Aggregate demand is the total quantity of output:

Demanded at alternative price levels in a given time period.

*Aggregate demand represents the total amount of spending at various price levels.
The combination of price level and real output that is compatible with both aggregate
demand and aggregate supply is the definition of:
Equilibrium.
*The macro equilibrium occurs at the intersection of the AS and AD curves.
Consumption expenditures:
Account for over two-thirds of total spending.
*The largest part of spending in the U.S. economy comes from consumer spending.
Which of the following forces did Keynes assert had the strongest influence on
consumption decisions?
Disposable income
Disposable income is one determinant of consumer spending which is the largest part of
the U.S. economy.
If the MPC is 0.60 and disposable income increases from $20,000 billion to $22,000
billion, then consumption will increase by:
$1,200 billion.
*Consumption spending will rise by the change in disposable income multiplied by the
MPC. (2000 × 0.60 = $1200)
The consumption function implies that:
Consumption increases as disposable income increases.
*There is a positive or direct relationship between consumption and disposable income.
If autonomous consumption decreases, then:
The AD curve will shift to the left.
* The AD curve will not be affected.
In this case, the consumption category falls so the AD curve would decrease, shifting to
the left.
With respect to the aggregate demand curve, improved consumer confidence would:
Shift the curve rightward.
*When consumers feel more secure about the economy, they will be inclined to spend
more.
If the availability of credit increases, then:
The AD curve will shift to the right.
*The availability of credit will cause interest rates to fall, giving consumers more buying
power and more buying power will tend to increase consumption.
The MPC indicates the portion of:
An additional dollar of income that will be spent.
*MPC is the change in consumption divided by the change in disposable income.
If tax policies become less favorable, then:
The AD curve will shift to the left.
*When taxes are higher, consumers and businesses will not be able to spend as much,
leading to a decrease in the AD curve.
Investment spending includes expenditures on all of the following except:
Stocks and bonds.
*Stocks and bonds represent how one chooses to hold one's wealth rather than physical
capacity.
Which of the following causes a movement along the investment demand curve?
A change in the rate of interest
*Investment spending is inversely related to the interest rate.
If the investment demand curve shifts to the left, then:
The AD curve will shift to the left.
*Because investment spending is part of GDP, a fall in investment will decrease the AD
curve.
Which of the following lists all the components that are included in aggregate demand?
correct
Consumption, government spending, net exports, and investment
*Aggregate demand includes the four components of spending that make up GDP.
Which of the following is not a component of aggregate demand?
Productivity
*Productivity is a measure of the efficiency of resources that are used to produce
output.
Which of the following occurs when the spending on final goods and services exceeds
full-employment GDP?
Inflationary gap
*When aggregate demand exceeds full employment GDP, resources are being over-
used and bidding wars will drive up their prices, creating inflation.
Which of the following most likely occurs when an inflationary gap exists?
A bidding war for available goods and services
*An inflationary gap will cause the price level to rise as too many dollars are chasing too
few resources.
Demand-pull inflation is caused by:
Excessive aggregate demand in relation to an economy's production capacity.
*When aggregate demand increases, production is unable to keep up with spending
and so prices rise as a result.
Using Figure 9.1, the amount of autonomous consumption is:
$500 billion
*The consumption function intersects the vertical axis at $500 billion which is the level of
autonomous consumption.
Using Figure 9.5, a movement from Point A to Point C would result from:
A decrease in the interest rates.
*Changes to interest rates cause a movement along the investment curve.
A movement from Point A to Point B in Figure 9.5 would result in:
An increase in aggregate demand.
*Investment spending is one of the four categories of spending so an increase in
investment would shift the aggregate demand curve to the right.
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It is possible for the economy to be in macro equilibrium at a point below full
employment output.
True
Suppose the economy is at macro equilibrium, which is below full employment output as
demonstrated by point E1 on the following graph.

Recall that an increase in C, I, G, or exports (X) shifts AD to the right while an increase
in imports (M) shifts AD to the left, a negative shift. If a policy is passed that increases
government spending, the new equilibrium output level will be ________, the new
equilibrium price will be __________, and the economy will have moved _________ full
employment output.
higher, higher, closer to
The marginal propensity to consume (MPC) is:
The change in consumption divided by the change in disposable income.
If consumers receive a $2 billion increase in disposable income and as a result increase
consumption by $1.4 billion, the closest approximation (at two decimal points) to
marginal propensity to consume (MPC) is:
.7
The consumption function consists of two additive terms: autonomous consumption
and:
Income-dependent consumption.
For a given week, a consumer's autonomous consumption is $110, marginal propensity
to consume is 0.9, and disposable income is $300. According to the consumer's
consumption function, how much will he/she spend on consumption each week?
$380
While a change in expectations will cause a shift of the investment curve, a change in
interest rates will cause movement along the investment curve.
True
assume investment is initially determined by curve I1. With worse expectations, what
will the interest rate need to be for planned investment to be $300?
4%
The two chief concerns about macro equilibrium are: (1) The market's macro equilibrium
might not give us full employment or price stability; and (2) Even if the market's macro
equilibrium were perfectly positioned, it might not last.
True
Based on the equilibrium level of GDP, if full-employment GDP were 8.0 trillion then the
inflationary/recessionary gap would be:
inflationary, 1.0

When the economy is at equilibrium:

