Deck 29: The Aggregate Expenditure Model

Question 1

The Keynesian perspective includes the view that:

A) in the short run, we are all dead.
B) supply determines output in an economy.
C) wages and prices are flexible.
D) changes in government purchases change total spending in an economy.

Answer 1

D

Question 2

Which of the following is NOT an assumption of the classical model in economics?

A) Markets are responsive.
B) The economy self-corrects.
C) Wages and prices are flexible.
D) The short run is the most important time period.

Answer 2

D

Question 3

(Figure: KSRAS) The figure shows the Keynesian short-run aggregate supply (KSRAS) curve and fiscal policy. What would cause the shift shown in the figure?

A) expansionary monetary policy
B) higher oil prices
C) expansionary fiscal policy
D) contractionary fiscal policy

Answer 3

D

Question 4

A government leader who believes that wages and prices are flexible, savings helps an economy, and the long run should be the time period of focus holds a _____ perspective on economic policy.

A) Keynesian
B) supply-side
C) classical
D) monetarist

Question 5

A key difference in Keynes's perspective compared to the classical view is that Keynes:

A) focused on the short run.
B) believed that prices were flexible.
C) believed that unemployment would not be persistent enough to be a problem.
D) believed that the supply side of the economy was the main determinant of current output.

Question 6

Which of the following is NOT part of the Keynesian perspective?

A) The short run is more important than the long run.
B) Prices and wages tend to be sticky.
C) Markets move quickly to new equilibriums when supply or demand curves shift.
D) Changes in government purchases change total spending in an economy.

Question 7

Which of the following is NOT true of an aggregate demand and aggregate supply graph that is drawn to represent the Keynesian perspective?

A) The aggregate demand curve has a negative slope.
B) If output is below the natural rate, changes in demand affect both output and price.
C) Output is determined primarily by shifts in the aggregate demand curve.
D) If output is below the natural rate, the price level remains steady when the aggregate demand curve shifts.

Question 8

Keynes assumed that the price level is _____ when the economy has slack, and that the time period of focus is the:

A) fixed; short run.
B) variable; long run.
C) fixed; long run.
D) variable; short run.

Question 9

When the aggregate supply and aggregate demand model is drawn to represent the Keynesian perspective, the short-run aggregate supply curve is:

A) horizontal until it reaches the natural rate of output and then becomes vertical.
B) vertical until it reaches the natural rate of output and then becomes horizontal.
C) upward sloping when there is unemployment and downward sloping when at full employment.
D) downward sloping when there is unemployment and upward sloping when at full employment.

Question 10

According to Keynes, if there is unemployment, then an increase in aggregate demand will:

A) decrease output and increase the price level.
B) decrease the price level and increase output.
C) increase output but not the price level.
D) increase the price level but not output.

Question 11

Keynes's theory is consistent with the idea of an economy that is producing _____ its production possibilities frontier.

A) on
B) inside
C) outside
D) to the right of

Question 12

The classical view is consistent with the idea of an economy that produces _____ its production possibilities frontier.

A) on
B) inside
C) outside
D) to the right of

Question 13

The classical view assumes that an increase in government purchases:

A) causes the money supply to rise by the amount of the increase.
B) is necessary to solve a recession.
C) is offset by a decrease in private spending.
D) raises total spending in the economy by the amount of the change in government purchases.

Question 14

When an economy is in a recession, where is it producing in relation to its production possibilities frontier?

A) on the curve near either axis
B) on the curve near its midpoint
C) outside the curve
D) inside the curve

Question 15

Classical economists believe that savings are:

A) bad for an economy because the drop in consumer spending reduces total spending.
B) bad for an economy because the drop in investments will be a drag on growth.
C) good for an economy as a way to provide funds for investments.
D) good for an economy as a way to increase consumer purchases.

Question 16

Keynes believed that increased saving:

A) leads to price increases.
B) causes economic growth.
C) causes an economy to grow by providing investment funds.
D) causes consumer spending and total spending to fall.

Question 17

The paradox of thrift is the idea that an increase in savings can cause:

A) an increase in GDP and income, which reduces the need for savings.
B) a drop in GDP and income, which leads to a drop in savings.
C) an increase in spending due to the interest earned on the savings.
D) a decrease in spending, which causes interest rates to rise.

Question 18

The idea that an increase in savings can lead to a reduction in consumer spending and total spending - which leads to fewer jobs, less income, and lower savings - is known as:

A) countercyclical saving.
B) Keynesian bartering.
C) spending neutralization.
D) the paradox of thrift.

Question 19

Which of the following is NOT consistent with the paradox of thrift?

