/MPS. For A, if MPC = 0.50, the multiplier is 1/(1-0.50) = 2.00. For C, if MPS = 0.35, then MPC = 1 - MPS = 0.65, and the multiplier is 1/(1-0.65) = 2.86.

Question 19

The answer is: "It is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates." What is the question?

Accepted Answer

Efficiency wage models suggest that paying employees higher-than-equilibrium wage rates can lead to increased productivity and decreased turnover, ultimately benefiting the firm.

Question 20

Here is a consumption function: C = C₀ + MPC(Y_d). If consumption is $3,300, MPC =0.85, and disposable income is $2,100, what does autonomous consumption equal?

Accepted Answer

We can start by plugging in the given values into the consumption function: C = C₀ + MPC(Y_d) $3,300 = C₀ + (0.85)($2,100)(_d) $3,300 = C₀ + $1,785(_d) We do not know the values of C₀ or _d, but we can solve for C₀ by setting disposable income equal to 0: C = C₀ + MPC(Y_d) $0 = C₀ + (0.85)($0)(_d) $0 = C₀ So C₀ = 0. Now we can substitute into the original equation: $3,300 = 0 + $1,785(_d) Solving for _d: _d = $3,300 / $1,785 = 1.85 Now we can solve for autonomous consumption: C = C₀ + MPC(Y_d) $3,300 = 0 + (0.85)($2,100)(1.85) $3,300 = $2,028.75 + $3,709.25B1 $1,271.25 = $3,709.25B1 B1 = $1,271.25 / $3,709.25 = 0.3426 Autonomous consumption is equal to C₀: C₀ = $3,300 / (1 + 0.85(1.85)) = $1,515.07 Therefore, the answer is C.

Quiz 10: Keynesian Macroeconomics and Economic Instability a Critique of the Self Regulating Economy

Which of the following statements is false?

If consumption is $1,230 when disposable income is $1,420, and consumption is $1,400 when disposable income is $1,620, then the marginal propensity to consume (MPC) is

Inventory levels unexpectedly fall and as a result firms increase the quantity of goods and services they produce. Which of the following is consistent with these two occurrences?

If total production (TP) is greater than total expenditures (TE) , it follows that

The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the curve shifts , inventory levels unexpectedly , and business firms the quantity of good and services they produce.

Which of the following statements is true?

If consumption is greater than disposable income, it follows that

Which of the following statements is false?

The change in disposable income is $200 and the change in saving is $50.What is the marginal propensity to consume (MPC) ?

Inventory levels unexpectedly rise and as a result firms reduce the level of production. Which of the following is consistent with these two occurrences?

The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result, rises, the curve shifts , inventory levels unexpectedly , and business firms __ the quantity of goods and services they produce.

Here is a consumption function: C = C₀ + MPC(Y_d) . Which of the following is true about the consumption function?

Government purchases rise by $100 billion and the MPC equals 0.75. Assuming that idle resources exist at each expenditure round, and the multiplier is operative, the change in Real GDP equals

If total production (TP) is less than total expenditures (TE) , it follows that

Which of the following is true?

The answer is: "It is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates." What is the question?

Here is a consumption function: C = C₀ + MPC(Y_d) . If consumption is $3,300, MPC =0.85, and disposable income is $2,100, what does autonomous consumption equal?

Quiz 10: Keynesian Macroeconomics and Economic Instability a Critique of the Self Regulating Economy

Which of the following statements is false?

If consumption is $1,230 when disposable income is $1,420, and consumption is $1,400 when disposable income is $1,620, then the marginal propensity to consume (MPC) is

Inventory levels unexpectedly fall and as a result firms increase the quantity of goods and services they produce. Which of the following is consistent with these two occurrences?

If total production (TP) is greater than total expenditures (TE) , it follows that

The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the quantity of good and services they produce.

Which of the following statements is true?

If consumption is greater than disposable income, it follows that

Which of the following statements is false?

The change in disposable income is $200 and the change in saving is $50.What is the marginal propensity to consume (MPC) ?

Inventory levels unexpectedly rise and as a result firms reduce the level of production. Which of the following is consistent with these two occurrences?

The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result, __________ rises, the __________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the quantity of goods and services they produce.

Here is a consumption function: C = C0 + MPC(Yd) . Which of the following is true about the consumption function?

Government purchases rise by $100 billion and the MPC equals 0.75. Assuming that idle resources exist at each expenditure round, and the multiplier is operative, the change in Real GDP equals

If total production (TP) is less than total expenditures (TE) , it follows that

Which of the following is true?

The answer is: "It is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates." What is the question?

Here is a consumption function: C = C0 + MPC(Yd) . If consumption is $3,300, MPC =0.85, and disposable income is $2,100, what does autonomous consumption equal?

The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the curve shifts , inventory levels unexpectedly , and business firms the quantity of good and services they produce.

The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result, rises, the curve shifts , inventory levels unexpectedly , and business firms __ the quantity of goods and services they produce.

Here is a consumption function: C = C₀ + MPC(Y_d) . Which of the following is true about the consumption function?

Here is a consumption function: C = C₀ + MPC(Y_d) . If consumption is $3,300, MPC =0.85, and disposable income is $2,100, what does autonomous consumption equal?