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Macro Economics Chapter 11

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Bank panic of 1907.

Great Depression.

Spectacular economic growth during World War II.

Economic expansion of the 1920s.

Great Depression.
The aggregate expenditures model is built upon which of the following assumptions?

Prices are fixed.

The economy is at full employment.

Prices are fully flexible.

Government spending policy has no ability to affect the level of output.

Prices are fixed.
A private closed economy includes:

households, businesses, and government, but not international trade.

households, businesses, and international trade, but not government.

households and businesses, but not government or international trade.

households only.

households and businesses, but not government or international trade.
In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________.

declined by 27 percent; rose to 25 percent

increased by 21 percent; fell to 2 percent

declined by 21 percent; rose to 27 percent

declined by 40 percent; rose to 50 percent

declined by 27 percent; rose to 25 percent
In the aggregate expenditures model, it is assumed that investment:

automatically changes in response to changes in real GDP.

changes by less in percentage terms than changes in real GDP.

does not respond to changes in interest rates.

does not change when real GDP changes.

does not change when real GDP changes.
All else equal, a large decline in the real interest rate will shift the:

investment demand curve leftward.

investment demand curve rightward.

investment schedule upward.

investment schedule downward.

investment schedule upward.
The level of aggregate expenditures in the private closed economy is determined by the:

expenditures of consumers and businesses.

intersection of the saving schedule and the 45-degree line.

equality of the MPC and MPS.

intersection of the saving and consumption schedules.

expenditures of consumers and businesses.
In a private closed economy, when aggregate expenditures equal GDP:

consumption equals investment.

consumption equals aggregate expenditures.

planned investment equals saving.

disposable income equals consumption minus saving.

planned investment equals saving.
In a private closed economy, when aggregate expenditures exceed GDP:

GDP will decline.

business inventories will rise.

saving will decline.

business inventories will fall.

business inventories will fall.
If an unintended increase in business inventories occurs at some level of GDP, then GDP:

entails a rate of aggregate expenditures in excess of the rate of aggregate production.

may be either above or below the equilibrium output.

is too low for equilibrium.

is too high for equilibrium.

is too high for equilibrium.
A private closed economy will expand when:

actual GDP is less than potential GDP.

unplanned decreases in inventories occur.

aggregate expenditures are less than GDP.

unplanned increases in inventories occur.

unplanned decreases in inventories occur.
If aggregate expenditures exceed GDP in a private closed economy:

leakages will exceed injections.

planned investment will exceed saving.

unplanned investment in inventories will occur.

saving will exceed planned investment.

planned investment will exceed saving.
Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when:
(Pic13)

C + Ig cuts the 45-degree line.

GDP is $180 billion.

GDP is $60 billion.

GDP is also zero.

GDP is $60 billion.
Actual investment is $62 billion at an equilibrium output level of $620 billion in a private closed economy. The average propensity to save at this level of output is:

0.10.

10.0.

0.62.

0.84.

0.10.
Refer to the diagram for a private closed economy. At the $300 level of GDP:
(Pic15)

aggregate expenditures and GDP are equal.

consumption is $200 and planned investment is $50.

saving exceeds planned investment.

consumption plus saving is $400.

aggregate expenditures and GDP are equal.
In the aggregate expenditures model, technological progress will shift the investment schedule:

downward and increase aggregate expenditures.

downward and decrease aggregate expenditures.

upward and increase aggregate expenditures.

upward and decrease aggregate expenditures.

upward and increase aggregate expenditures.
At equilibrium real GDP in a private closed economy:

the MPC must equal the APC.

the slope of the aggregate expenditures schedule equals the MPS.

aggregate expenditures and real GDP are equal.

planned saving and consumption are equal.

aggregate expenditures and real GDP are equal.
Which of the following statements is correct for a private closed economy?

Saving equals planned investment only at the equilibrium level of GDP.

All levels of GDP where planned investment exceeds saving will be too high for equilibrium.

