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The Economy Today, 15e (Schiller)
Chapter 9 Aggregate Demand
1) Aggregate demand is the total quantity of output

A) Demanded if the economy is in equilibrium.
B) Demanded at alternative price levels in a given time period.
C) Producers are willing and able to supply at alternative price levels.
D) Consumers actually buy.
Answer: B
Explanation: Aggregate demand represents the total amount of spending at various price levels.
Difficulty: 1 Easy
Topic: Macro Equilibrium
Learning Objective: 09-01 What the major components of aggregate demand are.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) The combination of price level and real output that is compatible with both aggregate demand
and aggregate supply is the definition of
A) Full-employment GDP.
B) Disposable income.
C) Macro equilibrium.
D) Real expenditures.
Answer: C
Explanation: The macro equilibrium occurs when the rate of output equals the rate of spending.
This occurs at the intersection of the AS and AD curves.
Difficulty: 1 Easy
Bloom's: Remember
1
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No reproduction or distribution without the prior written onsent of McGraw-Hill Education.
3) According to Keynesian theory, which of the following is not true e of all short-term macro
equilibria?
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.
Answer: C
Explanation: Some macroeconomics goals may not be achieved since the equilibrium could be
below or above the full employment level of output.
Difficulty: 1 Easy
Bloom's: Remember
4) 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.
Answer: A
Explanation: Aggregate demand is composed of all spending categories that make up GDP.
Difficulty: 1 Easy
Bloom's: Remember
5) Consumption expenditures
A) Account for over two-thirds of total spending.
B) Include purchases of new and used goods by consumers.
C) Are equal to disposable personal income plus personal saving.
D) Are equal to consumer spending plus transfer payments.
Answer: A
Explanation: The largest part of spending in the U.S. economy comes from consumer spending.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
2
6) Which of the following forces did Keynes assert had the strongest influence on consumption
decisions?
A) Prices.
B) Wealth.
C) Interest rates.
D) Disposable income.
Answer: D
Explanation: Disposable income is the strongest determinant of consumer spending, which is
the largest part of the U.S. economy.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
7) If consumption is $340 and saving is $20, then disposable income

A) Is $340.
B) Is $360.
C) Is $320.
D) Cannot be determined from the information given.
Answer: B
Explanation: Disposable income equals saving plus consumption (= $340 + $20).
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
AACSB: Analytical Thinking
3
8) 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.
Answer: C
Explanation: Saving will be negative when consumption exceeds disposable income. Use the
given formula where C=consumption and Y=the level of disposable income: C = $1,000 +
.6($1,000) = $1,600. So when consumption of $1,600 is more than disposable income of $1,000,
the difference is a decrease in saving of -$600.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
9) Given that C = $500 + 0.8YD, if the level of disposable income is $1,000, the level of saving
is
A) $300.
B) -$300.
C) $500.
D) -$1,300.
Answer: B
Explanation: Whenever consumption (C) ($1,300) exceeds disposable income (Y) ($1,000),
saving will be negative (-$300). Use the given formula: C = $500 + .8($1,000) = $1,300. So
when consumption of $1,300 is more than disposable income of $1,000, the difference is a
decrease in saving of -$300.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
4
10) When consumer spending exceeds disposable income, all of the following are true except
A) The APS is negative.
B) The APC is greater than 1.
C) Households are dissaving.
D) The MPS is negative.
Answer: D
Explanation: As the MPS is equivalent to 1-MPC, it is never negative or bigger than 1.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
11) When the APC is greater than 1, the APS must be

A) Equal to 1.
B) Greater than 1 also.
C) Between 0 and 1.
D) Negative.
Answer: D
Explanation: As APC is equivalent to total consumption divided by total disposable income,
when it is greater than 1, this suggests that an individual is consuming more than what their
disposable income is. Thereby, the consumer is dissaving.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
5
12) 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?
A) $13.3 billion.
B) $12.8 billion.
C) $9 billion.
D) $12.6 billion.
Answer: B
Explanation: In this case, consumption is initially $3.8 billion (.95 ×4). Consumption will rise
by the change in disposable income multiplied by the MPC. When income increases by $10
billion, the increase in consumption will be $9 billion (0.9 ×10). Therefore, the total
consumption will be $12.8 billion ($3.8 + $9).
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Evaluate
13) Which of the following is not true about the marginal propensity to consume?
A) It is equal to the change in consumption divided by the change in disposable income.
B) It is equal to the slope of the consumption function.
C) It is equal to 1 - MPS.
D) It is always equal to or greater than 1.
Answer: D
Explanation: The value of MPC must fall between 0 and 1.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
6
14) 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.
Answer: A
Explanation: The MPC is equal to the change in consumption spending divided by the change
in disposable income: (1,500/2,000) = .75.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
15) If the MPC is 0.60 and disposable income increases from $20,000 billion to $22,000 billion,
consumption will increase by
A) $2,000 billion.
B) $800 billion.
C) $1,200 billion.
D) $600 billion.
Answer: C
Explanation: Consumption spending will rise by the change in disposable income multiplied by
the MPC: (2,000 ×0.60 = $1,200).
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
7
16) 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.
Answer: C
Explanation: The marginal propensity to consume measures the additional spending that
accompanies additional disposable income.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
17) The MPC indicates the fraction of

A) An additional dollar of disposable income that will be saved.
B) An additional dollar of disposable income that will be spent.
C) Total income that will be saved.
D) Total income that will be spent.
Answer: B
Explanation: The marginal propensity to consume depicts how much consumer expenditure
will change in response to changes in disposable income. It is calculated by dividing the change
in consumption by the change in disposable income.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
8
18) The MPC + MPS must always equal
A) The slope of the consumption function.
B) 1.
C) The APC.
D) 0.
Answer: B
Explanation: The MPC and MPS always add to be 1. Separately, neither MPC nor MPS can be
less than 0 or greater than 1.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
19) If the MPC is 0.8 and the APC is 0.9, the MPS equals
A) 0.1.
B) 0.2.
C) 0.8.
D) 1.7.
Answer: B
Explanation: MPS plus MPC equals 1. So MPS must be equal to 0.2. The MPC and MPS
always add to be 1. Separately, neither MPC nor MPS can be less than 0 or greater than 1.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Apply
9
20) If, in the aggregate, consumers spend 75 cents of every extra dollar received, then the
A) APC is 1.25.
B) APC is 0.75.
C) MPC is 0.75.
D) MPS is 0.75.
Answer: C
Explanation: MPC describes the fraction of each additional dollar of disposable income spent
on consumption. The MPC would be .75 and the MPS would be .25. The MPC and MPS always
add to be 1. Separately, neither MPC nor MPS can be less than 0 or greater than 1.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Apply
21) Which of the following is not a determinant of autonomous consumption?

