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Chapter 9 / 25

Classical Macroeconomics and Keynesian Aggregate Expenditures
1) AM25 \ C \\ Classical Macroeconomics: Laissez Faire \ 1 \\ Laissez faire economic policies, broadly construed, tend to be most consistent with: (a) socio-political economics. (b) Keynesian theory. (c) classical macroeconomics. (d) institutional macroeconomics. 2) AM25 \ C \\ Classical Macroeconomics: Laissez Faire \ 2 \\ Classical macroeconomics suggests that the best government economic policy is usually to: (a) concentrate only on one policy objective at a time. (b) attempt to satisfy all objectives, while emphasizing the most important. (c) no government action at all, letting time work out any problems. (d) careful appraisal of alternatives, with a variety of policy approaches. 3) AM25 \ D \\ Classical Theory: Wage-Price Flexibility \ 2 \\ The classical prediction that market-based economies tend toward long run equilibrium at full employment rests on assumptions of: (a) quantity adjustments and inflexible prices. (b) mobile goods and immobile resources. (c) free international trade and mercantilist policies. (d) resource mobility and flexible prices for outputs and resources. (e) Smith’s “invisible hand” and Keynes’s fundamental psychological law. 4) AM25 \ C \\ Say’s Law \ 1 \\ According to Say’s Law: (a) demand and supply are totally independent. (b) demand creates its own supply. (c) supply creates its own demand. (d) unemployment and inflation are inversely related.

Ralph Byrns

Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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5) AM25 \ C \\ Say’s Law \ 1 \\ Jean Baptiste Say [1767-1832] asserted an economic law to the effect that: (a) demand creates its own supply. (b) long-run scarcity is impossible. (c) supply creates its own demand. (d) market shortages and surpluses never balance. Figure A2506

6) AM25\ D \ A2506 \ Classical Theory: Labor Markets \ 3\\ If this labor market adjusts in a classical manner and the overall state of the economy has initially generated demand for unskilled labor D0, then roughly: (a) 66,000 unskilled workers [line bf] will be unemployed. (b) 68,000 unskilled workers will each earn about $5.70 per hour [point e]. (c) 50,000 unskilled workers will be employed [point c]. (d) 68,000 workers being employed [point d] at the $8 per hour equilibrium wage. 7) AM25 \ A \ A2506 \ Classical Theory: Labor Markets \ 3 \\ If this labor market was in equilibrium at point d during a prosperous period, and then a sharp recession reduced the demand for unskilled labor to D1, the initial adjustment would be for: (a) about 35,000 workers [line ad] to become unemployed at the initial $8 hourly wage. (b) the equilibrium wage rate to instantaneously decline to roughly $5.70 per hour [point b]. (c) about 68,000 unskilled workers to be willing to work for roughly $5.70 [point e]. (d) equilibrium to move to point a, with the wage rate staying at a constant $8 per hour.

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8) AM25 \ E \ A2506 \ Classical Theory: Labor Markets \ 3 \\ Suppose a period of prosperity generated equilibrium at point d, and then a recession reduced the demand for labor to D1. Classical economic theory would conclude that: (a) about 50,000 workers will soon be fully employed at roughly a $7 hourly wage. (b) although 36,000 or so workers might initially lose their jobs, about 14,000 of the most desperate unemployed workers can quickly find worthwhile work by taking pay cuts, dropping from $8 an hour to a bit less than $7 per hour. (c) of the 68,000 or so workers originally employed in this market, about 18,000 who are unwilling to about $7 per hour will be voluntarily unemployed. (d) equilibrium moves to point c. (e) All of the above. 9) AM25 \ D \\ Classical Theory: Labor Markets \ 2 \\ The classical argument that market economies automatically move towards full employment in the long run is inconsistent with: (a) tendencies of firms to raise prices when demand increases. (b) unions’ abilities to gain higher wages when the demand for labor rises. (c) complete flexibility of wages and prices. (d) downward stickiness of wages and prices. 10) AM25 \ B \\ Classical Theory: Labor Markets \ 1 \\ According to classical macroeconomic theory: (a) changing interest rates destabilize a market economy. (b) flexible interest rates, prices, and wages ensure full employment. (c) involuntary unemployment occurs at full employment. (d) rising interest rates encourage business borrowing. 11) AM25 \ B \\ Classical Theory: Labor Markets \ 2 \\ In the classical theory of the labor market, employment is stimulated during a recession: (a) by declines in Aggregate Demand. (b) if wages fall faster than prices. (c) by unexpected deflation. (d) by technology that replaces labor.

