Question 1

Which of the following could cause equilibrium GDP to fall?
A) an increase in autonomous investment
B) a downward shift in the saving function
C) an increase in amounts saved along an existing saving function
D) a downward shift in the consumption function
E) an increase in the nation's population

Accepted Answer

A downward shift in the consumption function would reduce aggregate demand and, therefore, equilibrium GDP. Choices A and C would increase aggregate demand and output, while choice B would have no effect on aggregate demand or output. Choice E would increase the potential level of output (i.e., the long-run trend), but it would not affect equilibrium GDP unless accompanied by an increase in aggregate demand.

Question 2

John Maynard Keynes shocked the economic world with his theory that the Great Depression could continue in a never-ending downward spiral unless government intervened.According to Keynes,the reason the economy could NOT pull itself out of the Depression was that
A) the government continued to insist on high tax rates.
B) price controls precluded business expansion.
C) we no longer had a balanced budget.
D) the lack of income had reduced aggregate demand.
E) wages and prices were much too flexible.

Accepted Answer

Keynes believed that the lack of income had reduced aggregate demand, which in turn was causing a downward spiral of the economy. Without government intervention to stimulate demand, the Depression could continue indefinitely.

Question 3

If the marginal propensity to save is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.
A) $0.4
B) $0.6
C) $1.2
D) $1.67
E) $2

Accepted Answer

The marginal propensity to consume (MPC) is 1 - 0.6 = 0.4. The multiplier is 1/(1-MPC) = 1/0.4 = 2.5. Therefore, the increase in GDP is 1.2 billion * 2.5 = 3 billion. However, none of the options match this exactly, so the closest option is E) $2 billion, which might be a typographical error in the options.

Question 4

Which of the following was the most important force in bringing an end to the Great Depression?
A) the natural resilience of the economy
B) Roosevelt's New Deal policies
C) U.S. involvement in World War II
D) a delayed impact from increased business investment in the early 1930s
E) falling wages and prices

Accepted Answer

The U.S. involvement in World War II was the most important force in bringing an end to the Great Depression. The massive government spending to support the war effort created new jobs and stimulated demand for goods and services, leading to economic growth and a decrease in unemployment.

Question 5

The following question are based on the following consumption function for a hypothetical economy. Assume autonomous intended investment is $200 billion and there are no government expenditures, exports, or imports.
 
-If intended investment increases from 200 to 250,GDP will rise by ________ billion.
A) $30
B) $50
C) $83
D) $125
E) $250

Accepted Answer

The increase in GDP depends on the multiplier effect. If the multiplier is 2.5, then an increase in investment by $50 (from $200 to $250) will increase GDP by $125 billion (50 x 2.5 = 125).

Question 6

If disposable income is held constant,aggregate consumption expenditure will increase in all but which of the following cases?
A) The public's wealth holdings increase.
B) The rate of interest increases.
C) The public anticipates price increases in the future.
D) The public currently has an abnormally low stock of durable goods.
E) The population increases.

Accepted Answer

An increase in the rate of interest will increase the cost of borrowing, leading to a decrease in consumption expenditure and an increase in savings. Therefore, aggregate consumption expenditure will not increase in this case. In all other cases, aggregate consumption expenditure will increase. An increase in wealth increases the ability to spend, anticipation of future price increases encourages current consumption, a low stock of durable goods necessitates consumption, and an increase in population leads to higher demand for goods and services.

Question 7

If the marginal propensity to consume is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.
A) $0.4
B) $0.6
C) $1.2
D) $2.5
E) $3

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, a $1.2 billion increase in investment will increase GDP by 2.5 * $1.2 billion = $3 billion.

Question 8

The following question are based on the following consumption function for a hypothetical economy. Assume autonomous intended investment is $200 billion and there are no government expenditures, exports, or imports.
 
-The current equilibrium level of GDP is ________ billion.
A) $2,000
B) $2,100
C) $2,200
D) $2,300
E) $2,400

Accepted Answer

The current equilibrium level of GDP is $2,000 billion. This is because the aggregate expenditure (AE) curve intersects the aggregate supply (AS) curve at a point where the quantity of output supplied equals the quantity of output demanded.

Question 9

If the morning paper reports that Americans,for the sixth month in a row,tend to spend more money and save less,these events would be depicted in an income expenditures model as
A) causing the 45-degree line to slope upward.
B) a downward shift in the supply function.
C) an upward shift in the consumption function.
D) an upward shift in the investment function.
E) a right to left movement along the consumption function.