A) The disposable income level.
B) Taxes.
C) The availability of credit.
D) The price level.
Answer: A
Explanation: Autonomous consumption refers to consumption spending that is independent of
current disposable income. The income level is a determinant of spending but would not be
considered autonomous spending.
Difficulty: 1 Easy
Topic: The Consumption Function
Learning Objective: 09-02 What the consumption function tells us.
Bloom's: Remember
10
22) Which of the following is not a determinant of autonomous consumption?
A) Wealth.
B) Technology.
C) Tax policy.
D) Consumer confidence.
Answer: B
Explanation: Technology is a determinant not of consumption but of production possibilities
and aggregate supply.
Difficulty: 1 Easy
Bloom's: Remember
23) Given a consumption function of C = $25 + 0.75YD, the average propensity to consume
equals 1 when disposable income equals
A) $25.
B) $75.
C) $100.
D) -$300.
Answer: C
Explanation: If the APC equals 1, then YD = C and you can substitute YD for C in the
equation. In doing so, you have (YD = 25 +.75 YD). In solving this equation, YD = 100.
Difficulty: 3 Hard
Bloom's: Analyze
11
24) Under what conditions would the APC equal the MPC at all levels of disposable income?
A) When autonomous consumption equals 0.
B) When there is saving at very high levels of disposable income.
C) When disposable income is greater than consumption.
D) When the aggregate expenditure line is horizontal.
Answer: A
Explanation: When autonomous consumption is equal to 0, the vertical intercept of the
consumption function would be 0.
Difficulty: 3 Hard
Bloom's: Evaluate
25) Which of the following statements is not true about the consumption function?
A) The equation is written as C = a + bYD.
B) It indicates the rate of consumer spending that will take place at various disposable income
levels.
C) It indicates that consumption is inversely related to disposable income.
D) It shows how consumption is influenced by disposable income.
Answer: C
Explanation: Consumption is directly related to disposable income and is evidenced by the
positive slope in the consumption function: C = a + bYD.
Difficulty: 3 Hard
Bloom's: Analyze
12
26) The consumption function implies that
A) Disposable income inversely influences consumption.
B) Consumption increases as disposable income increases.
C) Autonomous consumption changes when people have low incomes.
D) None of the choices are correct.
Answer: B
Explanation: There is a positive and direct relationship between consumption and disposable
income.
Difficulty: 2 Medium
Bloom's: Understand
27) Suppose the consumption function is C = $200 + 0.85YD. If disposable income is $400,
consumption is
A) $200.
B) $540.
C) $340.
D) $185.
Answer: B
Explanation: The level of consumption is equal to autonomous consumption plus the disposable
income multiplied by the MPC: .85 × $400 + $200 = $540.
Difficulty: 3 Hard
Bloom's: Apply
13
28) Suppose a consumption function is given as C = $500 + 0.75YD. The marginal propensity to
consume is
A) 200.
B) 0.75.
C) 0.25.
D) -0.75.
Answer: B
Explanation: The MPC value is equal to the slope term (b), or .75, in the consumption function.
Difficulty: 3 Hard
Bloom's: Apply
save is
A) 150.
B) 0.75.
C) 0.25.
D) -0.75.
Answer: C
Explanation: The MPS is equal to 1 minus the MPC value, which is 1 - .75 or .25. The MPC
and MPS always add to be 1. Separately, neither MPC nor MPS can be less than 0 or greater than
1.
Difficulty: 3 Hard
Bloom's: Apply
14
save is
A) 200.
B) 0.15.
C) -0.15.
D) 0.85.
Answer: B
Explanation: 1 minus the MPC value is equal to the MPS value, which is 1 - .85 or .15. The
MPC and MPS always add to be 1. Separately, neither MPC nor MPS can be less than 0 or
greater than 1.
Difficulty: 3 Hard
Bloom's: Apply
31) Suppose the consumption function is C = $100 + 0.85YD. If disposable income is $400,
saving is
A) -$40.00.
B) $40.00.
C) -$15.00.
D) $15.00.
Answer: A
Explanation: Consumption is equivalent to 100+.85(400) = 440. Saving will be negative
whenever consumption exceeds disposable income ($400 - $440 = -$40).
Bloom's: Evaluate
15
32) If an increase in disposable income causes consumption to increase from $4,000 to $10,000
and causes saving to increase from $2,000 to $4,000, it can be inferred that the MPC equals
A) 0.4.
B) 0.6.
C) 0.5.
D) 0.75.
Answer: D
Explanation: Since consumption rose by $6,000 and saving rose by $2,000, MPC must be .75
and MPS must be .25. The total changes in consumption and saving sum to the total change in
disposable income, or $8,000. The MPC is the change in consumption divided by the change in
disposable income ($6,000/$8,000).
Bloom's: Evaluate
33) If an increase in disposable income causes consumption to increase from $4,000 to $10,000
and causes saving to increase from $1,000 to $5,000, then it can be inferred that the MPS equals
A) 0.60.
B) 0.40.
C) 0.05.
D) -0.60.
Answer: B
Explanation: Since consumption rose by $6,000 and saving rose by $4,000, MPC must be .6
and MPS must be .4. The total changes in consumption and saving sum to the total change in
disposable income, or $10,000. The MPS is the change in saving divided by the change in
disposable income ($4,000/$10,000).
Bloom's: Evaluate
16
34) The line described by the consumption function C = a + bYD will change its slope when
A) The MPC changes.
B) Autonomous consumption changes.
C) Disposable income changes.
D) The APS changes.
Answer: A
Explanation: Since the b = MPC is the slope, a change to MPC will alter the slope of the
consumption function.
Bloom's: Understand
35) 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.
Answer: A
Explanation: At this point, all disposable income is consumed, and there is no addition to or
decrease in saving.
Bloom's: Evaluate
17
36) Using the disposable income level at which the consumption function intersects the 45-
degree line, we can identify
A) Full employment at the intersection point.
B) An inflationary gap to the right of the intersection point.
C) Dissaving to the left of the intersection point.
D) Dissaving to the right of the intersection point.
Answer: C
Explanation: At lower levels of income, consumption will exceed disposable income, and
saving will be negative.
Difficulty: 3 Hard
Bloom's: Analyze
37) An increase in the income-dependent portion of the consumption function would correspond
to a
A) Shift of the consumption function upward.
B) Shift of the consumption function downward.
C) Movement along the consumption function to the right.
D) Movement along the consumption function to the left.
Answer: C
Explanation: If disposable income rises, there will be a movement along the consumption
function.
Difficulty: 3 Hard
Bloom's: Analyze
18
38) Given that autonomous consumption equals $1,000, disposable income equals $20,000, and
the MPC equals 0.80, the level of
A) Saving equals $4,000.
B) Saving equals $19,000.
C) Consumption equals $17,000.
D) Consumption equals $16,000.
Answer: C
Explanation: This corresponds to $16,000 of spending out of the $20,000 in income (=
20,000*0.8), plus the $1,000 in autonomous consumption.
Bloom's: Evaluate
39) If autonomous consumption decreases, then

A) The AD curve will shift to the right.
B) The AD curve will shift to the left.
C) There will be a movement to the left along the AD curve.
D) The AD curve will not be affected.
Answer: B
Explanation: In this case, the autonomous consumption category falls, so the AD curve would
decrease, thereby shifting to the left.
Bloom's: Understand
19
40) If wealth rises,
A) There will be a movement to the left along the AD curve.
B) There will be a movement to the right along the AD curve.
C) The AD curve will shift to the left.
D) The AD curve will shift to the right.
Answer: D
Explanation: More wealth leads consumers to feel more confident and therefore to spend more
freely at the same price level.
Bloom's: Understand
41) 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.
Answer: A
Explanation: When consumers feel more secure about the economy, they will be inclined to
spend more at the same price level.
Difficulty: 1 Easy
Bloom's: Remember
42) If the availability of credit increases, then

A) There will be a movement to the left along the AD curve.
Answer: D
Explanation: The availability of credit will cause interest rates to fall, giving consumers more
buying power; and more buying power will tend to increase consumption at the same price level.
Bloom's: Understand
20
43) If tax policies become less favorable, then
A) The AD curve will not be affected.
Answer: C
Explanation: When taxes are higher, consumers and businesses will not be able to spend as
much, leading to a decrease or leftward shift in the AD curve.
Bloom's: Understand
44) Investment spending includes expenditures on all of the following except

A) Stocks and bonds.
B) Equipment.
C) Inventory.
D) Plants or office buildings.
Answer: A
Explanation: Stocks and bonds represent how one chooses to hold one's wealth rather than
physical capacity.
Difficulty: 1 Easy
Topic: Investment
Learning Objective: 09-03 The determinants of investment spending.
Bloom's: Remember
45) Which of the following is not considered to be an important determinant of investment?

