Deck 22: The Is Curve

Question 1

If the consumption function is expressed as C = a + mpc × YD,then "a" represents ________.

A) autonomous consumer expenditure
B) the marginal propensity to consume
C) the expenditure multiplier
D) disposable income

Answer 1

A

Question 2

In the simple Keynesian model,equilibrium aggregate output is determined by ________.

A) aggregate demand
B) aggregate supply
C) the national demand for labor
D) the price level

Answer 2

A

Question 3

Assume that autonomous consumption equals $200 and that the mpc equals 0.8.If disposable income equals $1000,then total consumption equals ________.

A) $80
B) $200
C) $800
D) $1000

Answer 3

D

Question 4

Keynes reasoned that consumer expenditure is most closely related to ________.

A) the level of interest rates
B) the price level
C) disposable income
D) the marginal tax rate

Question 5

Keynes was especially concerned with explaining the ________ level of output and employment during the ________.

A) low; 1920s
B) low; 1930s
C) high; 1920s
D) high; 1930s

Question 6

Everything else held constant,if total consumption increases from $600 to $800 because of an increase of disposable income of $400,then the mpc is equal to ________.

A) 0.2
B) 0.4
C) 0.5
D) 0.6

Question 7

Everything else held constant,if consumption expenditure increases by 65 for a 100 increase in disposable income,the mpc is ________.

A) 0
B) 0.5
C) 0.65
D) 1

Question 8

Assume that disposable income equals $1000 and the mpc equals 0.6.If total consumption equal $800,then autonomous consumption is equal to ________.

A) $0
B) $200
C) $800
D) $1000

Question 9

Assume that autonomous consumption equals $200 and disposable income equals $1000.If total consumption equal $800,then the mpc equals ________.

A) 0.2
B) 0.6
C) 0.8
D) 1.0

Question 10

If the consumption function is expressed as C = a + mpc × YD,then "mpc" represents ________.

A) autonomous consumer expenditure
B) the marginal propensity to consume
C) the expenditure multiplier
D) disposable income

Question 11

His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure,planned investment spending,government spending,and net exports.

A) John Maynard Keynes
B) Sir John Hicks
C) Milton Friedman
D) Paul A. Samuelson

Question 12

Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining ________.

A) the hyperinflations of the 1920s
B) why the Great Depression occurred
C) the high unemployment in Great Britain before World War I
D) the high unemployment in Great Britain after World War II

Question 13

If the consumption function is C = 20 + 0.5YD,then an increase in disposable income by $100 will result in an increase in consumer expenditure by ________.

A) $25
B) $70
C) $50
D) $100

Question 14

Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

A) aggregate output; wages
B) aggregate output; employment
C) wage rates; wages
D) wage rates; employment

Question 15

Under Keynesian analysis,aggregate demand can be written as ________.

Question 16

The marginal propensity to consume (mpc)can be defined as the fraction of ________.

A) a change in income that is spent
B) a change in income that is saved
C) income that is spent
D) income that is saved

Question 17

If the consumption function is C = 20 + 0.8YD,then an increase in disposable income by $100 will result in an increase in consumer expenditure by ________.

A) $58
B) $64
C) $80
D) $100

Question 18

Keynes was especially concerned with explaining the ________.

A) recession of 1920-21
B) low levels of output and employment during the Great Depression
C) strong economic growth of the 1920s
D) high unemployment in Great Britain during the 1920s

Question 19

In the Keynesian model of income determination,consumer expenditure includes spending by ________.

A) consumers on personal computers
B) businesses on personal computers
C) governments on personal computers
D) foreigners on domestic personal computers

Question 20

Everything else held constant,if disposable income increases by 200 and consumption expenditure increases by 150,the mpc is ________.

A) 0
B) 0.15
C) 0.5
D) 0.75

Question 21

Aggregate demand in an economy with no government or foreign trade is ________.

A) consumer expenditure plus actual investment
B) consumer expenditure plus planned investment
C) consumer expenditure plus inventory investment
D) consumer expenditure plus fixed investment

Question 22

What do economists mean by the word "investment"?

Question 23

Keynes mentioned two factors that influenced planned investment spending.They are ________.

A) interest rates and disposable income
B) interest rates and business expectations about the future
C) disposable income and business expectations about the future
D) interest rates and business expectations about inflation

Question 24

Factors that influenced planned investment spending include ________.

A) real interest rates
B) financial frictions
C) emotional waves of optimism and pessimism
D) all of the above

Question 25

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to lower production.

A) below; negative
B) above; negative
C) below; positive
D) above; positive

Question 26

Economists define investment as the purchase of ________.

A) a new physical asset such as a new machine or a new house
B) any physical asset, whether new or not, used by business to increase production
C) any physical asset used by business to increase production and the repurchase of common stock
D) business spending on capital and household spending on durable goods

Question 27

What types of investment exist according to Keynes's theory of the determination of aggregate output? what is a major difference between the two according to Keynes?