A) Changes in savings cause changes in consumer spending.
B) Interest rates adjust to move the loanable funds market to equilibrium.
C) Changes in consumer spending cause changes in aggregate demand.
D) The level of aggregate demand impacts the output level in the country.

Question 20

Keynes believed that the main cause of swings in the business cycle is change in:

A) aggregate expenditures.
B) the money supply.
C) short-run aggregate supply.
D) interest rates.

Question 21

Aggregate expenditures is the:

A) total market value of the final goods and services that are purchased in an economy at different possible interest rates.
B) sum of all types of spending in an economy at different possible price levels.
C) sum of value of all the goods and services that are produced in an economy at different possible money supply levels.
D) total level of spending in an economy at different possible levels of GDP or income.

Question 22

What is the difference between aggregate demand (AD) and aggregate expenditures (AE)?

A) AD estimates the price levels that would exist at different spending levels, and AE estimates the production that would exist at different price levels.
B) AD estimates the production that would exist at different spending levels, and AE estimates the price levels that would exist at different spending levels.
C) AD estimates spending at different average price levels, and AE estimates spending at different income or real GDP levels.
D) AD estimates spending at different income or GDP levels, and AE estimates spending at different average price levels.

Question 23

The _____ economic model demonstrates the short-run relationship between aggregate expenditures and real GDP, assuming that the price level is constant.

A) market price
B) macroeconomic money
C) aggregate supply and aggregate demand
D) aggregate expenditures

Question 24

An assumption that is inconsistent with the aggregate expenditures model is that:

A) the short run is the time period of focus.
B) the price level is fixed.
C) there is no relationship between aggregate expenditures and real GDP.
D) the model is most accurate when the economy is at less than full employment (below the natural rate).

Question 25

If the consumption function is C = 25 + (.80 × disposable income), what is the marginal propensity to consume?

A) .80
B) .20
C) .25
D) It is impossible to tell without knowing either the level of consumption or the level of disposable income.

Question 26

Autonomous consumption equals $40 million. When disposable income equals $600 million, planned consumption spending equals $440 million. When disposable income equals $900 million, planned consumption spending equals $640 million. What is the marginal propensity to consume?

A) .67
B) .69
C) .72
D) -72

Question 27

The formula for the marginal propensity to consume is:

A) planned consumption spending divided by disposable income.
B) disposable income minus saving.
C) the change in planned consumption spending divided by the change in disposable income.
D) disposable income minus government purchases, investment, and net exports.

Question 28

The _____ relationship between consumption spending and income is depicted on:

A) negative; an aggregate demand curve
B) negative; a consumption function
C) positive; an aggregate demand curve
D) positive; a consumption function

Question 29

In the aggregate expenditures model, the level of expenditures that exists when income is zero is called _____ spending.

A) autonomous
B) zero-base
C) neutral
D) equilibrium

Question 30

When expenditures exceed income, businesses experience:

A) an increase in inventories.
B) a drop in inventories.
C) an increase in supply.
D) a decrease in supply.

Question 31

When expenditures exceed income, then business inventories will:

A) not change.
B) rise.
C) fall.
D) rise and then fall.

Question 32

When income is $600 million, consumption spending is $500 million. When income is $800 million, consumption spending is $660 million. What is the marginal propensity to consume?

A) 80
B) 20
C) .8
D) .5

Question 33

When income is $100 billion, consumption spending is $75 billion. When income is $120 billion, consumption spending is $89 billion. What is the marginal propensity to consume?

A) .7
B) .3
C) 2
D) 1.4

Question 34

When income is $200 billion, consumption spending is $175 billion. When income is $220 billion, consumption spending is $189 billion. What is the marginal propensity to save?

A) 2
B) .3
C) .7
D) 1.4

Question 35

According to the aggregate expenditures model, what is the main determinant of current consumption spending in an economy?

A) current disposable income
B) tax rates
C) interest rates
D) the money supply

Question 36

_____ spending includes some autonomous spending and some spending that is dependent on income. _____ spending are solely autonomous.