A) Current disposable income.
B) Expectations.
C) Interest rates.
D) Technological change.
Answer: A
Explanation: Disposable income is a determinant of consumption, not investment.
Difficulty: 1 Easy
Topic: Investment
Bloom's: Remember
21
46) 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.
Answer: C
Explanation: Investment spending is inversely related to the interest rate.
Topic: Investment
Bloom's: Understand
47) The investment demand curve would shift to the left because of
A) The discovery of more efficient production methods.
B) Expectations of a recession.
C) Higher interest rates.
D) A lower current income level for the economy.
Answer: B
Explanation: Expectations of a recession would cause companies to cut back on major outlays
in order to be better prepared financially to withstand the economic downturn.
Topic: Investment
Bloom's: Understand
48) Which of the following will cause the investment demand curve to shift to the right?
A) A decrease in interest rates.
B) A decrease in the cost of labor.
C) An increase in disposable income.
D) An improvement in technology.
Answer: D
Explanation: Technology makes production more efficient and less costly. So it will lead
companies to upgrade their facilities, thereby shifting the investment curve to the right.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Apply
22
49) 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.
Answer: A
Explanation: Because investment spending is part of GDP, a decline in investment will
decrease the AD curve as well. In other words, it will shift the AD curve leftward.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Apply
50) Which of the following will cause the aggregate demand curve to shift to the left?
A) A decrease in consumer and business confidence because of a terrorist attack.
B) A decrease in the interest rate.
C) A decrease in business taxes.
D) An improvement in technology.
Answer: A
Explanation: Anything that causes one or more categories of GDP (consumption, investment,
government expenditure, and net exports) to decrease will lead to a decrease in the AD curve.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Apply
51) If firms become more pessimistic about future sales, then

A) The AD curve will shift to the right.
B) The AD curve will shift to the left.
C) There will be a rightward movement along the AD curve.
D) There will be a leftward movement along the AD curve.
Answer: B
Explanation: This causes investment spending to fall, leading to a decrease or leftward shift in
the AD curve.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Apply
23
52) Federal, state and local purchases of goods and services sum to about ________ trillion.
A) 4
B) 12
C) 3
D) 7
Answer: C
Explanation: Total government expenditures are in excess of $3 trillion.
Difficulty: 1 Easy
Topic: Government Spending and Net Export
Bloom's: Remember
53) If consumption and investment spending decline, then state and local government spending is
likely to
A) Decline, leading to more economic instability.
B) Increase, leading to more economic instability.
C) Decline, leading to less economic instability.
D) Increase, leading to less economic instability.
Answer: A
Explanation: The drop in consumption would hurt state and local sales tax revenues, leading to
a drop in government spending in an effort to balance the budget.
Bloom's: Understand
54) Which government sector has the ability to respond countercyclically to the economy?
A) State only.
B) Federal only.
C) Local only.
D) Federal, state, and local.
Answer: B
Explanation: The federal government uses stabilizers such as income transfers to lessen the
effect of economic downturns.
Difficulty: 1 Easy
Bloom's: Remember
24
55) Gross exports for the United States depend most directly on the
A) Level of U.S. GDP.
B) Spending behavior of U.S. consumers.
C) Spending behavior of U.S. government agencies.
D) Spending behavior of foreign consumers and businesses.
Answer: D
Explanation: Since our exports go to other countries, exports are dependent on the welfare of
firms and consumers abroad (i.e., demands for US products is subject to changes in foreign
income, expectations, wealth, and other factors).
Difficulty: 1 Easy
Bloom's: Remember
56) Which of the following will cause an increase in U.S. gross exports?
A) An increase in foreign consumer income.
B) A decrease in foreign business investment.
C) An increase in U.S. consumer income.
D) A decrease in foreign business income.
Answer: A
Explanation: When foreign income rises, some of it will be used to buy additional U.S. goods.
Difficulty: 3 Hard
Bloom's: Analyze
57) Which of the following will not cause an increase in U.S. gross exports?
A) An increase in foreign business investment.
B) An increase in foreign wealth.
C) An increase in foreign consumer income.
D) A decrease in U.S. imports.
Answer: D
Explanation: If U.S. imports decrease, this will decrease foreign incomes, which will, in turn,
decrease foreign imports of U.S. exports.
Difficulty: 3 Hard
Bloom's: Analyze
25
58) Which of the following will cause a decrease in U.S. gross exports?
A) An increase in foreign consumer income.
B) A decrease in foreign business purchases of U.S. output.
C) An increase in foreign wealth.
Answer: B
Explanation: If foreign investment in U.S. capital goods falls, the demand for U.S. capital
goods will decline.
Difficulty: 3 Hard
Bloom's: Analyze
59) Which of the following will cause an increase in U.S. imports?