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Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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12) AM25 \ A \\ Classical Macroeconomic Theory \ 3 \\ Scientists whose conclusions would most closely resemble those of classical macroeconomists would include: (a) oceanographers who hypothesize that, in the long run, the water has a precise equilibrium depth at every possible location on Earth covered by oceans. (b) pre-Copernican cosmologists who insisted that the Earth is the stationary center of the universe. (c) physicists who believe quantum mechanics is inconsistent with Einstein’s formula e = mc2. (d) intelligent design theorists who reject any possibility of Darwinian evolution. (e) ecologists who assert that prices are irrelevant when evaluating environmental quality. 13) AM25 \ B \\ Classical Theory: Unemployment \ 2 \\ According to classical economics, unemployment is a symptom that the: (a) level of aggregate demand is inadequate. (b) wage rate of labor is too high relative to other prices. (c) unions need to raise wages to clear labor markets. (d) government needs to stimulate aggregate demand. Figure A2514

14) AM25 \ C \ A2514 \ Classical Theory: Capital Markets \ 3\\ This capital market is in a closed private economy. The initial plans of savers and investors are shown as curves S0 and I0. Market equilibrium will exist at: (a) point a. (b) point b. (c) point c. (d) point d. (e) point e.

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15) AM25 \ A \ A2514 \ Classical Theory: Capital Markets \ 3\\ The initial plans of savers and investors in this closed private economy are shown as S0 and I0. Suppose people begin spending less on current consumption and aggregate saving plans shift to curve S1. A classical adjustment is for the: (a) interest rate to fall to i1 while both saving and investment increase to q2. (b) future spending by consumers to perfectly offset the decline in current consumption; this provides firms with adequate incentives to store all their inventories. (c) investment curve I0 to shift rightwards because of the higher profits expected from future sales of the extra goods produced by the extra capital accumulated. (d) fall in interest rates to shift households back towards more current consumption. 16) AM25 \ C \ A2514 \ Classical Theory: Capital Markets \ 3\\ Any drop in interest rates caused by people’s increased willingness to save will cause: (a) the rate of return schedule reflected in I0 to shift to the right. (b) the rate of return schedule reflected in I0 to shift to the left. (c) a movement down the rate of return schedule from point c to point e. (d) a movement up the rate of return schedule from point c to point a. (e) households to increase their saving. 17) AM25 \ A \\ Classical Theory: Capital Markets \ 2 \\ According to classical macroeconomic theory, if everyone attempts to save more, falling: (a) interest rates will stimulate investment and economic growth. (b) sales revenue will cause unemployment to rise and output to fall. (c) tax collections will increase federal budget surpluses. (d) military spending will stimulate aggression by foreign enemies. 18) AM25 \ A \\ Classical Theory: Inflation \ 2 \\ Inflation is solely a symptom of excessive monetary growth in: (a) classical macroeconomic theory. (b) mercantilist doctrine. (c) Marxist theory. (d) Keynesian economic theory. (e) socialist economic theory. 19) AM25 \ C \\ Classical Theory: Aggregate Supply \ 2 \\ Classical economic theory implied that, in the long run, the Aggregate Supply curve is: (a) horizontal. (b) vertical at any given level of aggregate output. (c) vertical at the full-employment level of aggregate output. (d) gently sloped in a positive direction.

