1. According to Keynes, what households plan to save
a.
always equals what firms plan to invest.
b.
sometimes equals what firms plan to invest.
c.
is always greater than what firms plan to invest.
d.
is always less than what firms plan to invest.
2. If households purchase $60,000 worth of consumer goods and firms produce $50,000 worth of consumer goods, then
a.
inventory changes are -$10,000.
b.
inventory changes are +$10,000.
c.
new capital goods expenditures (by firms) are $10,000.
d.
consumer goods expenditures are $10,000.
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3. If total production is greater than total expenditures,
a.
there will be an increase in saving.
b.
there will be an increase in inventories.
c.
firms will then increase production.
d.
firms will then increase prices.
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4. When total production is greater than total expenditures, __________ is produced than households want to buy, which
leads to __________ in inventory, which signals firms that they have __________, which causes firms to cut back
production.
a.
less; decreases; underproduced
b.
less; increases; overproduced
c.
more; decreases; underproduced
d.
more; increases; overproduced
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5. If people buy more than has been produced,
a.
b.
c.
d.
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6. When the economy is in short-run equilibrium,
a.
there are increases in inventory.
b.
there are decreases in inventory.
c.
total expenditures equal total production.
d.
people want to buy more than will be produced.
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7. When there is economy-wide equilibrium, there is a tendency for
a.
total output to rise.
b.
total output to fall.
c.
total output to remain unchanged.
d.
prices to fall.
e.
prices to rise.
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8. When total expenditures are greater than total production, __________ is produced than households want to buy, which
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leads to __________ in inventory, which signals firms that they have __________, which causes firms to increase
production.
a.
less; decreases; underproduced
b.
more; increases; underproduced
c.
less; increases; underproduced
d.
more; decreases; overproduced
9. If total production is less than total expenditures, then business firms
a.
have overproduced.
b.
will cut back on production.
c.
will raise production.
d.
will experience increases in inventory.
e.
a and d
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10. If total production is greater than total expenditures, then business firms
a.
have underproduced.
b.
will step up production.
c.
will lower production.
d.
will experience decreases in inventory.
e.
a and b
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11. The two major curves or lines in the TE–TP diagram are:
a.
the total expenditure curve and the 45-degree line.
b.
the supply and demand curves.
c.
the total expenditures and national income curves.
d.
the total production and national income curves.
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Exhibit 10-1
12. Refer to Exhibit 10-1. At all points on the 45-degree line,
a.
TP = Real GDP.
b.
TP > Real GDP.
c.
TP < Real GDP.
d.
all of the above are possible.
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13. Refer to Exhibit 10-1. Equilibrium Real GDP occurs at
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q1 and Q3.
e.
none of the above
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14. Refer to Exhibit 10-1. At Q3,
a.
TE > TP, and there are decreases in inventory.
b.
TE = TP, and there are no changes in inventory.
c.
TP > TE, and there are increases in inventory.
d.
TE > TP, and there are increases in inventory.
15. Refer to Exhibit 10-1. At Q1,
a.
TE > TP, and there are decreases in inventory.
b.
TP > TE, and there are increases in inventory.
c.
TE = TP, and there are no changes in inventory.
d.
TE > TP, and there are increases in inventory.
1
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Bloom’s: Application
16. Refer to Exhibit 10-1. At Q3, there is a tendency for Real GDP to
a.
rise.
b.
fall.
c.
remain unchanged.
d.
There is not enough information to answer this question.
1
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Understanding and applying economic models
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17. Refer to Exhibit 10-1. At Q2, there is a tendency for Real GDP to
a.
rise.
b.
fall.
c.
remain unchanged.
d.
There is not enough information to answer this question.
1
United States – BUSPROG: Analytic
Bloom’s: Application
18. Refer to Exhibit 10-1. At Q1, there is a tendency for Real GDP to
a.
rise.
b.
fall.
c.
remain unchanged.
d.
There is not enough information to answer this question.