A) An increase in U.S. consumer confidence.
B) An increase in foreign consumer income.
C) An increase in foreign business investment.
D) A decrease in U.S. wealth.
Answer: A
Explanation: When consumers feel good about the economy, they will consume more of all
goods, including imports.
Difficulty: 3 Hard
Bloom's: Analyze
60) Which of the following lists all the components that are included in aggregate demand?
A) Consumption, government spending, net exports, and investment.
B) Government spending, saving, consumption, and investment.
C) Investment, imports, exports, and consumption.
D) Net exports, government spending, consumption, and transfer payments.
Answer: A
Explanation: Aggregate demand includes the four components of spending that make up GDP.
Difficulty: 1 Easy
Bloom's: Remember
26
61) Which of the following is not a component of aggregate demand?
A) Consumption.
B) Investment.
C) Productivity.
D) Net exports.
Answer: C
Explanation: Productivity is a measure of the efficiency of resources that are used to produce
output.
Difficulty: 3 Hard
Bloom's: Analyze
62) 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.
Answer: A
Explanation: When output is equivalent to full-employment GDP, only structural and frictional
unemployment exists.
Difficulty: 1 Easy
Topic: Macro Failure
Learning Objective: 09-05 How and when macro failure occurs.
Bloom's: Remember
63) Keynes was concerned that at macroeconomic equilibrium the economy would experience
A) Full employment and price stability.
B) Full employment but not price stability.
C) Price stability but not full employment.
D) Neither full employment nor price stability.
Answer: D
Explanation: Macro equilibrium occurs where the AS and AD curves intersect, which may be
below the full-employment level of output.
Bloom's: Understand
27
64) Keynes was concerned that at macroeconomic equilibrium in a laissez faire free market
economy, full employment
A) And price stability might not continue simultaneously.
B) Would continue but price stability might not.
C) Might not continue but price stability would.
Answer: A
Explanation: Keynes believed that in a laissez faire free-market economy, the macro
equilibrium at which full employment and price stability occur simultaneously is a brief
transitory phenomenon. To maintain this optimum position requires strong fiscal action.
Bloom's: Understand
65) 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.
Answer: C
Explanation: A recessionary gap indicates that many resources are not being fully used.
Cyclical unemployment will be above zero, and the total unemployment rate will be above its
normal rate.
Difficulty: 1 Easy
Bloom's: Remember
28
66) A recessionary gap implies that
A) Aggregate demand is less than aggregate supply at the full-employment price level.
B) The unemployment rate is falling.
C) Aggregate demand exceeds aggregate supply at the full-employment price level.
D) Inventories are being depleted faster than producers desire.
Answer: A
Explanation: The macro equilibrium occurs to the left of the full-employment level of output. A
recessionary gap indicates that many resources are not being fully used--more output is being
produced than purchased. Cyclical unemployment will be above zero, and the total
unemployment rate will be higher than its normal rate.
Bloom's: Understand
67) Which of the following is true when an economy produces at full employment, but
consumers, government, businesses, and the foreign sector do not buy all the output?
A) Inventories are depleted.
B) There is a recessionary gap.
C) Unemployment falls.
D) The price level rises.
Answer: B
Explanation: In this case, inventories will build up. As more output is being produced than
demanded, thereby causing unemployment to rise and subsequent production and prices to fall
until unwanted inventories of goods are depleted.
Difficulty: 3 Hard
Bloom's: Analyze
29
68) When aggregate expenditures fall below the full-employment level of output, which of the
following types of unemployment is most likely to increase?
A) Cyclical.
B) Seasonal.
C) Frictional.
D) Structural.
Answer: A
Explanation: When aggregate demand falls, production will need to fall to avoid
overproduction, thereby causing layoffs and cyclical unemployment to increase.
Bloom's: Evaluate
69) 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.
Answer: C
Explanation: When aggregate demand exceeds full-employment GDP, resources are being
overused, and bidding wars will drive up their prices, creating inflation.
Difficulty: 1 Easy
Bloom's: Remember
30
70) Which of the following most likely occurs when an inflationary gap exists?
A) Producers will use overtime shifts and strain capacity.
B) More layoffs.
C) Rising inventories.
D) Excessive saving.
Answer: A
Explanation: An inflationary gap occurs when aggregate demand exceeds the economy's full-
employment capacity. This causes the price level to rise because too many dollars are chasing
too few resources.
Bloom's: Understand
71) Demand-pull inflation is caused by

A) An increase in aggregate supply.
B) An increase in resource costs as an economy's production capacity is approached.
C) An increase in inventories.
D) Excessive aggregate demand in relation to an economy's production capacity.
Answer: D
Explanation: When aggregate demand increases and production is unable to keep up with
spending, prices will rise.
Difficulty: 1 Easy
Bloom's: Remember
31
72) According to Keynes, cyclical unemployment is caused by too
A) Much aggregate demand.
B) Little aggregate demand.
C) Much aggregate supply.
D) Little aggregate supply.
Answer: B
Explanation: Spending is insufficient to purchase all output. So production falls and
unemployment rises.
Difficulty: 3 Hard
Bloom's: Analyze
73) The economy will not reach and maintain its goals of full employment and price stability
unless the economy is
A) At full employment and the price level is stable.
B) Above full employment and the price level is stable.
C) Below full employment and the price level is stable.
Answer: A
Explanation: Only when AD intersects AS at the full-employment level of output at a stable
price level will macro equilibrium be achieving our goals for macroeconomic performance.
Difficulty: 3 Hard
Bloom's: Analyze
32
74) Table 9.1
Disposable Income Total Consumption

(Billions of dollars per year) (Billions of dollars per year)
$0 $50
200 210
What is the marginal propensity to consume in Table 9.1?

A) 0.15.
B) 0.80.
C) 0.85.
D) 0.90.
Answer: B
Explanation: The MPC is equal to the change in consumption divided by the change in
disposable income (= 160/200).
Difficulty: 3 Hard
Bloom's: Apply
33
75) Table 9.1

$0 $50
200 210
At which income level does consumption equal income according to the information provided in
Table 9.1?
A) $150 billion.
B) $600 billion.
C) $900 billion.
D) $250 billion.
Answer: D
Explanation: Consumption equals disposable income when APC is equal to 1. Given the above
consumption function of C = $50 + 0.8YD, and since the APC equals 1, then YD = C and you
can substitute YD for C in the equation. In doing so, you have (YD = $50 + .8 YD). In solving
this equation, YD = $250. Therefore, C = $250.
Difficulty: 3 Hard
Bloom's: Apply
34
76) Table 9.1

$0 $50
200 210
What is the rate of saving when income equals $1,000 billion in Table 9.1?
A) $100 billion.
B) $150 billion.
C) $250 billion.
D) Zero.
Answer: B
Explanation: Given the above consumption function of C = $50 + 0.8YD, substituting $1,000
billion for YD yields a consumption of $850 billion. Since income equals $1,000 billion, this
leaves savings at $150 billion. (Recall that consumption + savings = income).
Difficulty: 3 Hard
Bloom's: Apply
35
77) Table 9.1

$0 $50
200 210
What is the marginal propensity to save in Table 9.1?

A) 0.05.
B) 0.80.
C) 0.20.
D) 0.24.
Answer: C
Explanation: The MPS is equal to 1 minus the MPC or the change in saving divided by the
change in disposable income {(-10 - 50)/(200 - 0) = 0.2}. Another way to look at it is given the
above consumption function of C = $50 + 0.8YD, since the slope of the consumption function is
0.8, the MPS must be 0.2 (0.8 + 0.2 = 1).
Difficulty: 3 Hard
Bloom's: Apply
36
78) Table 9.1

$0 $50
200 210
Which of the following represents the consumption function consistent with the data in Table
9.1?
A) C = $160 billion + 0.91YD.
B) C = $160 billion + 0.80YD.
C) C = $50 billion + 0.76YD.
D) C = $50 billion + 0.80YD.
Answer: D
Explanation: The consumption function is the formula Consumption = Autonomous
Consumption + MPC ×YD. $50 billion is the autonomous consumption when disposable income
is equal to zero, and the MPC, the slope term, is equal to the change in consumption divided by
the change in disposable income {(210 - 50)/(200 - 0) = 0.8}.
Difficulty: 3 Hard
Bloom's: Apply
37
79) Table 9.1

$0 $50
200 210
What is the rate of saving when income equals $300 billion in Table 9.1?
A) Zero.
B) $50 billion.
C) $10 billion.
D) -$290 billion.
Answer: C
Explanation: Given the above consumption function of C = $50 + 0.8YD, substituting YD =
$300 billion accordingly yields a consumption of $290 billion. Since income equals $300 billion,
this leaves saving at $10 billion.
Bloom's: Evaluate
38
80) Refer to Table 9.2. (Data are expressed in billions of dollars.)
Table 9.2
Full Employment Consumers Investors Desire Total Private Total

Income (Output) Desire to Spend to Spend Spending Saving
$500 $300 $250 $________ $________
600 375 250 $________ $________
700 450 250 $________ $________
800 525 250 $________ $________
Given the information in Table 9.2, saving is equal to $200 billion at an output level of
A) $500 billion.
B) $600 billion.
C) $700 billion.
D) $800 billion.
Answer: A
Explanation: Disposable income is equal to saving plus consumption; when disposable income
is $500, saving is $200 and consumption is $300.
Table 9.2: Answer

Investors
Disposable Total Desire to Total Private Total
Income Consumption Spend Spending Saving
$500 $300 $250 $550 $200
600 375 250 $625 $225
700 450 250 $700 $250
800 525 250 $775 $275
Difficulty: 3 Hard
Bloom's: Apply
39
Table 9.2

