Introduction to Economic Reasoning, 8e (Rohlf)
Web Chapter: The Keynesian Total Expenditures Model
1) According to the Keynesian model, the primary determinant of the level of equilibrium output
is
A) the level of total income.
B) the level of total spending.
C) the rate of interest.
D) the level of saving.
E) the exchange rate.
2) The largest component of total spending is
A) consumption spending by households.
B) investment spending by businesses.
C) saving by households.
D) government purchases of goods and services.
E) interest payments by households.
3) According to Keynes, the level of consumption spending by households depends primarily on
A) the rate of interest.
B) the level of disposable income.
C) the price level.
D) expectations about the future.
E) the level of saving.
4) The consumption function shows that when disposable income increases, consumption
spending
A) decreases.
B) increases by the same amount.
C) increases by a smaller amount.
D) increases by a larger amount.
E) remains constant, but saving increases.
5) According to Keynes, the level of saving
A) depends primarily on the interest rate.
B) depends primarily on the level of disposable income.
C) depends primarily on the level of wealth.
D) depends primarily on the size of the family.
E) never changes.
6) Dissaving occurs when
A) disposable income exceeds the level of consumption spending.
B) planned saving exceeds planned consumption spending.
C) the level of consumption spending exceeds disposable income.
D) planned consumption spending exceeds planned saving.
E) planned investment spending exceeds planned saving.
7) The marginal propensity to consume is defined as
A) the fraction of disposable income spent on consumption.
B) the dollar amount of the difference between disposable income and consumption spending.
C) the fraction of each additional dollar of disposable income that households spend.
D) total consumption spending divided by disposable income.
E) the change in disposable income divided by the change in consumption spending.
8) The slope of the consumption function indicates
A) the level of income in the economy.
B) the level of wealth of the society.
C) the economy’s MPC.
D) the level of saving in the economy.
E) the level of consumption spending at a given level of income.
9) Suppose an individual earning $20,000 and saving $2,000 receives a $4,000 raise and spends
an additional $3,000.
A) Her MPC is 0.90.
B) Her MPC is 0.10.
C) Her MPC is 0.75.
D) Her MPC is 0.875.
E) Her MPC is 0.50.
10) If Susan’s income increases from $15,000 a year to $20,000 a year, and her consumption
spending increases from $12,000 to $15,000, then
A) her MPC is 0.75.
B) her MPS is 0.20.
C) her MPC is 0.60.
D) her MPC is 0.333.
E) her MPC is 0.50.
11) If the MPC of an economy is .8, the MPS will be
A) 1.8.
B) 1.6.
C) 0.2.
D) -0.8.
E) 5.
12) Which of the following is true?
A) MPS = 1 + MPC
B) MPC = 1/MPS
C) MPS = 1 – MPC
D) MPC = 1 + MPS
E) MPC = MPS – 1
13) Which of the following would cause the consumption function to shift upward?
A) an increase in disposable income
B) an increase in the interest rate
C) the expectation of higher prices
D) the increase in taxes
E) a reduction in the value of the financial assets held by households
14) If the value of the financial assets held by households increased,
A) the consumption function would probably shift downward.
B) consumers would move up along a stationary consumption function to a higher level of
consumption spending.
C) the consumption function would probably shift upward.
D) consumers would move down along a stationary consumption function to a lower level of
consumption spending.
E) consumption spending would be unaffected, since it depends primarily on income.
15) Which of the following would not cause the consumption function to shift to a new position?
A) a change in disposable income
B) the expectation of an increase in prices
C) a change in the value of the financial assets held by households
D) a change in the interest rate
E) the expectation of lower incomes in the future
16) In economics the term “investment” refers to
A) the purchase of stocks and bonds.
B) saving by households.
C) the purchase of capital equipment.
D) the purchase of gold.
E) any form of spending by businesses.
17) Which of the following statements regarding investment spending is incorrect?
A) An increase in the interest rate will tend to stimulate investment spending, ceteris paribus.
B) Investment spending contributes to economic growth by enlarging the economy’s productive
capacity.
C) Investment spending is a more stable component of total spending than is consumption by
households.
D) Investment spending helps determine the level of equilibrium output.
E) Any change in investment spending will be subject to a multiplier effect.
18) Which of the following would be most likely to reduce the level of investment spending?
