MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Chapters 11 & 12 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The Keynesian model of aggregate expenditure describes the economy in A) both the short run and the long run. B) only a strong expansion. C) the long run. D) the short run. 1) 2) Disposable income is A) income plus transfer payments minus consumption expenditure. B) income minus saving. C) total income divided by the price level. D) income minus taxes plus transfer payments. 2) 3) In the above figure, line ABC is called A) the saving function. B) the 45-degree line. C) aggregate supply. D) the consumption function. 3) 4) When disposable income is 0, consumption is $2000. Then A) saving = -$2000. B) saving = $0. C) saving = $2000. D) the MPC = ) 5) Autonomous expenditure refers to A) aggregate expenditure solely prompted by policy. B) aggregate expenditure that does not change when real GDP changes. C) changes in short-run aggregate supply. D) aggregate expenditure that varies because of changes in real GDP. 5) 1

2 6) Suppose that in 2014, firms discover that their inventories are falling below their planned levels. Which of the following statements is CORRECT? A) Real GDP is less than equilibrium expenditure. B) Aggregate demand is less than aggregate supply. C) Even though firms are trying, they are unable to maximize profits. D) The level of aggregate savings must equal the level of desired investment. 6) 7) In the above figure, at the equilibrium, induced expenditure is A) $10 trillion. B) $15 trillion. C) $5 trillion. D) some amount not given in the above answers. 7) 2

3 8) In the above figure, autonomous expenditure is equal to A) $0. B) $14 trillion. C) $12 trillion. D) $16 trillion. 8) 9) In the above figure the economy is initially at point A on the aggregate expenditure curve AE 0. Suppose firms expect profits to increase and decide to increase investment. As a result A) the AE curve shifts upward to a curve such as AE 2. B) there is a movement along AE 1 to a point such as C. C) the AE curve shifts downward to a curve such as AE 1. D) there is a movement along AE 1 to a point such as B. 9) 3

4 10) If investment increases by $300 and, in response, equilibrium aggregate expenditure increases by $600, then the multiplier must be A) 0.5. B) 2. C) 0.2. D) 5. 10) 11) An increase in the value of the multiplier can be caused by A) an increase in the marginal propensity to import. B) a decrease in the marginal propensity to consume. C) an increase in the marginal propensity to consume. D) an increase in autonomous consumption expenditure. 11) 12) If the multiplier is 4 and there are no imports or income taxes, the marginal propensity to consume is A) B) C) D) ) 13) An increase in shifts the AE curve and an increase in shifts the aggregate demand curve. A) the price level; downward; autonomous expenditure; rightward B) the price level; upward; autonomous expenditure; leftward C) autonomous expenditure; upward; the price level; rightward D) autonomous expenditure; upward; the price level; leftward 13) 14) When the economy is at full employment and investment increases, in the long run the price level will and, if potential GDP does not change, in the long run real GDP will. A) decrease; decrease B) increase; increase C) increase; not change D) decrease; not change 14) 15) The multiplier is 5.0 and autonomous expenditure increases by $30 billion. If potential real GDP is unaffected, in the long run, equilibrium real GDP will A) increase by more than $50 billion. B) not change. C) increase by less than $50 billion. D) increase by $50 billion. 15) 4

5 16) Which of the above figures best shows the start of a demand-pull inflation? A) Figure A B) Figure B C) Figure C D) Figure D 16) 17) Which of the following can start a demand-pull inflation? A) an increase in imports B) a decrease in productivity C) an improvement in technology D) None of the above can start a demand-pull inflation. 17) 18) If the economy is at potential GDP and the Fed increases the quantity of money, then A) potential GDP and real GDP both decrease. B) real GDP rises temporarily above potential GDP. C) potential GDP rises. D) real GDP rises permanently above potential GDP. 18) 5

6 19) In the above, which figure shows the start of a cost-push inflation? A) Figure A B) Figure B C) Figure C D) Figure D 19) 20) Stagflation is associated with A) neither cost-push inflation or demand-pull inflation because it is a different concept altogether. B) demand-pull inflation. C) both types of inflation. D) cost-push inflation. 20) 21) During a deflation, the price level is A) positive and falling. B) negative. C) positive and rising. D) positive and not changing. 21) 6

7 Answer Key Testname: UNTITLED1 1) D 2) D 3) D 4) A 5) B 6) A 7) C 8) B 9) A 10) B 11) C 12) A 13) A 14) C 15) B 16) A 17) D 18) B 19) C 20) D 21) A 7

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