Leakages equal injections
If injections exceed leakages:
The economy will expand
Equilibrium GDP could be upset by a change in: a.
Any leakage or injection.
If investment spending decreases and all other levels of spending remain constant, then
aggregate:
Demand decreases.
Assuming an upward-sloping AS curve, if an economy is at full employment and
investment spending decreases while all other levels of spending remaining constant,
then the price level:
Decreases and output decreases.
When unwanted inventories pile up in retail stores, retail managers will take actions that
lead to greater:
Unemployment.
Which of the following equations defines the multiplier?
1 ÷ (1 - MPC).
To illustrate the ultimate impact of the multiplier process when investment spending
falls, we should:
Shift the AD curve leftward twice, once for the autonomous change and second for the
multiplier effect.
Assuming an upward-sloping aggregate supply curve, when aggregate demand
decreases, unemployment:
Increases, and the price level decreases.
A decrease in a recessionary GDP gap will most likely be associated with a decrease in:
Cyclical unemployment.
A recessionary GDP gap is the:
Horizontal distance between full-employment GDP and equilibrium GDP.
If leakages are greater than injections, equilibrium output will be:
Less than full-employment output, and a recessionary gap will occur.
Which of the following can eliminate a recessionary GDP gap, ceteris paribus?
An increase in consumption expenditure.
In the short run, one reason why we do not define "full employment" as 0 percent
unemployment is because:
The closer the economy gets to capacity output, the greater the risk of inflation.

which of the following was not characteristic of the U.S. economy during the Great
Depression?
Unemployment reached 50%
Say's law states that
supply creates its own demand
who believed that small disturbances in output, prices or unemployment were likely to
be magnified by the invisible hand of the marketplace
john maynard keynes
which group of economists believes that there is a natural rate of output that is relatively
immune to short-run fluctuations in aggregate-demand?
monetarists
which of the following is not associated with the aggregate supply curve?
the interest rate effect. (factors of production, the profit effect, the cost effect)
alternating periods of economic growth and contraction in real GDP define
the business cycle
external shocks include all of the following except
population (natural disasters, terrorist attacks, wars)
which of the following is not determinant of autonomous consumption?
...
which of the following is not a determinant of autonomous consumption?
the disposable income level. (taxes, the availability of credit, the price level)
the marginal propensity to consume can be found by dividing
the change in total consumption by the change in disposable income
gross exports for the united states depend most directly on the
spending behavior of foreign consumers and businesses
which of the following lists all the components that are included in aggregate demand?
consumption, government spending, net exports, and investment
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according to keynesian theory, which of the following is not true of all short term macro
equilbria?
all macroeconomic goals are achieved. (the economy may or may not be at full
employment, the aggregate demand curve intersects the aggregate supply curve,
producers are selling everything they currently produce)
the MPC + MPS must always equal
1
which of the following equations defines the multiplier?
1/(1-MPC)
leakages include
business saving
injections include
exports
an addition of spending to the circular flow of income is
an injection
if equilibrium GDP exceeds full-employment GDP
the difference is the inflationary GDP gap
when an economy is operating at "full employment," as economists usually define the
term
the unemployment rate in 4-6 percent
The output level at which the aggregate demand curve intersects the aggregate supply
is always the level at which:
Macro equilibrium is achieved.
*At macro equilibrium spending is equal to total output.
When the economy is at equilibrium:
Leakages equal injections.
*The total amount of funds leaving the circular flow returns if the economy is in
equilibrium.
A leakage is:
A diversion of income from spending on output.
*Saving is a leakage as it is money earned but not spent by the household.
Which of the following is a leakage?
correct
Imports