A) an increase in the level of disposable income
B) a reduction in the rate of interest
C) a pessimistic forecast regarding future economic conditions
D) a shortage of production capacity among firms
E) a reduction in the rate of unemployment in the economy
19) Investment spending is volatile because
A) it is hard to postpone.
B) innovative ideas come regularly rather than in spurts.
C) interest rates seldom change, so they have very little impact on investment decisions.
D) the expectations of business executives are quite changeable.
E) new products and production processes are discovered in a very steady and predictable
pattern.
20) Keynes called attention to the fact that
A) investment spending is the largest component of total spending.
B) investment spending is more volatile than consumption spending.
C) investment spending is subject to the multiplier effect while consumption spending is not.
D) investment spending is the more stable component of total spending.
E) consumption spending is more volatile than investment spending.
Answer the following question(s) on the basis of the following data (assume that total income is
equal to disposable income). All figures are in billions of dollars.
21) Based on the table above, the MPC in this hypothetical economy is
A) 0.60.
B) 0.70.
C) 0.75.
D) 0.80.
E) 0.50.
22) Based on the table above, the MPS in this hypothetical economy is
A) 0.30.
B) 0.25.
C) 0.40.
D) 0.20.
E) 0.50.
23) Based on the table above, when income is $400 billion, planned saving is equal to
A) -$10 billion.
B) $50 billion.
C) $10 billion.
D) $70 billion.
E) $30 billion.
24) Based on the table above, at an income of $100 billion, planned consumption spending
would be
A) zero.
B) $80 billion.
C) $130 billion.
D) $150 billion.
E) less than $100 billion.
25) Based on the table above, at a level of income of $1,000 billion planned consumption
spending would be equal to
A) $750 billion.
B) $790 billion.
C) $820 billion.
D) $850 billion.
E) $900 billion.
26) Based on the table above, if investment spending is autonomous and equal to $70 billion, the
equilibrium level of output would be
A) $300 billion.
B) $400 billion.
C) $500 billion.
D) $600 billion.
E) $700 billion.
Answer the following question(s) on the basis of the following data. All figures are in billions of
dollars.
27) Based on the table above, the MPC in this hypothetical economy is
A) 0.80.
B) 0.60.
C) 0.50.
D) 0.75.
E) 0.25.
28) Based on the table above, the MPS in this hypothetical economy is
A) 0.50.
B) 0.25.
C) 0.60.
D) 0.333.
E) 0.40.
29) Based on the table above, the level of equilibrium output in this economy is
A) $300 billion.
B) $400 billion.
C) $500 billion.
D) $600 billion.
E) $700 billion.
30) Based on the table above, if this economy produced an output of $800 billion,
A) total spending would exceed total output.
B) businesses would experience unintended reductions in their inventories.
C) the level of output would tend to fall.
D) total output would exceed total income.
E) total income would exceed total output.
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31) Based on the table above, the multiplier in this hypothetical economy is
A) 2.
B) 3.
C) 4.
D) 5.
E) 2.5.
32) Based on the table above, if the level of autonomous investment were to increase from $40
billion to $80 billion, the new level of equilibrium output would be
A) $300 billion.
B) $400 billion.
C) $500 billion.
D) $600 billion.
E) $700 billion.
33) If the existing output is less than the equilibrium output level, then
A) there will be an unintended increase in inventory.
B) the actual level of spending exceeds the level anticipated by businesses.
C) the level of output in the economy will tend to fall.
D) the level of income in the economy will tend to fall.
E) the existing level of output will be maintained.
34) If the existing output is greater than the equilibrium output level, then
A) the actual level of spending exceeds the level anticipated by businesses.
B) there will be an unintended increase in inventory.
C) the level of output in the economy will tend to fall.
D) there will be no unintended change in inventory.
E) the level of consumption spending will tend to decline in order to bring the economy into
equilibrium.
35) Which of the following is a false statement regarding the equilibrium output?
A) At the equilibrium output, total spending must be equal to total output.
B) At the equilibrium output, full employment must exist.
C) At the equilibrium output, there is no unintended increase or decrease in inventory.
D) The equilibrium output will tend to be maintained.
E) When the economy has produced the equilibrium output, there will be no incentive for
businesses to expand or contract production.