$500 $300 $250 $________ $________
600 375 250 $________ $________
700 450 250 $________ $________
800 525 250 $________ $________
Given the information in Table 9.2, saving equals investment at an income of

A) $500 billion.
B) $600 billion.
C) $700 billion.
D) $800 billion.
Answer: C
Explanation: Saving equals disposable income less consumption, so saving is $250, the same as
investment, when disposable income is $700.
Table 9.2: Answer

Investors
$500 $300 $250 $550 $200
600 375 250 $625 $225
700 450 250 $700 $250
800 525 250 $775 $275
Difficulty: 3 Hard
Bloom's: Apply
40
Table 9.2

$500 $300 $250 $________ $________
600 375 250 $________ $________
700 450 250 $________ $________
800 525 250 $________ $________
If the full-employment level of income (YF) in Table 9.2 is $700 billion,

A) The economy is in equilibrium.
B) There is a recessionary gap of $250 billion.
C) There is an inflationary gap of $450 billion.
D) There is an inflationary gap of $700 billion.
Answer: A
Explanation: The economy is in equilibrium because consumption plus investment equals
income, and saving equals investment.
Table 9.2: Answer

Investors
$500 $300 $250 $550 $200
600 375 250 $625 $225
700 450 250 $700 $250
800 525 250 $775 $275
Difficulty: 3 Hard
Bloom's: Apply
41
Table 9.2

$500 $300 $250 $________ $________
600 375 250 $________ $________
700 450 250 $________ $________
800 525 250 $________ $________
If the full-employment level of income (YF) in Table 9.2 is $800 billion,

A) The economy is in equilibrium.
B) There is a recessionary gap of $25 billion.
C) There is an inflationary gap of $250 billion.
D) There is a recessionary gap of $275 billion.
Answer: B
Explanation: Total spending on consumption and investment is less than the full-employment
level of output (800 - 775 = 25).
Table 9.2: Answer

Investors
$500 $300 $250 $550 $200
600 375 250 $625 $225
700 450 250 $700 $250
800 525 250 $775 $275
Difficulty: 3 Hard
Bloom's: Apply
42
84)
Using Figure 9.1, dissaving occurs at all income levels

A) Above $2,000 billion.
B) Above $3,000 billion.
C) Below $2,000 billion.
D) Below $3,000 billion.
Answer: C
Explanation: As the 45-degree line represents every point where consumption equals disposable
income, dissaving occurs at any level to the left of the intersection of the consumption function
and the 45-degree line. At any point to the left of the intersection, represents levels of spending
in which consumption is greater than disposable income, thereby dissaving occurs.
Difficulty: 3 Hard
Bloom's: Apply
43
85)
Using Figure 9.1, the amount of autonomous consumption is

A) $500 billion.
B) $750 billion.
C) Different at every income level.
D) Equal to disposable income when the consumption line crosses the 45-degree line.
Answer: A
Explanation: The consumption function intersects the vertical axis at $500 billion, which is the
level of autonomous consumption (i.e., the intersection term of the consumption function).
Difficulty: 3 Hard
Bloom's: Apply
44
86)
According to Figure 9.1, saving equals zero at an income level of

A) $0.
B) $1,000 billion.
C) $2,000 billion.
D) $500 billion.
Answer: C
Explanation: Saving equals zero at the level of income where the consumption function
intersects the 45-degree line.
Difficulty: 3 Hard
Bloom's: Apply
45
87)
In Figure 9.1, at an income level of $2,000 billion,

A) Consumption equals $1,500 billion.
B) Saving equals $0.
C) The MPC equals 0.80.
D) There is dissaving.
Answer: B
Explanation: Saving equals zero at the level of income where the 45-degree line intersects the
consumption function.
Difficulty: 3 Hard
Bloom's: Apply
46
88)
In Figure 9.2, if the consumption function shifts from C1 to C2, it can be determined that the
A) MPC and APC have increased at each income level.
B) MPC and APC have decreased at each income level.
C) MPC has increased and the APC has stayed the same at each income level.
D) APC has increased and the MPC has stayed the same at each income level.
Answer: A
Explanation: The slope of the consumption function has become steeper, so the MPC must be
greater; the APC must be greater because consumption is higher at all levels of income.
Difficulty: 3 Hard
Bloom's: Analyze
47
89)
In Figure 9.2, if the consumption function shifts from C2 to C1, autonomous consumption
A) Increases, and aggregate demand shifts to the right.
B) Decreases, and aggregate demand shifts to the right.
C) Increases, and aggregate demand shifts to the left.
D) Decreases, and aggregate demand shifts to the left.
Answer: D
Explanation: A decreased consumption function will intersect the vertical axis at a lower point,
so autonomous consumption will be less; and the AD curve shifts to the left when the
consumption function decreases.
Difficulty: 3 Hard
Bloom's: Analyze
48
90)
According to Figure 9.3, which of the following is true?

A) Dissaving occurs at disposable income levels above $20 billion.
B) Consumption is $10 billion when disposable income is zero.
C) The APC is greater than 1 at disposable income levels above $20 billion.
D) At a disposable income level of $20 billion, consumption is zero.
Answer: B
Explanation: Autonomous consumption is $10 billion, the amount that will be spent even if
disposable income is equal to zero.
Bloom's: Create
49
91)
The MPC in the economy depicted in Figure 9.3

A) Is constant.
B) Increases steadily as disposable income increases.
C) Decreases steadily as disposable income increases.
D) Equals 1.0.
Answer: A
Explanation: The MPC is constant as the consumption function is linear, meaning the slope
must be constant.
Bloom's: Create
50
92)
Which diagram in Figure 9.4 shows how investment responds to the expectation that the
economy is about to go into a period of fast growth, causing firms to expect increased sales?
A) A.
B) B.
C) C.
D) D.
Answer: D
Explanation: If firms expect good economic times, they will invest more, thereby, leading to a
rightward shift of the investment curve.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Create
51
93) Which diagram in Figure 9.4 shows what happens to investment if the government decides to
make housing cheaper by lowering interest rates?
Which diagram in Figure 9.4 shows how investment responds to the expectation that the
economy is about to go into a period of fast growth, causing firms to expect increased sales?
A) A.
B) B.
C) C.
D) D.
Answer: C
Explanation: A lower interest rate causes an increase in the demand for borrowing money,
causing a movement along the investment curve--not an actual shift.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Create
52
94)
Which diagram in Figure 9.4 shows what is likely to happen to investment as a new
telecommunications technology suddenly is discovered that greatly facilitates the use of
computers, cable TV, and other information services?
A) A.
B) B.
C) C.
D) D.
Answer: D
Explanation: New technologies lead to greater investment because new technologies boost
productivity.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Create
53
95)
Which diagram in Figure 9.4 shows what happens to investment as the economy enters a
recession, causing both business expectations to collapse and saving to increase further, thus
causing banks to lower interest rates?
A) A.
B) B.
C) C.
D) D.
Answer: A
Explanation: The investment curve shifts to the left due to the recession, and there is a
movement along the new investment curve due to an increase in the supply of savings going into
banks and thereby lowering the interest rate.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Create
54
96)
In Figure 9.5, a movement from Point A to Point C would result from

A) An improvement in technology.
B) An improvement in expectations for future sales.
C) A decrease in the interest rates.
D) A decrease in disposable income.
Answer: C
Explanation: Changes to interest rates leads to an increase in planned investment spending,
causing a movement along the investment curve to the right.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Analyze
55
97)
In Figure 9.5, a movement from Point A to Point B would result from

