Deck 25: Spending and Output in the Short Run

Question 1

If firms sell less output than expected, planned investment:

A)is greater than actual investment.
B)is less than actual investment.
C)equals actual investment.
D)equals zero.

Answer 1

is less than actual investment.

Question 2

Planned investment may differ from actual investment because of:

A)changes in government purchases and net exports.
B)the marginal propensity to consume.
C)unplanned changes in inventories.
D)fluctuations in preset prices.

Answer 2

unplanned changes in inventories.

Question 3

Firms do not change prices frequently because:

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.

Answer 3

it is costly to do so.

Question 4

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes:

A)prices to meet the demand.
B)production levels to meet the demand.
C)prices and production levels to meet demand.
D)prices, but holds production levels constant, to meet the demand.

Question 5

Menu costs are the costs of:

A)running a restaurant.
B)changing prices.
C)increasing aggregate demand.
D)changing production.

Question 6

The basic Keynesian model is built on the key assumption that:

A)menu costs are not significant.
B)firms meet the demand for their products at preset prices.
C)firms price their products so as to see a preset quantity of output.
D)prices are prevented from changing frequently by government regulations.

Question 7

The assumption that firms meet the demand for their products at preset prices is the key assumption upon which ________ is built.

A)the basic Keynesian model
B)Okun's Law
C)the supply and demand model
D)quantity equation for money

Question 8

When actual investment is less than planned investment:

A)firms have sold less output than expected.
B)firms have sold more output than expected.
C)the quantity of output sold is the amount the firm expected to sell.
D)the economy produces short-run equilibrium output.

Question 9

Planned aggregate expenditure is total:

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.

Question 10

If firms sell less than is expected, actual investment increases because ________, which is counted as investment.

A)the unsold goods are added to inventory
B)the government buys the unsold goods
C)the unsold goods are distributed to poor households
D)households buy the unsold goods are bargain prices

Question 11

All of the following would be included in planned aggregate expenditure EXCEPT:

A)spending on consumer durables.
B)planned changes in inventories.
C)sales of domestically produced goods to foreigners.
D)interest paid on the government debt.

Question 12

When actual investment is greater than planned investment:

A)firms have sold less output than expected.
B)firms have sold more output than expected.
C)the quantity of output sold is the amount the firm expected to sell.
D)the economy produces the short-run equilibrium output.

Question 13

Unplanned inventory investment equals zero when:

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.

Question 14

In the basic Keynesian model all of the following are true EXCEPT:

A)planned consumption always equals actual consumption.
B)planned investment always equals actual investment.
C)planned government spending always equals actual government spending.
D)planned net exports always equal actual net exports.

Question 15

Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop). This type of behavior is ________.

A)exactly the type of behavior that Keynes believed most firms exhibit
B)known as meeting demand
C)inconsistent with the key assumption upon which the basic Keynesian model is built
D)free from menu costs

Question 16

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year. The company purchases $300,000 worth of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals ________ and planned investment equals ________.

A)$250,000; $150,000
B)$300,000; $200,000
C)$550,000; $450,000
D)$650,000; $550,000

Question 17

All of the following would be included in planned aggregate expenditure EXCEPT:

A)purchases of services provided by government employees.
B)planned changes in inventories.
C)sales to foreigners of domestically-produced goods.
D)social security payments.

Question 18

The four components of planned aggregate expenditure are:

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 exports.

Question 19

The decision about whether to change prices frequently or infrequently is an application of the:

A)principle of comparative advantage.
B)scarcity principle.
C)principle of increasing opportunity cost.
D)cost-benefit principle.

Question 20

If firms sell more output than expected, planned investment:

A)is greater than actual investment.
B)is less than actual investment.
C)equals actual investment.
D)equals zero.

Question 21

As disposable income decreases, consumption:

A)increases.
B)decreases.
C)may either increase or decrease depending on the mpc.
D)may either increase or decrease depending on the wealth effect.

Question 22

When housing prices increase, household wealth ________, and consumption ________.

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Question 23

The vertical intercept of the consumption function equals ________ and the slope equals ________.

A)the mpc; autonomous consumption
B)autonomous consumption; the mpc
C)the unplanned component of consumption; the planned component of consumption
D)the planned component of consumption; the unplanned component of consumption

Question 24

In the Keynesian model, consumption depends on:

A)whether the government has a budget surplus or deficit.
B)potential output.
C)the natural rate of unemployment.
D)disposable income.

Question 25

Planned aggregate expenditure (PAE )equals:

A)C + I ᵖ + G + NX.
B)C ᵖ + I + G + NX.
C)C + I + G ᵖ + NX.
D)C + I + G + NX ᵖ.

Question 26

The consumption function is the relationship between consumption and:

A)planned aggregate expenditure.
B)total spending.
C)investment.
D)disposable income.

