Chapter 8—The Keynesian Model
MULTIPLE CHOICE
1. Classical economists believed that:
a.
price flexibility automatically directs market economies to full employment.
b.
budget deficits and surpluses were necessary for the control of economic fluctuations.
c.
market economies suffer prolonged periods of recessions and depressions.
d.
market economies are inherently unstable because of fluctuating aggregate demand.
2. According to Say’s law, there cannot be overproduction of goods and services because:
a.
planned aggregate expenditures sometimes fall short of total output.
b.
prices and wages are “sticky” or inflexible in the downward direction.
c.
demand creates its own supply.
d.
supply creates its own demand.
3. Prior to the Great Depression, classical economists believed that a recessionary downturn would be
reversed by:
a.
higher wages and prices.
b.
lower wages and prices.
c.
an expansionary monetary policy on the part of the Federal Reserve System.
d.
an increase in government spending that would stimulate aggregate demand.
4. The popular theory prior to the Great Depression that the economy will automatically adjust to achieve
full employment in the long run is:
a.
supply-side economics.
c.
classical economics.
b.
Keynesian economics.
d.
mercantilism
5. The French economist Jean-Baptiste Say transformed the equality of total output and total spending
into a law that can be expressed as follows:
a.
Unemployment is not possible in the short run.
b.
Demand and supply are never equal.
c.
Supply creates its own demand.
d.
Demand creates its own supply.
6. Classical economic theory predicted that in the long run the economy would experience:
a.
below full unemployment.
c.
full employment.
b.
rising rate of inflation.
d.
idle factors of production.
7. According to the classical economists, which of the following would make prolonged unemployment
impossible?
a.
Flexible prices, wages, and interest rates.
c.
Stable investment demand.
b.
Activist government policies.
d.
A steadily growing money supply.
8. The classical economists argued that the production of goods and services (supply) generates an equal
amount of total income and, in turn, total spending. This theory is called:
a.
Keynes’ General Theory.
c.
the “animal spirits” theory.
b.
Say’s Law.
d.
the law of autonomous consumption.
9. Which of the following statements is true about Say’s law?
a.
It states that supply creates its own demand.
b.
It states that demand creates its own supply.
c.
It states that total output will always exceed total spending.
d.
It states that consumption spending is the most volatile component of aggregate
expenditures.
e.
It is a major proposition of the Keynesian model.
10. The dominant school of economic thought until midway through the Great Depression of the 1930s
was:
a.
classical.
b.
Keynesian.
c.
monetarism.
d.
supply-side.
e.
rational expectations.
11. If the economy were left on its own without the interference of government or the Fed, it would move
toward an equilibrium rate of growth that would produce, with only minor interruptions, full
employment without inflation. What school supports this view?
a.
Classical.
b.
Keynesian.
c.
Monetarism.
d.
Supply-side.
e.
Neo-Keynesian.
12. The hands-off view of the classical school rests on which of the following two simple propositions
about markets?
a.
Demand creates its own supply and markets are basically competitive.
b.
Industrial policy is inevitable and all prices are flexible.
c.
Market failure occurs and prices are rigid.
d.
Wages are sticky downward and market failure is inevitable.
e.
Markets are basically competitive and prices are flexible.
13. In the view of the classical school, unemployment:
a.
is a permanent condition.
b.
disappears when everyone who is willing to work at the equilibrium wage finds
employment.
c.
exists because people do not interfere with the competitive process.
d.
is only temporary because all wages and prices are rigid.
e.
is necessary and good for the economy.
14. The most appropriate countercyclical policy, or stabilization policy, in times of unemployment,
according to classical economists, is for the government to:
a.
increase the minimum wage.
b.
impose wage and price controls.
c.
stimulate aggregate demand.
d.
cut taxes.
e.
do nothing.
15. The school of thought that emphasizes the natural tendency for an economy to move toward
equilibrium full employment is known as the:
a.
Keynesian school.
c.
rational expectations school.
b.
supply-side school.
d.
classical school.
16. The dominant school of thought prior to the 1930s was known as the:
a.
Keynesian school.
b.
classical school.
c.
rational expectations school.
d.
supply-side school.
e.
monetarist school.
17. Keynes once remarked that, in the long run, we’re all dead. He was responding to the conventional
wisdom of classical economics who argued that:
a.
the supply curve should remain vertical in the long run.
b.