*Spending on imports is not a part of aggregate demand since it is not spent on

domestic goods.
Investment represents:
An injection into the circular flow, like government spending.
*Investment is money spent by businesses, a sector other than the household, which is
an important spending component.
If leakages exceed injections:
The unemployment rate will be above its full employment level.
*When leakages are greater than injections, a greater amount of funds are diverted from
spending than actually returned to the circular flow model, this results in higher than
normal unemployment.
If injections exceed leakages:
The economy will expand.
*When injections are greater than leakages, a greater amount of funds are entering the
circular flow than being diverted from households, causing production to rise and
unemployment to fall.
If investment spending decreases and all other levels of spending remain constant then
aggregate:
demand decreases
*A drop in one of the spending components, consumption, investment, government
expenditures or net exports, causes a change (shift) in AD.
If an economy is at full employment and investment spending decreases while all other
levels of spending remaining constant then:
A GDP gap emerges.
*Spending will fall short of the level required to maintain full-employment, creating a
recessionary GDP gap.
When unwanted inventories pile up in retail stores, retail managers will take actions that
lead to greater:
Inflation.
Unemployment
*Retail managers will reduce purchase orders and cut back on employment so that the
inventory will fall to normal levels, this reduces production up the supply chain and may
lead to more layoffs.
The multiplier process can occur when a decrease in investment spending:
Reduces household incomes causing consumers to buy fewer goods and services.
*With less income, households will buy less, which in turn increases layoffs elsewhere,
causing spending to fall further.
Which of the following is an example of the multiplier at work as a result of an increase
in consumption expenditures?
Households and businesses receive income from consumption expenditures; they
spend a portion of this new income; these expenditures in turn generate income for
other businesses and households, which in turn spend a portion of the new income, and
so on.
*The multiplier feeds on itself; more spending creates even more spending, and less
spending leads to even less spending.
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If consumers spend 80 cents out of every extra dollar received, the multiplier is:
5.
*The multiplier can be calculated using the formula, multiplier = 1 ÷ (1 - MPC).
The formula for the multiplier is:
1/(1 - MPC).
*The multiplier greatly magnifies changes to spending, either resulting in a much larger
increase or decrease than originally.
An initial (autonomous) decrease in aggregate demand will likely be:
Much smaller than the eventual decline in spending.
*This is because the spending decline leads to cuts in production and employment
elsewhere which results in further declines in spending.
With a consumption function of the form C = a + bYD, which of the following would best
measure how much a recession will spread?
1 ÷ (1 - b)
*This equation represents the multiplier.
Given C = 200 + 0.75YD, the multiplier is:
4
*The multiplier can be determined by the equation 1 ÷ (1 - MPC), where MPC is the
slope variable.
Calculate the total change in spending because of an initial $100 increase in aggregate
demand, given the MPC = 0.60.
$250 increase
*The total change in spending is equal to the multiplier times the initial change in
spending, where the multiplier equals 1 ÷ (1 - MPC).
If the MPC = 0.90, the total change in spending resulting from an initial $200 increase in
aggregate spending will be:
$2000
*One can find the total change in spending by using the initial change in spending and
multiplying it by the multiplier, where the multiplier is equal to 1 ÷ (1 - MPC).
Assume a decrease in interest rates causes an initial increase in desired investment
and aggregate demand. Additional increases in aggregate demand will:
Be caused by increases in induced expenditures.
*The increase in investment spending leads to higher income, which in turn spurs more
spending.
Assuming an upward-sloping aggregate supply curve, when aggregate demand
increases, unemployment:
Decreases and the price level increases.
*When aggregate demand increases, the new macro equilibrium will occur to the right
and above the old equilibrium, resulting in a lower level of unemployment and a higher
price level.
A decrease in a recessionary GDP gap will most likely be associated with a decrease in:
Cyclical unemployment
*In order to decrease the size of a recessionary GDP gap, the AD or AS curve must
move to the right, leading to more production and therefore lower cyclical
unemployment.
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Suppose an economy has an upward-sloping aggregate supply curve and a
recessionary GDP gap equal to $50 billion. If aggregate demand increases by a total of
$50 billion:
The resulting equilibrium GDP will be lower than full employment GDP because some of
the additional spending will drive up prices instead of increasing output.
*The AD curve shifts to the right, but the new macro equilibrium will occur at a higher
price level, so there will still be a recessionary GDP gap, though it will be smaller.
A recessionary GDP gap is the:
Horizontal distance between full-employment GDP and equilibrium GDP.

*The recessionary GDP gap means the economy is producing less output and so
cyclical unemployment will be higher.
The recessionary GDP gap represents the:
Value of the goods and services that could be produced but were not due to
unemployed resources.
*The recessionary GDP gap is a concrete measure of the opportunity cost of a
recession, in dollar value only.
If leakages are less than injections, then equilibrium output will be:
More than full-employment output and an inflationary gap will occur.
*When total spending exceeds production, inventories fall to unacceptably low levels,
leading to an increase in production and a rise in prices.
Full employment is estimated to occur at an unemployment rate:
Between 4 and 6 percent.
*When the unemployment rate is between 4 and 6 percent, the economy is efficiently
using its resources and inflation is in an acceptable range.
In the short-run, one reason why we do not define "full employment" as zero percent
unemployment is because:
The closer the economy gets to capacity output, the greater the risk of inflation.
*In order to achieve zero percent unemployment, the AD curve would need to intersect
the AS curve far to the right of the full-employment level which would mean a very high
price level.
Inventory depletion is a warning sign of:
Impending inflation.
*Depleted inventory signals that AD is greater than AS. The shortage will drive up prices
and encourage increased production.
An inflation problem can best be solved by:
A reduction in desired spending.
* the AD curve shifts to the left, inflation will be reduced.
Because the aggregate supply curve rises more steeply as the economy approaches
full employment:
Inflation tends to accelerate.
*As macro equilibrium moves to the right, higher inflation will occur.
A basic conclusion of Keynesian analysis is that:
Small macro disturbances can lead to much larger macro problems.
*Large macro problems can develop from small macro disturbances due to the fact that
a multiplier effect is set off when spending initially declines.
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Suppose the MPC in the economy in Figure 10.2 equals 0.8 and the shift from AD0 to
AD1 was caused by a decrease in investment of $30 billion. What will the total decrease
in aggregate demand be (i.e., AD0 to AD2) as a result of the initial $30 billion decrease?
$150 BILLION
*The total change in spending after an infinite number of cycles can be found by taking
the multiplier, which is 1 ÷ (1 - MPC) and multiplying it by the initial change of $30 billion
which is equal to $150.
Suppose the MPC in the economy in Figure 10.2 equals 0.5 and the shift from AD0 to
AD1 was caused by a decrease in consumption of $12 billion. What will the total
decrease in aggregate demand be (i.e., AD0 to AD2) as a result of the initial $12 billion
decrease?
24 billion
*The total change in spending after an infinite number of cycles can be found by taking
the multiplier, which is 1 ÷ (1 - MPC) and multiplying it by the initial change of $12 billion
which is equal to $24 billion.
A leakage refers to income not spent directly on domestic output but instead diverted
from the circular flow, for example, saving, imports, and taxes.
True
__________ serves as a leakage to the product market.
Household taxes
The multiplier is the multiple by which an initial change in spending will alter total
expenditure after an infinite number of spending cycles; 1/ (1-MPC).
True
Suppose that the consumption function is C = a + MPC*Yd, where a = autonomous
consumption, Yd represents disposable income, and the MPC = 0.9. If the economy is
at equilibrium and investment falls by $130 billion, this will lead to a decrease in goods
sold, cutbacks in employment or wages, a reduction in household income of $130 billion
and an initial decrease in consumption of:
117 billion
When government expenditures or business investments fall by some amount,
aggregate demand falls by the same amount, completing the multiplier process. Prices
adjust and the economy attains a new equilibrium.
False
At a given point in time MPC = 0.75. As a result of increased consumer confidence,
consumption initially increases by $200 billion. What will be the total change in spending
(in billions) after the multiplier effect?
800
The key features of the Keynesian adjustment process are (1) producers cut output and
employment when leakage exceeds injections; (2) the resulting loss of income causes a
decline in consumer spending; (3) declines in consumer spending lead to further
production cutbacks, more lost income, and still less consumption.
True
if the initial change in investment and spending were characterized by a decrease of
$30 billion and the multiplier (1/ (1-MPC) equals 5, then the change in consumption
must be:
120
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The basic conclusion of the Keynesian analysis is that the economy is vulnerable to
abrupt changes in spending behavior but will self-adjust to a desired macro equilibrium.
False
According to a recent World Bank study, every 1% change in consumer confidence
alters autonomous consumer spending by $1.1 billion. If consumer confidence rises by
35%, then autonomous consumer spending will increase by $_____ billion.
38.5

