Assume that the marginal propensity to save is 0.1 in an economy. To reduce the level of real GDP by $50 billion in that economy to achieve a full employment level of output, it will be necessary to

Assume that the marginal propensity to save is 0.1 in an economy. To reduce the level of real GDP by $50 billion in that economy to achieve a full employment level of output, it will be necessary to

A) decrease the aggregate expenditures schedule by $50 billion
B) decrease the aggregate expenditures schedule by $5 billion
C) increase the aggregate expenditures schedule by $50 billion
D) increase the aggregate expenditures schedule by $5 billion

Answer: B

A major limitation of the aggregate expenditures model is that it

A major limitation of the aggregate expenditures model is that it

A) gives more weight to cost-push than demand-pull inflation
B) makes a false distinction between planned and unplanned investment
C) assumes that prices are stuck or inflexible even as the economy moves near potential GDP
D) explains recessionary expenditure gaps but not inflationary expenditure gaps

Answer: C

If the MPC in an economy is 0.75, government could eliminate a recessionary expenditure gap of $50 billion by decreasing taxes by

If the MPC in an economy is 0.75, government could eliminate a recessionary expenditure gap of $50 billion by decreasing taxes by

A) $33.3 billion
B) $50 billion
C) $66.7 billion
D) $80 billion

Answer: C

The amount by which an economy's aggregate expenditures must shift upward to achieve full-employment GDP is

The amount by which an economy's aggregate expenditures must shift upward to achieve full-employment GDP is

A) an injection
B) a lump-sum tax
C) a recessionary expenditure gap
D) an unplanned change in inventories

Answer: C

The economy is operating at the full-employment level of output. A depreciation of the dollar will most likely result in

The economy is operating at the full-employment level of output. A depreciation of the dollar will most likely result in

A) a decrease in exports
B) an increase in imports
C) a decrease in real GDP
D) an increase in the price level

Answer: D

Other things remaining constant, which would increase an economy's real GDP and employment?

Other things remaining constant, which would increase an economy's real GDP and employment?

A) an increase in the exchange rate for foreign currencies
B) the imposition of tariffs on goods imported from abroad
C) an appreciation of the dollar relative to foreign currencies
D) an increase in the level of national income among the trading partners for this economy

Answer: D

An increase in the real GDP of an economy will, other things remaining constant,

An increase in the real GDP of an economy will, other things remaining constant,

A) increase its imports and the real GDPs in other economies
B) decrease its imports and the real GDPs in other economies
C) increase its imports and decrease the real GDPs in other economies
D) decrease its imports and increase the real GDPs in other economies

Answer: A

Compared with a private closed economy, aggregate expenditures and GDP will

Compared with a private closed economy, aggregate expenditures and GDP will

A) increase when net exports are positive
B) decrease when net exports are positive
C) increase when net exports are negative
D) decrease when net exports are zero

Answer: A

At the equilibrium level of GDP,

At the equilibrium level of GDP,

A) actual investment is zero
B) unplanned changes in inventories are zero
C) saving is greater than planned investment
D) saving is less than planned investment

Answer: B

If saving is greater than planned investment

If saving is greater than planned investment

A) saving will tend to increase
B) businesses will be motivated to increase their investments
C) real GDP will be greater than planned investment plus consumption
D) aggregate expenditures will be greater than the real domestic output

Answer: C

When the economy's real GDP exceeds its equilibrium real GDP,

When the economy's real GDP exceeds its equilibrium real GDP,

A) leakages equal injections
B) planned investment exceeds saving
C) there is unplanned investment in the economy
D) aggregate expenditures exceed the real domestic output

Answer: C

Which is an injection of spending into the income expenditures stream?

Which is an injection of spending into the income expenditures stream?

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

Answer: A

On a graph, the equilibrium real GDP is found at the intersection of the 45-degree line and the

On a graph, the equilibrium real GDP is found at the intersection of the 45-degree line and the

A) saving curve
B) consumption curve
C) investment demand curve
D) aggregate expenditures curve

Answer: D

If real GDP is $275 billion, consumption is $250 billion, and investment is $30 billion, real GDP

If real GDP is $275 billion, consumption is $250 billion, and investment is $30 billion, real GDP

A) will tend to decrease
B) will tend to increase
C) will tend to remain constant
D) equals aggregate expenditures

Answer: B

If the economy is private and closed to international trade, and government neither taxes nor spends, then real GDP equals

If the economy is private and closed to international trade, and government neither taxes nor spends, then real GDP equals

A) saving
B) consumption
C) disposable income
D) investment spending

Answer: C

The premise of the model in this chapter is that the amount of goods and services produced, and therefore the level of employment, depends

The premise of the model in this chapter is that the amount of goods and services produced, and therefore the level of employment, depends

A) directly on the rate of interest
B) directly on the level of total expenditures
C) inversely on the level of disposable income
D) inversely on the quantity of resources available