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Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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20) AM25 \ B \\ Classical Macroeconomics and the Great Depression \ 2 \\ The twentieth-century event that was least consistent with the predictions of Say’s law was: (a) World War II. (b) the Great Depression. (c) the breaking up of Standard Oil. (d) the collapse of the Soviet Union. (e) the replacement of IBM by Microsoft as the most powerful company in computing. 21) AM25 \ D \ History: The Great Depression \ 2 \\ Real income grew roughly 60 percent between 1933 and 1940, but the: (a) unemployment rate never fell below 25 percent. (b) rate of hyperinflation was not reduced. (c) purchasing power of wages increased even faster. (d) price level rose less than 13 percent. 22) AM25 \ C \\ History: The Great Depression \ 2 \\ During the period 1929 to 1933 in the United States, average: (a) industrialization was at its peak. (b) annual inflation was 15 percent. (c) monetary prices fell by roughly one-third. (d) involuntary employment fell sharply. (e) nominal wages rose by roughly one-half. 23) AM25 \ C \\ John Maynard Keynes \ 2 \\ The economist usually acknowledged as the founder of modern macroeconomics is: (a) Adam Smith. (b) Joseph A. Schumpeter. (c) John Maynard Keynes. (d) Alfred Marshall. (e) Thomas Robert Malthus. 24) AM25 \ E \\ Aggregate Demand \ 2 \\ According to Keynesian theory, a recession is most likely to begin if aggregate: (a) demand increases because of excessive government purchases. (b) demand and aggregate supply both increase because of a baby boom and technological innovations. (c) supply increases less rapidly than aggregate demand. (d) demand increases while aggregate supply decreases. (e) demand decreases because consumers and investors become pessimistic.

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25) AM25 \ C \\ Aggregate Demand \ 1 \\ Sets of terms that are reasonably synonymous include: (a) price controls and inflation and price ceilings. (b) quantity adjustments and inventory accumulation and market clearing. (c) Aggregate Demand and Aggregate Expenditures and Aggregate Spending. (d) spending multipliers and Keynesian macroeconomics and fiscal policy. (e) the marginal wage bill and average costs and average variable physical product. 26) AM25 \ B \\ Aggregate Demand \ 2 \\ “Demand creates its own supply” during a recession according to: (a) Say’s law. (b) Keynesian theory. (c) supply-side economics. (d) classical macroeconomic theory. (e) Adam Smith’s invisible hand. 27) AM25 \ B \\ Aggregate Demand \ 1 \\ Potential inadequacies of Aggregate Demand are emphasized most in: (a) classical economic theory. (b) Keynesian economic theory. (c) Say’s Law. (d) Schumpeter’s long wave theory. 28) AM25 \ C \\ Aggregate Demand \ 1 \\ According to Keynesian theory, in a recession or depression, the levels of output, employment, income, and prices are determined primarily by: (a) pure market operations. (b) interest rates. (c) Aggregate Demand. (d) Aggregate Supply. 29) AM25 \ D \\ Closed Private Economy Models \ 2 \\ A macroeconomic model for a purely private economy without international trade would not consider: (a) consumption, investment, or unemployment. (b) saving, investment, or interest rates. (c) differences between planned and actual investment. (d) imports, exports, taxes, or government purchases.

Ralph Byrns

Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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30) AM25 \ D \\ Aggregate Expenditures and Income \ 1 \\ The relationship between Aggregate Expenditures and nominal national income is: (a) positive over some range and then constant. (b) constant across all ranges of output. (c) negative over some range and then positive. (d) positive across all ranges of output. (e) constant over in initial range and then negative. 31) AM25 \ A \\ Aggregate Expenditures \ 2 \\ In the Keynesian model, aggregate expenditures comprise: (a) C + I + G + [X-M]. (b) import expenditures. (c) C + S + T. (d) gestational expenditures. 32) AM25 \ B \\ Aggregate Expenditures \ 2 \\ Basic components of Aggregate Expenditures do not include: (a) consumer spending. (b) corporate profit. (c) net exports. (d) private investment. (e) government purchases of goods and services. 33) AM25 \ A \\ Aggregate Expenditures and Aggregate Supply \ 2 \\ In a market economy that is experiencing a recession, according to Keynes, Aggregate Demand alone determines output and employment because the Aggregate Supply curve is: (a) almost horizontal. (b) positively related to government spending. (c) almost vertical. (d) negatively related to total investment spending. 34) AM25 \ C \\ Consumption \ 1 \\ In comparison to the other major components of GDP, consumption is: (a) the most volatile, and leads to business cycles. (b) influenced mainly by expectations and interest rates. (c) the largest and most stable type of spending. (d) primarily autonomous.