The business cycle is defined as

alternating periods of economic growth and contraction
Aggregate demand
is the total quantity of output demanded at alternative price levels
The components of aggregate demand are
consumption, investment, government spending, and net exports
If consumers spend 80 cents out of every extra dollar received, the
MPC is 0.80
If the MPC is 0.75 and the APC is 0.8, then the MPS equals
.0.25
Which of the following causes a movement along the investment demand curve?
A change in the rate of interest
The combination of price level and real output that is compatible with both aggregate
demand and aggregate supply is the definition of
Equilibrium
Assuming an upward-sloping aggregate supply curve, when aggregate demand
increases
GDP increases and the price level increases
When the aggregate supply curve is vertical, increases in aggregate demand will
Increase the average price level but have no impact on unemployment
Which of the following is an income transfer?
Unemployment benefits paid to a factory worker who was laid off
Fiscal policy options to stimulate the economy include
An increase in transfer payments
Assume the economy is operating below full employment. Which of the following policy
actions will allow aggregate spending to increase but will not increase the size of the
government in the process?
Decrease tax rates and leave government spending unchanged
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A tax cut has less impact on aggregate demand than an increase in government
purchases of the same size because
A portion of the tax cut is saved
Fiscal policy is the use of
wage and price controls to change the level of output
Which of the following describes a budget deficit
Tax revenues fall short of expenditures over the fiscal year
Which of the following policies will definitely increase the budget deficit, while achieving
greater fiscal stimulus?
Greater government expenditure and higher taxes
A budget surplus is
an excess of government spending over government revenues in a given time period
Automatic stabilizers
Respond automatically and counter cyclically to changes in national income
A national debt is
equal to the total stock of outstanding Treasury bonds, bills, and notes
Which of the following is an automatic stabilizer that increases income to individuals
during a recession?
Medicaid benefits
In the figure above, which of the following could cause a shift from AD(0) to AD(1),
ceteris paribus?
An increase in income tax rates
Given that autonomous consumption equals $1,000, income equals $20,000, and the
MPC equals 0.80, the level of
17,000
C=A+(B*Yd)
C=current consumption; a = autonomous consumption; b=marginal propensity to
consume; Yd = Disposable Income
C=1000+(.80*20000)
C=1000+(16000)
C=17000
Demand-pull inflation is caused by:
Excessive aggregate demand in relation to an economy's production capacity
A recessionary gap
Is the amount by which the rate of actual spending falls short of full-employment GDP
Consumption and investment spending account for approximately _______ percent of
total output.
80
The combination of price level and real output that is compatible with both aggregate
demand and aggregate supply is the definition of:
Equilibrium
If tax policies become less favorable, then
The AD curve will shift to the left
The MPC + MPS must always equal
1
The MPC indicates the portion of
An additional dollar of income that will be spent
The components of aggregate demand are:
Consumption, government spending, net exports, and investment
If consumption is $340 and saving is $20, then disposable income is:
$360
One In the News article says "Personal consumption expenditures (PCE) increased
$51.9 billion, or 0.5 percent." An increase in spending is likely the result of:
An increase in income.
If disposable income increases from $9,000 billion to $11,000 billion, and consumption
increases from $9,500 billion to $11,000 billion, the MPC must be:
0.75
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If the MPC is 0.8 and the APC is 0.9, then the MPS equals:
.2
A decrease in U.S. exports to Japan can be represented by:
The aggregate expenditure curve shifting downward.
A sudden increase in confidence by the business community could best be represented
by:
An aggregate expenditure curve shifting upward
Which of the following is not a component of aggregate demand?
Productivity
Suppose the MPC in an economy is 0.9. The APC is initially 0.95 and disposable
income is $4 billion. If disposable income increases to $14 billion, what is the new level
of consumption?
$12.8 billion
Given that C = $1,000 + 0.60YD, if the level of disposable income is $1,000, the level of
saving is
-$600.