Question 27

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

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

Question 28

Historically speaking, a one-dollar decrease in household wealth will cause consumer spending to fall by:

A)$0.03 to $0.07.
B)$0.30 to $0.70.
C)$3.00 to $7.00.
D)$30.00 to $70.00.

Question 29

The tendency of changes in asset prices to affect spending on consumption goods is called the ________ effect.

A)income
B)substitution
C)wealth
D)multiplier

Question 30

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

A)$13.33
B)$25
C)$75
D)$133

Question 31

The largest component of planned aggregate expenditure is:

A)consumption.
B)investment.
C)government purchases.
D)exports.

Question 32

The marginal propensity to consume (mpc)is the:

A)amount by which disposable income increases when consumption increases by $1.
B)amount by which consumption increases when disposable income increases by $1.
C)percentage by which consumption increases when disposable income increases by 1 percent.
D)percentage by which disposable income increases when consumption increases by 1 percent.

Question 33

The slope of the consumption function:

A)is vertical.
B)is horizontal.
C)equals 1.
D)equals the marginal propensity to consume.

Question 34

C + I ᵖ + G + NX equals:

A)planned aggregate expenditure.
B)potential GDP.
C)the output gap.
D)the income-expenditure multiplier.

Question 35

As disposable income increases, consumption:

A)increases.
B)decreases.
C)may either increase or decrease depending on the wealth effect.
D)may either increase or decrease depending on the mpc.

Question 36

Data on after-tax income and consumption spending for the Adam Smith family are given below: $\begin{array}{|r|r|}\hline {\text { After-Tax Income }} & \text { Consumption Spending } \\\hline \$ 9,000 & \$ 18,100 \\\hline \$ 14,000 & \$ 22,600 \\\hline \$ 19,000 & \$ 27,100 \\\hline \$ 24,000 & \$ 31,600 \\\hline\end{array}$ Based on these data, the Adam Smith family has a marginal propensity to consume equal to: 

A)0.9.
B)0.8.
C)0.75.
D)0.6.

Question 37

Changes in autonomous consumption could be the result of:

A)changes in disposable income.
B)changes in inflation.
C)changes in the mpc.
D)changes in housing prices.

Question 38

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

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Question 39

If consumption increases by $9 when disposable income increases by $10, the marginal propensity to consume (mpc)equals:

A)0.1.
B)0.9.
C)1.0.
D)9.0.

Question 40

A decrease in stock prices alters the consumption function by:

A)increasing the slope.
B)decreasing the slope.
C)increasing the vertical intercept.
D)decreasing the vertical intercept.

Question 41

The portion of planned aggregate expenditure that is independent of output is called ________ expenditure.

A)potential
B)planned
C)actual
D)autonomous

Question 42

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Induced expenditure equals:

A)0.25Y.
B)320 + 0.25Y.
C)0.75Y.
D)290 + 0.75Y.

Question 43

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The slope of the expenditure line is:

A)0.20.
B)0.80.
C)0.90.
D)0.99.

Question 44

When prices are predetermined, the level of output that equals planned aggregate expenditure is called ________ output.

A)the natural rate of
B)potential
C)short-run equilibrium
D)induced

Question 45

Autonomous expenditure is the portion of planned aggregate expenditure that:

A)equals aggregate output.
B)equals planned spending.
C)equals induced expenditure.
D)is independent of output.

Question 46

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Planned aggregate expenditure equals:

A)990 + 0.20Y.
B)900 + 0.80Y.
C)940 + 0.80Y.
D)990 + 0.80Y.

Question 47

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals:

A)1,000.
B)1,160.
C)1,280.
D)1,440.

Question 48

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Autonomous expenditure equals:

A)990.
B)940.
C)900.
D)890.

Question 49

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Planned aggregate expenditure equals:

A)290 + 0.25Y.
B)320 + 0.25Y.
C)320 + 0.75Y.
D)290 + 0.75Y.

Question 50

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. The slope of the expenditure line is:

A)0.25.
B)0.75.
C)290.
D)320.

Question 51

When real output increases, planned aggregate expenditures increase because:

A)autonomous expenditures increase.
B)autonomous expenditures decrease.
C)induced expenditures increase.
D)induced expenditures decrease.

Question 52

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. The vertical intercept of the expenditure line is:

A)0.25.
B)0.75.
C)290.
D)320.

Question 53

When real output decreases, planned aggregate expenditures decrease because:

A)autonomous expenditures increase.
B)autonomous expenditures decrease.
C)induced expenditures increase.
D)induced expenditures decrease.

Question 54

The two parts of planned aggregate expenditure are ________ expenditures and ________ expenditures.

A)real; nominal
B)inflated; deflated
C)autonomous; induced
D)positive; normative

Question 55

Short-run equilibrium output is the level of output at which actual output:

A)equals potential output.
B)maximizes firm profits.
C)equals real GDP per capita.
D)equals planned aggregate expenditure.