A) A decrease in wage costs.
B) An increase in the interest rate.
C) An increase in disposable income.
D) An improvement in expectations for future sales.
Answer: D
Explanation: An improvement in business outlook will lead businesses to expand, thereby
shifting the investment curve to the right.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Analyze
56
98)
A movement from Point A to Point B in Figure 9.5 would result in

A) A decrease in aggregate demand.
B) A decrease in both aggregate demand and aggregate supply.
C) An increase in aggregate demand.
D) An increase in aggregate demand and a decrease in aggregate supply.
Answer: C
Explanation: Investment spending is one of the four categories which comprise aggregate
demand spending. So an increase in investment would shift the aggregate demand curve to the
right.
Difficulty: 3 Hard
Learning Objective: 09-04 How and why AD shifts occur.
Bloom's: Analyze
57
99)
In Figure 9.6, if full employment occurs at QC, then aggregate demand is

A) Too great, causing cyclical unemployment.
B) Too small, causing demand-pull inflation.
C) Too small, causing cyclical unemployment.
D) Just right.
Answer: C
Explanation: Since macro equilibrium falls to the left of the full-employment level of output,
there will be a recession and cyclical unemployment.
Bloom's: Create
58
100)
In Figure 9.6, if full employment occurs at QB, then aggregate demand is

A) Too great, causing cyclical unemployment.
B) Too great, causing demand-pull inflation.
C) Too small, causing cyclical unemployment.
D) Just right, causing no cyclical unemployment.
Answer: D
Explanation: At QB macro equilibrium corresponds to the full-employment level of output.
Bloom's: Create
59
101)
In Figure 9.6, if full employment occurs at QA, then aggregate demand is

A) Just right, causing no cyclical unemployment.
B) Too great, causing an inflationary gap.
C) Too small, causing an inflationary gap.
D) Too great, causing a recessionary gap.
Answer: B
Explanation: Since macro equilibrium falls to the right of the full-employment level of output,
there will be an inflationary gap.
Bloom's: Create
60
102) One In the News article titled "News Release: Disposable Income and Outlays: February
2017" says, "Personal spending increased $44 billion." An increase in spending is likely the
result of
A) An increase in saving.
B) An increase in income.
C) An increase in taxes.
D) A decrease in economic growth.
Answer: B
Explanation: An increase in income causes a rightward movement along the consumption
function.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
103) One In the News article titled, "News Release: Disposable Income and Outlays: February
2017" says that personal income increased $44 billion, or 0.31 percent, in February 2017, and
consumers are likely to spend more if
A) Income increases.
B) Saving increases.
C) Interest rates increase.
D) Taxes increase.
Answer: A
Explanation: With higher incomes, consumers will spend more, thereby leading to a rightward
movement along the consumption function.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
61
104) One In the News article titled "Consumer Confidence Index at Record Low" indicates that
consumer confidence decreased. As a result, which of the following is most likely to happen?
A) Autonomous consumption will decrease.
B) Total spending will increase.
C) Investment will increase.
D) Government spending will decrease.
Answer: A
Explanation: A drop in consumer confidence causes a downward shift of the consumption
function, thereby leading to a lower level of autonomous consumption.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
105) If we assume that government expenditure, investment, and net exports are not affected by
income, the slope of the consumption function equals
A) APC.
B) The change in income divided by the change in consumption.
C) The slope of the aggregate expenditure curve.
D) APS.
Answer: C
Explanation: The aggregate expenditure line is parallel to the consumption function, so the
slope will be the same.
Bloom's: Understand
62
106) A decrease in U.S. exports to Japan can be represented by
A) The aggregate expenditure curve shifting upward.
B) The aggregate expenditure curve shifting downward.
C) A rightward movement along the aggregate expenditure curve.
D) A leftward movement along the aggregate expenditure curve.
Answer: B
Explanation: A drop in exports means total income will decrease, so the aggregate expenditure
curve shifts down, thereby leading to a lower equilibrium output.
Difficulty: 3 Hard
Bloom's: Apply
107) A sudden increase in confidence by the business community could best be represented by
A) The consumption curve shifting downward.
B) The AS curve shifting downward.
C) An aggregate expenditure curve shifting upward.
D) An aggregate expenditure curve shifting downward.
Answer: C
Explanation: When businesses feel good about the future, investment will be higher, resulting
in a higher equilibrium level of output.
Difficulty: 3 Hard
Bloom's: Apply
63
108) Assume there is a decrease in government purchases and exports. Currently there is a
recessionary gap, which implies that
A) Inventories are accumulating.
B) Inventories are being depleted.
C) Desired spending is greater than output.
D) Investment is greater than saving.
Answer: A
Explanation: A recessionary gap occurs when production exceeds spending so that inventories
must be accumulating.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Create
109) Using the output at which the aggregate expenditure curve intersects the 45-degree line, we
can identify
A) Equilibrium (macro) at the intersection point.
B) Dissaving to the right of the intersection point.
C) Full employment to the left of the intersection point if there is a recessionary gap.
D) A consumption shortfall at the intersection point.
Answer: A
Explanation: At this point, the economy is in equilibrium because total spending is sufficient to
purchase all output.
Difficulty: 3 Hard
Bloom's: Apply
64
110) If the full-employment level of income in Figure 9.7 is $300 billion, there is
A) A recessionary gap of $50 billion per year.

B) A recessionary gap of $100 billion per year.
C) An inflationary gap of $500 billion per year.
D) Achievement of macro equilibrium.
Answer: B
Explanation: In this case, macro equilibrium is to the left of the full-employment level of
income. So the economy is in a recession.
Difficulty: 3 Hard
Bloom's: Analyze
65
111) If the full-employment level of income in Figure 9.7 is $200 billion, there is
A) A recessionary gap of $100 billion per year.

B) A recessionary gap of $200 billion per year.
C) An inflationary gap of $100 billion per year.
D) Achievement of macro equilibrium.
Answer: D
Explanation: The macro equilibrium occurs at the full-employment level of income where the
45-degree line intersects AD.
Difficulty: 3 Hard
Bloom's: Analyze
66
112) Given the information in Figure 9.7, dissaving would occur at all income levels below
A) $100 billion per year.

B) $150 billion per year.
C) $200 billion per year.
D) $300 billion per year.
Answer: A
Explanation: Below $100 billion, consumption is greater than disposable income, so dissaving
must occur.
Difficulty: 3 Hard
Bloom's: Apply
67
113) In Figure 9.8, if full-employment income is produced at $400 billion, we can expect
inventories to
A) Rise as a result of undesired inventory investment.

B) Rise as a result of undesired saving.
C) Fall as a result of undesired inventory investment.
D) Fall as a result of undesired saving.
Answer: A
Explanation: Inventories will rise because production exceeds aggregate expenditure, resulting
in an undesired increase in inventories-which are part of investment.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Analyze
68
114) In response to changing inventories in Figure 9.8, if the economy produces at full
employment of $400 billion, firms will attempt to
A) Lower production rates and hire more workers.

B) Lower production rates and lay off workers.
C) Raise production rates and hire more workers.
D) Raise production rates and lay off workers.
Answer: B
Explanation: In this case, at full employment, inventories are accumulating as more is being
produced than demanded. So firms will cut back on production, prices, and employment so that
production will better match the quantities that people want to buy.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Analyze
69
115) In response to changing inventories in Figure 9.8, if the economy produces at full
employment of $400 billion, firms will attempt to
A) Reduce employment and buy more machinery.

