Question 1

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, planned expenditures (PE) are determined by aggregate demand, while actual expenditures (AE) are determined by the level of output in the economy. If output (Y) is greater than planned expenditures, then unplanned inventory investment will occur as firms accumulate more inventory than they intended to. Conversely, if output is less than planned expenditures, inventory investment will be negative, as firms sell off more inventory than they intended to. Therefore, actual expenditures differ from planned expenditures by the amount of unplanned inventory investment.

Question 2

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:
A) income falls.
B) planned expenditure falls.
C) unplanned inventory investment is negative.
D) prices rise.

Accepted Answer

In the Keynesian cross analysis, when planned expenditure exceeds income, it leads to unplanned inventory depletion (negative unplanned inventory investment) because firms sell more goods than anticipated, reducing their inventories unexpectedly.

Question 3

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 4

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. This is reflected in the IS curve representing equilibrium in the goods market and the LM curve representing equilibrium in the money market. Together, they determine the short-run equilibrium level of income and interest rate.

Answer: C 
 The IS-LM model also explains the determination of investment and saving, or what shifts the liquidity preference schedule. This is reflected in the LM curve, which shows the equilibrium level of real money balances for a given interest rate. The liquidity preference schedule shifts when there is a change in income or when there is a change in expectations about future interest rates or inflation.

Question 5

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

Question 6

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 an excess supply of goods, signalling that demand has not met expectations. As a result, firms may respond by reducing production and laying off workers to align output with demand and avoid a buildup of inventory.

Question 7

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:
A) right with a slope less than one.
B) right with a slope greater than one.
C) left with a slope less than one.
D) left with a slope greater than one.

Accepted Answer

Planned expenditure typically increases with an increase in income (represented by Y on the horizontal axis), indicating a positive relationship. The slope is less than one because the marginal propensity to consume (the slope of the planned expenditure line) is between 0 and 1, meaning people spend a fraction of additional income rather than the entire increase.

Question 8

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 shows the equality of planned expenditure and income in the short run, where aggregate demand is determined by the level of planned expenditure and assumes that prices remain fixed in the short run. It does not determine equilibrium in the long run as it assumes that prices are fixed and does not consider adjustments in the price level.

Question 9

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:
A) consumption function.
B) interest rate.
C) price level.
D) nominal money supply.

Accepted Answer

The interest rate is the variable that links the market for goods and services and the market for real money balances in the IS-LM model. The IS curve represents the equilibrium in the goods and services market, while the LM curve represents the equilibrium in the market for real money balances. The interest rate is the price for holding money and it affects both markets. When the interest rate decreases, investment and consumption increase, which shifts the IS curve to the right. At the same time, a decrease in the interest rate lowers the opportunity cost of holding money, leading to an increase in demand for real money balances and shifting the LM curve to the right. Thus, the interest rate is the key variable that links the two markets in the IS-LM model.

Question 10

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 represented by the equation AE=C+I+G+(X-M), where C represents consumption, I represents planned investment, G represents government spending, and (X-M) represents net exports. The sum of these components equals actual expenditures, which is also equal to GDP in equilibrium.

Question 11

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.
A) right; decumulation
B) right; accumulation
C) left; decumulation
D) left; accumulation

Accepted Answer

When income exceeds expenditure, it means that not all goods produced are being sold, leading to an accumulation of unsold goods or inventory. This situation places the economy to the right of the equilibrium income on the graph.

Question 12

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

Accepted Answer

The slope of the planned expenditure line is typically between zero and one, as income increases, people tend to spend a higher proportion of that income but not all of it. If the slope is zero, it means that there is no relationship between income and planned expenditure, while a slope greater than one means that people are spending more than they earn, which is not sustainable in the long run.

Question 13

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 14

Use the following to answer questions : Exhibit: Keynesian Cross -(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

If firms are producing at level Y1, which is below the equilibrium level of output, inventories will fall because the actual production is less than the aggregate demand. This will induce firms to increase production to meet the higher demand.

Question 15

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 16

In the IS-LM model, which two variables are influenced by the interest rate?
A) supply of nominal money balances and demand for real balances
B) demand for real money balances and government purchases
C) supply of nominal money balances and investment spending
D) demand for real money balances and investment spending

Accepted Answer

In the IS-LM model, the two variables that are influenced by the interest rate are the demand for real money balances and investment spending. As the interest rate rises, the demand for real money balances decreases, as individuals and firms are willing to hold less money when the opportunity cost of holding it (in terms of the foregone interest they could earn by investing it) is higher. At the same time, higher interest rates tend to reduce investment spending, as the cost of borrowing increases and firms are less likely to invest in new projects or expand their operations.

Question 17

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 is because in equilibrium, there are no unplanned changes in inventories, which means that actual expenditure (output) equals planned expenditure (aggregate demand).

Question 18

Use the following to answer questions : Exhibit: Keynesian Cross -(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 Use the following to answer questions :
Exhibit:...

Question 19

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

Accepted Answer

According to Keynes, low income and high unemployment during economic downturns are caused by insufficient aggregate demand, meaning that not enough people are willing and able to spend enough money to keep the economy running. This can be addressed through government intervention, such as increasing public spending or lowering interest rates, to stimulate demand and promote economic growth.

Question 20

For the purposes of the Keynesian cross, planned expenditure consists of:
A) planned investment.
B) planned government spending.
C) planned investment and government spending.
D) planned investment, government spending, and consumption expenditures.

Accepted Answer

The Keynesian cross model considers the equilibrium level of GDP at the point where planned expenditure equals actual output. Therefore, planned expenditure in this model consists of all components of aggregate demand, including planned investment, government spending, and consumption expenditures. Therefore, option D is the correct answer.

Quiz 11: Aggregate Demand I: Building the Is-Lm Model

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

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

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

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

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

When firms experience unplanned inventory accumulation, they typically:

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

The Keynesian cross shows:

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

In the Keynesian-cross model, actual expenditures equal:

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the of equilibrium income and there is unplanned inventory .

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

The IS-LM model takes ______ as exogenous.

Use the following to answer questions : Exhibit: Keynesian Cross -(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y₁, then inventories will , inducing firms to production.

Planned expenditure is a function of:

In the IS-LM model, which two variables are influenced by the interest rate?

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

Use the following to answer questions : Exhibit: Keynesian Cross -(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are:

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

For the purposes of the Keynesian cross, planned expenditure consists of: