Question 1

In a private closed economy, when aggregate expenditures equal GDP,
A)consumption equals investment.
B)consumption equals aggregate expenditures.
C)planned investment equals saving.
D)disposable income equals consumption minus saving.

Accepted Answer

In a closed economy, aggregate expenditures are equal to GDP which means that output equals income. Planned investment is also a part of aggregate expenditures. In a closed economy, there is no foreign trade so exports and imports do not affect GDP. Therefore, when aggregate expenditures equal GDP, planned investment must equal saving in the economy. This is because any injections of spending (such as investment) must be matched by leakages (such as saving) in a closed economy in order to maintain equilibrium.

Question 2

If an unintended increase in business inventories occurs,
A)we can expect aggregate production to be unaffected.
B)we can expect businesses to increase the level of production.
C)we can expect businesses to lower the level of production.
D)aggregate expenditures must exceed the domestic output.

Accepted Answer

An unintended increase in business inventories indicates that businesses are producing more goods than they are selling. To correct this imbalance, businesses will likely lower their production levels to prevent further accumulation of inventories. This decrease in production would cause a decrease in aggregate production.

Question 3

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In this economy, the equilibrium level of income (Y) is
A)360.
B)225.
C)200.
D)135.

Accepted Answer

The equilibrium level of income is the level of output (Y) where total output is equal to total expenditure. In a closed economy, total expenditure is the sum of consumption (C) and investment (I).

So, Y = C + I

Substituting the given equations for C and I, we get:

Y = (60 + 0.6Y) + 30

Simplifying:

Y = 90 + 0.6Y

0.4Y = 90

Y = 225

Therefore, the equilibrium level of income in this economy is $225 billion.

The answer is B.

Question 4

In a private closed economy, when aggregate expenditures exceed GDP,
A)GDP will decline.
B)business inventories will rise.
C)saving will decline.
D)business inventories will fall.

Accepted Answer

When aggregate expenditures exceed GDP, it means that consumers are spending more than the economy is producing, leading to a decrease in business inventories as goods are being purchased faster than they are being produced.

Question 5

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?
A)bank panic of 1907
B)Great Depression
C)spectacular economic growth during World War II

Accepted Answer

The Great Depression was a severe worldwide economic depression that began in the United States in the 1930s. The aggregate expenditures model was developed by John Maynard Keynes in response to the Great Depression.

Question 6

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of
A)a decline in the size of the inflationary gap.
B)an increase in the MPC.
C)an increase in the MPS.
D)a decline in the general price level.

Accepted Answer

An increase in the MPC (marginal propensity to consume) will increase the slope of the aggregate expenditures schedule. This is because the MPC measures the change in consumption spending for a given change in disposable income. A higher MPC means that consumers will spend a larger proportion of any increase in disposable income, which will lead to a greater increase in aggregate expenditures.

Question 7

Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output.Thus,
A)saving is $10 billion.
B)unplanned decreases in inventories of $10 billion will occur.
C)the MPC is 0.80.
D)unplanned increases in inventories of $10 billion will occur.

Accepted Answer

The answer of Assume that in a private closed economy,...

Question 8

In the United States from 1929 to 1933, real GDP and the unemployment rate _.
A)declined by 27 percent; rose to 25 percent
B)increased by 21 percent; fell to 2 percent
C)declined by 21 percent; rose to 27 percent

Accepted Answer

During the Great Depression, from 1929 to 1933, the U.S. real GDP declined by approximately 27 percent, and the unemployment rate rose to about 25 percent.

Question 9

The aggregate expenditures model is built upon which of the following assumptions?
A)Prices are fixed.
B)The economy is at full employment.
C)Prices are fully flexible.

Accepted Answer

The aggregate expenditures model assumes that prices are fixed, which allows for the analysis of output and employment without considering price changes.

Question 10

If at some level of GDP the economy is experiencing an unintended decrease in inventories,
A)the aggregate level of saving will decline.
B)the price level will fall.
C)the business sector will lay off workers.
D)domestic output will increase.

Accepted Answer

A decrease in inventories suggests that demand has exceeded supply, which indicates that firms need to increase their production to meet the demand. Therefore, domestic output will increase. Option A is incorrect because there is no direct relationship between unintended decrease in inventories and aggregate saving. Option B is also incorrect because a fall in the price level would suggest a decrease in demand, which is not consistent with an unintended decrease in inventories. Option C is incorrect because firms may need to hire more workers to increase production to meet demand, rather than laying off workers.

