Question 1

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:
A)income equals consumption plus investment plus government spending.
B)planned expenditure equals consumption plus planned investment plus government spending.
C)actual expenditure equals planned expenditure.
D)actual saving equals actual investment.

Accepted Answer

The equilibrium condition in the Keynesian-cross analysis in a closed economy is that actual expenditure equals planned expenditure. This means that at the point of equilibrium, the level of aggregate expenditure in the economy is equal to the level of output, and there is no tendency for output to either increase or decrease.

Question 2

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:
A)increases by 250.
B)increases by more than 250.
C)decreases by 250.
D)increases but by less than 250.

Accepted Answer

In the Keynesian-cross model, an increase in government purchases leads to a multiplied increase in equilibrium income due to the multiplier effect, which is greater than the initial increase in spending.

Question 3

In the Keynesian-cross model, actual expenditures equal:
A)GDP.
B)the money supply.
C)the supply of real balances.
D)unplanned inventory investment.

Accepted Answer

In the Keynesian-cross model, actual expenditures (AE) equal GDP. This is because in the model, AE consists of consumption (C), investment (I), government spending (G), and net exports (NX), all of which contribute to overall economic activity and thus determine GDP. Therefore, AE must be equal to GDP in order for the model to accurately reflect the economy.

Question 4

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income.
A)aggregate demand; aggregate supply
B)aggregate supply; aggregate demand
C)monetary policy; fiscal policy
D)fiscal policy; monetary policy

Accepted Answer

According to classical theory, national income depends on aggregate supply, while Keynes proposed that aggregate demand determines the level of national income.

Question 5

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.
A)the budget deficit
B)consumption
C)income
D)real balances

Accepted Answer

The government-purchases multiplier measures the change in income that results from a change in government purchases. It is calculated as the initial change in government purchases multiplied by the multiplier. Therefore, the correct choice is income.

Question 6

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₁, then inventories will _____, inducing firms to _____ production. A)rise; increase B)rise; decrease C)fall; increase D)fall; decrease

Accepted Answer

The answer of Exhibit: Keynesian Cross  In this graph,...

Question 7

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG, then equilibrium income rises by:
A)one unit.
B)ΔG.
C)ΔG divided by one minus the marginal propensity to consume.
D)ΔG multiplied one plus the marginal propensity to consume.

Accepted Answer

In the Keynesian-cross analysis, the change in equilibrium income due to a change in government purchases is determined by the government spending multiplier, which is 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, the equilibrium income rises by ΔG divided by one minus the marginal propensity to consume.

Question 8

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____.
A)$2 billion; $4 billion
B)$0.75 billion; $1 billion
C)$0.75 billion; $0.75 billion
D)$1 billion; $4 billion

Accepted Answer

The MPC is the marginal propensity to consume, which is the fraction of each additional dollar of income that is spent on consumption. In this case, the MPC is 0.75, which means that for every additional dollar of income, 75 cents is spent on consumption. Therefore, a $2 billion increase in government spending will increase planned expenditures by $2 billion x 0.75 = $1.5 billion. The equilibrium level of income is the level of income at which planned expenditures equal actual expenditures. Therefore, the $1.5 billion increase in planned expenditures will increase the equilibrium level of income by $1.5 billion / 0.75 = $2 billion.

Question 9

Planned expenditure is a function of:
A)planned investment.
B)planned government spending and taxes.
C)planned investment, government spending, and taxes.
D)national income and planned investment, government spending, and taxes.

Accepted Answer

Planned expenditure includes all components that an economy intends to spend in a given period. This encompasses planned investment by businesses, government spending on goods and services, and the impact of taxes on spending. Additionally, national income influences overall spending behavior, as it affects consumer spending and savings, thereby making it a comprehensive function of planned expenditure.

Question 10

Two interpretations of the IS-LM model are that the model explains:
A)the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.
B)the short-run quantity theory of income or the short-run Fisher effect.
C)the determination of investment and saving or what shifts the liquidity preference schedule.
D)changes in government spending and taxes or the determination of the supply of real money balances.

Accepted Answer

The IS-LM model explains the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve. It shows how changes in interest rates and output affect the equilibrium level of income and how monetary and fiscal policies can be used to stabilize the economy in the short run.

Question 11

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₃, then inventories will _____, inducing firms to _____ production. A)rise; increase B)rise; decrease C)fall; increase D)fall; decrease

Accepted Answer

The answer of Exhibit: Keynesian Cross  In this graph,...

Question 12

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:
A)liquidity preference.
B)the government-purchases multiplier.
C)unplanned inventory investment.
D)real money balances.

Accepted Answer

In the Keynesian-cross model, actual expenditures are the sum of planned expenditures and unplanned inventory investment. Therefore, the difference between actual and planned expenditures is equal to unplanned inventory investment. Choices A, B, and D do not directly affect the difference between actual and planned expenditures in the model.

Question 13

When firms experience unplanned inventory accumulation, they typically:
A)build new plants.
B)lay off workers and reduce production.
C)hire more workers and increase production.
D)call for more government spending.

