Deck 31: The Aggregate Expenditures Model

Question 1

In a private closed economy, when aggregate expenditures equal GDP,

A)consumption equals investment.
B)consumption equals aggregate expenditures.
C)planned investment equals saving.
D)disposable income equals consumption minus saving.

Answer 1

planned investment equals saving.

Question 2

If an unintended increase in business inventories occurs,

A)we can expect aggregate production to be unaffected.
B)we can expect businesses to increase the level of production.
C)we can expect businesses to lower the level of production.
D)aggregate expenditures must exceed the domestic output.

Answer 2

we can expect businesses to lower the level of production.

Question 3

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In this economy, the equilibrium level of income (Y) is

A)360.
B)225.
C)200.
D)135.

Answer 3

225.

Question 4

In a private closed economy, when aggregate expenditures exceed GDP,

A)GDP will decline.
B)business inventories will rise.
C)saving will decline.
D)business inventories will fall.

Question 5

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

A)bank panic of 1907
B)Great Depression
C)spectacular economic growth during World War II

Question 6

Other things equal, the slope of the aggregate expenditures schedule will increase as a result of

A)a decline in the size of the inflationary gap.
B)an increase in the MPC.
C)an increase in the MPS.
D)a decline in the general price level.

Question 7

Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output.Thus,

A)saving is $10 billion.
B)unplanned decreases in inventories of $10 billion will occur.
C)the MPC is 0.80.
D)unplanned increases in inventories of $10 billion will occur.

Question 8

In the United States from 1929 to 1933, real GDP and the unemployment rate _.

A)declined by 27 percent; rose to 25 percent
B)increased by 21 percent; fell to 2 percent
C)declined by 21 percent; rose to 27 percent

Question 9

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

A)Prices are fixed.
B)The economy is at full employment.
C)Prices are fully flexible.

Question 10

If at some level of GDP the economy is experiencing an unintended decrease in inventories,

A)the aggregate level of saving will decline.
B)the price level will fall.
C)the business sector will lay off workers.
D)domestic output will increase.

Question 11

In a private closed economy, investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where investment is equal to saving.

A)planned; actual
B)actual; planned
C)gross; net
D)net; gross

Question 12

If aggregate expenditures exceed GDP in a private closed economy,

A)leakages will exceed injections.
B)planned investment will exceed saving.
C)unplanned investment in inventories will occur.
D)saving will exceed planned investment.

Question 13

In the aggregate expenditures model, it is assumed that investment

A)automatically changes in response to changes in real GDP.
B)changes by less in percentage terms than changes in real GDP.
C)does not respond to changes in interest rates.
D)does not change when real GDP changes.

Question 14

If an unintended increase in business inventories occurs at some level of GDP, then GDP

A)entails a rate of aggregate expenditures in excess of the rate of aggregate production.
B)may be either above or below the equilibrium output.
C)is too low for equilibrium.
D)is too high for equilibrium.

Question 15

A private closed economy will expand when

A)actual GDP is less than potential GDP.
B)unplanned decreases in inventories occur.
C)aggregate expenditures are less than GDP.
D)unplanned increases in inventories occur.

Question 16

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of consumption spending will be

A)170.
B)270.
C)160.
D)195.

Question 17

The equilibrium level of GDP is associated with

A)an excess of planned investment over saving.
B)no unintended changes in inventories.
C)an unintended decrease in business inventories.
D)an unintended increase in business inventories.Topic: Other Features of Equilibrium GDP

Question 18

For a private closed economy, an unintended decline in inventories suggests that

A)aggregate expenditures are less than the business sector expected them to be.
B)aggregate expenditures exceed production.
C)actual investment exceeds saving.
D)planned investment is greater than consumption.

Question 19

A private closed economy includes

A)households, businesses, and government, but not international trade.
B)households, businesses, and international trade, but not government.
C)households and businesses, but not government or international trade.
D)households only.

Question 20

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of saving will be

A)30.
B)26.
C)25.
D)60.

Question 21

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy.Planned investment must be

A)$138 billion.
B)$126 billion.
C)$38 billion.
D)$180 billion.

Question 22

Investment and saving are, respectively,

A)income and wealth.
B)stocks and flows.
C)injections and leakages.
D)leakages and injections.

Question 23

Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S.GDP, then

A)unemployment will decrease domestically.
B)U.S.real GDP will fall.
C)inflation will occur domestically.
D)U.S.real GDP will rise.

Question 24

(Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y, where C is consumption and Y is gross domestic product.The multiplier for this economy is

A)3.
B)4.
C)5.
D)10.

