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Chapter 12 Consumption, Real GDP, and the Multiplier 515

36) Suppose autonomous consumption is $1 trillion, investment spending is $1.5 trillion, and the

marginal propensity to consume is 0.75. Show the graph for the C I curve. What is the

equilibrium level of real GDP? Explain its meaning.

37) In the above diagram, what happens if the real GDP is $3 trillion? $5 trillion? $7 trillion? What is

the equilibrium level of real GDP? Why?

12.5 Keynesian Equilibrium with Government and the Foreign Sector Added

1) Government purchases

A) are determined by the public. B) are determined by the political process.

C) are influenced by interest rates. D) are determined by suppliers.

2) Refer to the above figure. The equilibrium level of real Gross Domestic Product (GDP) is

A) $6 trillion. B) $7 trillion. C) $12 trillion. D) $20 trillion.

3) Refer to the above figure. If real Gross Domestic Product (GDP) is $2 trillion, then

A) the level of total planned expenditures is less than real GDP.

B) the level of total planned expenditures equals real GDP.

C) the level of total planned expenditures is greater than real GDP.

D) the level of total planned expenditures equals zero.

4) Refer to the above figure. If real Gross Domestic Product (GDP) is $6 trillion, then unplanned

business inventories will

A) rise. B)

b

e zero.

C) fall. D)

b

e equal to planned inventories.

5) When real Gross Domestic Product (GDP) exceeds total planned real expenditures,

A) there will be unplanned decreases in inventories.

B) the circular flow will increase.

C) a lower level of equilibrium real Gross Domestic Product (GDP) will result.

D) a higher level of equilibrium real Gross Domestic Product (GDP) will prevail.

6) A higher level of real Gross Domestic Product (GDP) will result if

A) total planned real expenditures exceed real Gross Domestic Product (GDP).

B) aggregate supply exceeds aggregate demand.

C) aggregate demand exceeds aggregate supply.

D) leakage exceeds injections.

7) If, at some level of output, total planned real expenditures are less than real Gross Domestic

Product (GDP),

A) real GDP will rise.

B) real GDP remains unchanged.

C) real GDP will either fall or remain unchanged, depending on the MPC.

D) unplanned inventories will increase and real GDP will fall.

8) Suppose the economy is at an equilibrium when C I G X $12 trillion. If the economy is

currently at a real national income level of $14 trillion, then total planned real expenditures

A) exceed real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will

increase.

B) are less than real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP)

will decline.

C) are equal to real Gross Domestic Product (GDP), and there will be no change in real Gross

Domestic Product (GDP).

D) are less than real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP)

will increase.

9) Suppose equilibrium for an economy occurs when C I G X $14 trillion. If the real Gross

Domestic Product (GDP) is $13 trillion, then unplanned inventories are

A) increasing, and real Gross Domestic Product (GDP) will expand.

B) increasing, and real Gross Domestic Product (GDP) will contract.

C) decreasing, and real Gross Domestic Product (GDP) will expand.

D) decreasing, and real Gross Domestic Product (GDP) will contract.

10) If real Gross Domestic Product (GDP) is above its equilibrium level,

A) firms are not maximizing their profits.

B) planned investment is greater than planned saving.

C) firms accumulate unplanned inventories.

D) planned consumption is less than actual consumption.

11) In the above figure, at an income level of Y3and planned expenditures of (C I)1

,

A) planned saving exceeds planned investment.

B) the economy is in equilibrium.

C) the quantity of aggregate demand exceeds real Gross Domestic Product (GDP).

D) there is full employment.

12) In the above figure, at an income level of Y1and planned expenditures of (C I)1

,

the level of

autonomous investment is

A) ED. B) EF. C)

J

K. D) GK.

13) Total planned expenditures in a closed economy are equal to

A) consumption investment government expenditures.

B) consumption savings transfers investment.

C) saving investment government expenditures.

D) investment saving transfers.

14) If the MPC equals 0.75, then

A) for every $100 increase in consumption, real Gross Domestic Product (GDP) increases by

$75.

B) consumption is always more than real Gross Domestic Product (GDP).

C) for every $100 increase in real Gross Domestic Product (GDP), saving increases by $75.

D) for every $100 increase in real Gross Domestic Product (GDP), saving increases by $25.

15) In the Keynesian model, government spending is considered

A) a positive function of real GDP.

B) a negative function of real GDP.

C) to be a negative function of the real interest rate.

D) to be autonomous.

16) The following would cause an upward shift in the C I G X curve EXCEPT

A) an increase in disposable income. B) an increase in export spending.

C) a decrease in import spending D) an increase in household wealth.

17) A lump sum tax, such as a $1000 tax that every family must pay one time, is

A) a type of income tax. B) an autonomous tax.

C) negatively related to real GDP. D) a regressive tax.

18) Which of the following does NOT occur when the economy is operating at the equilibrium level

of GDP?

A) Total planned expenditures equal real GDP.

B) Real GDP tends to rise over time.

C) Planned investment equals actual investment.

D) Inventory investment equals zero.

19) When the economy is operating at the equilibrium level of GDP, we know that

A) total planned real consumption expenditures equal real GDP.

B) planned real investment spending equals real net exports of zero.

C) total planned real expenditures equal real GDP.

D) real net exports equal inventory changes.

20) Refer to the above figure. The equilibrium level of real GDP occurs

A) at point A.

B) to the right of point A.

C) to the left of point A.

D) at the undetermined point on the graph depending upon the level of investment.

21) Refer to the above figure. Point B

A) equals autonomous consumption.

B) equals autonomous consumption plus autonomous consumption plus planned investment

plus autonomous government spending plus autonomous net exports.

C) has no special significance.

D) equals government expenditures.

Chapter 12 Consumption, Real GDP, and the Multiplier 523

Real Real Real Real Real Real Real Total Real

Real Net Disposable Consumption Planned Planned Government Net Planned

GDP Taxes Income Spending Saving Investment Spending Exports Spending

10 2 8 6.8 1.2 1.5 2 0.5 10.8

11 2 9 7.6 1.4 1.5 2 0.5 11.6

12 2 10 8.4 1.6 1.5 2 0.5 12.4

13 2 11 9.2 1.8 1.5 2 0.5 13.2

14 2 12 10.0 2.0 1.5 2 0.5 14.0

15 2 13 10.8 2.2 1.5 2 0.5 14.8

16 2 14 11.6 2.4 1.5 2 0.5 15.6

Note: Amounts in $ trillions

22) Refer to the above table. Which variables in the table are NOT autonomous?

A) Taxes, government spending, and saving.

B) Planned investment, net exports, and government spending.

C) Planned consumption and planned saving.

D) Planned saving only.

Real

Natl Disp. Cnsmp. Plnd Plnd Gvt Net Plnd

Incm Txs Inc. Spnd Sav. Invst Expnd Expt Expnd

10 2 8 6.8 1.2 1.5 2 0.5 10.8

11 2 9 7.6 1.4 1.5 2 0.5 11.6

12 2 10 8.4 1.6 1.5 2 0.5 12.4

13 2 11 9.2 1.8 1.5 2 0.5 13.2

14 2 12 10.0 2.0 1.5 2 0.5 14.0

15 2 13 10.8 2.2 1.5 2 0.5 14.8

16 2 14 11.6 2.4 1.5 2 0.5 15.6

23) Refer to the above table. Which variables in the table are NOT autonomous?

A) Taxes, government spending, and saving.

B) Planned investment, net exports, and government spending.

C) Planned consumption and planned saving.

D) Planned saving only.

24) Refer to the above table. The equilibrium real GDP is

A) $12 trillion. B) $13 trillion. C) $14 trillion. D) $15 trillion.

25) Refer to the above table. If real GDP is $12 trillion, total planned expenditures and unplanned

inventory changes are respectively

A) $14 trillion and 0. B) $13.2 trillion and $0.8 trillion.

C) $12.4 trillion and $0.4 trillion. D) $12.4 trillion and $0.4 trillion.

26) Refer to the above table. When real GDP equals $10 trillion,

A) government expenditures will increase. B) the economy is in equilibrium.

C) unplanned inventories will increase. D) unplanned inventories will decrease.

27) Refer to the above table. When real GDP equals $16 trillion,

A) government expenditures will increase. B) the economy is in equilibrium.

C) unplanned inventories will increase. D) unplanned inventories will decrease.

28) Whenever total planned expenditures differ from real GDP,

A) unplanned inventories will remain unchanged.

