978-1259723223 Test Bank TBChap031 Part 10

341. In an open mixed economy, the inflationary expenditure gap may be described as the

A.

excess of GDP over Ca + Ig + Xn + G at the full-employment output.

342. In the Great Recession of 2007–2009, the aggregate expenditures schedule in the U.S.

economy dropped, mostly due to a fall in

A.

consumption spending.

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Topi c :

Equilibrium versus Full-Employment GDP

343. The $787 billion stimulus package enacted by the Federal government in 2009 to try to

deal with the Great Recession was intended to

A.

shift the aggregate expenditures schedule down.

344. In 2008 during the Great Recession, the Federal government provided tax rebate checks to

taxpayers in the hope that

A.

C would shift down.

345. If consumers respond to a tax-cut by saving a large portion of the extra disposable income

(or using it to reduce their debts), then the tax-cut policy would

A.

shift the AE curve up significantly.

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D. not have much effect on the aggregate expenditures curve.

346. Say’s law in classical economics suggests that, over a period of time,

A.

aggregate spending would tend to exceed total output and income.

347. One of the most important views expressed by classical macroeconomists was that

A.

wages and prices are inflexible.

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Topi c :

Equilibrium versus Full-Employment GDP

348. From the perspective of classical macroeconomic theory, if aggregate spending was

temporarily less than output,

D. product and resource prices would increase, so that aggregate spending would equal output.

349. From the perspective of classical macroeconomic theory, an excess of aggregate spending

would

A.

increase aggregate output and the level of employment in the economy.

350. Classical economists held the view that in the economy,

A.

demand creates its own supply.

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B. unemployment is temporary and is soon eliminated.

C. there is an imbalance between saving and investment.

D. it is difficult for an economy to adjust because wages and prices are inflexible.

351. John Maynard Keynes developed the ideas underlying the aggregate expenditures model

A.

in the 1960s.

352. One major point that Keynes raised pertains to income and spending. He argued that

A.

all income is often spent in the same period of time.

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inflationary expenditure gaps.

Test Bank: II

Topi c :

Equilibrium versus Full-Employment GDP

353. The major economic issue during the Great Depression of the 1930s that concerned John

Maynard Keynes was

D. hyperinflation.

354. John Maynard Keynes expressed his ideas about the macroeconomy and attacked classical

economics in his book, The

A.

Affluent Society.

True / False Questions

355. One basic assumption of the aggregate expenditures model is that the price level in the

economy is fixed.

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356. The major basic premise of the aggregate expenditures model is that if the total demand

for output increases, then firms will raise their prices.

357. In the aggregate expenditures model of a private closed economy, we analyze a

consumption schedule and an investment schedule, both of which indicate that as income

increases then consumption and investment will increase.

358. If the expected rates of return from investment decrease in an economy, there would most

likely be a downward shift in the investment schedule for that economy.

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TRUE

359. A rightward shift of the investment demand curve translates into an upward shift of the

investment schedule in the aggregate expenditures model.

360. A downward-sloping investment demand curve and a horizontal investment schedule

indicate that investments are inversely related to interest rates but are not affected by the level

of income.

361. In the aggregate expenditures model of the economy, equilibrium is attained when planned

aggregate spending equals total output.

362. In the aggregate expenditures model of a private closed economy, aggregate expenditures

(C + Ig) is always equal to output GDP.

363. In the aggregate expenditures model of a private closed economy, if aggregate

expenditures are greater than output or income, then real GDP will increase toward its

equilibrium level.

364. When a private closed economy is at equilibrium, then (GDP − C) is equal to planned

investment.

365. When there are unplanned increases in inventories, then actual investment ends up being

less than planned investment.

366. If planned investment is larger than saving, then real GDP will increase as the economy

adjusts toward equilibrium.

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Topi c :

Other Features of Equilibrium GDP

367. In a closed private economy, an unplanned decrease in inventories will cause firms to

increase real GDP.

368. If the MPC in the economy is 0.7 and aggregate expenditures fall by $10 billion, then real

GDP will fall by $17 billion.

369. If aggregate expenditures rise by $200 billion and real GDP consequently rises by $500

billion, then the MPC in the economy must be 0.4.

370. If households and firms in an economy would save all extra income that they receive so

that MPC = 0, then the multiplier in that economy is zero.

371. The steeper is the consumption schedule in an economy, the larger will be the multiplier.

372. Positive net exports increase aggregate expenditures beyond what they would be in a

closed economy and thus have an expansionary effect on domestic GDP.

373. An increase in imports, other things constant, would tend to raise the equilibrium level of

GDP.

374. An increase in a lump-sum tax has the same effect on equilibrium GDP as an equal

decrease in government purchases.

375. If the government increases its purchases by $200 billion but at the same time raises lump-

sum taxes by $200 billion, then equilibrium GDP will remain constant.

376. A decrease in taxes will have a larger effect on equilibrium GDP if the marginal

propensity to consume is smaller.

377. A recessionary expenditure gap is the amount by which aggregate expenditures must

increase in order to reach the full-employment level of GDP.

378. In the Great Recession of 2007–2009, the sector of the economy that decreased the most

was G.

379. In the Great Recession of 2007–2009, consumption, C, and investment, Ig, fell, while

government, G, expanded.

380. In the Great Recession of 2007–2009, the Federal government enacted a “stimulus

package” that was intended to bring inflation down.

381. When the Federal government provides tax rebate checks to taxpayers, as it did in 2008,

the intent is to push the aggregate expenditures schedule in the economy upward.