A) Government; All other types of
B) Investment and consumer; Government spending and net export
C) Consumer; All other types of
D) Net export and investment; Consumer spending and government

Question 37

(Table 1: Economic Data for Macroland) Table 1 shows economic data for Macroland. Assume that Macroland is not involved in any international trade. Use the data in Table 1 to determine the level of autonomous spending in Macroland.
$\begin{array}{c}\hline \text { Table 1. Economic Data for Macroland }\\\begin{array}{|l|l|l|l|l|}\hline {\text { Income }} & {\begin{array}{c}\text { Consumption } \\\text { Spending }\end{array}} & \begin{array}{c}\text { Government } \\\text { Spending }\end{array} & \begin{array}{c}\text { Investment } \\\text { Spending }\end{array} & \begin{array}{c}\text { Aggregate } \\\text { Expenditures }\end{array} \\\hline \$ 0 & \$ 50 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 200 \text { billion } \\\hline \$ 100 \text { billion } & \$ 120 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 270 \text { billion } \\\hline \$ 200 \text { billion } & \$ 190 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 340 \text { billion } \\\hline \$ 300 \text { billion } & \$ 260 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 410 \text { billion }\\\hline\end{array}\end{array}$

A) $50 billion
B) $70 billion
C) $100 billion
D) $200 billion

Question 38

(Table 1: Economic Data for Macroland) Table 1 shows economic data for Macroland. Assume that Macroland is not involved in any international trade. Use the data in Table 1 to determine the marginal propensity to consume in Macroland.
$\begin{array}{c}\hline \text { Table 1. Economic Data for Macroland }\\\begin{array}{|l|l|l|l|l|}\hline {\text { Income }} & {\begin{array}{c}\text { Consumption } \\\text { Spending }\end{array}} & \begin{array}{c}\text { Government } \\\text { Spending }\end{array} & \begin{array}{c}\text { Investment } \\\text { Spending }\end{array} & \begin{array}{c}\text { Aggregate } \\\text { Expenditures }\end{array} \\\hline \$ 0 & \$ 50 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 200 \text { billion } \\\hline \$ 100 \text { billion } & \$ 120 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 270 \text { billion } \\\hline \$ 200 \text { billion } & \$ 190 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 340 \text { billion } \\\hline \$ 300 \text { billion } & \$ 260 \text { billion } & \$ 100 \text { billion } & \$ 50 \text { billion } & \$ 410 \text { billion }\\\hline\end{array}\end{array}$

A) 1.75
B) .75
C) .7
D) .25

Question 39

(Figure: Aggregate Expenditure Model) The figure shows the aggregate expenditure model. What is the equilibrium point?

A) $750
B) , $500
C) $1,000
D) $3,000

Question 40

(Figure: Aggregate Expenditure Model) The figure shows the aggregate expenditure model. Equilibrium occurs where aggregate expenditure equals:

A) consumption + investment + government spending
B) government spending + investment
C) real GDP (income)
D) real GDP (income) - investment

Question 41

In the aggregate expenditure model, the points on the 45-degree line represent all points where:

A) aggregate expenditure equals aggregate saving.
B) real GDP equals the money supply.
C) real GDP equals aggregate expenditure.
D) aggregate saving equals aggregate GDP.

Question 42

An important point in understanding the aggregate expenditures model is that real GDP:

A) equals consumer expenditures.
B) consists of consumer expenditures plus savings plus jobs plus government spending.
C) can be negative during recessions.
D) equals total income in the economy.

Question 43

In the aggregate expenditures model, an economy's equilibrium occurs where the:

A) aggregate expenditures equal real GDP.
B) 45-degree line intersects with the aggregate savings curve.
C) total spending equals total saving.
D) total investment equals total saving plus total government purchases.

Question 44

The economy's real GDP level and aggregate expenditures level can be identified in the aggregate expenditures model by the:

A) intersection of the aggregate demand curve and the aggregate supply curve.
B) sum of consumer expenditures, government purchases, and unplanned investments.
C) national income minus savings.
D) point where the aggregate expenditures line intersects the 45-degree line.

Question 45

In the aggregate expenditures model, an economy will be producing at the:

A) maximum investment level that is allowed by its savings.
B) intersection of real GDP and aggregate expenditures.
C) intersection of aggregate demand and aggregate supply.
D) point where government purchases equal taxes.

Question 46

(Figure: Aggregate Expenditure Model 0) The figure shows a recession in the aggregate expenditure model. The full employment level of output is assumed to be $4,000. At lower levels of output, the economy is in a recession. Equilibrium in the aggregate expenditure model may occur below full employment. In Keynes's view, because the economy is at equilibrium at _____, it will remain _____ absent corrective policy measures.

A) $3000; below full employment
B) $4000; at full employment
C) $3000; at full employment
D) $4000; below full employment

Question 47

An unemployment problem can be identified in the aggregate expenditures model when:

A) equilibrium is to the left of the natural rate of output.
B) output is at a point above the aggregate expenditures curve.
C) output is at a point below the aggregate expenditures curve.
D) equilibrium is to the right of the natural rate of output.

Question 48

When the aggregate expenditures model shows an equilibrium below the natural rate of output, the country's economy:

A) is experiencing inflation.
B) has an unemployment problem.
C) has had an increase in savings.
D) has some positive unplanned inventory investment.

