Question 1

A higher level of real Gross Domestic Product (GDP) will result if
A) total planned real expenditures exceed real Gross Domestic Product (GDP).
B) aggregate supply exceeds aggregate demand.
C) aggregate demand exceeds aggregate supply.
D) leakage exceeds injections.

Accepted Answer

The answer of A higher level of real Gross Domestic...

Question 2

-Refer to the above figure. If real Gross Domestic Product (GDP) is $2 trillion, then
A) the level of total planned expenditures is less than real GDP.
B) the level of total planned expenditures equals real GDP.
C) the level of total planned expenditures is greater than real GDP.
D) the level of total planned expenditures equals zero.

Accepted Answer

The answer of 
-Refer to the above figure. If real...

Question 3

In a closed economy, equilibrium real Gross Domestic Product (GDP) occurs where
A) the C + I + G line crosses the 45-degree line.
B) planned expenditures exceed national income.
C) saving exceeds planned investment.
D) all of these.

Accepted Answer

In a closed economy, equilibrium real GDP occurs where the C + I + G line intersects the 45-degree line because this is the point where aggregate expenditures (C + I + G) equal the total output (real GDP) produced in the economy. At this point, there is no unplanned inventory accumulation or depletion, which indicates that the economy is in equilibrium. Thus, option A is the correct answer. Options B and C do not describe a state of equilibrium in a closed economy.

Question 4

When real planned saving is greater than real planned investment spending,
A) the interest rate will increase.
B) the interest rate will decrease.
C) real GDP will increase.
D) real GDP will decrease.

Accepted Answer

The answer of When real planned saving is greater than...

Question 5

Consider a closed economy without a government and without international trade. What will be true when this economy is in equilibrium?
A) Total planned real investment spending will exceed total planned real expenditures.
B) Planned real investment spending will exceed real planned saving.
C) Planned real consumption spending equals real GDP.
D) Planned real consumption spending plus planned real investment spending equals real GDP.

Accepted Answer

In a closed economy without a government and international trade, the only components of aggregate expenditure are consumption (C) and investment (I). In equilibrium, the total planned real consumption spending and the total planned real investment spending must equal the real GDP, as there is no leakage or injection in the economy. Therefore, choice D is correct. The other choices are not true, as total planned real investment spending cannot exceed total planned real expenditures (choice A) and planned real investment spending cannot be greater than planned real saving (choice B) as there are no leakages. Finally, choice C makes no sense in such an economy as the notion of planned real consumption spending is not well defined.

Question 6

When real Gross Domestic Product (GDP) exceeds total planned real expenditures,
A) there will be unplanned decreases in inventories.
B) the circular flow will increase.
C) a lower level of equilibrium real Gross Domestic Product (GDP) will result.
D) a higher level of equilibrium real Gross Domestic Product (GDP) will prevail.

Accepted Answer

The answer of When real Gross Domestic Product (GDP) exceeds...

Question 7

-Refer to the above figure. The equilibrium level of real Gross Domestic Product (GDP) is
A) $6 trillion.
B) $7 trillion.
C) $12 trillion.
D) $20 trillion.

Accepted Answer

The equilibrium level of real GDP is where the aggregate demand curve intersects the aggregate supply curve, which, based on the information provided, occurs at $12 trillion.

Question 8

In the simple Keynesian model, why does actual investment spending have to equal saving in the absence of the government and foreign sectors? Is this true only for the equilibrium? Explain.

Accepted Answer

The answer of In the simple Keynesian model, why does...

Question 9

Suppose equilibrium for an economy occurs when C + I + G + X = $14 trillion. If the real Gross Domestic Product (GDP) is $13 trillion, then unplanned inventories are
A) increasing, and real Gross Domestic Product (GDP) will expand.
B) increasing, and real Gross Domestic Product (GDP) will contract.
C) decreasing, and real Gross Domestic Product (GDP) will expand.
D) decreasing, and real Gross Domestic Product (GDP) will contract.

Accepted Answer

The answer of Suppose equilibrium for an economy occurs when...

Question 10

Real consumption is a function of real disposable income, but the simple Keynesian model uses real GDP instead of real disposable income. This is appropriate since
A) real disposable income tends to move proportionately with real GDP.
B) real disposable income is a fixed percentage of real GDP.
C) real GDP is a fixed percentage of real disposable income.
D) we cannot measure either exactly and the purpose of the exercise is theoretical only.

Accepted Answer

Real disposable income and real GDP tend to move in proportion to each other, meaning that changes in real GDP generally result in changes in real disposable income. Therefore, using real GDP as a proxy for real consumption is an appropriate simplification in the Keynesian model.

Question 11

-In the above diagram, what happens if the real GDP is $3 trillion? $5 trillion? $7 trillion? What is the equilibrium level of real GDP? Why?

Accepted Answer

The answer of 
-In the above diagram, what happens if...

Question 12

Suppose autonomous consumption is $1 trillion, investment spending is $1.5 trillion, and the marginal propensity to consume is 0.75. Show the graph for the C + I curve. What is the equilibrium level of real GDP? Explain its meaning.

Accepted Answer

The answer of Suppose autonomous consumption is $1 trillion, investment...

Question 13

Government purchases
A) are determined by the public.
B) are determined by the political process.
C) are influenced by interest rates.
D) are determined by suppliers.