Answer: B

If in an economy a $150 billion increase in investment spending creates $150 billion of new income in the first round of the multiplier process and $105 billion in the second round, the multiplier and the marginal propensity to consume will be, respectively,

If in an economy a $150 billion increase in investment spending creates $150 billion of new income in the first round of the multiplier process and $105 billion in the second round, the multiplier and the marginal propensity to consume will be, respectively,

A) 5.00 and 0.80
B) 4.00 and 0.75
C) 3.33 and 0.70
D) 2.50 and 0.40

Answer: C

If the marginal propensity to consume is 0.67 and initial spending increases by $25, real GDP will

If the marginal propensity to consume is 0.67 and initial spending increases by $25, real GDP will

A) increase by $75
B) decrease by $75
C) increase by $25
D) decrease by $25

Answer: C

If the marginal propensity to consume is 0.6 and real GDP falls by $25, this is caused by a decrease in initial spending of

If the marginal propensity to consume is 0.6 and real GDP falls by $25, this is caused by a decrease in initial spending of

A) $10.00
B) $15.00
C) $16.67
D) $20.00

Answer: A

If there was a change in investment spending of $10 and the marginal propensity to save was .25, then real GDP would increase by

If there was a change in investment spending of $10 and the marginal propensity to save was .25, then real GDP would increase by

A) $10
B) $20
C) $25
D) $40

Answer: D

Which best explains the variability of investment?

Which best explains the variability of investment?

A) the predictable useful life of capital goods
B) constancy or regularities in business innovations
C) instabilities in the level of profits
D) business pessimism about the future

Answer: C

Which would increase investment demand?

Which would increase investment demand?

A) an increase in business taxes
B) an increase in planned inventories
C) a decrease in the rate of technological change
D) an increase in the cost of acquiring capital goods

Answer: B

A decrease in investment demand would be a consequence of a decline in

A decrease in investment demand would be a consequence of a decline in

A) the rate of interest
B) the level of wages paid
C) business taxes
D) expected future sales

Answer: D

Which relationship is an inverse one?

Which relationship is an inverse one?

A) consumption and disposable income
B) investment spending and the rate of interest
C) saving and disposable income
D) investment spending and GDP

Answer: B

An increase in taxes shifts the consumption schedule

An increase in taxes shifts the consumption schedule

A) downward and the saving schedule upward
B) upward and the saving schedule downward
C) downward and the saving schedule downward
D) upward and the saving schedule upward

Answer: C

Higher real interest rates are likely to

Higher real interest rates are likely to

A) increase consumption and saving
B) decrease consumption and saving
C) decrease consumption and increase saving
D) increase consumption and decrease saving

Answer: C

Expectations of a recession are likely to lead households to

Expectations of a recession are likely to lead households to

A) increase consumption and saving
B) decrease consumption and saving
C) decrease consumption and increase saving
D) increase consumption and decrease saving

Answer: C

An increase in wealth shifts the consumption schedule

An increase in wealth shifts the consumption schedule

A) downward and the saving schedule upward
B) upward and the saving schedule downward
C) downward and the saving schedule downward
D) upward and the saving schedule upward

Answer: B

If the slope of a linear saving schedule decreases, then it can be concluded that the

If the slope of a linear saving schedule decreases, then it can be concluded that the

A) MPS has decreased
B) MPC has decreased
C) income has decreased
D) income has increased

Answer: A

As the disposable income of the economy increases,

As the disposable income of the economy increases,

A) both the APC and the APS rise
B) the APC rises and the APS falls
C) the APC falls and the APS rises
D) both the APC and the APS fall

Answer: C

If disposable income is $375 billion when the average propensity to consume is 0.8, it can be concluded that

If disposable income is $375 billion when the average propensity to consume is 0.8, it can be concluded that

A) the marginal propensity to consume is also 0.8
B) the marginal propensity to save is 0.2
C) consumption is $325 billion
D) saving is $75 billion

Answer: D

If consumption spending increases from $358 to $367 billion when disposable income increases from $412 to $427 billion, it can be concluded that the marginal propensity to consume is

If consumption spending increases from $358 to $367 billion when disposable income increases from $412 to $427 billion, it can be concluded that the marginal propensity to consume is

A) 0.4
B) 0.6
C) 0.8
D) 0.9

Answer: B

Households tend to spend a larger portion of

Households tend to spend a larger portion of

A) a small disposable income than a large disposable income
B) a large disposable income than a small disposable income
C) their disposable income on saving when the rate of return is high
D) their saving than their disposable income when the rate of return is low

Answer: A

As disposable income decreases, ceteris paribus,

As disposable income decreases, ceteris paribus,

A) both consumption and saving increase
B) consumption increases and saving decreases
C) consumption decreases and saving increases
D) both consumption and saving decrease

Answer: D

Saving equals

Saving equals

A) investment plus consumption
B) investment minus consumption
C) disposable income minus consumption
D) disposable income plus consumption

Answer: C