B) Reduce employment and buy less machinery.
C) Increase employment and buy more machinery.
D) Increase employment and buy less machinery.
Answer: B
Explanation: In this case, at full employment, inventories are accumulating. So firms will cut
back on production, prices, and employment, which will lower wages; ultimately production will
equal aggregate expenditure.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Analyze
70
116) In Figure 9.8, if full-employment income is produced at $400 billion, the government can
reduce a recessionary gap by
A) Decreasing government spending.

B) Decreasing investment spending.
C) Decreasing income taxes on consumers.
D) Increasing taxes.
Answer: C
Explanation: At full employment, production exceeds spending. So production will fall unless
additional spending results in production equaling aggregate expenditure.
Difficulty: 3 Hard
Bloom's: Analyze
71
117) In Figure 9.8, if full-employment income is produced at $400 billion, which of the
following can alleviate a recession?
A) An increase in government spending.

B) An increase in taxes.
C) An increase in interest rates.
D) An increase in saving.
Answer: A
Explanation: At full employment, production exceeds spending. So production will fall unless
additional spending, possibly from the government, results in production equaling aggregate
expenditure.
Difficulty: 3 Hard
Bloom's: Analyze
72
118) In Figure 9.9, at a full-employment output level of $150 billion, the gap by which actual
aggregate income or GDP is different from full-employment income or GDP is
A) An inflationary gap of $25 billion income.

B) A recessionary gap of $50 billion income.
C) An inflationary gap of $50 billion income.
D) Expenditure equilibrium.
Answer: B
Explanation: Recessionary or inflationary gaps regarding GDP or income are measured on the
horizontal axis. Recessionary or inflationary gaps regarding expenditure are measured on the
vertical axis. In this case, regarding GDP or income, the current macro equilibrium occurs to the
left of the full-employment level of output, so the economy is in recession (150-100=50).
Difficulty: 3 Hard
Bloom's: Analyze
73
119) If the economy depicted in Figure 9.9 produced at the full-employment output level of $150
billion instead of the equilibrium output level, inventory levels would
A) Remain constant.
B) Increase by $50 billion.
C) Increase by $25 billion.
D) Decrease by $100 billion.
Answer: C
Explanation: Total spending of $125 billion while production is $150 billion leads to an
accumulation of inventory.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Create
74
120) Using Figure 9.9, and assuming the full-employment output level is $50 billion,
A) There is an inflationary gap of $50 billion income.

B) There is a recessionary gap of $50 billion income.
C) There is an inflationary gap of $25 billion income.
D) The economy is at macro equilibrium.
Answer: C
Explanation: Consumption exceeds current income/expenditure (45 degree line) by 25 billion,
this is the inflationary gap. Explained on pages 200-201 of the text. Note: Previously provided
answer was incorrect.
Difficulty: 3 Hard
Bloom's: Analyze
75
121) If the economy depicted in Figure 9.9 produced at a full-employment output level of $50
billion instead of the equilibrium output level, inventory levels would
A) Increase by $50 billion.

B) Increase by $25 billion.
C) Decrease by $25 billion.
D) Decrease by $50 billion.
Answer: C
Explanation: Since total spending of $75 billion exceeds total production of $50 billion,
inventory levels will be depleted. Note: This amount is referred in the text as the inflationary gap
(see above question). Making 121 and 122 the same question. Both are correct but this may
confuse students. I advise omitting 122 at your own discretion.
Difficulty: 3 Hard
Bloom's: Analyze
76
122) Assuming that investment, government expenditures, and net exports are all autonomous,
the marginal propensity to consume for the economy represented in Figure 9.9 is
A) 1.0 since aggregate expenditure is a straight line.

B) 0.5.
C) 0.25.
D) Indeterminate since there is no consumption function.
Answer: B
Explanation: The MPC is the slope, which measures the rise over the run; in this case it is 0.5
[(75-50)/(50-0)=0.5].
Difficulty: 3 Hard
Bloom's: Evaluate
77
123) Autonomous consumption depends on all of the following except
A) Innovation.
B) Wealth.
C) Credit.
D) Expectations.
Answer: A
Explanation: Innovation leads to a shift of the investment curve.
Difficulty: 3 Hard
Bloom's: Apply
124) The four components of aggregate demand include all of the following except
A) Consumption.
B) Saving.
C) Investment.
D) Net exports.
Answer: B
Explanation: Saving is not an actual spending category but is the source of funds for
investment.
Difficulty: 3 Hard
Bloom's: Apply
125) APC is equal to

A) The change in total consumption divided by the change in total disposable income.
B) The change in total saving divided by the change in total disposable income.
C) Total consumption divided by total disposable income.
D) Total saving divided by total disposable income.
Answer: C
Explanation: The APC measures the fraction of total disposable income that is spent by
households.
Topic: Consumption
Bloom's: Understand
78
126) All of the following will shift the investment curve except
A) Innovation.
B) Improvements in available technology.
C) Changes to expectations.
D) Changes to the interest rate.
Answer: D
Explanation: Changes to the interest rate cause a movement along the investment curve, not a
shift.
Difficulty: 3 Hard
Topic: Investment
Bloom's: Apply
127) The change in total spending from additional income is

A) MPC.
B) MPS.
C) APC.
D) APS.
Answer: A
Explanation: The marginal propensity to consume measures the fraction of each additional
dollar of disposable income that is consumed and is equivalent to: (Change in
consumption)/(Change in disposable income).
Bloom's: Understand
79
128) Dissaving occurs whenever
A) Current supply exceeds current production.
B) Current income falls.
C) Current consumption exceeds current income.
D) Current unemployment falls.
Answer: C
Explanation: Dissaving is defined as consumption expenditure being in excess of disposable
income-a negative saving flow.
Bloom's: Understand
129) A rise in interest rates will cause