The output level at which the aggregate demand curve intersects the aggregate supply
is always the level at which

A. Saving is zero.

B. Macro equilibrium is reached.

C. Full employment is sustainable by the economy.

D. Micro equilibrium is achieved.
B. Macro equilibrium is reached.
John Maynard Keynes argued that

A. Macro failure is likely to occur, and it isn't likely to go away.

B. Macro failure is unlikely to occur.

C. Macro failure is likely to occur but will go away quickly.

D. None of the choices are correct.

A. Macro failure is likely to occur, and it isn't likely to go away.
Disposable income is less than GDP due to

A. Taxes by governments along with exports.

B. Income held by businesses.

C. Taxes by governments and income held back as saving by businesses.

D. Taxes by governments along with imports.

C. Taxes by governments and income held back as saving by businesses.
Investment represents

A. A leakage from the circular flow, similar to saving.

B. A leakage from the circular flow, similar to taxes.

C. An injection into the circular flow, similar to government spending.

D. An injection into the circular flow, similar to imports.

C. An injection into the circular flow, similar to government spending.
According to Keynes, if injections equal leakages,

A. The economy will always stabilize at full employment.

B. Macroeconomic equilibrium will occur.

C. Macroeconomic equilibrium will not occur.

D. Microeconomic instability will persist.

B. Macroeconomic equilibrium will occur.
If leakages exceed injections,

A. The economy will stabilize at full employment.

B. Interest rates will rise.

C. The economy is contracting.

D. Microeconomic instability will persist.

C. The economy is contracting.
Classical economists assume that

A. Spending leakages exceed spending injections.

B. Interest rate adjustment will cause business investment to equal consumer saving.

C. The economy might experience persistent macro instability.

D. No leakages would occur.

B. Interest rate adjustment will cause business investment to equal consumer saving.
If investment spending decreases and all other levels of spending remain constant, then
aggregate

A. Supply increases.

B. Supply decreases.

C. Demand increases.

D. Demand decreases.
D. Demand decreases.
A decrease in sales expectations may shift the AD curve to the

A. Left, causing more undesired investment.

B. Left, causing less undesired investment.

C. Right, causing more undesired investment.

D. Right, causing less undesired investment

A. Left, causing more undesired investment.
Assuming an upward-sloping AS curve, if an economy is at full employment and
investment spending decreases while all other levels of spending remaining constant,
then

A. A GDP gap emerges.

B. The price level increases.

C. Output increases.

D. The unemployment rate falls.

A. A GDP gap emerges.
Assuming an upward-sloping AS curve, if an economy is at full employment and
consumption spending decreases while all other levels of spending remaining constant,
then

A. Increased unemployment results.

B. Any GDP gap disappears.

C. Inventory levels are less than desired until a new equilibrium is reached.

D. Changes in consumption spending have no impact on GDP.

A. Increased unemployment results.
Desired saving equals desired investment in an economy with no government and no
foreign trade

A. At the full-employment level of income.

B. At the income where desired investment equals output.

C. By definition.

D. At the equilibrium level of income.

D. At the equilibrium level of income.
The multiplier process can occur when a decrease in investment spending

A. Increases household saving, causing consumers to buy more goods and services.

B. Reduces household incomes, causing consumers to buy fewer goods and services.

C. Increases household incomes, causing consumers to buy fewer goods and services.
D. Reduces household incomes, causing consumers to buy more goods and services.
B. Reduces household incomes, causing consumers to buy fewer goods and services.
Which of the following is an example of the multiplier at work as a result of an increase
in consumption expenditures?

A. Consumers compete with the government by increasing their expenditures, causing

businesses to increase their investments to satisfy the increased demand.

B. Consumption expenditures increase inflation, which reduces real incomes; consumer

expenditures and investment decline, which reduces aggregate spending.

C. Households and businesses receive income from consumption expenditures; they

spend a portion of this new income; these expenditures, in turn, generate income for
other businesses and households, which in turn spend a portion of the new income, and
so on.

D. Consumption expenditures stimulate investment in new plants and equipment to

produce goods and services for the government, which provides fewer jobs and
decreases incomes.
C. Households and businesses receive income from consumption expenditures; they
spend a portion of this new income; these expenditures, in turn, generate income for
other businesses and households, which in turn spend a portion of the new income, and
so on.
If consumers spend 90 cents out of every extra dollar received, the

A. MPS is 0.90.

B. The MPC is 0.90.

C. Multiplier is 0.90.

D. Multiplier is 9.
B. The MPC is 0.90.
If the marginal propensity to consume is 0.60, then the multiplier equals

A. 2.50.

B. 0.60.

C. 1.67.

D. 0.40.
A. 2.50.
With a consumption function of the form C = a + bYD, which of the following would best
measure how much a recession will spread?

A. Parameter a.

B. Parameter b.

C. Variable YD.

D. 1 ÷ (1 - b).
D. 1 ÷ (1 - b).
Suppose an economy can be described by the consumption function C = 250 + 0.90YD
and I = $300. What is the multiplier?

A. 0.1.

B. 0.9.

C. 3.

D. 10.
D. 10.
Given C = 200 + 0.75YD, the multiplier is

A. 0.25.

B. 0.75.

C. 4.

D. 1.33.
C. 4.
Given the MPS = 0.40, with no government and no foreign trade, a $10 billion increase
in investment will eventually result in an increase in

A. Consumption by $40 billion.

B. Total spending by $15 billion.

C. Consumption by $15 billion.

D. Total spending by $2.5 billion.
C. Consumption by $15 billion.
Calculate the total change in spending because of an initial $100 increase in aggregate
demand, given that the MPC = 0.60.