1
Moderate
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19. Consumption and disposable income are
a.
indirectly related.
b.
directly related.
c.
not related.
d.
sometimes directly and sometimes indirectly related, depending upon whether consumption is planned or
unplanned.
b
1
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20. The classical economists believed __________ determined savings, while Keynes said it was __________.
a.
interest rates; income
b.
income; investment
c.
investment; interest rates
d.
interest rates; investment
1
Moderate
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1
Moderate
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21. The horizontal investment curve used to derive the TE curve implies that investment is
a.
directly related to Real GDP.
b.
indirectly related to Real GDP.
c.
independent of Real GDP.
d.
sometimes directly and sometimes indirectly related to Real GDP, depending upon whether it is planned
capital or planned inventory investment.
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Exhibit 10-2
22. Refer to Exhibit 10-2. Equilibrium Real GDP occurs at
a.
$3,000 billion.
b.
$1,500 billion.
c.
$7,500 billion.
d.
$4,000 billion.
e.
$4,500 billion.
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23. Refer to Exhibit 10-2. At M,
a.
TP = TE.
b.
TP > TE.
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c.
TE > TP.
d.
the relationship between TP and TE cannot be determined.
24. Refer to Exhibit 10-2. Which of the following is correct about point M?
a.
TE is $4,500 billion and TP is only $1,500 billion.
b.
TP is $4,500 billion and TE is only $1,500 billion.
c.
TE is $7,500 and TP is only $5,500 billion.
d.
TP is only $7,500 billion and TE is only $5,500 billion.
e.
TE is $3,000 billion and TP is only $1,500 billion.
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25. Refer to Exhibit 10-2. If autonomous consumption increases, the TE curve will shift ____________ and the new level
of equilibrium Real GDP will be ___________ than $4,500.
a.
downward; greater
b.
downward; less
c.
upward; less
d.
upward; greater
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26. Refer to Exhibit 10-2. If autonomous investment decreases, the TE curve will shift ____________ and the new level
of equilibrium Real GDP will be ___________ than $4,500.
a.
downward; greater
b.
downward; less
c.
upward; less
d.
upward; greater
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27. Total production
a.
always equals total expenditures.
b.
equals total expenditures in equilibrium.
c.
is always greater than total expenditures.
d.
is always less than total expenditures.
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28. When total production is greater than total expenditures,
a.
the economy is in disequilibrium.
b.
there are increases in inventory.
c.
total output will decrease.
d.
all of the above
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29. John Maynard Keynes drew many economists ______________ the classical view. The classical view held that a
market economy __________ regulate itself to avoid long periods of excessive unemployment.
a.
toward; can
b.
toward; cannot
c.
away from; can
d.
away from; cannot
Understanding and applying economic models
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30. In a recessionary gap, the implications of downward wage inflexibility are that there will be
a.
further leftward shifts of AD that worsen unemployment.
b.
no further leftward shifts of AD, allowing the shifts in SRAS to close the recessionary gap.
c.
no further leftward shifts of SRAS, allowing the shifts in AD to close the recessionary gap.
d.
no rightward shifts of SRAS, allowing for the possibility of persistent high unemployment.
31. The efficiency wage model is an explanation of wage __________ and thus a support for the ____________________
view.
a.
flexibility; Keynesian
b.
flexibility; classical
c.
inflexibility; Keynesian
d.
inflexibility; classical
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32. According to the efficiency wage model, firms tend to pay workers
a.
the market-clearing wage that efficiently equates labor supplied and demanded.
b.
in excess of the market-clearing wage to provide an incentive for productivity and efficiency.
c.
less than the market-clearing wage to assure themselves a pool of workers ready to replace workers who quit.
d.
less than the market-clearing wage to minimize labor cost per unit of production.
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33. The efficiency wage model contains the assumption that labor productivity __________ the wage rate, so that a firm
maximizing its profits __________ pay workers an above-market wage rate.
a.
is independent of; may
b.
is independent of; will never
c.
depends on; may
d.
depends on; will never
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34. Two economists, Smith and Jones, are discussing the currently high unemployment rate. Smith says that something
ought to be done quickly because the economy may not be able to restore itself to full employment. Jones says that it is
better to take a “hands-off” approach. Which of the following is most likely to be true?
a.
Smith and Jones are most likely both Keynesian economists with a few minor differences of opinion.
b.
Smith and Jones are most likely both classical economists with a few minor differences of opinion.
c.
Jones is likely to be a Keynesian economist and Smith is likely to be a classical economist.
d.
Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist.
e.
none of the above.
d
Moderate
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35. Keynesian macroeconomists believe that the time it takes for falling wages and prices to eliminate a recessionary gap
is __________ enough to say that the economy is __________.
a.
long; not self-regulating
b.
long; self-regulating
c.
short; not self-regulating
d.
short; self-regulating
1
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36. Keynes’s major work, The General Theory of Employment, Interest and Money, was published during the
a.
late 1800s.
b.
mid-1700s.
c.
1930s.
d.
Panic of 1907.
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37. Who would be most likely to agree that “People do not always save more as interest rates rise”?
a.
a classical economist
b.
John Maynard Keynes
c.
an efficiency wage theorist
d.
a and b
e.
a, b, and c
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38. Autonomous consumption is
a.
the change in consumption that results as a person’s (or nation’s) income increases or decreases.
b.
that portion of total consumption that is dependent upon the level of income.
c.
the steady increase in the consumption of goods and services that automatically occurs as a person grows from
a child to an adult.
d.
that portion of total consumption that is independent of the level of income.
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39. Keynes believed that saving is
a.
more responsive to changes in income than to changes in interest rates.
b.
less responsive to changes in income than to changes in interest rates.
c.
equally responsive to changes in income and to changes in interest rates.
d.
dependent only on changes in interest rates.
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40. Keynes believed that investment is
a.
dependent on a number of factors, including business expectations.
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b.
mainly determined by changes in interest rates.
c.
unrelated to business expectations.
d.
related to business expectations only during recessionary periods.
41. Keynes believed that
a.
Say’s law would hold in a laissez-faire economy.
b.
the economy would always be near or on its production possibilities frontier.
c.
wages and prices are often inflexible in the downward direction.
d.
the equilibrium level of output will always be at the full-employment level of output.
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42. Which of the following statements is false?
a.
Keynes believed that monopolistic elements in the economy will prevent immediate price declines.
b.
Keynes believed that during periods of high unemployment, labor unions will prevent wages from falling fast
enough to restore full employment.
c.
Keynes believed that interest rate flexibility will ensure that saving is equal to investment.
d.
Keynes did not believe in Say’s law.
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43. Keynes believed that
a.
the internal structure of the economy is extremely competitive and that wage-price flexibility exists.
b.
monopolistic elements in the economy prevent immediate and sharp price declines in response to falling
demand.
c.
even though there are monopolistic elements in the economy, wage-price flexibility exists.
d.
in spite of the competitiveness of the economy, wage-price flexibility does not exist.
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44. Which statement is consistent with what Keynes believed about consumption and disposable income?
a.
Consumption depends upon disposable income and falls as disposable income rises.
b.
Consumption rises by the same amount as disposable income rises.
c.
Consumption rises by less than disposable income rises.
d.
Disposable income depends upon consumption.
1
Easy
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45. If income rises from $1,000 to $1,400 and consumption rises from $800 to $1,168, the marginal propensity to
consume is __________ percent.
a.
8
b.
85
c.
15
d.
92
d
1
Moderate
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New
46. The consumption function is a function showing the relationship between consumption and
a.
disposable income.
b.
exports.
c.
interest rates.
d.
investment.
1
Easy
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47. According to the Keynesian consumption function, an increase in disposable income will result in
United States – BUSPROG: Analytic
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a.
a decrease in consumption.
b.
an increase in consumption.
c.
a decrease in investment.
d.
an increase in investment.
48. The ratio of the change in consumption to the change in disposable income is called the
a.
marginal utility of consumption.
b.
average utility of consumption.
c.
marginal propensity to consume.
d.
average propensity to consume.
1
Moderate
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49. The marginal propensity to consume plus the marginal propensity to save is always
a.
equal to zero.
b.
greater than zero but less than one.
c.
equal to one.
d.
greater than one.
1
Moderate
United States – BUSPROG: Analytic
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50. If income rises from $1,000 to $1,400 and consumption rises from $1,100 to $1,440, the marginal propensity to save
(MPS) is
a.
0.15.
b.
0.85.
c.
0.25.
d.