Question 28

Planned investment spending is higher ________.

A) when real interest rate is higher
B) during financial frictions
C) when businesses are optimistic
D) A and C

Question 29

If unplanned investment is positive,firms will ________ production and output will ________.

A) cut; rise
B) cut; fall
C) increase; rise
D) increase; fall

Question 30

How is Keynes's consumption function defined? describe the terms used in this function?

Question 31

A fall in inventories is synonymous with ________ investment.

A) negative fixed
B) positive fixed
C) positive inventory
D) negative inventory

Question 32

A difference between inventory investment and fixed investment is that ________.

A) fixed investment is never unplanned
B) fixed investment is never planned
C) inventory investment is never unplanned
D) unplanned inventory investment is always zero

Question 33

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to raise production.

A) below; negative
B) above; negative
C) below; positive
D) above; positive

Question 34

In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.

A) negative; lower
B) negative; raise
C) positive; lower
D) positive; raise

Question 35

If unplanned investment is negative,firms will ________ production and output will ________.

A) cut; rise
B) cut; fall
C) increase; rise
D) increase; fall

Question 36

Everything else held constant,if consumption expenditure falls by 160 when disposable income falls by 200,the mpc is ________.

A) 0
B) 0.2
C) 0.4
D) 0.8

Question 37

What is the marginal propensity to consume according to Keynes's consumption theory? provide an example.

Question 38

Planned investment spending,a component of aggregate demand,is equal to ________.

A) fixed investment plus actual inventory investment
B) fixed investment plus unplanned inventory investment
C) fixed investment
D) fixed investment plus planned inventory investment

Question 39

There are two types of investment: ________ investment-the spending by business firms on equipment and structures,and planned spending on residential houses-and ________ investment-spending by business firms on additional holdings of raw materials,parts,and finished goods.

A) planned; gross
B) planned; inventory
C) fixed; gross
D) fixed; inventory

Question 40

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain positive and firms will continue to ________ production.

A) below; lower
B) above; lower
C) below; raise
D) above; raise

Question 41

Using the information contained in Situation 20-1,if autonomous consumption increases by $100,then equilibrium aggregate output will change by ________.

A) -$1,000
B) -$100
C) $100
D) $1,000

Question 42

If aggregate demand falls short of current output,business firms will ________ production to ________ inventories.

A) cut; keep from accumulating
B) expand; keep from accumulating
C) cut; build up
D) expand; build up

Question 43

When the level of unplanned inventory investment is equal to zero,the economy is ________.

A) in disequilibrium
B) in a recession
C) in equilibrium
D) overheating

Question 44

If aggregate demand equals output,________.

A) the economy is in a recession
B) output will increase
C) output will fall
D) the economy is at its equilibrium level

Question 45

Using the information contained in Situation 20-1,if planned investment decreases by $100,the equilibrium aggregate output will change by ________.

A) -$1,000
B) $-100
C) $100
D) $1,000

Question 46

Keynes believed that changes in autonomous spending were dominated by changes in ________.

A) consumer expenditure
B) autonomous consumer expenditure
C) investment spending
D) taxes
E) none of the above

Question 47

If actual output is less than equilibrium output,firms will ________ output to keep from ________ inventories.

A) increase; accumulating
B) increase; depleting
C) decrease; depleting
D) decrease; accumulating

Question 48

If aggregate demand is less than the level of aggregate output,then ________ inventory investment will be ________.

A) planned; positive
B) actual; positive
C) actual; negative
D) planned; negative

Question 49

In the Keynesian framework,as long as output is above the equilibrium level,unplanned inventory investment will remain ________ and firms will continue to ________ production.

A) negative; lower
B) negative; raise
C) positive; lower
D) positive; raise

Question 50

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________,firms will continue to lower production,and output will continue to fall.

A) below; negative
B) above; negative
C) below; positive
D) above; positive

Question 51

Using the information in Situation 20-1,the equilibrium level of aggregate output is ________.

A) $900
B) $8,000
C) $9,000
D) $10,000

Question 52

Using the information in Situation 20-1,if aggregate output is equal to $10,000,then unplanned inventory investment equals ________.

A) -$1000
B) -$100
C) $0
D) $100

Question 53

If actual output is greater than equilibrium output,firms will ________ output to keep from ________ inventories.

A) increase; accumulating
B) increase; depleting
C) decrease; depleting
D) decrease; accumulating

Question 54

Using the information in Situation 20-1,if aggregate output equals $8,000,the unplanned inventory investment equals ________.

A) -$100
B) $0
C) $100
D) $500

Question 55

An increase in unplanned inventory investment for the entire economy equals the excess of ________.