World War I was fought to free Britain from economic ruin.
c.
depression was only a short-run, temporary departure from full-employment equilibrium.
d.
funeral plots need to be determined by the market.
e.
market-based realities cause the estate tax to be too high.
18. The Keynesian view stresses that:
a.
demand creates its own demand.
b.
there is direct relationship between consumer spending and disposable income.
c.
when aggregate expenditures (demand) can be forever less than full-employment output
therefore prolonged unemployment will persist.
d.
all of these are true.
19. According to the Keynesian view, the prolonged unemployment of the Great Depression:
a.
was surprising because Keynesians believed that wage rates would decline and direct the
economy to full employment.
b.
was surprising because Keynesians believed that lower interest rates would direct the
economy to full employment.
c.
resulted because the total expenditures on goods and services were less than the full-
employment rate of output.
d.
resulted because the federal government ran large budget deficits during the 1930s.
20. John Maynard Keynes and his followers argued that the Great Depression was primarily the result of:
a.
excessive government spending.
b.
large budget deficits.
c.
the perverse monetary policies of the Fed.
d.
insufficient aggregate spending on goods and services.
21. The Keynesian model of macro equilibrium provided an explanation for the:
a.
high rates of both unemployment and inflation experienced during the 2110s.
b.
prolonged high rates of unemployment experienced during the 1930s.
c.
low interest rates of the 1950s and 1960s.
d.
budget surpluses and rapid growth of the U.S. economy during the 1990s.
22. What is the title of the John Maynard Keynes’s book published in 1936 that challenged the classical
self-correction economic theory?
a.
In the Long-run We Are Dead.
b.
Classical Economics Revised.
c.
General Theory of Employment, Interest, and Money.
d.
A Keynesian Approach to Economic Policy.
23. According to John Maynard Keynes:
a.
aggregate expenditures (demand) can be forever inadequate to achieve full employment.
b.
aggregate output (supply) can be forever inadequate to achieve full employment.
c.
the economy would automatically adjust to full employment in the long run.
d.
neither aggregate demand nor aggregate supply is a determinant of full-employment real
GDP.
24. Keynesian economics:
a.
affirms the classical economists’ basic premise concerning competitive markets.
b.
believes that monopolies and unions tend to be permanent fixtures in our economy and the
prices they create tend to be flexible, at least downwardly.
c.
emphasizes the possibility that an economy can never be in equilibrium at less than full
employment.
d.
prefers to emphasize aggregate supply over aggregate demand.
e.
believes that unemployment results when aggregate demand is insufficient to reach a full-
employment level of real GDP.
25. Keynesians:
a.
accept the countercyclical policy of doing nothing, that is, allowing market forces to work.
b.
believe that the level of aggregate demand in the 1930s was sufficient to generate full
employment.
c.
accept the fact that policymakers should eliminate inflation first before focusing on
unemployment.
d.
focus on increasing aggregate demand in order to stimulate the economy.
e.
were prepared for the events that beset our economy in the 1970s and 1980s.
26. A primary emphasis of the Keynesian school is the economy:
a.
has a tendency to always create a full-employment level of output.
b.
has a tendency to always create inflationary pressure at all levels of output.
c.
has a tendency to eliminate unemployment by lowering wage rates to create an
equilibrium in the labor market.
d.
is driven by the supply-side of the market.
e.
has a tendency to be in equilibrium at less than full employment.
27. If the economy is experiencing less than full-employment, the Keynesian school recommends that the
government:
a.
do nothing to stimulate the economy.
b.
undertake fiscal policy to stimulate aggregate demand.
c.
undertake fiscal policy to stimulate aggregate supply.
d.
balance the budget to stimulate aggregate demand.
28. The consumption function shows the relationship between:
a.
planned consumption expenditures and disposable income.
b.
permanent income and savings.
c.
business inventory and real GDP.
d.
aggregate demand and aggregate consumption.
29. In the basic Keynesian model, the major determinant of consumption expenditures is:
a.
the interest rate.
c.
investment.
b.
inflation.
d.
disposable income.