Planned and actual investment are identical at all possible levels of GDP.

Saving equals actual investment only at the equilibrium level of GDP

Saving equals planned investment only at the equilibrium level of GDP.
At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be:

$138 billion.

$126 billion.

$38 billion.

$180 billion.

$38 billion.
Planned investment plus unintended increases in inventories equals:

actual investment.

consumption.

consumption minus saving.

unintended saving.

actual investment.
Saving is always equal to:

planned investment less unintended increases in inventories.

actual investment.

planned investment.

unintended changes in inventories.

actual investment.
Actual investment equals saving:

at all levels of GDP.

at all below-equilibrium levels of GDP.

at all above-equilibrium levels of GDP.

only at the equilibrium GDP.

at all levels of GDP.
Unintended changes in inventories:

cause the economy to move away from the equilibrium GDP.

are treated as components of consumption.

bring actual investment and saving into equality only at the equilibrium level of GDP.

bring actual investment and saving into equality at all levels of GDP.

bring actual investment and saving into equality at all levels of GDP.
At the equilibrium GDP for a private open economy:

net exports may be either positive or negative.

imports will always exceed exports.

exports will always exceed imports.

exports and imports will be equal.

net exports may be either positive or negative.
Other things equal, an increase in an economy’s exports will:

lower the marginal propensity to import.

have no effect on domestic GDP because imports will change by an offsetting amount.

decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP.

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.
If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to:

reduce the rate of domestic inflation.

increase efficiency in the world economy.

increase domestic output and employment.

reduce domestic output and employment.

increase domestic output and employment.
If the equilibrium level of GDP in a private open economy is $1,000 billion and consumption is $700 billion at that level of GDP, then:

saving must be $300 billion.

net exports must be $300 billion.

S + C must equal $300 billion.

Ig + Xn must equal $300 billion.

Ig + Xn must equal $300 billion.
An exchange rate:

is the ratio of the dollar volume of a nation’s exports to the dollar volume of its imports.

measures the interest rate ratios of any two nations.

is the amount that one nation must export to obtain $1 worth of imports.

is the price that the currencies of any two nations exchange for one another.

is the price that the currencies of any two nations exchange for one another.
If the United States wants to increase its net exports in the short term, it might take steps to:

increase its GDP.

reduce existing tariffs and import quotas.

appreciate the dollar compared to foreign currencies.

depreciate the dollar compared to foreign currencies.

depreciate the dollar compared to foreign currencies.
Other things equal, a serious recession in the economies of U.S. trading partners will:

have no perceptible impact on the U.S. economy.

cause inflation in the U.S. economy.

depress real output and employment in the U.S. economy.

stimulate real output and employment in the U.S. economy.

depress real output and employment in the U.S. economy.
In a mixed open economy, the equilibrium GDP exists where:

Ca + Ig + Xn intersects the 45-degree line.

Ca + Ig = Sa + T + X.

Ca + Ig + Xn + G = GDP.

Ca + Ig + Xn = Sa + T.

Ca + Ig + Xn + G = GDP.
In a mixed open economy, the equilibrium GDP is determined at that point where:

Sa + M + T = Ig + X + G.

the 45-degree line and the saving schedule intersect.

Sa + X + G = Ig + T.

Sa + Ig + X = G + T.

Sa + M + T = Ig + X + G.
Suppose the economy’s multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to:

decrease by $50 billion.

decrease by $150 billion.

remain unchanged since spending on military goods is unproductive and usually wasteful.

decrease by $25 billion.

decrease by $50 billion.
Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by:

$100 billion.

$90 billion.

$40 billion.

$50 billion.