Question 25

Saving is always equal to

A)planned investment less unintended increases in inventories.
B)actual investment.
C)planned investment.
D)unintended changes in inventories.

Question 26

Imports have the same effect on the current size of GDP as

A)exports.
B)investment.
C)consumption.
D)saving.

Question 27

If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to

A)reduce the rate of domestic inflation.
B)increase efficiency in the world economy.
C)increase domestic output and employment.
D)reduce domestic output and employment.

Question 28

Exports have the same effect on the current size of GDP as

A)imports.
B)investment.
C)taxes.
D)saving.

Question 29

Other things equal, an increase in an economy's exports will

A)lower the marginal propensity to import.
B)have no effect on domestic GDP because imports will change by an offsetting amount.
C)decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP.
D)increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

Question 30

Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5.Aggregate expenditures must have increased by

A)$100 billion.
B)$50 billion.
C)$500 billion.
D)$5 billion.

Question 31

An upward shift of the aggregate expenditures schedule might be caused by

A)a decrease in exports, with no change in imports.
B)a decrease in imports, with no change in exports.
C)an increase in exports, with an equal decrease in investment spending.
D)an increase in imports, with no change in exports.

Question 32

If the dollar appreciates relative to foreign currencies, we would expect

A)the multiplier to decrease.
B)a country's exports and imports to both fall.
C)a country's net exports to rise.
D)a country's net exports to fall.

Question 33

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?

A)a decline in the rate of interest
B)an unintended accumulation of inventories by businesses
C)a rise in the real GDP
D)The federal budget will automatically move toward a deficit.

Question 34

If net exports are positive,

A)the equilibrium GDP must be greater than the full-employment GDP.
B)imports must exceed exports.
C)aggregate expenditures are greater at each level of GDP than when net exports are zero or negative.
D)some other component of aggregate expenditures must be negative.

Question 35

(Advanced analysis) Assume the saving schedule for a private closed economy is S = -20 + 0.2Y, where S is saving and Y is gross domestic product.The multiplier for this economy is

A)3.
B)4.
C)5.
D)10.

Question 36

Unintended changes in inventories

A)cause the economy to move away from the equilibrium GDP.
B)are treated as components of consumption.
C)bring actual investment and saving into equality only at the equilibrium level of GDP.
D)bring actual investment and saving into equality at all levels of GDP.

Question 37

If net exports decline from zero to some negative amount, the aggregate expenditures schedule would

A)shift upward.
B)shift downward.
C)not move.(Net exports do not affect aggregate expenditures.)
D)become steeper.

Question 38

At equilibrium real GDP in a private closed economy,

A)the MPC must equal the APC.
B)the slope of the aggregate expenditures schedule equals the MPS.
C)aggregate expenditures and real GDP are equal.
D)planned saving and consumption are equal.

Question 39

In the aggregate expenditures model, technological progress will shift the investment schedule

A)downward and increase aggregate expenditures.
B)downward and decrease aggregate expenditures.
C)upward and increase aggregate expenditures.
D)upward and decrease aggregate expenditures.

Question 40

If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease

A)GDP by $20 billion.
B)GDP by $100 billion.
C)saving by $20 billion.
D)consumption by $200 billion.

Question 41

Which of the following statements is incorrect?

A)Given the economy's MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes.
B)Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4.
C)If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate expenditures of $8 billion.
D)A government surplus is anti-inflationary; a government deficit is expansionary.

Question 42

C = 26 + 0.75Y Ig = 60 X = 24
M = 10
(Advanced analysis) The equations give information for a private open economy.The letters Y, C, I g, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively.Figures are in billions of dollars.The equilibrium GDP for the open economy is

A)$390.
B)$375.
C)$320.
D)$400.

Question 43

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

A)the MPC is smaller in the private sector than it is in the public sector.
B)declines in government spending always tend to stimulate private investment.
C)disposable income will fall by some amount smaller than the tax increase.
D)some of the tax increase will be paid out of income that would otherwise have been saveD.

Question 44

Other things equal, the multiplier effect associated with a change in government spending is

A)the same as that associated with a change in taxes.
B)equal to that associated with a change in investment or consumption.
C)less than that associated with a change in investment.
D)greater than that associated with a change in investment.

Question 45

Other things equal, a serious recession in the economies of U.S.trading partners will

A)have no perceptible impact on the U.S.economy.
B)cause inflation in the U.S.economy.
C)depress real output and employment in the U.S.economy.
D)stimulate real output and employment in the U.S.economy.

Question 46

An increase in taxes will have a greater effect on the equilibrium GDP

A)if the tax revenues are redistributed through transfer payments.
B)the larger the MPS.
C)the smaller the MPC.
D)the larger the MPC.

