Question 1

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*)equals 9,000, then government purchases must ________ to eliminate any output gap.
A)increase by 100
B)decrease by 100
C)increase by 1,000
D)decrease by 1,000

Accepted Answer

If the multiplier is 10, a 100-unit decrease in government purchases results in a 1,000-unit decrease in output. This closes the expansionary output gap of 1,000.

Question 2

Contractionary policies are government stabilization policies intended to decrease:
A)population.
B)unemployment.
C)average labor productivity.
D)planned spending.

Accepted Answer

Contractionary policies are government stabilization policies intended to decrease planned spending and output.

Question 3

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ________ in short-run equilibrium output.
A)a $1 billion increase
B)a greater than $1 billion increase
C)no change
D)a $1 billion decrease

Accepted Answer

Due to the income-expenditure multiplier, a $1 billion increase in autonomous consumption results in a final increase in output greater than $1 billion.

Question 4

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by more than $1 billion.
D)increased by less than $1 billion.

Accepted Answer

Due to the income-expenditure multiplier, a short-run recessionary gap of $1 billion can be closed with new government purchases of less than $1 billion.

Question 5

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:
A)increased by $10 billion.
B)decreased by $10 billion.
C)increased by more than $10 billion.
D)decreased by less than $10 billion.

Accepted Answer

Due to the income-expenditure multiplier, a short-run expansionary gap of $10 billion can be closed with decreased government purchases of less than $10 billion.

Question 6

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ________ in short-run equilibrium output.
A)a $5 billion increase
B)a greater than $5 billion decrease
C)no change.
D)a $5 billion decrease

Accepted Answer

Due to the income-expenditure multiplier, a $5 billion decrease in autonomous consumption results in a final decrease in output greater than $5 billion.

Question 7

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ________ policies.
A)structural
B)cyclical
C)productivity
D)stabilization

Accepted Answer

Stabilization policies are government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps. The two major tools of stabilization policy are monetary policy and fiscal policy.

Question 8

Changes in government purchases affect planned spending ________, and changes in taxes and/or transfers affect planned spending ________.
A)directly; directly
B)directly; indirectly
C)directly; not at all
D)indirectly; indirectly

Accepted Answer

Changes in government purchases affect planned spending directly because the purchases are part of aggregate expenditure. Changes in taxes and/or transfers indirectly affect spending because they inspire households to make changes to their planned expenditures as disposable income changes.

Question 9

In the basic Keynesian model, an increase in government purchases:
A)reduces short-run equilibrium output.
B)increases short-run equilibrium output.
C)reduces potential output.
D)increases potential output.

Accepted Answer

An increase in government purchases shifts the aggregate expenditures line upward, which increases short-run equilibrium output.

Question 10

Changes in taxes and transfers affect planned spending:
A)only when there is an expansionary gap.
B)autonomously.
C)directly, by changing induced expenditures.
D)indirectly, by changing disposable income and, consequently, consumption.

Accepted Answer

Changes in taxes and/or transfers indirectly affect spending because they inspire households to make changes to their planned expenditures as disposable income changes.

Question 11

Stabilization policies are government policies used to affect ________, with the objective of eliminating output gaps.
A)planned aggregate expenditure
B)potential output.
C)labor productivity.
D)diminishing returns to capital.

Accepted Answer

Stabilization policies are government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps. The two major tools of stabilization policy are monetary policy and fiscal policy.

Question 12

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*)equals 11,000, then government purchases must ________ to eliminate any output gap.
A)increase by 200
B)increase by 1,000
C)increase by 5,000
D)decrease by 200

Accepted Answer

If the multiplier is 5, a 200-unit increase in government purchases results in a 1,000-unit increase in output. This closes the recessionary output gap of 1,000.

Question 13

Government policies intended to decrease planned spending and output are called ________ policies.
A)aggregate
B)monetary
C)fiscal
D)contractionary

Accepted Answer

Contractionary policies are government stabilization policies intended to decrease planned spending and output.

Question 14

Expansionary policies are government stabilization policies intended to increase:
A)population.
B)unemployment.
C)average labor productivity.
D)planned spending.

Accepted Answer

Expansionary policies are government stabilization policies intended to increase planned spending and output.

Question 15

Government policies intended to increase planned spending and output are called ________ policies.
A)aggregate
B)monetary
C)fiscal
D)expansionary

Accepted Answer

Expansionary policies are government stabilization policies intended to increase planned spending and output.

Question 16

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)decreased by $0.5 billion.
D)decreased by $2 billion.

Accepted Answer

A $1 billion increase in autonomous consumption shifts the PAE curve upward. To shift it back down to its original position, government purchases (another type of autonomous expenditures)must be decreased by $1 billion.

Question 17

In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by $0.5 billion.
D)increased by $2 billion.

Accepted Answer

A $1 billion decrease in autonomous consumption shifts the PAE line downward. To shift it back to its original position, government purchases (another type of autonomous expenditures)must be increased by $1 billion.

Question 18

The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:
A)spending.
B)autonomous expenditure.
C)menu costs.
D)cyclical unemployment.

Accepted Answer

Spending by one person provides income for a second person, which then results in greater spending by the second person, and so on.

Question 19

In the basic Keynesian model, a decrease in government purchases:
A)reduces short-run equilibrium output.
B)increases short-run equilibrium output.
C)reduces potential output.
D)increases potential output.

Accepted Answer

A decrease in government purchases shifts the aggregate expenditures line downward, which reduces short-run equilibrium output.

Question 20

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:
A)the direct changes in spending change the income of producers which leads to additional changes in spending.
B)multiple deposits are generated when new reserves are produced through fractional reserve banking.
C)autonomous spending supports more output than induced spending.
D)planned changes in inventories signal producers to adjust the level of output.

Accepted Answer

The income-expenditure multiplier gets its name because a one-time infusion of spending gets re-spent many times before the final effects are realized.

Quiz 25: Spending and Output in the Short Run

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ________ to eliminate any output gap.

Contractionary policies are government stabilization policies intended to decrease:

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ________ in short-run equilibrium output.

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ________ in short-run equilibrium output.

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ________ policies.

Changes in government purchases affect planned spending , and changes in taxes and/or transfers affect planned spending .

In the basic Keynesian model, an increase in government purchases:

Changes in taxes and transfers affect planned spending:

Stabilization policies are government policies used to affect ________, with the objective of eliminating output gaps.

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ________ to eliminate any output gap.

Government policies intended to decrease planned spending and output are called ________ policies.

Expansionary policies are government stabilization policies intended to increase:

Government policies intended to increase planned spending and output are called ________ policies.

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:

In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:

The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:

In the basic Keynesian model, a decrease in government purchases:

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because: