Question 1

For an economy starting at potential output, a decrease in planned investment in the short run results in a(n) :

Accepted Answer

A)  expansionary output gap.
B)  recessionary output gap.
C)  increase in potential output.
D)  decrease in potential output.E) A) and C)
F) B) and C)

Question 2

When housing prices decrease, household wealth _____, and consumption _____.

Accepted Answer

A)  increases; increases
B)  increases; decreases
C)  decreases; decreases
D)  decreases; increasesE) B) and C)
F) A) and B)

Question 3

For an economy starting at potential output, an increase in planned investment in the short run results in a(n) :

Accepted Answer

A)  expansionary output gap.
B)  recessionary output gap.
C)  increase in potential output.
D)  decrease in potential output.E) B) and D)
F) A) and B)

Question 4

In the basic Keynesian model, a decrease in transfer payments:

Accepted Answer

A)  reduces short-run equilibrium output.
B)  increases short-run equilibrium output.
C)  reduces potential output.
D)  increases potential output.E) None of the above
F) A) and D)

Question 5

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be:

Accepted Answer

A)  increased by $1 billion.
B)  decreased by $1 billion.
C)  increased by $1.33 billion.
D)  decreased by $1.33 billion.E) A) and B)
F) A) and C)

Question 6

If planned aggregate expenditure (PAE)  in an economy equals 2,000 + 0.8Y and potential output (Y*)  equals 11,000, then this economy has:

Accepted Answer

A)  an expansionary gap.
B)  a recessionary gap.
C)  no output gap.
D)  no autonomous expenditure.E) None of the above
F) C) and D)

Question 7

If planned aggregate expenditure (PAE)  in an economy equals 3,000 + 0.75Y and potential output (Y*)  equals 12,000, then this economy has:

Accepted Answer

A)  an expansionary gap.
B)  a recessionary gap.
C)  no output gap.
D)  no autonomous expenditure.E) A) and D)
F) B) and D)

Question 8

The two parts of the Keynesian consumption function are consumption that depends on ______ and consumption that depends on _____.

Accepted Answer

A)  disposable income; factors other than disposable income
B)  planned spending; unplanned spending
C)  real income; nominal income
D)  money; wealthE) B) and D)
F) B) and C)

Question 9

Refer to the figure below.  Based on the figure, and starting from an initial short-run equilibrium where output equals 20,000, if autonomous consumption spending decreases by 1,000, then the new short-run equilibrium output (Y)  is equal to:

Accepted Answer

A)  24,000.
B)  16,000.
C)  14,000.
D)  22,000.E) None of the above
F) A) and B)

Question 10

If the marginal propensity to consume is 0.75, then a $100 increase in disposable income leads to a ______ increase in consumption.

Accepted Answer

A)  $13.33
B)  $25
C)  $75
D)  $133E) A) and D)
F) B) and C)

Question 11

The smaller the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.

Accepted Answer

A)  larger; larger
B)  larger; smaller
C)  smaller; smaller
D)  smaller; largerE) A) and D)
F) B) and C)

Question 12

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be:

Accepted Answer

A)  increased by $1 billion.
B)  decreased by $1 billion.
C)  increased by $1.33 billion.
D)  decreased by $1.33 billion.E) None of the above
F) A) and B)

Question 13

In the basic Keynesian model, an increase in transfer payments:

Accepted Answer

A)  reduces short-run equilibrium output.
B)  increases short-run equilibrium output.
C)  reduces potential output.
D)  increases potential output.E) A) and B)
F) B) and C)

Question 14

A recession in Japan ______ the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n)  ______ output gap in the East Asian countries.

Accepted Answer

A)  reduces; expansionary
B)  increases; expansionary
C)  reduces; recessionary
D)  increases; recessionaryE) A) and D)
F) A) and B)

Question 15

If short-run equilibrium output equals 20,000 and potential output (Y*)  equals 25,000, then this economy has a(n)  ______ gap that can be closed by _________.

Accepted Answer

A)  recessionary; increasing taxes
B)  expansionary; increasing transfer payments
C)  expansionary; increasing government purchases
D)  recessionary; increasing government purchasesE) C) and D)
F) A) and D)

Question 16

Firms do not change prices frequently because:

Accepted Answer

A)  there are legal prohibitions against doing so.
B)  it is easier to change the quantity of capital used in production.
C)  it is costly to do so.
D)  customers will refuse to patronize firms that change prices frequently.E) All of the above
F) B) and C)

Question 17

One drawback in using fiscal policy as a stabilization tool is that fiscal policy:

Accepted Answer

A)  affects potential output as well as planned aggregate expenditure.
B)  effects are frequently offset by automatic stabilizers.
C)  is too flexible to use to close output gaps.
D)  is not useful for dealing with prolonged episodes of recession.E) A) and B)
F) A) and C)

Question 18

Unplanned inventory investment equals zero when:

Accepted Answer

A)  planned investment is greater than actual investment.
B)  planned investment is less than actual investment.
C)  planned investment equals actual investment.
D)  expected sales are greater than actual sales.E) A) and B)
F) None of the above

Question 19

Planned aggregate expenditure is total:

Accepted Answer

A)  value added in the economy.
B)  planned spending on final goods and services.
C)  income of households, businesses, governments, and foreigners.
D)  revenue from the sale of goods and services.E) A) and B)
F) A) and C)

Question 20

The four components of planned aggregate expenditure are:

Accepted Answer

A)  spending on domestic goods, domestic services, foreign goods, and foreign services.
B)  spending on durable goods, inventory investment, government debt, and net exports.
C)  consumption, planned investment, government transfers, and net interest.
D)  consumption, planned investment, government purchases, and net exportsE) A) and B)
F) None of the above

Exam 11: Spending, Output, and Fiscal Policy

The four components of planned aggregate expenditure are:

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If the marginal propensity to consume is 0.75, then a $100 increase in disposable income leads to a ______ increase in consumption.

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The smaller the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.

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In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be:

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For an economy starting at potential output, an increase in planned investment in the short run results in a(n) :

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In the basic Keynesian model, an increase in transfer payments:

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The two parts of the Keynesian consumption function are consumption that depends on ______ and consumption that depends on _____.

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In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be:

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Planned aggregate expenditure is total:

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If planned aggregate expenditure (PAE) in an economy equals 3,000 + 0.75Y and potential output (Y*) equals 12,000, then this economy has:

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For an economy starting at potential output, a decrease in planned investment in the short run results in a(n) :

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If planned aggregate expenditure (PAE) in an economy equals 2,000 + 0.8Y and potential output (Y*) equals 11,000, then this economy has:

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If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ______ gap that can be closed by _________.

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Unplanned inventory investment equals zero when:

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When housing prices decrease, household wealth _____, and consumption _____.

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Firms do not change prices frequently because:

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A recession in Japan ______ the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) ______ output gap in the East Asian countries.

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In the basic Keynesian model, a decrease in transfer payments:

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Refer to the figure below. Based on the figure, and starting from an initial short-run equilibrium where output equals 20,000, if autonomous consumption spending decreases by 1,000, then the new short-run equilibrium output (Y) is equal to:

Correct AnswerverifiedShow Answer

One drawback in using fiscal policy as a stabilization tool is that fiscal policy:

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The smaller the mpc, the the income-expenditure multiplier and the the effect of a change in autonomous spending on short-run equilibrium output.

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The two parts of the Keynesian consumption function are consumption that depends on __ and consumption that depends on _.

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If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) gap that can be closed by ___.

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When housing prices decrease, household wealth _, and consumption _.

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A recession in Japan the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) output gap in the East Asian countries.

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