A. $100 increase.

B. $100 decrease.

C. $250 increase.

D. $60 increase.
C. $250 increase.
If the MPC = 0.90, the total change in spending resulting from an initial $200 increase in
aggregate spending will be

A. $2,000.

B. $200.

C. $180.

D. $1,800.
A. $2,000.
If the MPC = 0.60, the total change in spending resulting from an initial $500 decrease
in aggregate spending will be

A. $300.

B. $800.

C. $1,250.

D. $833.
C. $1,250.
If the MPC = 0.80, the cumulative decrease in total spending resulting from an initial
$150 recessionary gap would be

A. $150.

B. $187.5.
C. $500.

D. $750.
D. $750.
To illustrate the ultimate impact of the multiplier process when investment spending
falls, we should

A. Shift the AD curve rightward once.

B. Shift the AD curve leftward twice, once for the autonomous change and second for
the multiplier effect.

C. Shift the AD curve leftward and then rightward.

D. Shift the AD curve leftward and then shift the AS curve leftward.
B. Shift the AD curve leftward twice, once for the autonomous change and second for
the multiplier effect.
If aggregate demand shifts to the left by $400 billion and aggregate supply is upward-
sloping, then real output will decrease by

A. $400 billion, and the price level will not change.

B. Less than $400 billion, and the price level will fall.

C. $400 billion, and the price level will fall.

D. More than $400 billion, and the price level will not change.
B. Less than $400 billion, and the price level will fall.
Assuming the economy is at full employment, a decrease in aggregate demand will
most likely cause a change in which of the following types of unemployment?

A. Seasonal.

B. Cyclical.

C. Frictional.

D. Structural.
B. Cyclical.
Suppose an economy has an upward-sloping aggregate supply curve and a
recessionary GDP gap equal to $50 billion. If aggregate demand increases by a total of
$50 billion,
A. The recessionary GDP gap will be eliminated.

B. The resulting equilibrium GDP will be lower than full employment GDP because
some of the additional spending will drive up prices instead of increasing output.

C. The resulting equilibrium GDP will be greater than full-employment GDP because of
demand-pull inflation.

D. Cyclical unemployment will increase.

B. The resulting equilibrium GDP will be lower than full employment GDP because
some of the additional spending will drive up prices instead of increasing output.
Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to
$10 billion. If AD shifts to the left by $10 billion,

A. Real output will fall by less than $10 billion.

B. Real output will fall by $10 billion.

C. The inflationary gap will be eliminated.

D. A recessionary gap will be created.

A. Real output will fall by less than $10 billion.
If leakages are less than injections, equilibrium output will be

A. Less than full-employment output, and a recessionary gap will occur.

B. More than full-employment output, and a recessionary gap will occur.

C. Less than full-employment output, and an inflationary gap will occur.

D. More than full-employment output, and an inflationary gap will occur.

D. More than full-employment output, and an inflationary gap will occur.
Which of the following can eliminate a recessionary GDP gap, ceteris paribus?

A. An increase in consumption expenditure.

B. A decrease in investment.

C. An increase in saving.

D. A decrease in government spending.

A. An increase in consumption expenditure.
An inflationary spiral can emerge when

A. Desired spending at full employment falls short of full-employment output.

B. Desired saving falls short of desired investment at full employment.

C. Actual investment equals desired investment.

D. Desired leakages exceed desired injections

B. Desired saving falls short of desired investment at full employment.
If desired investment exceeds actual investment, then

A. A recessionary GDP gap will emerge.

B. Inventories are less than the desired level.

C. Inventories are accumulating beyond desired levels.

D. Cyclical unemployment exists.

B. Inventories are less than the desired level.
A demand-pull inflation problem can best be solved by

A. An increase in production of goods and services.

B. A reduction in desired spending.

C. An increase in aggregate demand.

D. A reduction in aggregate supply.

B. A reduction in desired spending.
Keynes believed that abrupt changes in spending behavior

A. Have no effect on the economy.

B. Help stabilize the economy.

C. Cause recurring business cycles.

D. Move the economy to full employment.

C. Cause recurring business cycles.
The consumption function will shift when

A. Autonomous consumption changes.

B. Induced consumption changes.

C. Autonomous or induced consumption changes.

D. Investment changes.
A. Autonomous consumption changes.
A decline in household income that sets off a multiplier process causes