Question 49

According to the aggregate expenditures model, when an economy is in equilibrium at an output level that has high levels of unemployment:

A) there is no reason to expect that the unemployment will disappear in the short run.
B) the unemployment will disappear as soon as the economy self-corrects.
C) the equilibrium is at a point to the right of the natural rate of output.
D) the price level will soon rise.

Question 50

According to the aggregate expenditures model, what happens initially when there is a sudden, unexpected drop in consumer spending?

A) Aggregate expenditures immediately fall by the amount of the drop in consumer spending.
B) The equilibrium level of output immediately rises.
C) The equilibrium level of output immediately falls.
D) Aggregate expenditures hold steady at first due to a matching increase in unplanned inventory investment.

Question 51

(Table 2: Economic Data for Four Firms, 2017) Table 2 provides 2017 economic data for four firms. Use the data to determine which firm had unplanned inventory investment of $200,000.
$\begin{array}{c}\hline \text { Table 2. Economic Data for Four Firms, } 2017\\\begin{array}{|l|l|l|l|l|l|}\hline & \begin{array}{c}\text { Revenue from } \\2017 \text { Sales }\end{array} & \begin{array}{c}\text { Value of } 2017 \\\text { Production }\end{array} & \begin{array}{c}\text { Purchases of } \\\text { New Equipment }\end{array} & \begin{array}{l}\text { Construction of } \\\text { New Facilities }\end{array} & \begin{array}{c}\text { Value of Desired } \\\text { Change in } \\\text { Inventory }\end{array} \\\hline \text { Firm A } & \$ 10,400,000 & \$ 10,600,000 & \$ 300,000 & \$ 0 & \$ 0 \\\hline \text { Firm B } & \$ 10,400,000 & \$ 10,000,000 & \$ 100,000 & \$ 75,000 & \$ 25,000 \\\hline \text { Firm C } & \$ 10,400,000 & \$ 10,200,000 & \$ 0 & \$ 0 & \$ 0 \\\hline \text { Firm D } & \$ 10,400,000 & \$ 10,800,000 & \$ 50,000 & \$ 100,000 & \$ 50,000\\\hline\end{array}\end{array}$

A) Firm A
B) Firm B
C) Firm C
D) Firm D

Question 52

When there is positive unplanned investment, firms typically respond by:

A) increasing production to meet the unfulfilled demand.
B) reducing production to allow inventories to return to the desired level.
C) increasing production to allow the economy to reach full employment.
D) reducing production to prevent inflation from increasing.

Question 53

How do firms typically respond to a sudden drop in consumer purchases?

A) Unplanned investment rises, and then output falls.
B) Both investment and output fall.
C) Planned investment falls, and then unplanned investment rises.
D) Output falls, and then investment falls.

Question 54

Changes in _____ do NOT cause the aggregate expenditures curve to shift.

A) planned investment
B) expectations
C) government spending
D) national income

Question 55

Changes in _____ do NOT cause the aggregate expenditures curve to shift.

A) taxes
B) real GDP
C) real interest rates
D) wealth

Question 56

Which of the following would cause the aggregate expenditures curve to increase (shift upward)?

A) Planned investment is increased.
B) Expectations become more pessimistic.
C) The value of shares on the stock market declines.
D) Taxes are increased.

Question 57

Which of the following would cause the aggregate expenditures curve to decrease (shift downward)?

A) The value of shares on the stock market increases.
B) Government spending increases.
C) Taxes are reduced.
D) Real interest rates are increased.

Question 58

In the aggregate expenditures model, which of the following would cause the aggregate expenditures curve to increase?

A) Disposable income decreases.
B) Interest rates decrease.
C) Net exports decrease.
D) Government purchases decrease.

Question 59

According to the aggregate expenditures model, a change in _____ would NOT cause a shift in the aggregate expenditures curve.

A) real GDP
B) net wealth
C) business expectations
D) government spending
E) real interest rates

Question 60

In the aggregate expenditures model, which of the following would cause the aggregate expenditures curve to decrease?

A) Disposable income increases.
B) Business expectations become more pessimistic.
C) Net wealth increases.
D) Interest rates decrease.

Question 61

According to the aggregate expenditures model, an increase in the aggregate expenditures curve for an economy will lead to:

A) higher output and lower prices.
B) lower prices and fewer jobs.
C) higher output and more jobs.
D) lower output and higher prices.

Question 62

In the aggregate expenditures model, a change in autonomous spending has _____ impact on output and income in the economy.