30. The consumption function has a slope less than one because:
a.
as disposable income increases, the real rate of interest will decline.
b.
saving and consumption are equal at all levels of income.
c.
as disposable income increases, consumption expenditures increase by an amount less than
the increase in income.
d.
as disposable income increases, consumption expenditures increase by an amount greater
than the increase in income.
31. In the Keynesian aggregate consumption-income graph, the vertical distance between the consumption
function and the 45-degree line shows the:
a.
amount of savings (or dissavings) at that level of disposable income.
b.
amount of disposable income at that level of consumption.
c.
increase in planned business investment at each level of inflation.
d.
increase in income that causes each change in real GDP.
32. At the point where the consumption function crosses the 45-degree line:
a.
consumption is equal to disposable income, and therefore, saving is zero.
b.
consumption is less than income, and saving is present.
c.
consumption is greater than income, and dissaving is present.
d.
planned saving equals actual saving minus disposable income.
33. In the Keynesian aggregate expenditure model, the 45-degree line indicates:
a.
amounts households plan to spend at each possible level of income.
b.
amounts households plan to save at each possible level of income.
c.
all income levels at which the planned spending of decision makers equals total output.
d.
all income levels at which the marginal propensity to consume is one.
34. According to Keynes, what is the most important determinant of households’ spending on goods and
services?
a.
The price level.
c.
Autonomous consumption.
b.
The interest rate.
d.
Disposable income.
35. The consumption function shows the relationship between consumer expenditures and:
a.
the interest rate.
c.
savings.
b.
the tax rate.
d.
disposable income.
36. The value of consumption at each level of disposable personal income, all other determinants of
consumption unchanged, is shown by the:
a.
aggregate dissaving curve.
c.
investment schedule.
b.
consumption function.
d.
savings function.
37. The consumption function expresses the:
a.
relation between consumption and dissaving.
b.
relation between consumption and disposable personal income.
c.
purposes of consumption.
d.
relation between consumption and dissaving.
38. A movement along the consumption function is caused by a change in:
a.
consumption.
c.
aggregate supply.
b.
expectations.
d.
disposable income.
39. Consider the Keynesian consumption function. If disposable income is greater than the break-even
level of disposable income, then households will be:
a.
investing.
c.
dissaving.
b.
borrowing.
d.
saving.
40. A movement along the consumption function is caused by a change in:
a.
the price level.
c.
real disposable income.
b.
autonomous consumption.
d.
the stock of durable goods.
41. Which of the following events would produce an upward shift in the consumption function, other
things being equal?
a.
An increase in consumer wealth.
c.
A decrease in autonomous consumption.
b.
A decrease in consumer wealth.
d.
Both b and c.
42. The relationship between consumer expenditures and disposable income is the:
a.
savings function.
c.
disposable income function.
b.
the tax rate function.
d.
consumption function.
43. Which of the following statements is true concerning the consumption function?
a.
It slopes upward.
b.
Its slope equals the MPC.
c.
It represents the direct (positive) relationship between consumption spending and the level
of real disposable income.
d.
If the consumption function lies above the 45-degree line then saving is positive.
e.
All of these.
44. Which of the following will shift the consumption function upward?
a.
An increase in consumer wealth.
b.
An increase in the interest rate.
c.
An increase in personal income taxes.
d.
A decrease in the MPC.
e.
An increase in disposable income.
45. A movement along in the consumption function is caused by a change in:
a.
real disposable income.
b.
can be caused by a change in the price level.
c.
the marginal propensity to consume (MPC).
d.
none of these.
46. Economists refer to the simple relationship between consumption and disposable income as:
a.
autonomous consumption.
b.
the marginal propensity to consume.
c.
the absolute disposable income hypothesis.
d.
disposable income.
e.
the consumption function.
47. The consumption function will shift upward if real asset and money holdings:
a.
increase, if people expect prices to increase, if interest rates decrease, and if taxes
decrease.
b.
increase, if people expect prices to increase, if interest rates increase, and if taxes increase.
c.
increase, if people expect prices to increase, if interest rates increase, and if taxes decrease.
d.
decrease, if people expect prices to decrease, if interest rates decrease, and if taxes
decrease.
e.
decrease, if people expect prices to increase, if interest rates increase, and if taxes
decrease.
48. The consumption function shows the relationship between consumption and:
a.
interest rates.
c.
price level changes.
b.
saving.
d.
disposable income.