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35) AM25 \ C \\ Fundamental Psychological Law of Consumption \ 2 \\ John Maynard Keynes’ explanation of the marginal propensities to consume and save, and of the characteristics of normal consumption functions, was based on: (a) extensive empirical evidence. (b) pure logic. (c) introspective assertions about behavior. (d) classical theory. 36) AM25 \ E \\ Fundamental Psychological Law of Consumption \ 1 \\ The idea that consumption depends primarily on disposable income was first emphasized as a foundation for macroeconomic theory by: (a) David Ricardo. (b) Milton Friedman. (c) Jean Baptiste Say. (d) Adam Smith. (e) John Maynard Keynes. 37) AM25 \ E \\ Fundamental Psychological Law of Consumption \ 2 \\ A paraphrase of Keynes’s characterization of consumption behavior is: (a) 100 percent of wage income is spent. (b) everyone “tries to keep up with the Joneses.” (c) consumption requires equality between subjective and market prices. (d) social values and customs largely determine consumption patterns. (e) people spend more and save more as their income rises. 38) AM25 \ D \\ Fundamental Psychological Law \ 2 \\ Positive marginal propensities to consume and to save would be most compatible with: (a) Jean Baptiste Say’s Law. (b) Joseph Schumpeter’s theory of innovation. (c) William Stanley Jevons’ cyclical theories. (d) John Maynard Keynes’ “fundamental psychological law.” 39) AM25 \ B \\ Induced Spending \ 2 \\ Spending that is positively related to the level of GDP is called: (a) autonomous expenditures. (b) induced expenditures. (c) fixed expenditures. (d) ex post expenditures.

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Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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40) AM25 \ A \\ Dissaving \ 1 \\ Dissaving occurs when: (a) net wealth [assets minus liabilities] decrease. (b) the federal government runs a budget deficit. (c) a household spends all of its disposable income. (d) your assets grow faster than your liabilities. 41) AM25 \ D \\ Dissaving \ 2 \\ People whose consumption exceeds their disposable income definitely experience: (a) delayed gratification. (b) disinvestment. (c) increased consumer surplus. (d) dissaving. (e) immediate gratification. 42) AM25 \ D \\ Consumption Function \ 2 \\ A family’s consumption schedule would not shift in response to changes in: (a) family assets relative to liabilities. (b) expectations about income. (c) consumer tastes and preferences. (d) the family’s disposable income. 43) AM25 \ C \\ Consumption Function \ 2 \\ My income was $30,000 last year. My salary increased to $32,000 and my mpc is .8. My consumption will grow by: (a) $2,000. (b) $9,600. (c) $1,600. (d) $11,000. 44) AM25 \ C \\ Consumption and Saving \ 2 \\ Saving in the simple Keynesian model is: (a) uniformly a positive number. (b) determined primarily by interest rates. (c) positive if consumption is less than income. (d) consistently a negative number. 45) AM25 \ D \\ Consumption and Saving \ 2 \\ A decline in autonomous consumption requires an equal, offsetting increase in the: (a) marginal propensity to consume. (b) level of autonomous investment. (c) marginal propensity to save. (d) level of autonomous saving.
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46) AM25 \ C \\ Autonomous Consumption \ 2 \\ Factors that influence the autonomous consumption of a household do not include the: (a) number and ages of family members. (b) wealth of the family. (c) amount of money in circulation in the nation per family. (d) expectations of family members about job security and future earnings. (e) assets relative to liabilities of the household. 47) AM25 \ C \\ Autonomous Consumption \ 2 \\ Major determinants of a family’s autonomous consumption do not include: (a) the stocks of consumer durables owned by the family. (b) the number of children in the family and the ages of family members. (c) offsetting expectations about changes in relative prices. (d) family wealth and the amounts of its assets and indebtedness. (e) its expectations about future income. 48) AM25 \ B \\ Autonomous Consumption \ 2 \\ Aggregate autonomous consumption would not change in response to changes in: (a) the distribution of income. (b) disposable income. (c) economic expectations. (d) typical household balance sheets. 49) AM25 \ A \\ Autonomous Consumption \ 2 \\ The relationship between inflationary expectations and autonomous consumption is: (a) positive. (b) negative. (c) zero. (d) set by income tax rates. 50) AM25 \ E \\ Wealth and Autonomous Consumption \ 2 \\ A declining stock market index due to lower prices for shares of corporate stocks will be most likely to (a) create inflationary pressure, thereby increasing interest rates. (b) generate ever-larger federal government budget surpluses. (c) drive unemployment rates down. (d) make it easier for new firms to secure funding. (e) reduce people’s wealth and as a result, reduce autonomous consumption in the simple Keynesian model.