Question 47

An exchange rate

A)is the ratio of the dollar volume of a nation's exports to the dollar volume of its imports.
B)measures the interest rate ratios of any two nations.
C)is the amount that one nation must export to obtain $1 worth of imports.
D)is the price that the currencies of any two nations exchange for one another.

Question 48

If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause

A)a rightward shift in the investment demand schedule.
B)an $8 billion downshift in the consumption schedule.
C)a $4 billion upshift in the consumption schedule.
D)a $12 billion downshift in the consumption schedule.

Question 49

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

A)government spending is more employment intensive than is either consumption or investment spending.
B)government spending increases the money supply and a tax reduction does not.
C)a portion of a tax cut will be saved.
D)taxes vary directly with income.

Question 50

If the United States wants to increase its net exports in the short term, it might take steps to

A)increase its GDP.
B)reduce existing tariffs and import quotas.
C)appreciate the dollar compared to foreign currencies.
D)depreciate the dollar compared to foreign currencies.

Question 51

Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero.If at the equilibrium income the public sector's budget shows a surplus,

A)Ca + I g + Xn + G must exceed GDP.
B)planned investment must exceed saving.
C)a recessionary expenditure gap must exist.
D)saving must exceed planned investment.

Question 52

In a mixed open economy, if aggregate expenditures exceed GDP,

A)Ig + X + G = Ca .
B)Ca + Ig + Xn + G < domestic output.
C)Ig > S.
D)I g + X + G > Sa + M + T.

Question 53

Assume the MPC is 0.8.If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by

A)$100 billion.
B)$90 billion.
C)$40 billion.
D)$50 billion.

Question 54

C = 26 + 0.75Y I g = 60 X = 24
M = 10
(Advanced analysis) The equations give information for a private open economy.The letters Y, C, I g, X, and M stand for GDP, consumption, gross investment, exports, and imports, respectively.Figures are in billions of dollars.The multiplier for the economy is

A)4.6.
B)3.33.
C)5.0.
D)4.0.

Question 55

Suppose the economy is operating at its full-employment, noninflationary GDP and the MPC is 0.75.The federal government now finds that it must increase spending on military goods by $21 billion in response to deterioration in the international political situation.To sustain full-employment, noninflationary GDP, government must

A)reduce taxes by $28 billion.
B)reduce transfer payments by $21 billion.
C)increase taxes by $21 billion.
D)increase taxes by $28 billion.

Question 56

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

A)saving must be $300 billion.
B)net exports must be $300 billion.
C)S + C must equal $300 billion.
D)I g + Xn must equal $300 billion.

Question 57

If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the

A)saving schedule will shift upward by $5 billion.
B)consumption schedule will shift downward by $25 billion.
C)consumption schedule will shift downward by $20 billion.
D)consumption schedule will shift upward by $25 billion.

Question 58

In a mixed open economy, the equilibrium GDP exists where

A)Ca + I g + Xn intersects the 45-degree line.
B)Ca + I g = Sa + T + X.
C)Ca + Ig + Xn + G = GDP.
D)Ca + I g + Xn = Sa + T.

Question 59

In a mixed closed economy,

A)government purchases and saving are injections, while investment and taxes are leakages.
B)taxes and government purchases are leakages, while investment and saving are injections.
C)taxes and savings are leakages, while investment and government purchases are injections.
D)taxes and investment are injections, while saving and government purchases are leakages.

Question 60

A lump-sum tax causes the after-tax consumption schedule

A)and the before-tax consumption schedule to coincide.
B)to be steeper than the before-tax consumption schedule.
C)to be flatter than the before-tax consumption schedule.
D)to be parallel to the before-tax consumption schedule.

Question 61

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10
G = 70
T = 30
(Advanced analysis) The accompanying equations are for a mixed open economy.The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively.Figures are in billions of dollars.If government desired to raise the equilibrium GDP to $650, it could

A)raise G by $45 and reduce T by $10.
B)raise G by $40 and reduce T by $30.
C)raise G by $30 or reduce T by $40.
D)raise both G and T by $40.

Question 62

Which of the following would reduce GDP by the greatest amount?

A)a $20 billion increase in taxes
B)$20 billion increases in both government spending and taxes
C)$20 billion decreases in both government spending and taxes
D)a $20 billion decrease in government spending

Question 63

Refer to the accompanying table.If an additional lump-sum tax of $20 were imposed, we would expect

A)equilibrium GDP to fall by $30.
B)equilibrium GDP to fall by $20.
C)equilibrium GDP to fall by $50.
D)equilibrium GDP to rise by $24.