B) unplanned inventories will change.

C) government spending will adjust.

D) tax revenues will move the economy back to equilibrium.

29) In equilibrium, real GDP is equal to

A) C I G X. B) C I X G.

C) C I G X. D) C I G X S.

30) In the above figure, the equilibrium level of real GDP per year is

A) $1.0 trillion. B) $2.0 trillion. C) $3.0 trillion. D) $4.0 trillion.

31) In the above figure, the sum of real planned investment spending, government expenditures,

and net export spending is equal to

A) $0.5 trillion. B) $1.0 trillion. C) $1.5 trillion. D) $2.0 trillion.

32) In the above figure, the equilibrium level of planned saving plus net taxes is

A) $1.0 trillion. B) $2.0 trillion. C) $3.0 trillion. D) $4.0 trillion.

33) Which one of the following is true in an open economy with a government sector?

A) The equilibrium level of real GDP occurs when real net export spending equals zero.

B) The equilibrium level of real GDP occurs when planned real saving equals government

spending.

C) The equilibrium level of real GDP occurs when total planned real expenditures equal real

GDP.

D) The equilibrium level of real GDP occurs when planned real investment spending is zero.

34) What effect would taxation have on real consumption spending when government spending is

autonomous?

A) Taxation reduces real consumption spending.

B) Taxation increases real consumption spending.

C) Taxation causes both real consumption spending and planned real saving to increase.

D) None of the above is correct.

35) In the above figure, what is the equilibrium level of real GDP with government and the foreign

sector?

A) $2.0 trillion B) $2.5 trillion C) $3.0 trillion D) $4.0 trillion

36) In the above figure, at the equilibrium level of real GDP, there is

A) positive saving. B) negative saving.

C) zero saving. D) a negative tax rate.

37) In the above figure, if real GDP is $1 trillion, there is

A) dissaving. B) positive saving.

C) negative investment. D) negative consumption.

38) In the Keynesian model with government and the foreign sector added, what are the

components of spending? Which of these components are autonomous and which are not? How

is the equilibrium found? When the economy is not at an equilibrium, what adjustments are

made?

39) Explain how the aggregate demand curve is related to the C I G X curve.

12.6 The Multiplier

1) One divided by the marginal propensity to save (MPS) is the formula for

A) one minus the multiplier. B) the inverse of the multiplier.

C) the multiplier. D) autonomous consumption.

2) Suppose that the marginal propensity to save (MPS) equals 0.2. The value of the multiplier

would be

A) .8. B) 1.25. C) 2. D) 5.

3) Suppose that the marginal propensity to consume (MPC) is .75 and there is an increase in

investment spending of $100,000. As a result, equilibrium real Gross Domestic Product (GDP)

would increase by

A) $75,000. B) $100,000. C) $400,000. D) $750,000.

4) The larger is the marginal propensity to consume (MPC),

A) the larger is the multiplier.

B) the smaller is the multiplier.

C) the smaller is the slope of the consumption function.

D) the larger is the slope of the saving function.

5) If the marginal propensity to consume (MPC) decreases, then

A) the marginal propensity to save (MPS) decreases.

B) the multiplier decreases.

C) the multiplier increases.

D) MPC MPS is less than 1.

6) If the marginal propensity to consume (MPC) is 0.9, then the multiplier for a change in

autonomous spending will be

A) 0.1. B) 9. C) 10. D) 100.

7) If the marginal propensity to save (MPS) increases, the multiplier

A) decreases.

B) increases.

C) stays the same.

D) can either increase or decrease, depending on what happens to the marginal propensity to

consume (MPC).

8) If the multiplier is 10 and income increases by $100, then saving will increase by

A) $90. B) $9. C) $10. D) $100.

9) If the multiplier is 10, then the marginal propensity to consume (MPC) is

A) 0.9. B) 0.1. C) 1. D) 9.

10) If the marginal propensity to consume (MPC) is 0.8, the multiplier will be

A) 0.8. B) 1. C) 4. D) 5.

11) If the marginal propensity to save (MPS) is 0.1, the multiplier will be

A) 0.1. B) 1. C) 5. D) 10.

12) If the multiplier in the economy is 3, the marginal propensity to save (MPS) must be

A) 0.33. B) 0.67. C) 1. D) 3.

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