A. An increase in AS.

B. A decrease in AS.

C. An increase in AD.

D. A decrease in AD.
D. A decrease in AD.

C
According to Keynesian theory, which of the following is not true at each short-term
macro equilibrium?
A. The economy may or may not be at full employment.
B. The aggregate demand curve intersects the aggregate supply curve.
C. All macroeconomic goals are achieved.
D. Producers are selling everything they currently produce.
A
The components of aggregate demand are
A. Consumption, government spending, net exports, and investment.
B. Consumption, exports, imports, and disposable income.
C. Consumption, inventory, government spending, and disposable income.
D. Exports, imports, investment, and disposable income.
C
Given that C = $1,000 + 0.60YD, if the level of disposable income is $1,000, the level of
saving is
A. $600.
B. $400.
C. -$600.
D. -$300.
A
. If disposable income increases from $9,000 billion to $11,000 billion, and consumption
increases from $9,500 billion to $11,000 billion, the MPC must be
A. 0.75.
B. 1.00.
C. 0.90.
D. 0.25.
C
The marginal propensity to consume can be found by dividing
A. Total consumption by total saving.
B. Total consumption by the number of people consuming.
C. The change in total consumption by the change in disposable income.
D. Disposable income by total consumption.
A
In a graph with disposable income on the horizontal axis and consumption on the
vertical axis, the intersection of the 45-degree line with the
A. Consumption function indicates zero saving.
B. Aggregate spending curve indicates full employment.
C. Full-employment output indicates equilibrium (macro).
D. Aggregate demand curve indicates equilibrium.
A
With respect to the aggregate demand curve, improved consumer confidence would
A. Shift the curve rightward.
B. Shift the curve leftward.
C. Move the economy down along the curve.
D. Move the economy up along the curve.
C
Which of the following causes a movement along the investment demand curve?
A. A change in expenditures.
B. A change in technology.
C. A change in the rate of interest.
D. The current level of income.
A
If the investment demand curve shifts to the left, then
A. The AD curve will shift to the left.
B. The AD curve will shift to the right.
C. The AD curve will not be affected.
D. There will be upward movement along the AD curve.
A
Income transfers, such as unemployment insurance, welfare benefits, and food stamps,
A. Help stabilize aggregate demand.
B. Destabilize aggregate demand.
C. Have almost no impact on aggregate demand.
D. Shift aggregate demand to the left during a recession.
A
Which of the following is eliminated when output equals full-employment GDP?
A. Cyclical unemployment.
B. Demand-pull inflation.
C. The need for autonomous consumption.
D. Net exports.
C
A recessionary gap
A. Would cause a depletion of inventories.
B. Would occur if total output were less than aggregate demand.
C. Is the amount by which the rate of actual spending falls short of full-employment
GDP.
D. Is the amount by which total spending exceeds GDP.
C
Which of the following occurs when the spending on final goods and services exceeds
full-employment GDP?
A. Inventory accumulation.
B. Unemployment.
C. Inflationary gap.
D. Recessionary gap.
B
Which of the following is not considered a macro outcome?
A. The level of unemployment.
B. External shocks such as weather.
C. The average price of goods and services.
D. The year-to-year expansion in overall productive capacity.
C
Internal market forces include
A. Wars, natural disasters, and trade disruptions.
B. Tax policy, government spending, and availability of money.
C. Population growth, spending behavior, and invention.
D. External shocks and policy levers.
B
Which of the following is illustrated by the aggregate demand curve?
A. How real personal income varies with the inflation rate.
B. How total quantity of output demanded varies with the average price level.
C. How real output varies with the inflation rate.
D. How real personal income varies with the price level.
D
The real balances effect says that an increase in the price level
A. Increases the price of U.S. produced goods, causing Americans to buy more
imported goods.
B. Increases the price of U.S. produced goods, causing foreign consumers to buy fewer
U.S. goods.
C. Increases the need to borrow, which drives up interest rates and reduces loan-
financed purchases.
D. Reduces the real value of a fixed amount of savings, which reduces the purchase of
goods and services.
C
A positively sloped aggregate supply curve reflects
A. The idea that greater production lowers profit margins, which raises quantity
demanded.
B. The decrease in the real value of money as the price level rises.
C. The rising costs associated with increased capacity utilization.
D. None or the other choices.
B
The unique situation in which the behavior of buyers and sellers is compatible is
referred to as
A. Full-employment GDP.
B. Macro equilibrium.
C. Micro equilibrium.
D. Labor market balance.
C
Which combination of shifts of aggregate demand and supply would definitely cause an
increase in real GDP?
A. Demand shifts to the left and supply shifts to the right.
B. Demand shifts to the left and supply shifts to the left.
C. Demand shifts to the right and supply shifts to the right.
D. Demand shifts to the right and supply shifts to the left.
A
When the AS curve is vertical, increases in AD will
A. Increase the average price level but have no impact on unemployment.
B. Increase the average price level and decrease unemployment.
C. Increase both the average price level and unemployment.
D. Have no impact on either the average price level or unemployment.
A
Fiscal policy is the use of
A. Government spending and taxes to alter macroeconomic outcomes.
B. Money and credit controls to alter macroeconomic outcomes.
C. Tax incentives, deregulation, and other mechanisms to increase the ability and
willingness to produce goods and services.
D. Trade policy to alter macroeconomic outcomes.
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A
When the economy is at equilibrium,
A. Leakages equal injections.
B. Inventories must equal zero.
C. Leakages equal aggregate demand.
D. There are no leakages.
A
An addition of spending to the circular flow of income is
A. An injection.
B. A leakage.
C. A surplus.
D. Household taxes.
B
According to Keynes, if injections equal leakages,
A. The economy will always stabilize at full employment.
B. Macroeconomic equilibrium will occur.
C. Macroeconomic equilibrium will not occur.
D. Microeconomic instability will persist.
B
Assuming an upward-sloping AS curve, if an economy is at full employment and
investment spending decreases while all other levels of spending remaining constant,
then the price level
A. Increases and output decreases.
B. Decreases and output decreases.
C. Increases and output increases.
D. Decreases and output increases.
B
The multiplier process can occur when a decrease in investment spending
A. Increases household saving, causing consumers to buy more goods and services.
B. Reduces household incomes, causing consumers to buy fewer goods and services.
C. Increases household incomes, causing consumers to buy fewer goods and services.
D. Reduces household incomes, causing consumers to buy more goods and services.
D
The marginal propensity to consume is
A. Total consumption in a given period divided by total disposable income.
B. The percentage of total disposable income spent on consumption.
C. That part of the average consumer dollar that goes to the purchase of final goods.
D. The fraction of each additional dollar of disposable income spent on consumption.
C
The marginal propensity to consume is
A. That part of the average consumer dollar that goes to saving.
B. The same as the spending multiplier.
C. The change in consumption divided by the change in disposable income.
D. Always equal to 1.
C
Which of the following is an example of the multiplier at work as a result of an increase
in consumption expenditures?
A. Consumers compete with the government by increasing their expenditures, causing
businesses to increase their investments to satisfy the increased demand.
B. Consumption expenditures increase inflation, which reduces real incomes; consumer
expenditures and investment decline, which reduces aggregate spending.
C. Households and businesses receive income from consumption expenditures; they
spend a portion of this new income; these expenditures, in turn, generate income for
other businesses and households, which in turn spend a portion of the new income, and
so on.
D. Consumption expenditures stimulate investment in new plants and equipment to
produce goods and services for the government, which provides fewer jobs and
decreases incomes.
A
If consumers spend 80 cents out of every extra dollar received, the multiplier is
A. 5.
B. 8.
C. 0.80.
D. 1.25.
C
Calculate the total change in spending because of an initial $100 increase in aggregate
demand, given that the MPC = 0.60.
A. $100 increase.
B. $100 decrease.
C. $250 increase.
D. $60 increase.
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B
To illustrate the ultimate impact of the multiplier process when investment spending
falls, we should
A. Shift the AD curve rightward once.
B. Shift the AD curve leftward twice, once for the autonomous change and second for
the multiplier effect.
C. Shift the AD curve leftward and then rightward.
D. Shift the AD curve leftward and then shift the AS curve leftward.
B
A decrease in a recessionary GDP gap will most likely be associated with a decrease in
A. Structural unemployment.
B. Cyclical unemployment.
C. The price level.
D. Frictional unemployment.
B
According to Keynes, the level of economic activity is predominantly determined by the
level of
A. Aggregate supply.
B. Aggregate demand.
C. Unemployment.
D. Interest rates.
B
Fiscal policy works primarily through
A. Shifts of the AS curve.
B. Shifts of the AD curve.
C. The improvement of worker skills through subsidized training programs.
D. Shifts of both AD and AS, as a result of changes in the interest rate.
D
From a Keynesian perspective, the way out of recession is to
A. Wait for the economy to fix itself.
B. Use monetary restraint.
C. Get consumers to spend less on goods and services.
D. Get consumers to spend more on goods and services.
C
A tax cut intended to increase aggregate demand is an example of
A. Fiscal restraint.
B. Monetary restraint.
C. Fiscal stimulus.
D. Fiscal targeting.
D
Which of the following is a fiscal policy tool used to stimulate the economy?
A. Lower interest rates.
B. Increased imports.
C. Reducing inefficient employment of resources.
D. Increased government purchases.
A
The "naïve" Keynesian model is unrealistic because it
A. Does not take into account probable changes in the price level as the economy
approaches full employment.
B. Assumes that the price level decreases as AD increases.
C. Assumes that AS is upward sloping when it is more probably horizontal.
D. Does not account for changes in output due to the multiplier.
A
The total change in aggregate spending generated by increased government spending
depends on the
A. Marginal propensity to consume.
B. Size of the recessionary GDP gap.
C. AD shortfall.
D. AD excess.
B
Assume the MPC is 0.75. To eliminate an AD shortfall of $200 billion, the government
should
A. Decrease spending by $50 billion.
B. Increase spending by $50 billion.
C. Increase taxes by $66.7 billion.
D. Increase spending by $800 billion.
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B
A tax cut has a smaller impact on aggregate demand than an increase in government
purchases of the same size because
A. A portion of the tax cut is invested.
B. A portion of the tax cut is saved.
C. Tax cuts do not increase disposable income.
D. The tax cut multiplier is equal to 1.
B
A tax cut
A. Directly decreases the disposable income of consumers.
B. Contains less fiscal stimulus than an increase in government spending of the same
size.
C. Shifts the AD curve to the left.
D. Indirectly increases the disposable income of consumers.

