econ ch. 11

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John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Great Depression.

The aggregate expenditures model is built upon which of the following assumptions?

Prices are fixed.

A private closed economy includes:

households and businesses, but not government or international trade.

In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________.

declined by 27 percent; rose to 25 percent

In the aggregate expenditures model, it is assumed that investment:

does not change when real GDP changes.

All else equal, a large decline in the real interest rate will shift the:

investment schedule upward.

The level of aggregate expenditures in the private closed economy is determined by the:

expenditures of consumers and businesses.

In a private closed economy, when aggregate expenditures equal GDP:

planned investment equals saving.

In a private closed economy, when aggregate expenditures exceed GDP:

business inventories will fall.

If an unintended increase in business inventories occurs at some level of GDP, then GDP:

is too high for equilibrium.

A private closed economy will expand when:

unplanned decreases in inventories occur.

If aggregate expenditures exceed GDP in a private closed economy:

planned investment will exceed saving.

Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when:

GDP is $60 billion.

Actual investment is $62 billion at an equilibrium output level of $620 billion in a private closed economy. The average propensity to save at this level of output is:


Refer to the diagram for a private closed economy. At the $300 level of GDP:

aggregate expenditures and GDP are equal.

In the aggregate expenditures model, technological progress will shift the investment schedule:

upward and increase aggregate expenditures.

At equilibrium real GDP in a private closed economy:

aggregate expenditures and real GDP are equal.

Which of the following statements is correct for a private closed economy?

Saving equals planned investment only at the equilibrium level of GDP.

At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be:

$38 billion.

Planned investment plus unintended increases in inventories equals:

actual investment.

Saving is always equal to:

actual investment.

Actual investment equals saving:

at all levels of GDP.

Unintended changes in inventories:

bring actual investment and saving into equality at all levels of GDP.

At the equilibrium GDP for a private open economy:

net exports may be either positive or negative.

Other things equal, an increase in an economy’s exports will:

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to:

increase domestic output and employment.

If the equilibrium level of GDP in a private open economy is $1,000 billion and consumption is $700 billion at that level of GDP, then:

Ig + Xn must equal $300 billion.

An exchange rate:

is the price that the currencies of any two nations exchange for one another.

If the United States wants to increase its net exports in the short term, it might take steps to:

depreciate the dollar compared to foreign currencies.

Other things equal, a serious recession in the economies of U.S. trading partners will:

depress real output and employment in the U.S. economy.

In a mixed open economy, the equilibrium GDP exists where:

Ca + Ig + Xn + G = GDP.

In a mixed open economy, the equilibrium GDP is determined at that point where:

Sa + M + T = Ig + X + G.

Suppose the economy’s multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to:

decrease by $50 billion.

Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by:

$40 billion.

Other things equal, the multiplier effect associated with a change in government spending is:

equal to that associated with a change in investment or consumption.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because:

a portion of a tax cut will be saved.

An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because:

some of the tax increase will be paid out of income that would otherwise have been saved.

If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause:

an $8 billion downshift in the consumption schedule.

Which of the following would increase GDP by the greatest amount?

A $20 billion increase in government spending

Which of the following would reduce GDP by the greatest amount?

A $20 billion decrease in government spending.

Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government purchases by $18 billion. On the basis of this information, we can say that the:

MPS in this economy is .4.

In the aggregate expenditures model, a reduction in taxes may:

increase saving.

In the aggregate expenditures model, an increase in government spending may:

increase output and employment.

A lump-sum tax means that:

the same amount of tax revenue is collected at each level of GDP.

It is true that:

equal increases in government spending and taxes increase the equilibrium GDP.

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from:

a rapid decline in investment spending.

In an effort to stop the U.S. recession of 2007-2009, the federal government:

reduced taxes and increased government spending.

(Last Word) Say’s law and classical macroeconomics were disputed by:

John Maynard Keynes.

(Last Word) Classical macroeconomics was dealt severe blows by:

the Great Depression and Keynes’s macroeconomic theory.

(Last Word) In The General Theory of Employment, Interest, and Money:

John Maynard Keynes attacked the classical economist’s contention that recession or depression will automatically cure itself.

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