49. The relationship between consumption and disposable income is the:
a.
spending function.
b.
consumption function.
c.
autonomous consumption.
d.
household consumer spending
e.
household spending function.
50. If people expect prices to fall in the future,
a.
their consumption function in the present will shift downward.
b.
their consumption function in the present will shift upward.
c.
their consumption function in the present will be unchanged.
d.
they will increase their current levels of consumption by moving up along their
consumption functions.
e.
they will decrease their current levels of consumption by moving down along their
consumption functions.
51. The consumption function will shift for all of the following reasons except:
a.
a change in a household’s real assets.
b.
a change in interest rates.
c.
expectations of price changes.
d.
changes in a household’s disposable incomes.
e.
changes in taxation policy.
52. A movement along a consumption function is caused by:
a.
a change in households’ real assets.
b.
a change in interest rates.
c.
changes in taxation policy.
d.
expectations of price changes.
e.
changes in households’ disposable incomes.
53. In the consumption function, consumption is caused by changes in the:
a.
price level.
b.
level of disposable income.
c.
interest rate.
d.
level of investment.
e.
level of real assets.
54. Which one of the following will shift the consumption function upward?
a.
Higher interest rates.
b.
Expectations that the economy will grow in the future.
c.
A decrease in money holdings.
d.
Higher capacity utilization rates.
e.
A tax increase.
55. \If the interest rate increases, then the:
a.
economy will move to a new point along the existing consumption function.
b.
consumption function will shift up.
c.
consumption function will shift down.
d.
investment demand curve will shift up.
e.
economy will move to a new point along the existing investment demand curve.
56. If people’s real assets increase, then the:
a.
economy will move to the right along the existing consumption function.
b.
economy will move to the left along the existing consumption function.
c.
consumption function will shift down.
d.
consumption function will shift up.
e.
investment demand curve will shift up.
57. Which one of the following will shift the consumption function upward?
a.
Higher interest rates.
b.
An increase in real assets.
c.
Expectations of future economic growth.
d.
Lower capacity utilization rates.
e.
A tax increase.
58. Which one of the following will shift the consumption function downward?
a.
An increase in disposable income.
b.
A decrease in disposable income.
c.
Legislation making credit harder to obtain.
d.
Lower tax rates.
e.
A technological breakthrough.
59. Given the consumption function C = $500 billion + 0.80Y, an increase in disposable income from
$6,000 billion to $7,000 billion will cause consumption to increase by:
a.
$800 billion.
b.
$1,000 billion.
c.
$1,300 billion.
d.
$1,500 billion.
e.
$1,800 billion.
60. Which one of the following changes is consistent with a change in an economy’s consumption function
from C = $500 billion + 0.80Y to C = $700 billion + 0.80Y?
a.
An increase in disposable income taxes.
b.
An increase in interest rates
c.
A decrease in permanent disposable income.
d.
An increase in wealth.
e.
An increase in savings.
61. At the point where the disposable income line intersects the consumption function, saving:
a.
equals consumption.
c.
is less than zero.
b.
equals disposable income.
d.
is equal to zero.
62. Which of the following will shift the consumption function upward?
a.
A tax increase.
b.
Higher capacity utilization rates.
c.
Higher disposable income.
d.
Lower wealth holdings.
e.
Expectations of inflation.
63. If consumption spending is larger than disposable income,
a.
saving is positive.
b.
dissaving occurs.
c.
saving is exactly zero.
d.
a depression results.
e.
this cannot occur.
64. When economists say that private investment is “autonomous,” they mean that it:
a.
will never change.
b.
is not dependent on the current level of disposable income.
c.
is determined by the “animal spirits” of business decision makers.
d.
is determined by the level of saving.
65. Consumption spending that is independent of the level of disposable income is known as:
a.
marginal consumption.
b.
transitory consumption.
c.
permanent consumption.
d.
relative consumption.
e.
autonomous consumption.
66. Autonomous consumption is consumption that:
a.
varies directly with disposable income.
b.
varies inversely with disposable income.
c.
is independent of the level of disposable income.
d.
is constant at first and then varies with disposable income.
67. For any given consumption function, autonomous consumption is equal to the level of consumption
associated with:
a.
negative disposable income.
c.
zero disposable income.
b.
positive disposable income.
d.
unstable disposable income.