Question 56

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Autonomous expenditure equals:

A)320.
B)320 + 0.25Y.
C)290.
D)290 + 0.75Y.

Question 57

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Induced expenditure equals:

A)0.20Y.
B)990 + 0.20Y.
C)0.80Y.
D)900 + 0.80Y.

Question 58

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The vertical intercept of the expenditure line is:

A)890.
B)900.
C)940.
D)990.

Question 59

Induced expenditure is the portion of planned aggregate expenditure that:

A)equals aggregate output.
B)equals planned spending.
C)equals autonomous expenditure.
D)depends on output.

Question 60

Data on output and planned aggregate expenditure in Macroland are given below.  
Based on these data, the short-run equilibrium level of output is:

A)2,000.
B)3,200.
C)4,100.
D)5,000.

Question 61

Refer to the accompanying figure. Based on the Keynesian cross diagram, if output equals 5,000, planned aggregate expenditure is ________ output, and firms will ________ production in response.

A)less than; decrease
B)greater than; decrease
C)equal to; not change
D)less than; increase

Question 62

Refer to the accompanying figure. Based on the Keynesian cross diagram, short-run equilibrium output equals:

A)3,000.
B)3,250.
C)4,000.
D)4,750.

Question 63

Refer to the accompanying figure. 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:

A)24,000.
B)16,000.
C)14,000.
D)22,000.

Question 64

In the basic Keynesian model, a decline in autonomous spending:

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

Question 65

Refer to the accompanying figure. Based on the Keynesian cross diagram, at short-run equilibrium output,

A)there is a recessionary gap.
B)there is an expansionary gap.
C)output equals potential output.
D)firms will be producing more than they can sell.

Question 66

Refer to the accompanying figure. Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will equal:

A)1,200.
B)400.
C)600.
D)800.

Question 67

In the short run, with predetermined prices, when output is less than planned aggregate expenditure:

A)potential output is greater than short run equilibrium output.
B)potential output is less than short run equilibrium output.
C)planned investment is less than actual investment.
D)planned investment is greater than actual investment.

Question 68

In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:

A)reduce production.
B)increase production.
C)increase planned aggregate expenditure.
D)decrease planned aggregate expenditure.

Question 69

In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ________ and the slope of the expenditure line equals ________.

A)induced expenditures; autonomous expenditures
B)autonomous expenditures; induced expenditures
C)planned spending; unplanned spending
D)autonomous expenditures; the mpc

Question 70

In the short run, with predetermined prices, when output is greater than planned aggregate expenditure, firms will:

A)reduce production.
B)increase production.
C)increase planned aggregate expenditure.
D)decrease planned aggregate expenditure.

Question 71

Refer to the accompanying figure. Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal:

A)1,200.
B)400.
C)600.
D)800.

Question 72

In the Keynesian cross diagram, the 45-degree line represents the short-run equilibrium condition that:

A)Y = PAE.
B)PAE = C + I ᵖ ⁺ ᴳ ⁺ ᴺˣ.
C)I ≠ I ᵖ.
D)Y* = Y.

Question 73

Refer to the accompanying figure. Based on the figure, when PAE = 200 + 0.5Y, short-run equilibrium output equals:

A)1,200.
B)400.
C)600.
D)800.

Question 74

In the Keynesian cross diagram, the ________ line shows the relationship between planned aggregate expenditure and output, and the ________ line represents the condition that planned aggregate expenditure and output are equal.

A)consumption function; 45-degree
B)45-degree; consumption function
C)expenditure; 45-degree
D)45 degree; expenditure

Question 75

Refer to the accompanying figure. Based on the figure, when PAE = 600 + 0.5Y, short-run equilibrium output equals:

A)1,200.
B)400.
C)600.
D)800.

Question 76

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

A)24,000.
B)6,000.
C)14,000.
D)16,000.

Question 77

Refer to the accompanying figure. Based on the figure, when PAE = 400 + 0.5Y, short-run equilibrium output equals:

A)1,200.
B)400.
C)600.
D)800.

Question 78

Refer to the accompanying figure. Based on the Keynesian cross diagram, at short-run equilibrium output autonomous expenditure equals ________ and induced expenditure equals ________.

A)1,000; 3,000
B)1,000; 4,000
C)3,000; 4,000
D)4,000; 2,000

Question 79

The expenditure line in the Keynesian cross diagram represents the:

A)equilibrium condition that Y = PAE.
B)relationship between planned expenditure and output.
C)relationship between consumption and after-tax disposable income.
D)equilibrium condition that Y = Y*.

Question 80

In the short run, with predetermined prices, when output is greater than planned aggregate expenditures:

A)potential output is greater than short-run equilibrium output.
B)potential output is less than short-run equilibrium output.
C)planned investment is less than actual investment.
D)planned investment is greater than actual investment.