0.20.
b
1
Easy
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51. Here is a consumption function: C = C0 + MPC(Yd). The C0 term is usually defined as
a.
autonomous consumption.
b.
point-zero consumption.
c.
mandatory consumption.
d.
propensitory consumption.
e.
none of the above
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52. Here is a consumption function: C = C0 + MPC(Yd). If MPC is 0.80, then we know that
a.
as Yd rises by $1, Co rises by $0.80.
b.
as Yd rises by $1, C rises by $0.80.
c.
Yd rises by $0.80.
d.
as C0 rises by $0.80, Yd rises by $1.
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53. Here is a consumption function: C = C0 + MPC(Yd). If C0 = $200, then we know that
a.
if Yd is zero, C will be $200.
b.
when Yd rises, C rises by $200.
c.
when Yd falls, C falls by MPC times C0.
d.
C will always equal C0.
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54. If autonomous consumption rises by $20 and, as a result, Real GDP rises by $200, then the multiplier is
a.
4.
b.
5.
c.
6.
d.
10.
e.
none of the above
d
1
Moderate
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55. If autonomous consumption rises by $60 and, as a result, Real GDP rises by $240, then the marginal propensity to
consume is
a.
0.25.
b.
0.75.
c.
0.05.
d.
0.95.
e.
none of the above
b
1
Challenging
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New
56. The larger the marginal propensity to save,
a.
the smaller the multiplier.
b.
the larger the multiplier.
c.
the smaller the change in Real GDP, given a change in autonomous consumption.
d.
a and c
e.
none of the above
d
1
Moderate
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57. On a TE–TP diagram consider a level of Real GDP at which the vertical distance to the TE line exceeds the vertical
distance to the 45-degree line. This level of Real GDP is __________ its equilibrium level, with __________.
a.
above; TE > TP
b.
above; TE < TP
c.
below; TE > TP
d.
below; TE < TP
58. On a TE–TP diagram consider a level of Real GDP at which the vertical distance to the TE line is less than the vertical
distance to the 45-degree line. This level of Real GDP is __________ its equilibrium level, with __________.
a.
above; TE > TP
b.
above; TE < TP
c.
below; TE > TP
d.
below; TE < TP
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59. Suppose the MPC = 0.60 and government purchases increase by $40 billion. In Keynesian theory, which of the
following is true?
a.
The TE curve shifts downward by $40 billion and total spending decreases by $40 billion.
b.
The TE curve shifts upward by $40 billion, and total spending increases by $40 billion.
c.
The TE curve shifts downward by $40 billion, and total spending decreases by $100 billion.
d.
The TE curve shifts upward by $40 billion, and total spending increases by $100 billion.
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60. Considering both the Keynesian and the aggregate demand-supply frameworks, if households as a group experience
an increase in wealth at a given price level, then the TE curve shifts __________, the AD curve shifts __________, and
Real GDP __________.
a.
downward; leftward; decreases
b.
downward; rightward; decreases
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c.
upward; rightward; increases
d.
upward; leftward; increases
61. When the MPC = 0.9, the multiplier is
a.
0.20.
b.
1.25.
c.
2.50.
d.
5.00.
e.
10.00.
1
Moderate
United States – BUSPROG: Analytic
Bloom’s: Application
62. When the MPC = 0.80, the multiplier is
a.
5.00.
b.
0.25.
c.
4.00.
d.
7.50.
1
Moderate
United States – BUSPROG: Analytic
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63. When the MPC = 0.6, the multiplier is
a.
0.40.
b.
2.50.
c.
1.67.
d.
6.00.
b
1
Moderate
1
Moderate
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64. How is the multiplier expressed in terms of the MPS?
a.
1 – MPS
b.
1/MPS
c.
1/(1 – MPS)
d.
1/(1 + MPS)
b
Moderate
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65. A rise in MPC makes the total expenditures (TE) curve __________ and __________ the multiplier.
a.
steeper; raises
b.
steeper; lowers
c.
flatter; raises
d.
flatter; lowers
1
Challenging
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66. Keynes argued that
a.
monopolistic elements in the economy will prevent an immediate sharp fall in prices as a result of decreasing
demand.
b.
wages and prices are not flexible in a downward direction.
c.
a and b
d.
none of the above
1
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67. Keynes assumed consumption is
a.
inversely related to the rate of interest.
b.
directly related to disposable income.
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