36) If a $50 billion increase in planned investment causes a $200 billion increase in equilibrium
output, then the multiplier is
A) $150 billion.
B) 0.25.
C) 4.
D) 3.
E) $250 billion.
37) Which of the following is the formula for the multiplier?
A) 1/MPS
B) 1/MPC
C) 1 – MPC
D) MPC – MPS
E) 1 – MPS
38) If the MPC is 0.75, an $80 billion increase in planned investment spending would cause
equilibrium output to increase by
A) $60 billion.
B) $140 billion.
C) $320 billion.
D) $400 billion.
E) $106.7 billion.
39) If the MPS is 0.4, a $20 billion decrease in planned investment spending would cause
equilibrium output to
A) increase by $8 billion.
B) decrease by $80 billion.
C) decrease by $50 billion.
D) decrease by $12 billion.
E) decrease by $33.3 billion.
40) Which of the following would cause the size of the multiplier to become larger?
A) an increase in the MPC
B) a reduction in equilibrium output
C) an increase in the level of planned investment
D) an increase in the MPS
E) an upward, parallel shift of the consumption function
41) According to Keynesian theory, unemployment is caused by
A) rigid wages.
B) too little total spending.
C) excessive welfare payments.
D) excessive government spending.
E) lazy workers.
42) A recessionary gap is
A) the amount by which the equilibrium output falls short of the full employment output.
B) the amount by which the equilibrium output exceeds the full employment output.
C) the amount by which total spending falls short of what is needed to achieve full employment.
D) the difference between the existing unemployment rate and the full employment target of 5
percent unemployment.
E) the amount of additional tax revenue that the government needs to balance its budget during a
recession.
43) If the total expenditures function crosses the 45-degree line at an output less than the full
employment output
A) the price level will tend to rise.
B) there will be a recessionary gap.
C) there will be an inflationary gap.
D) the MPS must be zero.
E) the MPC must be zero.
44) In the Keynesian model, inflation
A) never occurs.
B) results from too much spending.
C) occurs along with unemployment.
D) is caused by labor unions.
E) is caused by excessive taxation.
45) In the Keynesian model, if households and businesses attempt to purchase more output than
the economy is capable of producing
A) real GDP will increase.
B) unemployment will rise.
C) nominal GDP will increase, but real GDP will not.
D) the price level will fall.
E) real GDP will increase, but nominal GDP will not.
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1) When Jim’s income increased by $1,000, he decided to spend $600 and save the rest. That
means his marginal propensity
A) to save is 0.6.
B) to consume is $600.
C) to consume is 0.6.
D) to consume is 0.4.
2) If the economy’s MPS is 0.2, the multiplier would be
A) 0.8.
B) 20.
C) 5.
D) 4.
Use the following information to answer the following question(s).
3) Based on the table above, what is the marginal propensity to consume in this hypothetical
economy?
A) 0.8
B) 0.5
C) 0.75
D) $80
4) Based on the table above, at what income level would the consumption function cross the 45-
degree line in this hypothetical economy?
A) $200 billion
B) $300 billion
C) $400 billion
D) $500 billion
E) None of the above
5) Based on the table above, if businesses plan to invest $20 billion, what would be the
equilibrium level of output in this economy? (Hint: Remember what makes up total
expenditures.)
A) $200 billion
B) $300 billion
C) $400 billion
D) $500 billion
E) None of the above.
6) Based on the table above, at an income of $700 billion, how much would households desire to
consume? (It’s not on the schedule, but you can use your previous answers to figure it out.)
A) $560 billion
B) $580 billion
C) $620 billion
D) $640 billion
E) $700 billion
7) Assuming that the economy’s MPC is 0.8, if autonomous investment spending increases by
$15 billion, how much will equilibrium GDP increase?
A) $15 billion
B) $30 billion
C) $45 billion
D) $60 billion
E) $75 billion
8) If people expected prices to be higher in the future, this would probably cause
A) their current consumption function to shift down.
B) their current saving function to shift up.
C) their current consumption function to shift up.
D) the investment function to shift down.
9) Keynes focused particular attention on investment spending because
A) investment spending is the largest component of total spending.
B) only investment spending is subject to a multiplier effect.
C) investment spending is very volatile, or changeable.
D) investment spending is the most reliable, or predictable, component of total spending.