Question 1

As income increases, consumption

Accepted Answer

This observation is known as the income elasticity of demand. As income increases, the demand for most goods and services increases as well, but at a slower rate. This is because as income increases, consumers tend to devote a smaller percentage of their income to basic needs like food and housing, and instead spend more on discretionary items like vacations, entertainment, and luxury goods.

Question 2

(Figure: Simple Keynesian Model) Based on the figure, which graph would BEST represent the associated saving-investment?

Accepted Answer

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

Question 3

Assume that the multiplier is 10. Full employment is considered to be at a GDP level of $500 billion. Current GDP is $400 billion. According to Keynesian macroeconomics, what should the government do to achieve full employment?

Accepted Answer

The answer of Assume that the multiplier is 10. Full...

Question 4

How does the simple Keynesian model differ from the classical approach to analyzing savings?

Accepted Answer

The answer of How does the simple Keynesian model differ...

Question 5

One of the determinants of investment is the current level of capital goods.

Accepted Answer

The current level of capital goods is one of the determinants of investment as it affects the productivity and efficiency of the production process, which in turn affects the profitability and attractiveness of investment.

Question 6

When the economy is in equilibrium in the simple Keynesian model

Accepted Answer

In the simple Keynesian model, equilibrium is reached where aggregate output (Y) is equal to aggregate expenditure (AE), which is equal to consumption (C) plus investment (I) plus government spending (G) minus taxes (T). Hence, saving (S) is equal to investment (I) in equilibrium (S=AE-Y=I).

Question 7

Spending by federal, state, and local governments has grown from _____ of GDP in the 1930s to more than _____ today.

Accepted Answer

Spending by federal, state, and local governments has indeed grown significantly since the 1930s. In the 1930s, such spending was a smaller portion of the GDP, reflecting a more limited government role in the economy. Over the decades, this has increased to more than 30% of GDP today, reflecting expanded government responsibilities and services, including social security, healthcare, education, and infrastructure. The correct answer reflects this growth from a smaller base to a substantial portion of the economy, but not to the extent of exceeding half of the GDP.

Question 8

When the costs of operating machinery rise, new investment will rise.

Accepted Answer

When the costs of operating machinery rise, it may not necessarily lead to new investment. In fact, it may result in companies cutting back on investment to reduce costs.

Question 9

Which equation is correct?

Accepted Answer

The correct equation for Aggregate Expenditure (AE) includes consumption (C), investment (I), government spending (G), and net exports (X - M), where X represents exports and M represents imports. This is because AE represents the total spending in an economy, which is comprised of these four components. Option B is the only equation that correctly includes the subtraction of imports from exports, reflecting the net effect of international trade on the economy's spending.

Question 10

The multiplier effect is a domino effect as income goes from person to person. Explain why this is true.

Accepted Answer

The answer of The multiplier effect is a domino effect...

Question 11

Equal changes in government spending and taxation lead to an equal change in income.

Accepted Answer

This is known as the balanced budget multiplier, where the increase in government spending is equal to the increase in taxation, resulting in a proportional increase in overall income.

Question 12

(Table: Keynesian Equilibrium Analysis with Taxes and Net Exports) Given the data in the table, if full employment income is $500 while the current equilibrium is $750, a(n) _____ gap exists, such that a(n) _____ in spending equal to _____ is needed to close the gap.

Accepted Answer

The answer of (Table: Keynesian Equilibrium Analysis with Taxes and...

Question 13

(Graph: Consumption) Based on the information provided in the graph, at an income level of $300, savings equals _____, the MPC equals _____, and the APC equals _____.

Accepted Answer

At an income level of $300:
Savings equals -$80 (where the consumption line intersects the 45-degree line)
MPC equals 0.6 (the slope of the consumption line)
APC equals 1.27 ([consumption at $300 / $300] or $190 / $300)

Question 14

Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $40 billion. These economists would estimate that the marginal propensity to save is

Accepted Answer

The marginal propensity to save (MPS) can be found using the multiplier formula, which is 1/(1-MPC) or 1/MPS. Given that a $10 billion increase in government purchases raises aggregate expenditures by $40 billion, the multiplier is 4 ($40 billion / $10 billion). Therefore, MPS = 1/4 = 0.25.

Question 15

Which of these is true of macroeconomic equilibrium in the simple Keynesian model?

Accepted Answer

In the simple Keynesian model, macroeconomic equilibrium occurs when Aggregate Expenditure (AE) equals Output (Y).

Question 16

If aggregate expenditures equal $7,600 and aggregate income equals $8,000, businesses will produce

Accepted Answer

When aggregate expenditures are less than aggregate income, it indicates that the demand for goods and services is lower than what is being produced. As a result, businesses will likely reduce production to match the lower level of spending, which can lead to a decrease in employment and income as they adjust to the reduced demand.

Question 17

Which of these will NOT cause an increase in the consumption schedule?

Accepted Answer

The answer of Which of these will NOT cause an...

Question 18

If the government always balances its budget

Accepted Answer

If the government always balances its budget, it limits its ability to increase spending during times of economic downturns, which can weaken the impact of government spending on the overall economy. This can also limit the government's ability to invest in infrastructure and other projects that could stimulate economic growth.

Question 19

The balanced budget multiplier equals 1.

Accepted Answer

The balanced budget multiplier suggests that an equal increase in government spending and taxes will lead to an equal increase in output, hence the multiplier is 1. This is because the increase in government spending directly increases demand, while the increase in taxes decreases disposable income and thus consumption, but the net effect on demand equals the initial increase in spending.

Question 20

Expectations of large increases in income lead to lower levels of consumption.

Accepted Answer

This statement is not accurate. Generally, people tend to increase their consumption when their income increases. However, there may be individual factors, such as saving for long-term goals or concerns about economic stability, that affect an individual's consumption choices.

Quiz 8: Aggregate Expenditures