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Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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51) AM25 \ D \\ Autonomous Consumption and Saving \ 2 \\ Autonomous consumption and autonomous saving are least influenced by: (a) the average size and age of the household. (b) stocks of goods held by consumers. (c) the nature of the household balance sheet. (d) random changes in relative prices. 52) AM25 \ C \\ Autonomous Saving \ 3 \\ If all consumption were induced then, at all levels of disposable income, autonomous saving would be: (a) positive. (b) negative. (c) zero. (d) infinite. (e) larger than consumption. Figure A2553

53) AM25 \ D \ A2553 \ Consumption and Saving\ 3 \\ For each possible level of income to the right of the intersection of the consumption [C] and income [Y] lines, the vertical distance between these functions represents the rate of: (a) induced consumption. (b) dissaving. (c) autonomous consumption. (d) positive saving. (e) loan repayments.

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54) AM25 \ B \ A2553 \ Consumption and Dissaving\ 3 \\ For each possible level of income to the left of the intersection of the consumption [C] function and the income [Y] reference line, the vertical distance between these functions represents the level of: (a) induced consumption. (b) dissaving. (c) autonomous consumption. (d) positive saving. (e) investment. 55) BM08\ C \ A2553\ Consumption \ 3\ The marginal propensity to consume [mpc] may be measured graphically by the slope of the: (a) 45-degree reference line. (b) saving function. (c) consumption function. (d) line from the origin to a given point on the consumption function. 56) AM25 \ B \ A2553 \ Marginal Propensity to Consume \ 3 \\ The marginal propensity to consume in this figure equals: (a) one-third. (b) one half. (c) three-fifths. (d) two-thirds. 57) AM25 \ D \\ Autonomous Consumption and Autonomous Saving \ 2 \\ If the marginal propensity to consume [mpc] is 0.8 and autonomous consumption for a family is $15,000, then the family’s autonomous saving is: (a) $12,000. (b) -$12,000. (c) $15,000. (d) -$15,000. 58) AM25 \ C \\ Marginal Propensity to Consume \ 1 \\ The marginal propensity to consume [mpc] is the: (a) proportion of disposable income consumed. (b) reciprocal of the ratio of income to saving. (c) change in consumption as a percentage of a small increase in income. (d) Keynesian multiplier coefficient.

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Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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59) AM25 \ A \\ Marginal Propensity to Consume \ 1 \\ The marginal propensity to consume refers to the: (a) proportional rate at which consumption changes as disposable income changes. (b) tendency of low-income people to proportionally spend more than high-income families. (c) consumption per dollar of GDP. (d) level of per capita consumption. (e) per capita consumption of a good. 60) AM25 \ C \\ Marginal Propensity to Consume \ 2 \\ If all planned consumption is induced, the marginal propensity to consume [mpc]: (a) equals 1. (b) is zero. (c) is positive. (d) is less than 1. (e) equals infinity. Figure A2561

61) AM09 \ A \ A2561 \ Keynesian Cross \ 1 \\ The slope of the curve Yd = C + S in this figure is: (a) plus one [1.0]. (b) zero [0]. (c) forty five [45]. (d) minus one [-1].

