Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the Keynesian model of aggregate expenditure, real GDP is determined by the 1) A) level of taxes. B) level of aggregate demand. C) price level. D) level of aggregate supply. 2) The consumption function relates the consumption expenditure decisions of households to 2) A) investment decisions of firms. B) the level of disposable income. C) saving decisions of households. D) the nominal interest rate. 3) As disposable income increases, consumption expenditures 3) A) increase by the same amount. B) increase by a larger amount. C) increase by a smaller amount. D) remain constant. 4) An increase in expected future income. 4) A) shifts the saving function upward B) decreases consumption expenditure C) increases saving D) shifts the consumption function upward 5) In the above figure, consumption and disposable income are equal at 5) A) a saving level of $100 billion and disposable income level of $400 billion. B) a disposable income level of $0. C) a disposable income level of $200 billion. D) any point along the consumption function. 6) In the above figure, at a disposable income level of $200 billion, saving equals 6) A) disposable income. B) consumption expenditures. C) zero. D) $40 billion. 1

2 7) What is the marginal propensity to consume? 7) A) the ratio of the change in consumption expenditure to the change in disposable income. B) the percentage of income that is consumed. C) the percentage of income that is not saved. D) one minus the fraction of total disposable income that is saved. 8) At the level of disposable income where the consumption function crosses the 45-degree line, 8) A) saving is negative. B) the marginal propensity to consume is C) consumption expenditure equals only autonomous consumption expenditure. D) saving is zero. 9) The value of the marginal propensity to consume is 9) A) between -1 and +1. B) between 1 percent and 10 percent. C) between 0 and 1. D) between 1 and ) Suppose disposable income increases from $7 trillion to $8 trillion. At the same time, consumption expenditure increases from $6.8 trillion to. Thus the MPC must equal. A) $7.6 trillion; 0.80 B) $7.8 trillion; 0.80 C) $7.4 trillion; 0.40 D) $8 trillion; ) 11) If the marginal propensity to save is 0.6, then the marginal propensity to consume is 11) A) 1.0. B) 0.4. C) 0.6. D) not determinable. 12) When the consumption function becomes steeper, 12) A) the saving function also become steeper. B) the MPC falls. C) the MPC rises. D) less of every dollar is consumed. 2

3 13) In the above figure, when disposable income is greater than $6 trillion, then 13) A) savings are positive. B) the MPC is greater than 1. C) savings are negative. D) the MPS is negative. 14) Expenditure that does NOT depend on real GDP is called 14) A) autonomous expenditure. B) induced expenditure. C) equilibrium expenditure. D) spurious expenditure. Real GDP C I G NX ) In the above table, C is consumption expenditure, I is investment, G is government expenditure, and NX is net exports. All entries are in dollars. The equilibrium level of real GDP is A) $2,300. B) $2,500. C) $2,400. D) $2, ) In the above table, C is consumption expenditure, I is investment, G is government expenditure, and NX is net exports. All entries are in dollars. The slope of the aggregate expenditure function is A) B) C) D) ) 16) 3

4 17) The figure shows Tropical Isle's aggregate planned expenditure curve. When aggregate planned expenditure is $2 trillion, aggregate planned expenditure is than real GDP, firms' inventories, and firms their production. A) greater; decrease; increase B) less; decrease; increase C) less; increase; decrease D) greater; increase; decrease 17) 18) In the above figure, if the marginal propensity to consume increases, the slope of the AE curve would A) decrease. B) stay the same but the AE curve would shift upwards. C) increase. D) stay the same but the AE curve would shift downwards. 18) 4

5 19) In the above figure, point d represents planned expenditures real GDP. 19) A) less than B) greater than C) equal to D) There is not enough information to answer the question. 20) When autonomous expenditure decreases,. 20) A) there is a movement down along the AE curve B) the AE curve shifts upward C) the AE curve becomes less steep D) the AE curve shifts downward 21) When autonomous expenditure increases, equilibrium aggregate expenditure 21) A) increases by an equal amount. B) decreases by a greater amount due to the multiplier. C) decreases by an equal amount to offset the unplanned portion. D) increases by a greater amount due to the multiplier. 22) If there are no taxes or imports and MPC = 0.75, the multiplier equals 22) A) 6.0. B) C) D) ) Suppose that in 2006 the slope of the AE curve is 0.67 and in 2007 the slope of the AE curve changes to 0.8. Which of the following best describes what happens to the multiplier? A) It rises from 1.25 to B) It falls from 1.49 to C) It falls from 5 to 3. D) It rises from 3 to 5. 23) 24) In the above figure, an increase in autonomous expenditure is depicted by the movement from point E to A) point I. B) point G. C) point H. D) point F. 24) 5

6 25) In the above figure, the increase in autonomous expenditure moves the economy from point E to 25) A) point F. B) point G. C) point I. D) point H. 26) In the above figure, the multiplier is equal to 26) A) three. B) one. C) zero. D) two. 6

7 Answer Key Testname: STUDY QUESTIONS 8 (KEYNESIAN MODEL) 1) B 2) B 3) C 4) D 5) C 6) C 7) A 8) D 9) C 10) A 11) B 12) C 13) A 14) A 15) C 16) A 17) A 18) C 19) A 20) D 21) D 22) D 23) D 24) D 25) B 26) D 7

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