Accepted Answer

Government purchases are determined by the political process, as they are decisions made by elected officials and government agencies. These decisions are influenced by various factors, such as public demand, economic conditions, and political considerations. While interest rates may have an impact on government spending, they are not the primary determinant. Suppliers may have some influence on government purchases through the bidding process, but they do not ultimately make the decisions.

Question 14

-The above figure shows a consumption function and a 45-degree line. Real consumption is a function of disposable income. Why is real GDP used here instead? What is measured along the vertical axis? What is measured by point B? Explain the significance of point A.

Accepted Answer

The answer of 
-The above figure shows a consumption function...

Question 15

What is the result when real planned saving exceeds real planned investment spending?
A) The economy is in equilibrium.
B) There is unplanned accumulation of business inventories.
C) There is unplanned depletion of business inventories.
D) Employment expands.

Accepted Answer

When real planned saving exceeds real planned investment spending, it means that households are saving more than businesses are investing. This results in businesses accumulating inventories they did not plan on having, leading to unplanned accumulation of business inventories.

Question 16

-Refer to the above figure. If real Gross Domestic Product (GDP) is $6 trillion, then unplanned business inventories will
A) rise.
B) be zero.
C) fall.
D) be equal to planned inventories.

Accepted Answer

The answer of 
-Refer to the above figure. If real...

Question 17

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),
A) real GDP will rise.
B) real GDP remains unchanged.
C) real GDP will either fall or remain unchanged, depending on the MPC.
D) unplanned inventories will increase and real GDP will fall.

Accepted Answer

If total planned real expenditures are less than real GDP, it means that goods and services are not being consumed as much as they are being produced. This leads to an increase in unplanned inventories as businesses are not able to sell all their output, resulting in a decrease in real GDP.

Question 18

-In the above figure, point E represents the level of real GDP at which planned saving equals planned investment. At point C,
A) unplanned inventories increase.
B) changes in inventories cannot be determined.
C) unused industrial capacity exists in the economy.
D) unplanned inventories decrease.

Accepted Answer

At point C, the economy is producing at a level below where planned saving equals planned investment (point E). This means that actual investment is less than what businesses anticipated, leading to an accumulation of unplanned inventories as goods produced are not sold.

Question 19

Suppose the economy is at an equilibrium when C + I + G + X = $12 trillion. If the economy is currently at a real national income level of $14 trillion, then total planned real expenditures
A) exceed real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will increase.
B) are less than real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will decline.
C) are equal to real Gross Domestic Product (GDP), and there will be no change in real Gross Domestic Product (GDP).
D) are less than real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will increase.

Accepted Answer

Total planned real expenditures (C + I + G + X) being less than real GDP ($14 trillion) implies an excess supply of goods and services. This means that firms will have unsold inventory and will need to reduce production, which will result in a decline in real GDP.

Question 20

If real Gross Domestic Product (GDP) is at an equilibrium level in a closed economy,
A) C + I + G = real GDP.
B) saving will be less than planned investment.
C) unplanned inventory accumulation will equal planned inventory accumulation.
D) C + T - G = real GDP.

Accepted Answer

In an equilibrium level, real GDP is equal to the sum of consumption (C), investment (I), and government spending (G). This is also known as the expenditure approach to calculating GDP. Option B is not necessarily true as saving could be equal to planned investment in an equilibrium level. Option C does not relate to the equilibrium level of GDP. Option D is incorrect as it includes taxes (T) which are not required to calculate equilibrium GDP in a closed economy.

Quiz 12: Consumption, Real GDP, and the Multiplier

A higher level of real Gross Domestic Product (GDP) will result if

-Refer to the above figure. If real Gross Domestic Product (GDP) is $2 trillion, then

In a closed economy, equilibrium real Gross Domestic Product (GDP) occurs where

When real planned saving is greater than real planned investment spending,

Consider a closed economy without a government and without international trade. What will be true when this economy is in equilibrium?

When real Gross Domestic Product (GDP) exceeds total planned real expenditures,

-Refer to the above figure. The equilibrium level of real Gross Domestic Product (GDP) is

In the simple Keynesian model, why does actual investment spending have to equal saving in the absence of the government and foreign sectors? Is this true only for the equilibrium? Explain.

Suppose equilibrium for an economy occurs when C + I + G + X = $14 trillion. If the real Gross Domestic Product (GDP) is $13 trillion, then unplanned inventories are

Real consumption is a function of real disposable income, but the simple Keynesian model uses real GDP instead of real disposable income. This is appropriate since

-In the above diagram, what happens if the real GDP is $3 trillion? $5 trillion? $7 trillion? What is the equilibrium level of real GDP? Why?

Suppose autonomous consumption is $1 trillion, investment spending is $1.5 trillion, and the marginal propensity to consume is 0.75. Show the graph for the C + I curve. What is the equilibrium level of real GDP? Explain its meaning.

Government purchases

-The above figure shows a consumption function and a 45-degree line. Real consumption is a function of disposable income. Why is real GDP used here instead? What is measured along the vertical axis? What is measured by point B? Explain the significance of point A.

What is the result when real planned saving exceeds real planned investment spending?

-Refer to the above figure. If real Gross Domestic Product (GDP) is $6 trillion, then unplanned business inventories will

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP) ,

-In the above figure, point E represents the level of real GDP at which planned saving equals planned investment. At point C,

Suppose the economy is at an equilibrium when C + I + G + X = $12 trillion. If the economy is currently at a real national income level of $14 trillion, then total planned real expenditures

If real Gross Domestic Product (GDP) is at an equilibrium level in a closed economy,