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62) AM09 \ D \ A2561 \ Marginal Propensity to Consume \ 3 \\ In this diagram, the marginal propensity to consume [mpc] equals: (a) 0.9. (b) 0.8. (c) 2/3. (d) 0.5. (e) 1/3. 63) AM09 \ C \ A2561 \ Consumption \ 3 \\ If disposable income rose to $24 trillion, then total consumption would be: (a) $24 trillion. (b) $22 trillion. (c) $20 trillion. (d) $18 trillion. (e) $16 trillion. 64) AM09 \ E \ A2561 \ Autonomous Saving \ 3 \\ Autonomous saving in this figure is: (a) $8 trillion. (b) $4 trillion. (c) zero. (d) -$4 trillion. (e) -$8 trillion. 65) AM09 \ A \ A2561 \ Saving \ 3 \\ If income rose to $24 trillion, realized saving would equal: (a) $4 trillion. (b) $5 trillion. (c) $6 trillion. (d) $7 trillion. 66) AM25 \ D \\ Marginal Propensity to Consume \ 1 \\ A marginal propensity to consume of one [1] indicates that every dollar: (a) of consumer spending is autonomous. (b) saved by households is induced. (c) is hoarded by wealthy households. (d) of increased disposable income is consumed.

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Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

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67) AM25 \ B \\ Marginal Propensity to Consume \ 2 \\ The average U.S. marginal propensity to consume would probably change most in response to: (a) changes in total investment. (b) redistributions of income from the rich to the poor. (c) lowering the legal drinking age. (d) severe changes in the weather. 68) AM25 \ E \\ Marginal Propensity to Consume \ 2 \\ If Chandra decides to save an extra $10 each month after a raise increases her monthly takehome pay by $100, her marginal propensity to consume is: (a) 0.5. (b) 0.6. (c) 0.7. (d) 0.8. (e) 0.9. 69) AM25 \ B \\ Marginal Propensity to Consume \ 2 \\ If all consumption is autonomous, the marginal propensity to consume is: (a) 1.0. (b) zero. (c) infinity. (d) minus infinity. (e) - 1.0. 70) AM25 \ B \\ Marginal Propensity to Consume \ 2 \\ The marginal propensity to consume equals the: (a) ratio C/Y. (b) change in consumption divided by the change in disposable income. (c) consumption level relative to the income level. (d) change in income induced by a change in consumption. 71) AM25 \ C \\ Marginal Propensities to Consume and Save \ 2 \\ The marginal propensity to consume [mpc] plus the marginal propensity to save [mps] equals: (a) induced spending minus autonomous spending. (b) 0. (c) 1. (d) the marginal expected interest rate.

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72) AM25 \ D \\ Marginal Propensity to Save \ 2 \\ The marginal propensity to save [mps] is equal to: (a) consumption divided by disposable income. (b) savings divided by disposable income. (c) change in consumption divided by change in disposable income. (d) change in savings divided by change in disposable income. 73) AM25 \ C \\ Marginal Propensity to Save \ 2 \\ The marginal propensity to save is the ratio of: (a) per capita saving / population. (b) saving / GDP. (c) [change in intended saving] / [change in disposable income]. (d) [1-mps] / mpc. 74) AM25 \ B \\ Marginal Propensity to Save \ 1 \\ If all of an increase in disposable income is saved, the marginal propensity to save is: (a) 0.0 (b) 1.0 (c) -1. (d) 0.5. 75) AM25 \ B \\ Marginal Propensity to Save \ 2 \\ If the stock market booms and increases the wealth of stockholders all over the country: (a) net exports are likely to increase. (b) people will save more. (c) the economy will tend to fall into a recession. (d) people will become increasingly thrifty and reduce their spending. (e) the real estate market is likely to go down. 76) AM25 \ B \\ Marginal Propensity to Save \ 2 \\ If you spend $800 out of an extra $1000 in income, your marginal propensity to save is: (a) $200. (b) 0.2. (c) $800. (d) 0.8. 77) AM25 \ A \\ Marginal Propensity to Save \ 1 \\ If the marginal propensity to consume falls, the marginal propensity to save: (a) must rise. (b) may rise. (c) must fall. (d) may fall.
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78) AM25 \ E \\ Average Propensity to Consume \ 2 \\ The average propensity to consume [apc]: (a) plus the marginal propensity to consume equals one [apc + mpc = 1]. (b) rises sharply as income rises. (c) equals the change in consumption divided by the change in income. (d) tends to be negative at low levels of income. (e) is computed as C/Yd. 79) AM25 \ A \ Average Propensity to Save \ 1 \\ In simple Keynesian models, the average propensity to save equals: (a) the ratio S/Y. (b) 1 - mpc. (c) the ratio Y/S. (d) the apc. (e) the mpc. 80) AM25 \ A \\ Induced Consumption \ 2 \\ Simple Keynesian models assume that a change in national income will primarily affect the level of: (a) consumption. (b) private investment. (c) net exports. (d) government spending. 81) AM25 \ B \\ Induced Consumption \ 2 \\ Consumption that varies with the level of disposable income is called: (a) autonomous consumption. (b) induced consumption. (c) spontaneous consumption. (d) unintended consumption. (e) overconsumption. 82) AM25 \ B \\ Induced Consumption \ 2 \\ During prosperous periods, the largest component of the consumption expenditure flow is: (a) autonomous consumption. (b) induced consumption. (c) unintended consumption. (d) impulsive consumption.