Question 64

In a mixed open economy, changes in which of the following all affect the equilibrium GDP in the same direction?

A)Ca, I g, Sa, and M
B)Sa, T, and M
C)Ig, T, and Ca
D)Sa, I g, and X

Question 65

GDP C S Ig $100 $100 $0 $80
200 160 40 80
300 220 80 80
400 280 120 80
500 340 160 80
600 400 200 80
700 460 240 80
Refer to the accompanying information for a closed economy.If government spends $80 billion at each level of GDP, and imposes a lump-sum tax of $100

A)equilibrium GDP will now be $350.
B)equilibrium GDP will now be $400.
C)equilibrium GDP will now be $300.
D)the equilibrium GDP cannot be determineD.

Question 66

In an aggregate expenditures diagram, a lump-sum tax (T) will

A)not affect the C + Ig + Xn line.
B)shift the C + Ig + Xn line upward by an amount equal to T.
C)shift the C + I g + Xn line downward by an amount equal to T.
D)shift the C + Ig + Xn line downward by an amount equal to T × MPC.

Question 67

If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift

A)downward by $24 billion.
B)upward by $24 billion.
C)downward by $16 billion.
D)upward by $16 billion.

Question 68

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10
G = 70
T = 30
(Advanced analysis) The accompanying equations are for a mixed open economy.The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively.Figures are in billions of dollars.The equilibrium level of GDP for this economy is

A)$600.
B)$530.
C)$415.
D)$400.

Question 69

The effect of imposing a lump-sum tax is to

A)reduce the absolute levels of consumption and saving at each level of GDP and to reduce the size of the multiplier.
B)reduce the absolute levels of consumption and saving at each level of GDP but to not change the size of the multiplier.
C)reduce the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier.
D)increase the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier.

Question 70

In moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes

A)must be added to gross investment.
B)must be added to saving.
C)must be added to consumption and gross investment.
D)have no impact upon the equilibrium GDP.

Question 71

GDP C S Ig $100 $100 $0 $80
200 160 40 80
300 220 80 80
400 280 120 80
500 340 160 80
600 400 200 80
700 460 240 80
Refer to the accompanying information for a closed economy.The introduction of $80 billion of government spending would

A)lower the multiplier from 2.5 to 2.0.
B)increase the multiplier from 2.5 to 3.0.
C)increase the multiplier from 2.0 to 2.5.
D)have no effect on the size of the multiplier.

Question 72

If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion, then

A)the multiplier is 4.
B)the MPC for this economy is 0.8.
C)the MPC for this economy is 0.6.
D)the multiplier is 3.

Question 73

A lump-sum tax means that

A)the tax only applies to one time period.
B)the same amount of tax revenue is collected at each level of GDP.
C)tax revenues vary directly with GDP.
D)tax revenues vary inversely with GDP.

Question 74

GDP C S Ig $100 $100 $0 $80
200 160 40 80
300 220 80 80
400 280 120 80
500 340 160 80
600 400 200 80
700 460 240 80
Refer to the accompanying information for a closed economy.If both government spending and taxes are zero, the equilibrium level of GDP is

A)$200.
B)$300.
C)$400.
D)$500.

Question 75

Refer to the accompanying table.The MPC and MPS in the economy

A)are 0.4 and 0.6, respectively.
B)are 0.6 and 0.4, respectively.
C)are 0.8 and 0.2, respectively.
D)cannot be determined from the information given.

Question 76

Refer to the accompanying table.The tax in the economy is a

A)10 percent proportional tax.
B)lump-sum tax of $20.
C)lump-sum tax of $10.
D)progressive tax.

Question 77

If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion, then

A)the multiplier is 2.
B)the MPC for this economy is 0.6.
C)inflation is occurring.
D)the MPS for this economy is 0.6.

Question 78

Which of the following would increase GDP by the greatest amount?

A)a $20 billion reduction in taxes
B)$20 billion increases in both government spending and taxes
C)$20 billion decreases in both government spending and taxes
D)a $20 billion increase in government spending

Question 79

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10
G = 70
T = 30
(Advanced analysis) The accompanying equations are for a mixed open economy.The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively.Figures are in billions of dollars.The multiplier for this economy is

A)4.
B)3.
C)2.
D)2.33.

Question 80

GDP C S Ig $100 $100 $0 $80
200 160 40 80
300 220 80 80
400 280 120 80
500 340 160 80
600 400 200 80
700 460 240 80
Refer to the accompanying information for a closed economy.If government now spends $80 billion at each level of GDP and taxes remain at zero, the equilibrium GDP

A)will rise to $700.
B)will rise to $600.
C)will rise to $500.
D)may either rise or fall.