A) no
B) an equal-sized and direct
C) a multiplied
D) an equal-sized and opposite

Question 63

If the consumption function is C = 25 + .80 (disposable income), what is the expenditure multiplier for the full potential expenditure multiplier effect?

A) 25
B) 1.25
C) 31.25
D) 5

Question 64

If the consumption function is C = 40 + .90 (disposable income), what is the expenditure multiplier for the full potential expenditure multiplier effect?

A) 44.44
B) 10
C) 40
D) 1.11

Question 65

If the consumption function is C = 50 + .60 (disposable income), what is the expenditure multiplier for the full potential expenditure multiplier effect?

A) 8.33
B) 1.67
C) 50
D) 2.5

Question 66

Assume that the MPC = .75. The government of Ecoland announces that it will spend an additional $40 billion on flu shot immunizations this year to counteract a growing flu epidemic. If the full multiplier effect occurs, this spending will lead Ecoland's to:

A) grow by $80 billion.
B) fall by $53.33 billion.
C) grow by $300 billion.
D) grow by $160 billion.

Question 67

An economy is at a real GDP level of $600 billion. Autonomous planned expenditures rise by $20 billion. If the MPC = .75, what will the new real GDP level be after the full potential multiplier effect occurs?

A) $680 billion
B) $700 billion
C) $520 billion
D) $480 billion

Question 68

A country's real GDP level is $800 billion, and its full-employment real GDP level is $920 billion. If the MPC = 2/3 and the full potential expenditure multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?

A) Government purchases are decreased by $20 billion.
B) Government purchases are increased by $60 billion.
C) Government purchases are increased by $120 billion.
D) Government purchases are increased by $40 billion.

Question 69

A government announces that it will increase government purchases by $20 billion. If the MPC = .8, what impact will this have on the equilibrium level of real GDP after the full potential expenditure multiplier effect is felt?

A) It will decrease by $80 billion.
B) It will increase by $100 billion.
C) It will increase by $25 billion.
D) It will decrease by $25 billion.

Question 70

Autonomous planned spending in a country rises by $60 billion when its MPC = 2/3. How much will the equilibrium level of real GDP change according to the aggregate expenditures model with the full potential multiplier effect?

A) It will increase by $120 billion.
B) It will decrease by $90 billion.
C) It will increase by $180 billion.
D) There will be no change in equilibrium real national income.

Question 71

An economy is at a real GDP level of $800 billion. Autonomous planned spending falls by $40 billion. If the MPC = .8, what will be the new real GDP level after the full potential multiplier effect occurs?

A) $750 billion
B) $600 billion
C) $1,000 billion or $1 trillion
D) $1,130 billion or $1.230 trillion

Question 72

If the MPS = .1, what is the full potential expenditure multiplier?

A) 10
B) 9
C) .9
D) 5

Question 73

If the MPS = .2, what is the full potential expenditure multiplier?

A) .8
B) 8
C) 1
D) 5

Question 74

If the MPC = .6, what is the full potential expenditure multiplier?

A) .4
B) 2.5
C) 6
D) 4

Question 75

If autonomous spending rises by $8 billion and the MPC = .75, what is the maximum potential impact on GDP after the full multiplier effect?

A) It increases by $32 billion.
B) It increases by $64 billion.
C) It decreases by $16 billion.
D) It decreases by $10.5 billion.

Question 76

The MPC = 2/3. Autonomous spending rises by $12 million. What is the maximum potential impact on GDP after the full multiplier effect?

A) It decreases by $36 million.
B) It decreases by $20 million.
C) It increases by $20 million.
D) It increases by $36 million.

Question 77

The MPC = .8. Taxes are reduced by $5 million. What is the maximum potential impact on GDP after the full multiplier effect?

A) It decreases by $20 million.
B) It decreases by $25 million.
C) It increases by $20 million.
D) It increases by $25 million.

Question 78

Econia's real GDP is $700 billion. Full-employment real GDP is $900 billion. The MPC = .75. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?

A) Decrease government purchases by $150 billion.
B) Decrease taxes by $150 billion.
C) Increase government purchases by $50 billion.
D) Increase taxes by $50 billion.

Question 79

(Figure: Economy Graph) The figure shows an economy in a(n) _____. Keynes believed that these were the result of _____.

A) expansion; excess aggregate supply
B) expansion; excess aggregate demand
C) recession; inadequate aggregate supply
D) recession; inadequate aggregate demand

Question 80

Econia's real GDP is $600 billion. Full-employment real GDP is $900 billion. The MPC = .8. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?

A) Increase government purchases by $50 billion.
B) Increase government purchases by $60 billion.
C) Decrease government purchases by $80 billion.
D) Decrease government purchases by $240 billion.