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83) AM25 \ C \\ Induced Consumption \ 2 \\ Induced consumption would be most influenced by: (a) inherited wealth. (b) expectations. (c) the mpc. (d) inflation. 84) AM25 \ C \\ Dissaving \ 3 \\ In a simple Keynesian-cross model of a closed private economy, if C = Yd at Yd = $3,000 billion, and if the marginal propensity to consume is positive, then there is: (a) no autonomous consumption. (b) no induced consumption. (c) dissaving below Yd = $3,000 billion. (d) saving equal to $600 billion. 85) AM25 \ B \\ Autonomous Spending \ 2 \\ All of the autonomous variables in a simple linear Keynesian model are assumed to be independent of: (a) consumer expectations. (b) national income. (c) interest rates. (d) the state of international relations. 86) AM25 \ B \\ Economic Investment \ 2 \\ Investment spending in the United States is: (a) the most stable component of Aggregate Demand. (b) the major form of final spending by business. (c) countercyclically stabilizing. (d) related to the average number of new college graduates in any given year. 87) AM25 \ D \\ Economic Investment \ 2 \\ When calculating the United States’ Aggregate Expenditures, investment spending does not include: (a) all final purchases of new capital equipment. (b) residential construction. (c) changes in inventories. (d) all business construction in foreign countries by American firms. (e) all investment in the United States by foreign firms.

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88) AM25 \ C \\ Economic Investment \ 2 \\ Economic investment can be facilitated by: (a) high interest rates in capital markets. (b) low saving rates by consumers. (c) financial investments from savers who buy newly-issued corporate stocks or bonds. (d) federal budget deficits at full employment. 89) AM25 \ D \\ Economic Investment: Rates of Return \ 2 \\ To compare the profitability of potential investment projects, the expected future incomes from each project are expressed as: (a) dollars. (b) percentages of the cost of the project. (c) dollars per year across each project’s duration. (d) annual percentage rates of return. 90) AM25 \ A \\ Economic Investment: Diminishing Rates of Return \ 2 \\ All else equal, the greater the level of economic investment in a country, the: (a) lower the expected rate of return on additional investment. (b) higher the interest rate. (c) higher the expected rate of return on additional investment. (d) lower the rate of expected incomes. 91) AM25 \ A \\ Economic Investment: Rates of Return and Interest \ 2 \\ If the rate of return on investment exceeds the interest rate, investment will: (a) rise. (b) remain constant. (c) fall. (d) be highly unstable. 92) AM25 \ C \\ Economic Investment: Rates of Return and Interest \ 2 \\ If an investment’s expected rate of return exceeds the prevailing interest rate, then: (a) no bank will be willing to make a loan to an investor. (b) a saver will try to save more. (c) a firm will make the investment. (d) total costs exceed the revenues expected from investing. 93) AM25 \ C \\ Economic Investment: Rates of Return and Interest \ 3 \\ An investment that fully depreciates in one year and costs $100,000, and that is expected to add $110,000 to the firm’s revenue in one year will be: (a) unprofitable at an interest rate of 5%. (b) profitable at an interest rate of 15%. (c) profitable at an interest rate of 7.5%. (d) ignored because state lotteries have higher payoffs.
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94) AM25 \ C \\ Economic Investment: Rates of Return and Interest \ 1 \\ If the interest rate rises because families with mortgages are borrowing more when they buy a home, other things equal, business investment will: (a) rise. (b) fluctuate wildly. (c) fall. (d) remain constant. 95) AM25 \ D \\ Economic Investment: Rates of Return and Interest \ 2 \\ Planned investment spending tends to: (a) be a major component of Aggregate Supply. (b) stabilize volatile consumer spending. (c) include purchases of new stocks and bonds. (d) increase when interest rates fall. (e) fall when new capital costs decrease. 96) AM25 \ A \\ Economic Investment: Rates of Return and Interest \ 2 \\ Autonomous investment is most likely to be affected by changes in: (a) market interest rates and expected rates of return. (b) personal income. (c) wage rates and CEO salaries. (d) the size of the federal budget. (e) the cost of gasoline and oil. 97) AM25 \ C \\ Economic Investment: Rates of Return and Interest \ 2 \\ Classical macroeconomists and Keynesians would agree that: (a) the volatility of economic activity in a market economy is reduced by government policies. (b) business cycles occur primarily because of volatility in investors' moods. (c) equilibrium investment occurs when expected rates of return on investment equal market interest rates. (d) inflation is a more serious problem than unemployment during a recession. (e) increased investment leads to higher rates of return. 98) AM25 \ E \\ Economic Investment: Expectations \ 2 \\ For the economy as a whole, expected rates of return on investment would be least influenced by the: (a) level of business confidence about future sales. (b) rate of technological innovation. (c) rate of capital utilization. (d) tax rates on corporate income. (e) relative structures of family budgets.

