Question 1

The investment function intersects the saving schedule at an interest rate of 8 percent and a level of investment of $1.5 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then

Accepted Answer

The equilibrium level of real GDP is found by adding the level of investment ($1.5 trillion) to the point where the consumption curve intersects the 45-degree line ($3 trillion), totaling $4.5 trillion. This is because the 45-degree line represents points where planned spending equals real GDP, and the equilibrium is where planned investment plus consumption equals GDP.

Question 2

-In the above figure, what is the equilibrium level of real consumption spending?

Accepted Answer

The equilibrium level of real consumption spending is where the consumption function intersects the 45-degree line, indicating that planned spending equals actual spending.

Question 3

Using real GDP on the horizontal axis instead of real disposable income implies that a marginal propensity to consume 0.8 generates for every additional $100 of real GDP

Accepted Answer

The answer of Using real GDP on the horizontal axis...

Question 4

-Refer to the above figure. At real GDP of $3 trillion, actual investment equals

Accepted Answer

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

Question 5

The 45-degree reference line indicates all points at which

Accepted Answer

The 45-degree line represents points where planned real consumption expenditures equal real GDP, indicating that all income is spent.

Question 6

For a closed economy with no government, we know that at every level of GDP actual investment equals

Accepted Answer

The answer of For a closed economy with no government,...

Question 7

In the Keynesian model, whenever planned saving is more than planned investment

Accepted Answer

Whenever planned saving is more than planned investment, firms will have more unsold goods than expected, leading to unplanned inventory accumulation. This will cause firms to decrease output and employment, leading to a decrease in real GDP. To reduce the excess inventory, firms may also lower prices, ultimately leading to a decrease in the interest rate.

Question 8

Ignoring the government and foreign sectors, if planned investment spending is $50 billion, planned saving is $80 billion, and real Gross Domestic Product (GDP) is $130 billion, then unplanned inventories will

Accepted Answer

Planned investment spending is less than planned saving, which means there is a savings excess of $30 billion. This excess will lead to an increase in unplanned inventories of $30 billion, as producers will accumulate more inventory than planned due to the lack of demand. This will be reflected in an increase in GDP, as the value of these inventories is included in the calculation of GDP.

Question 9

-Refer to the above figure. If real GDP is $4 trillion, then

Accepted Answer

If real GDP is $4 trillion and consumption is lower than expected, businesses will find that they have more inventory than planned, leading to an increase in unplanned inventories.

Question 10

Investment is

Accepted Answer

Investment is considered autonomous with respect to real GDP, meaning it does not directly depend on the current level of real GDP but is influenced by other factors such as expectations of future profitability, interest rates, and technological advances.

Question 11

A permanent increase in autonomous investment causes

Accepted Answer

Autonomous investment is investment spending that is not influenced by changes in income or the interest rate. Therefore, a permanent increase in autonomous investment will shift the aggregate demand curve to the right, leading to an increase in real GDP. However, because the economy is not operating at full capacity, the increase in real GDP will be more than proportional to the increase in autonomous investment due to the multiplier effect.

Question 12

-In the above figure, what is autonomous consumption?

Accepted Answer

Autonomous consumption is the level of consumption when income is zero, represented by the intercept of the consumption function on the consumption axis. In this case, it is $1.0 trillion.

Question 13

-Refer to the above figure. Which variable is autonomous with respect to real GDP?

Accepted Answer

Real investment spending is considered autonomous with respect to real GDP because it is determined by factors other than the current level of real GDP, such as interest rates, business expectations, and technology, making it independent of the current income level.

Question 14

Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $100 billion at the current level of real national income of $20 trillion. From this information, we know that

Accepted Answer

An unplanned decrease in inventories indicates that actual investment is less than planned investment, meaning planned investment exceeds planned saving by $100 billion.

Question 15

Along the 45-degree reference line

Accepted Answer

Along the 45-degree reference line, total planned real expenditures are equal to real GDP. This is because the 45-degree line represents the points where actual output (real GDP) equals planned expenditures.

Question 16

In the Keynesian model, whenever planned investment is less than planned saving

Accepted Answer

When planned investment is less than planned saving, it indicates that not all savings are being used for investment. This leads to an accumulation of unsold goods, or an unplanned inventory increase. According to the Keynesian model, this situation typically results in a decrease in production and thus a decrease in real GDP, as businesses adjust to the excess inventory by reducing output.

Question 17

Supposed actual investment is greater than planned investment at the current level of output in a given year. Given this information, we know that

Accepted Answer

If actual investment is greater than planned investment at the current level of output, it means that firms have invested more than they originally intended to. This implies that their stock of inventories must have increased, as they produce more than they are currently selling. Therefore, choice B is the correct answer, while choices A, C, and D do not necessarily follow from this information.

Question 18

In the Keynesian model, whenever planned saving exceeds planned investment

Accepted Answer

In the Keynesian model, when planned saving exceeds planned investment, it means that households, in general, are saving more than businesses are investing. This leads to a decrease in aggregate demand, which causes firms to reduce their production levels leading to unplanned or unintended inventory accumulation. This is because sales are lower than expected, causing businesses to have more goods on hand than they had planned.

Question 19

In the Keynesian model, whenever planned investment is greater than planned saving

Accepted Answer

Whenever planned investment is greater than planned saving, there will be an excess demand for goods and services. Firms, anticipating this, will increase production and create unplanned inventory accumulation. However, production cannot be sustained at this level without increasing investment or cutting back on production. Eventually, the unplanned inventory buildup will lead to a decrease in planned investment and a decrease in real GDP. However, in the short run, GDP may increase as firms increase production to meet the excess demand.

Question 20

When graphing the consumption function, we include a 45-degree reference line. What is TRUE at the points at which the consumption function crosses this line?

Accepted Answer

The 45-degree reference line on a consumption function graph represents where consumption equals income. At the points where the consumption function crosses this 45-degree line, planned real saving is zero because all income is being consumed, leaving no income for saving.

Quiz 12: Consumption, Real GDP, and the Multiplier