A) A decline in investment spending.
B) A rise in investment spending.
C) Investment spending to remain constant.
D) Investment spending to be eliminated from the economy.
Answer: A
Explanation: We anticipate a lower rate of investment spending when interest rates are high (a
movement to the left on the investment curve) and more investment at lower rates, ceteris
paribus.
Bloom's: Understand
130) Unlike the classical economists, Keynes believed that the economy would automatically
adjust to full employment.
Answer: FALSE
Explanation: Keynes believed the economy would not self-adjust and needed government
intervention.
Bloom's: Understand
80
131) Most economists today recognize that a short-run macro failure is possible.
Answer: TRUE
Explanation: In the short run, the macro equilibrium could be below the full-employment level
of output.
Bloom's: Understand
132) The four components of aggregate spending are consumption, saving, imports, and taxes.
Answer: FALSE
Explanation: The four components of aggregate spending are consumption, investment,
government expenditures, and net exports.
Difficulty: 1 Easy
Bloom's: Remember
133) Keynes asserted that wealth was the most important determinant of consumer spending.
Answer: FALSE
Explanation: Keynes believed that disposable income was the most important determinant of
consumer spending.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
134) The largest component of aggregate spending is government spending.
Answer: FALSE
Explanation: The largest component of aggregate spending is consumption of goods and
services.
Difficulty: 1 Easy
Topic: Consumption
Bloom's: Remember
81
135) The marginal propensity to consume (MPC) is related to the marginal propensity to save
(MPS) by the formula MPC = 1 - MPS.
Answer: TRUE
Explanation: Out of any additional disposable income, the MPC and MPS measure the fractions
that are spent and saved, respectively.
Topic: Consumption
Bloom's: Understand
136) Total consumption consists entirely of two components: autonomous consumption and
income-dependent consumption.
Answer: TRUE
Explanation: Autonomous consumption is independent of income, while the rest of
consumption is strongly correlated to the level of income.
Difficulty: 1 Easy
Bloom's: Remember
137) The slope of a graph of the consumption function equals the marginal propensity to
consume.
Answer: TRUE
Explanation: The MPC represents the portion of disposable income that is spent rather than
saved.
Difficulty: 1 Easy
Bloom's: Remember
82
138) The consumption function will shift because of a change in current disposable income.
Answer: FALSE
Explanation: There will be a movement along the consumption function due to a change in
current disposable income.
Bloom's: Understand
139) Favorable expectations about future sales will cause higher investment, ceteris paribus.
Answer: TRUE
Explanation: Businesses will be more inclined to invest when it seems likely to pay off
financially.
Topic: Investment
Bloom's: Understand
140) Gross exports depend on the behavior of foreign businesses and consumers.
Answer: TRUE
Explanation: The amount of exports the United States sells depends on how well consumers
and businesses are doing overseas; a recession will leave them with less income so they will buy
fewer U.S. exports. Likewise, U.S. imports depend directly on the U.S. economy. Higher U.S.
incomes mean more consumption of both U.S. GDP as well as foreign production.
Bloom's: Understand
83
141) Full-employment income is the same as the potential GDP of the economy.
Answer: TRUE
Explanation: At full employment, the economy will be operating at a point along its production
possibilities curve.
Difficulty: 1 Easy
Bloom's: Remember
142) The aggregate expenditure curve tells how much market participants desire to spend at
different income levels.
Answer: TRUE
Explanation: The aggregate expenditure curve reflects total spending by consumers, businesses,
governments, and foreigners.
Difficulty: 1 Easy
Bloom's: Remember
143) If there is an inflationary gap, then a 45-degree line exceeds the aggregate expenditure
curve at the full-employment level of income.
Answer: FALSE
Explanation: The 45-degree line exceeds the aggregate expenditure when there is a recessionary
gap and spending would be insufficient to purchase all output.
Difficulty: 1 Easy
Bloom's: Remember
84
144) What must the value of the average propensity to save (APS) be if the average propensity to
consume (APC) is greater than 1? Why?
Answer: The APS must be negative if the APC is greater than 1. The APC is the proportion of
total income that is saved by consumers. The APC is the proportion of income that is spent by
consumers. Consumers have only two options-to spend or save-so the portion spent plus the
portion saved equal total income. The APC plus the APS must equal 1. If the APC is greater than
1, it means that consumers are spending more than their current disposable income and are
therefore dissaving.
Difficulty: 3 Hard
Topic: Consumption
Bloom's: Analyze
145) What are the two types of consumer spending as identified by Keynes, and what are the
determinants of each?
Answer: Consumer spending can be classified as autonomous consumption and income-

dependent consumption. Autonomous consumption is consumption that occurs independent of
income. It is determined by factors such as expectations, wealth, credit, taxes, and price level.
Income-dependent consumption is determined by current income only.
Bloom's: Understand
146) How can autonomous consumption be greater than zero when income is zero?
Answer: Autonomous consumption is the level of consumption independent of income. People

with zero income still consume goods and services such as food, shelter, and medical care. This
is possible through the use of savings or credit and is referred to as dissaving.
Difficulty: 3 Hard
Bloom's: Analyze
85
147) How does an improvement in consumer confidence affect the consumption function and the
aggregate demand curve?
Answer: Consumer confidence is affected by expectations about the future. It impacts

autonomous consumption and causes the consumption function to shift. If consumers are more
confident, they will spend more dollars at all income levels, and the consumption function shifts
upward. This increase in spending causes the aggregate demand curve to shift to the right.
Difficulty: 3 Hard
Bloom's: Analyze
148) What is investment spending, and what are the factors that impact investment demand?
Explain.
Answer: Investment is expenditures on new plants, equipment, and structures, plus changes in
inventories. Demand for investment is determined by several factors. Ceteris paribus, a change in
interest rates causes a movement along the investment demand curve. A change in expectations
(particularly expectations of future sales) or a technology or innovation change or an unexpected
depreciation, such as from a fire, causes a shift of the investment demand curve.
Topic: Investment
Bloom's: Understand
149) If the economy is in equilibrium, how can a recessionary gap exist, and how will producers
respond to this gap?
Answer: Equilibrium occurs where desired spending equals the value of output, but equilibrium
may not be at the full-employment level of output. A recessionary gap occurs when the level of
spending is less than output at full employment, or the equilibrium output level is less than full-
employment output. Producers respond to the recessionary gap by decreasing production and
laying off workers.
Difficulty: 3 Hard
Bloom's: Analyze
86
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1) Aggregate demand is the total quantity of output

4) The components of aggregate demand are

7) If consumption is $340 and saving is $20, then disposable income

11) When the APC is greater than 1, the APS must be

17) The MPC indicates the fraction of

21) Which of the following is not a determinant of autonomous consumption?

39) If autonomous consumption decreases, then

42) If the availability of credit increases, then

44) Investment spending includes expenditures on all of the following except

45) Which of the following is not considered to be an important determinant of investment?

51) If firms become more pessimistic about future sales, then

59) Which of the following will cause an increase in U.S. imports?

65) A recessionary gap

71) Demand-pull inflation is caused by

Disposable Income Total Consumption

What is the marginal propensity to consume in Table 9.1?

Disposable Income Total Consumption

Disposable Income Total Consumption

Disposable Income Total Consumption

What is the marginal propensity to save in Table 9.1?

Disposable Income Total Consumption

Disposable Income Total Consumption

Full Employment Consumers Investors Desire Total Private Total

Table 9.2: Answer

Full Employment Consumers Investors Desire Total Private Total

Given the information in Table 9.2, saving equals investment at an income of

Table 9.2: Answer

Full Employment Consumers Investors Desire Total Private Total

If the full-employment level of income (YF) in Table 9.2 is $700 billion,

Table 9.2: Answer

Full Employment Consumers Investors Desire Total Private Total

If the full-employment level of income (YF) in Table 9.2 is $800 billion,

Table 9.2: Answer

Using Figure 9.1, dissaving occurs at all income levels

Using Figure 9.1, the amount of autonomous consumption is

According to Figure 9.1, saving equals zero at an income level of

In Figure 9.1, at an income level of $2,000 billion,

According to Figure 9.3, which of the following is true?

The MPC in the economy depicted in Figure 9.3

In Figure 9.5, a movement from Point A to Point C would result from

In Figure 9.5, a movement from Point A to Point B would result from

A movement from Point A to Point B in Figure 9.5 would result in

In Figure 9.6, if full employment occurs at QC, then aggregate demand is

In Figure 9.6, if full employment occurs at QB, then aggregate demand is

In Figure 9.6, if full employment occurs at QA, then aggregate demand is

A) A recessionary gap of $50 billion per year.

A) A recessionary gap of $100 billion per year.

A) $100 billion per year.

A) Rise as a result of undesired inventory investment.

A) Lower production rates and hire more workers.

A) Reduce employment and buy more machinery.

A) Decreasing government spending.

A) An increase in government spending.

A) An inflationary gap of $25 billion income.

A) There is an inflationary gap of $50 billion income.

A) Increase by $50 billion.

A) 1.0 since aggregate expenditure is a straight line.

125) APC is equal to

127) The change in total spending from additional income is