68. The vertical intercept of the consumption function that represents the portion of consumption
expenditure not associated with a level of disposable income is known as:
a.
zero income intercept.
c.
autonomous consumption.
b.
disposable income intercept.
d.
automatic consumption line.
69. Autonomous consumption is equal to the level of consumption associated with:
a.
unstable disposable income.
c.
zero disposable income.
b.
positive disposable income.
d.
negative disposable income.
70. Autonomous consumption spending is consumption spending:
a.
that is dependent on changes in disposable income.
b.
on durable goods.
c.
that causes the MPC to rise.
d.
that is independent of the level of disposable income.
e.
that causes the MPC to fall.
71. Given the consumption function C = $100 billion + 0.75 ($300 billion), autonomous consumption is
equal to:
a.
$100 billion.
b.
$225 billion.
c.
$300 billion.
d.
$325 billion.
e.
$400 billion.
72. That part of disposable income not spent on consumption is defined as:
a.
transitory disposable income.
b.
permanent disposable income.
c.
disposable income.
d.
autonomous consumption.
e.
saving.
73. If disposable income is $400 billion, consumption spending is $380 billion, and MPC is 0.5, what is
the level of saving?
a.
$20 billion.
b.
$210 billion.
c.
$380 billion.
d.
$590 billion.
e.
$780 billion.
74. If disposable income is $400 billion, autonomous consumption is $60 billion, and MPC is 0.8, what is
the level of saving?
a.
$20 billion.
b.
$210 billion.
c.
$380 billion.
d.
$590 billion.
e.
$780 billion.
75. That part of disposable income not spent on consumption is:
a.
saved.
c.
wasted.
b.
invested.
d.
borrowed.
76. If, for a given disposable income level, the disposable income line lies above the consumption curve,
saving:
a.
equals consumption.
b.
equals disposable income.
c.
is less than zero.
d.
is equal to zero.
e.
is greater than zero.
77. If, for a given disposable income level, the disposable income line lies below the consumption curve,
saving:
a.
equals consumption.
b.
equals disposable income.
c.
is less than zero.
d.
is equal to zero.
e.
is greater than zero.
78. If Y = $500 billion, autonomous consumption = $400 billion, and the marginal propensity to save =
0.20, then saving will equal:
a.
−$300 billion.
b.
$300 billion.
c.
$0.
d.
$80 billion.
e.
−$80 billion.
79. If Y = $500 billion, autonomous consumption = $300 billion, and the marginal propensity to save =
0.20, then saving will equal:
a.
−$200 billion.
b.
$200 billion.
c.
−$100 billion.
d.
$100 billion.
e.
$40 billion.
80. If income increases from $110,000 to $120,000 and consumption from $108,000 to $114,000, the
marginal propensity to consume is:
a.
0.40.
c.
0.94.
b.
0.60.
d.
1.60.
81. Use the table below to answer the following question.
Income
Consumption
(Dollars)
(Dollars)
60,000
58,000
66,000
62,000
What is the marginal propensity to consume?
a.
0.33.
c.
0.96.
b.
0.67.
d.
1.5.
82. Use the table below to answer the following question.
Income
Consumption
(Dollars)
(Dollars)
45,000
40,000
50,000
44,000
What is the marginal propensity to consume?
a.
0.80.
c.
0.89.
b.
0.88.
d.
1.25.
83. The marginal propensity to consume is defined as the:
a.
fraction of total income not spent on consumption.
b.
proportion of any change in income that is spent on consumption.
c.
fraction of total income spent on consumption.
d.
fraction of a change in income that is saved.
84. Mathematically, the marginal propensity to consume is:
a.
consumption divided by income.
b.
the change in consumption divided by the change in income.
c.
income divided by consumption.
d.
the change in income divided by the change in consumption.
85. John Maynard Keynes’s central proposition that a dollar increase in disposable income would increase
consumption, but by less than the increase in disposable income, means the marginal propensity to
consume (MPC) is:
a.
greater than or equal to one.
c.
less than one, but greater than zero.
b.
equal to one.
d.
negative.
86. The fraction of each added dollar of disposable income that is used for consumption is called the:
a.
average propensity to consumer (APC).
c.
marginal consumption propensity (MCP).
b.
autonomous consumption rate (ACR).
d.
marginal propensity to consume (MPC).