The conusumption schedule shows the various amounts that households plan to (save,
consume) _____ at various levels of disposable income, and the saving schedule
shows the various amounts that households plan to ____.
consume, save
Both consumption and saving are (directly, indirectly) _______ related to the level of
disposable income. At lower levels of disposable income, households tend to spend a
(smaller, larger) _____ proportion of this income and save a ________ proportion, but
at higher levels, they tend to spend a _____ proportion and save a ____ proportion. At
the break-even income, consumption is (greater than, less than, equal to) _____
disposable income.
directly, larger, smaller, smaller, larger, equal to
As disposable income falls, the APC will (rise, fall) _____ and the APS will _____.
rise, fall
The sum of APC and APS is equal to (0, 1) _____.
1
The MPC is the change in (consumption, income) _______ divided by the change in
_______.
consumption, income
The MPS is the change in (saving, income) ______ divided by the change in _____.
saving, income
The sum of MPC and MPS is equal to (0, 1) _____
1
The MPC is the numerical value of the slope of the (consumption, saving) ______
schedule, and the MPS is the numerical value of the slope of the _____ schedule.
consumption, saving
The most inmportant determinants of consumption spending, other than the level of
income, are:
a. ______
b. _____
c. ______
d. _____
e. _____
wealth, expectations, taxation, household debt, real interest rate
An increase in the consumption schedule means that the consumption schedule shifts
(upward, downward) ____ and a decrease in the consumption schedule means that it
will shift ______, and these shifts occur because of a change in one of the nonincome
determinants. An increase in the amount consumed occurs because of an increase in
(income, stability) _____.
upward, downward, income