Accepted Answer

An upward shift in the consumption function would indicate that Americans are spending more at each level of income, which is consistent with the news report. This would be shown graphically as a shift to the right of the consumption function, keeping the 45-degree line unchanged. None of the other options accurately reflect this situation.

Question 10

An upward shift in the consumption function must
A) reduce equilibrium GDP.
B) be accompanied by a downward shift in the saving function.
C) reduce the value of the multiplier.
D) increase the volatility of the investment process.
E) reduce the amount of consumption at equilibrium.

Accepted Answer

An upward shift in the consumption function implies that at each income level, consumption is higher than before. Since saving is the part of income not consumed, an increase in consumption at each income level must mean a decrease in saving at each income level, hence a downward shift in the saving function.

Question 11

An upward shift in the saving function
A) will cause GDP to rise.
B) will have the same effect on GDP as an upward movement along the saving function.
C) means that, at any given level of income, people want to save less.
D) will cause GDP to fall by an amount equal to the shift divided by the marginal propensity to save.
E) means that the marginal propensity to save must have fallen.

Accepted Answer

An upward shift in the saving function indicates that at any given level of income, people want to save more, not less. This increased saving reduces consumption in the short run, leading to a decrease in aggregate demand and thus a potential fall in GDP. The magnitude of the GDP change is determined by the size of the shift and the marginal propensity to save, as it affects the multiplier effect on the economy.

Question 12

If interest rates on consumer loans rise,the
A) consumption function will shift downward.
B) saving function will shift downward.
C) consumption and saving functions will not change, but the amounts consumed and saved will decline.
D) marginal propensity to consume will rise.
E) marginal propensity to save will rise.

Accepted Answer

If interest rates on consumer loans rise, the cost of borrowing money increases, which means that consumers will be less likely to spend money on goods and services. This results in a downward shift of the consumption function, as consumers will be consuming less overall.

Question 13

A reduction in personal consumption expenditures induced by a fall in disposable income
A) will shift the consumption function downward.
B) will shift the saving function downward.
C) will produce an increase in intended investment.
D) will be offset by an increase in the amount saved.
E) represents a movement along a given consumption function.

Accepted Answer

A reduction in personal consumption expenditures due to a fall in disposable income does not shift the consumption function itself but represents a movement along the existing consumption function. This is because the consumption function plots consumption against income, so a change in income leads to a movement along the curve rather than a shift of the curve.

Question 14

A marginal propensity to consume of 0.8 means the value of the multiplier is
A) 1.
B) 2.
C) 3.
D) 4.
E) 5.

Accepted Answer

The answer of A marginal propensity to consume of 0.8...

Question 15

An upward shift in the consumption function
A) results if people decide they want to save more.
B) has the same kind of multiplier effect as an increase in investment.
C) occurs if people's incomes rise.
D) raises the average propensity to save.
E) raises the marginal propensity to consume.

Accepted Answer

An upward shift in the consumption function indicates that at each level of income, consumption is higher than before. This is similar to the effect of an increase in investment, as both can stimulate economic activity through the multiplier effect, leading to increased output, income, and further consumption. Choices A, C, D, and E do not accurately describe the effects of an upward shift in the consumption function.

Quiz 17: The Determination of National Output and the Keynesian Multiplier

Which of the following could cause equilibrium GDP to fall?

John Maynard Keynes shocked the economic world with his theory that the Great Depression could continue in a never-ending downward spiral unless government intervened.According to Keynes,the reason the economy could NOT pull itself out of the Depression was that

If the marginal propensity to save is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.

Which of the following was the most important force in bringing an end to the Great Depression?

If disposable income is held constant,aggregate consumption expenditure will increase in all but which of the following cases?

If the marginal propensity to consume is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.

The following question are based on the following consumption function for a hypothetical economy. Assume autonomous intended investment is $200 billion and there are no government expenditures, exports, or imports. -The current equilibrium level of GDP is ________ billion.

If the morning paper reports that Americans,for the sixth month in a row,tend to spend more money and save less,these events would be depicted in an income expenditures model as

An upward shift in the consumption function must

An upward shift in the saving function

If interest rates on consumer loans rise,the

A reduction in personal consumption expenditures induced by a fall in disposable income

A marginal propensity to consume of 0.8 means the value of the multiplier is

An upward shift in the consumption function