$40 billion.
Other things equal, the multiplier effect associated with a change in government spending is:

the same as that associated with a change in taxes.

equal to that associated with a change in investment or consumption.

less than that associated with a change in investment.

greater than that associated with a change in investment.

equal to that associated with a change in investment or consumption.
A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because:

government spending is more employment-intensive than is either consumption or investment spending.

government spending increases the money supply and a tax reduction does not.

a portion of a tax cut will be saved.

taxes vary directly with income.

a portion of a tax cut will be saved.
An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because:

the MPC is smaller in the private sector than it is in the public sector.

declines in government spending always tend to stimulate private investment.

disposable income will fall by some amount smaller than the tax increase.

some of the tax increase will be paid out of income that would otherwise have been saved.

some of the tax increase will be paid out of income that would otherwise have been saved.
If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause:

a rightward shift in the investment demand schedule.

an $8 billion downshift in the consumption schedule.

a $4 billion upshift in the consumption schedule.

a $12 billion downshift in the consumption schedule.

an $8 billion downshift in the consumption schedule.
Which of the following would increase GDP by the greatest amount?

A $20 billion reduction in taxes

$20 billion increases in both government spending and taxes

$20 billion decreases in both government spending and taxes

A $20 billion increase in government spending

A $20 billion increase in government spending
Which of the following would reduce GDP by the greatest amount?

A $20 billion increase in taxes.

$20 billion increases in both government spending and taxes.

$20 billion decreases in both government spending and taxes.

A $20 billion decrease in government spending.

A $20 billion decrease in government spending.
Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government purchases by $18 billion. On the basis of this information, we can say that the:

MPS in this economy is .4.

MPC in this economy is .4.

multiplier does not apply in this economy.

multiplier is 3.

MPS in this economy is .4.
In the aggregate expenditures model, a reduction in taxes may:

increase saving.

decrease real GDP.

increase unemployment.

reduce consumption.

increase saving.
In the aggregate expenditures model, an increase in government spending may:

decrease real GDP.

increase output and employment.

shift the aggregate expenditures schedule downward.

reduce the size of the inflationary gap.

increase output and employment.
A lump-sum tax means that:

the tax only applies to one time period.

the same amount of tax revenue is collected at each level of GDP.

tax revenues vary directly with GDP.

tax revenues vary inversely with GDP.

the same amount of tax revenue is collected at each level of GDP.
It is true that:

equal increases in government spending and taxes do not change the equilibrium GDP.

equal increases in government spending and taxes reduce the equilibrium GDP.

equal increases in government spending and taxes increase the equilibrium GDP.

taxes have a stronger effect upon equilibrium GDP than do government purchases.

equal increases in government spending and taxes increase the equilibrium GDP.
The recessionary expenditure gap associated with the recession of 2007-2009 resulted from:

the government’s attempt to control hyperinflation.

a major increase in personal and corporate taxes.

a rapid decline in investment spending.

a rapid increase in imports resulting from large tariff reductions.

a rapid decline in investment spending.
In an effort to stop the U.S. recession of 2007-2009, the federal government:

reduced taxes and increased government spending.

imposed large tariffs on many imported goods to protect domestic jobs.

raised interest rates to encourage greater business investment.

avoided Keynesian policies because of the threat of inflation.

reduced taxes and increased government spending.
(Last Word) Say’s law and classical macroeconomics were disputed by:

Adam Smith.

Jeremy Bentham.

John Stuart Mill.

John Maynard Keynes.

John Maynard Keynes.
(Last Word) Classical macroeconomics was dealt severe blows by:

the Great Depression and Keynes’s macroeconomic theory.

the Second World War and the writings of Milton Friedman.

Adam Smith and his idea of the invisible hand.

the strong recovery after the Second World War and Alvin Hansen’s stagnation thesis.

the Great Depression and Keynes’s macroeconomic theory.
(Last Word) In The General Theory of Employment, Interest, and Money:

Adam Smith stated his idea of the invisible hand.

Thorstein Veblen poked fun at the leisure class.

John Maynard Keynes attacked the classical economist’s contention that recession or depression will automatically cure itself.

J. B. Say developed “Say’s law.”

John Maynard Keynes attacked the classical economist’s contention that recession or depression will automatically cure itself.

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