Question 11

In a private closed economy, investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where investment is equal to saving.
A)planned; actual
B)actual; planned
C)gross; net
D)net; gross

Accepted Answer

In a closed economy, investment and saving are the only two components of GDP. Investment is the planned increase in capital stock and saving is the part of income that is not consumed. Therefore, investment is a planned expenditure while saving is an actual income. At equilibrium, the actual income (saving) is equal to the planned investment. Thus, equilibrium occurs only when actual saving (B) is equal to planned investment (B).

Question 12

If aggregate expenditures exceed GDP in a private closed economy,
A)leakages will exceed injections.
B)planned investment will exceed saving.
C)unplanned investment in inventories will occur.
D)saving will exceed planned investment.

Accepted Answer

The answer of If aggregate expenditures exceed GDP in a...

Question 13

In the aggregate expenditures model, it is assumed that investment
A)automatically changes in response to changes in real GDP.
B)changes by less in percentage terms than changes in real GDP.
C)does not respond to changes in interest rates.
D)does not change when real GDP changes.

Accepted Answer

In the aggregate expenditures model, investment is typically assumed to be autonomous, meaning it does not change in response to changes in real GDP. This simplification allows for easier analysis of the economy's equilibrium without considering the complexities of investment behavior.

Question 14

If an unintended increase in business inventories occurs at some level of GDP, then GDP
A)entails a rate of aggregate expenditures in excess of the rate of aggregate production.
B)may be either above or below the equilibrium output.
C)is too low for equilibrium.
D)is too high for equilibrium.

Accepted Answer

An unintended increase in business inventories indicates that businesses are producing more than what consumers are consuming. This implies that GDP is too high for equilibrium, as it surpasses the level of demand for goods and services in the economy. Therefore, the correct option is D.

Question 15

A private closed economy will expand when
A)actual GDP is less than potential GDP.
B)unplanned decreases in inventories occur.
C)aggregate expenditures are less than GDP.
D)unplanned increases in inventories occur.

Accepted Answer

The answer of A private closed economy will expand when
A)actual...

Question 16

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of consumption spending will be
A)170.
B)270.
C)160.
D)195.

Accepted Answer

In equilibrium for a private closed economy, total spending (Y) equals consumption (C) plus investment (I). Given C = 60 + 0.6Y and I = 30, we set Y = C + I. Substituting the given values, we get Y = 60 + 0.6Y + 30. Solving for Y, we find Y = 225. Substituting Y back into the consumption function, C = 60 + 0.6(225) = 195.

Question 17

The equilibrium level of GDP is associated with
A)an excess of planned investment over saving.
B)no unintended changes in inventories.
C)an unintended decrease in business inventories.
D)an unintended increase in business inventories.Topic: Other Features of Equilibrium GDP

Accepted Answer

The equilibrium level of GDP occurs when aggregate demand equals aggregate supply, resulting in no unintended changes in inventories. This means that businesses are selling exactly what they expected, with no excess or shortage in inventory levels.

Question 18

For a private closed economy, an unintended decline in inventories suggests that
A)aggregate expenditures are less than the business sector expected them to be.
B)aggregate expenditures exceed production.
C)actual investment exceeds saving.
D)planned investment is greater than consumption.

Accepted Answer

An unintended decline in inventories indicates that actual sales were higher than businesses anticipated, meaning aggregate expenditures (total spending on goods and services) were greater than the amount of goods and services produced. This scenario leads to a reduction in inventories as the demand exceeds the supply.

Question 19

A private closed economy includes
A)households, businesses, and government, but not international trade.
B)households, businesses, and international trade, but not government.
C)households and businesses, but not government or international trade.
D)households only.

Accepted Answer

A private closed economy includes households and businesses, but excludes both government and international trade, focusing on the internal economic activities between private entities.

Question 20

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of saving will be
A)30.
B)26.
C)25.
D)60.

Accepted Answer

The answer of (Advanced analysis) The given equations describe consumption...

Quiz 31: The Aggregate Expenditures Model

In a private closed economy, when aggregate expenditures equal GDP,

If an unintended increase in business inventories occurs,

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In this economy, the equilibrium level of income (Y) is

In a private closed economy, when aggregate expenditures exceed GDP,

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of

Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output.Thus,

In the United States from 1929 to 1933, real GDP and the unemployment rate _.

The aggregate expenditures model is built upon which of the following assumptions?

If at some level of GDP the economy is experiencing an unintended decrease in inventories,

In a private closed economy, investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where investment is equal to saving.

If aggregate expenditures exceed GDP in a private closed economy,

In the aggregate expenditures model, it is assumed that investment

If an unintended increase in business inventories occurs at some level of GDP, then GDP

A private closed economy will expand when

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of consumption spending will be

The equilibrium level of GDP is associated with

For a private closed economy, an unintended decline in inventories suggests that

A private closed economy includes

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of saving will be