Ralph Byrns

Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

Test Bank One

21

99) AM25 \ D \\ Economic Investment: Expectations \ 2 \\ Positive expectations about the business environment are necessary before firms will: (a) make profit-maximizing decisions. (b) intentionally decrease their inventories. (c) advertise to increase their sales. (d) invest in new plants and equipment to produce more output. 100) AM25 \ A \\ Economic Investment: Inventories \ 2 \\ Investment is the least stable major component of aggregate expenditures. The most volatile component of investment is: (a) inventory accumulation. (b) depreciation. (c) residential construction. (d) business construction. (e) new machinery and equipment. 101) AM25 \ A \\ Autonomous Investment \ 2 \\ In a simple Keynesian model, an increase in investment: (a) increases autonomous spending. (b) raises the marginal propensity to spend. (c) expands the value of the multiplier. (d) reduces the marginal propensity to save. 102) AM25 \ C \\ Government Purchases \ 2 \\ Checks written by the Department of the Treasury that would most directly and positively affect the level of Aggregate Expenditures in the United States would be for: (a) Social Security payments to the families of retired and disabled workers. (b) interest on U.S. Savings bonds that your parents gave you for your tenth birthday. (c) salaries paid to summer interns who fight fires in national forests. (d) interest on U.S. Treasury Bonds held by the Social Security Administration and the Federal Reserve System. (e) imported petroleum products used to power the ships of the U.S. Navy and Coast Guard. 103) AM25 \ C \\ Government Purchases \ 1 \\ During the past 100 years, government purchases have been: (a) the largest expenditure flow in the U.S. GDP. (b) about twice as large as personal spending. (c) the second largest expenditure flow in the U.S. GDP. (d) less than net exports.

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Contemporary Economics

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104) AM25 \ A \\ Government Purchases \ 2 \\ Congress enacted major increases in military spending and national security after 9/11/2001, which suggests that defense spending is primarily: (a) autonomous. (b) induced. (c) unintended. (d) permanently fixed. 105) AM25 \ A \\ Net Exports \ 1 \\ Aggregate Expenditures are not increased by increases in: (a) imports. (b) exports. (c) investment. (d) government purchases. 106) AM25 \ C \\ Net Exports \ 2 \\ Faster growth of a country’s exports than of its imports will cause Aggregate: (a) unemployment rates to rise. (b) inflation rates to fall. (c) Spending to rise. (d) balance of trade deficits. 107) AM25 \ C \\ Net Exports \ 2 \\ The smallest component of U. S. Aggregate Expenditures is: (a) consumption. (b) investment. (c) net exports. (d) government purchases of goods and services. (e) government transfer payments.

Ralph Byrns

Chapter 9 / 25: Classical Macroeconomics and Keynesian Aggregate Expenditures

Test Bank One

23