Accepted Answer

Unplanned inventory accumulation indicates that demand for a firm's goods is lower than anticipated. In such situations, the firm may reduce production to match the level of demand to prevent further build-up of inventories. This can involve laying off workers if production levels need to be significantly decreased. Building new plants or hiring more workers would be inappropriate as it increases the firm's costs and capacity. Calling for more government spending is not a direct solution to the firm's inventory accumulation issue.

Question 14

The IS curve plots the relationship between the interest rate and _____ that arises in the market for _____.
A)national income; goods and services
B)the price level; goods and services
C)national income; money
D)the price level; money

Accepted Answer

The IS curve represents the relationship between the interest rate and national income in the market for goods and services, showing combinations where total spending equals total output.

Question 15

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:
A)increases the amount of money in the economy.
B)changes income, which changes consumption, which further changes income.
C)is government spending and, therefore, more powerful than private spending.
D)changes the interest rate.

Accepted Answer

In the Keynesian-cross model, an initial change in fiscal policy, such as increased government spending, leads to a change in income, which then affects consumption. This cycle continues, amplifying the initial impact through the multiplier effect.

Question 16

John Maynard Keynes wrote that low income and high unemployment in economic downturns should be blamed on:
A)low levels of capital.
B)an untrained labour force.
C)inadequate technology.
D)low aggregate demand.

Accepted Answer

Keynes argued that low aggregate demand is the primary cause of economic downturns, leading to low income and high unemployment.

Question 17

The IS-LM model takes _____ as exogenous.
A)the price level and national income
B)the price level
C)national income
D)the interest rate

Accepted Answer

The IS-LM model takes the price level as exogenous, meaning it is assumed to be determined outside of the model. The model itself is used to determine the equilibrium levels of interest rates and national income (GDP).

Question 18

Exhibit: Keynesian Cross In this graph, the equilibrium levels of income and expenditure are: A)Y₁ and PE₁. B)Y₂ and PE₂. C)Y₃ and PE₃. D)Y₃ and PE₄.

Accepted Answer

The answer of Exhibit: Keynesian Cross  In this graph,...

Question 19

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:
A)between minus one and zero.
B)between zero and one.
C)one.
D)greater than one.

Accepted Answer

The slope of the planned expenditure line, which represents the marginal propensity to consume, is typically between zero and one, indicating that as income increases, consumption increases but at a decreasing rate.

Question 20

The equilibrium of the Keynesian cross shows:
A)determination of equilibrium income and the interest rate in the short run.
B)determination of equilibrium income and the interest rate in the long run.
C)equality of planned expenditure and income in the short run.
D)equality of planned expenditure and income in the long run.

Accepted Answer

The Keynesian cross model illustrates the point where planned expenditure equals actual income in the short run, determining the equilibrium level of income.

Quiz 11: Aggregate Demand I: Building the Islm Model

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

In the Keynesian-cross model, actual expenditures equal:

According to classical theory, national income depends on _, while Keynes proposed that _ determines the level of national income.

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₁, then inventories will _, inducing firms to _ production.

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG, then equilibrium income rises by:

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _ and increases the equilibrium level of income by _.

Planned expenditure is a function of:

Two interpretations of the IS-LM model are that the model explains:

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₃, then inventories will _, inducing firms to _ production.

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

When firms experience unplanned inventory accumulation, they typically:

The IS curve plots the relationship between the interest rate and _ that arises in the market for _.

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:

John Maynard Keynes wrote that low income and high unemployment in economic downturns should be blamed on:

The IS-LM model takes _____ as exogenous.

Exhibit: Keynesian Cross In this graph, the equilibrium levels of income and expenditure are:

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

The equilibrium of the Keynesian cross shows:

Quiz 11: Aggregate Demand I: Building the Islm Model

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

In the Keynesian-cross model, actual expenditures equal:

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income.

The government-purchases multiplier indicates how much _____ change(s) in response to a $1 change in government purchases.

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production.

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG, then equilibrium income rises by:

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____.

Planned expenditure is a function of:

Two interpretations of the IS-LM model are that the model explains:

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production.

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

When firms experience unplanned inventory accumulation, they typically:

The IS curve plots the relationship between the interest rate and _____ that arises in the market for _____.

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:

John Maynard Keynes wrote that low income and high unemployment in economic downturns should be blamed on:

The IS-LM model takes _____ as exogenous.

Exhibit: Keynesian Cross In this graph, the equilibrium levels of income and expenditure are:

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

The equilibrium of the Keynesian cross shows:

According to classical theory, national income depends on _, while Keynes proposed that _ determines the level of national income.

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₁, then inventories will _, inducing firms to _ production.

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _ and increases the equilibrium level of income by _.

Exhibit: Keynesian Cross In this graph, if firms are producing at level Y₃, then inventories will _, inducing firms to _ production.

The IS curve plots the relationship between the interest rate and _ that arises in the market for _.