87. The marginal propensity to consume (MPC) is computed as the change in:
a.
consumption divided by the change in savings.
b.
consumption divided by the change in disposable personal income.
c.
consumption divided by the change in GDP.
d.
None of these.
88. If your disposable income increases from $30,000 to $35,000 and your consumption increases from
$11,000 to $12,000, your marginal propensity to consume (MPC) is:
a.
0.2.
b.
0.4.
c.
0.5.
d.
0.8.
e.
1.0.
89. If your disposable personal income increases from $33,000 to $41,000 and your consumption increases
from $8,000 to $12,000, your marginal propensity to consume (MPC) is:
a.
0.2.
b.
0.4.
c.
0.5.
d.
0.8.
e.
1.0.
90. The marginal propensity to consume (MPC) is the slope of the:
a.
GDP curve.
c.
consumption function.
b.
disposable income curve.
d.
autonomous consumption curve.
91. The slope of the consumption function is called the:
a.
autonomous consumption rate.
c.
average propensity to consume.
b.
marginal consumption rate.
d.
marginal propensity to consume.
92. The marginal propensity to consume (MPC) is computed as the change in consumption divided by the
change in:
a.
GDP.
c.
saving.
b.
disposable personal income.
d.
none of these.
93. If your disposable personal income increases from $40,000 to $48,000 and your consumption increases
from $35,000 to $39,000, your marginal propensity to consume (MPC) is:
a.
0.20.
b.
0.40.
c.
0.50.
d.
0.80.
e.
1.00.
94. The change in consumption divided by a change in disposable income is defined as:
a.
the marginal propensity to consume.
b.
autonomous consumption.
c.
the consumption function.
d.
Keynes’ absolute disposable income hypothesis.
e.
transitory consumption.
95. The nation has its own MPC. When disposable income increases from $300 billion to $400 billion,
national consumption increases from $300 billion to $360 billion. At Y = $400 billion, the MPC is:
a.
0.2.
b.
0.5.
c.
0.6.
d.
0.67.
e.
1.33.
96. The marginal propensity to consume is:
a.
the change in disposable income divided by the change in consumption.
b.
consumption spending divided by disposable income.
c.
disposable income divided by consumption spending.
d.
the change in consumption divided by the change in disposable income.
e.
the change in consumption divided by disposable income.
97. The change in consumption divided by a change in disposable income is called the:
a.
consumption function.
b.
marginal propensity to consume.
c.
marginal propensity to spend.
d.
spending function.
e.
changing propensity to consume.
98. The ratio of a change in consumption to a change in disposable income is the:
a.
consumption function.
b.
propensity to consume.
c.
average propensity to consume.
d.
extra propensity to consume.
e.
marginal propensity to consume.
99. The marginal propensity to consume measures the ratio of the:
a.
average amount of our disposable income that we spend.
b.
average amount of our savings that we spend.
c.
change in consumer spending to a change in money holdings.
d.
change in consumer spending to a change in interest rates.
e.
change in consumer spending to a change in disposable income.
Exhibit 8-1 Disposable income and consumption data
Disposable Income
(Y)
Change in
Disposable Income
Consumption
(C)
0
500
1,000
1,000
1,400
2,000
1,000
2,200
3,000
1,000
2,900
4,000
1,000
3,500
5,000
1,000
4,000
100. In Exhibit 8-1, when disposable income (Y) is increased from $1,000 to $2,000, the marginal
propensity to consume is:
a.
0.2.
b.
0.6.
c.
0.8.
d.
1.0.
e.
1.25.
101. In Exhibit 8-1, when disposable income is increased from $2,000 to $3,000 to $4,000,
a.
total consumption increases by $1,000.
b.
the marginal propensity to consume remains constant.
c.
the marginal propensity to consume increases from 0.6 to 0.7.
d.
the marginal propensity to consume decreases from 0.8 to 0.7.
e.
the marginal propensity to consume decreases from 0.7 to 0.6.
102. In Exhibit 8-1, when disposable income (Y) is increased from $0 to $1,000 to $2,000, the marginal
propensity to consume:
a.
is 1.
b.
decreases from 0.9 to 0.8.
c.
decreases from 0.8 to 0.7.
d.
increases from 0.8 to 0.9.
e.
is negative.