A) output over aggregate supply
B) output over aggregate demand
C) aggregate supply over output
D) aggregate demand over output

Question 56

If aggregated demand is less than actual output,unplanned inventory ________ will cause output to ________.

A) accumulation; rise
B) depletion; fall
C) depletion; rise
D) accumulation; fall

Question 57

In the Keynesian framework,as long as output is below the equilibrium level,unplanned inventory investment will remain negative,firms will continue to ________ production,and output will continue to ________.

A) lower; fall
B) lower; rise
C) raise; fall
D) raise; rise

Question 58

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain ________,firms will continue to raise production,and output will continue to rise.

A) below; negative
B) above; negative
C) below; positive
D) above; positive

Question 59

A decrease in unplanned inventory investment for the entire economy equals the excess of ________.

A) output over aggregate supply
B) output over aggregate demand
C) aggregate supply over output
D) aggregate demand over output

Question 60

In the Keynesian framework,as long as output is ________ the equilibrium level,unplanned inventory investment will remain negative and firms will continue to ________ production.

A) below; lower
B) above; lower
C) below; raise
D) above; raise

Question 61

In an open economy,aggregate demand is the sum of ________.

A) consumer expenditure, actual investment spending, and government spending
B) consumer expenditure, planned investment spending, and government spending
C) consumer expenditure, actual investment spending, government spending, and net exports
D) consumer expenditure, planned investment spending, government spending, and net exports

Question 62

Using the information in situation 20-2,if government increases their spending by $50 and increases net taxes by 50,then equilibrium aggregate output will change by ________.

A) -$100
B) -$50
C) $50
D) $100

Question 63

A tax cut initially ________.

A) increases consumption expenditure by an amount greater than the tax cut
B) increases consumption expenditure by an amount equal to the tax cut
C) increases consumption expenditure by an amount that is less than the value of the tax cut
D) has no effect on consumption expenditure
E) reduces consumption expenditure by an amount that is less than the value of the tax cut

Question 64

Define the IS curve.

Question 65

In the simple Keynesian framework,declines in planned investment spending that produce high unemployment can be offset by raising ________.

A) taxes
B) government spending
C) consumer confidence
D) business confidence

Question 66

Keynes believed that unstable investment caused the Great Depression.Using the simple Keynesian model,explain how a fall in investment affects equilibrium output.

Question 67

In a closed economy,aggregate demand is the sum of ________.

A) consumer expenditure, actual investment spending, and government spending
B) consumer expenditure, planned investment spending, and government spending
C) consumer expenditure, actual investment spending, government spending, and net exports
D) consumer expenditure, planned investment spending, government spending, and net exports

Question 68

Aggregate output is ________ related to autonomous consumer expenditure,and is ________ related to the level of taxes.

A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively

Question 69

Using the information in situation 20-2,if government spending increases by $100,then the equilibrium aggregate output will change by ________.

A) -$1,000
B) -$100
C) $100
D) $1,000

Question 70

Describe Keynes's equilibrium condition and what it implies.

Question 71

Equilibrium output is reduced by an increase in ________.

A) planned investment
B) taxes
C) government spending
D) net exports

Question 72

Using the information in Situation 20-2,if taxes increase by $10,then the equilibrium aggregate output will change by ________.

A) -$90
B) -$10
C) $10
D) $90

Question 73

Aggregate output is ________ related to autonomous consumer expenditure,and is ________ related to planned investment spending.

A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively

Question 74

If net exports decrease by 250 and the mpc is 0.75,equilibrium aggregate output ________.

A) increases by 1000
B) increases by 750
C) decreases by 750
D) decreases by 1000

Question 75

The Keynesian framework indicates that government can play an important role in determining aggregate output by ________.

A) changing the level of government spending or taxes
B) raising consumer confidence
C) raising investor confidence
D) changing the money supply and interest rates

Question 76

Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________,which are influenced by emotional waves of optimism and pessimism-factors he referred to as "animal spirits."

A) unplanned investment spending
B) actual investment spending
C) planned investment spending
D) autonomous consumer expenditures

Question 77

Aggregate output is increased by a decrease in ________.

A) autonomous consumption
B) government spending
C) planned investment
D) net taxes

Question 78

Assume equilibrium at full employment for an economy characterized by the simple Keynesian model.If the government raises taxes to eliminate a budget deficit,then ________.

A) the rate of unemployment will increase
B) the level of aggregate output will increase
C) the price level will increase
D) the rate of interest will fall

Question 79

If net exports increase by 250 and the mpc is 0.75,equilibrium aggregate output increases by ________.

A) 250
B) 500
C) 750
D) 1000

Question 80

If net exports increase by 100 and the mpc is 0.75,equilibrium aggregate output increases by ________.

A) 100
B) 250
C) 400
D) 750