c.
directly related to investment.
d.
less than disposable income.
e.
both b and d
Exhibit 10-3
Disposable
Income
Yd
Consumption
C
$2,000
$2,040
2,100
2,120
2,200
2,200
2,300
2,280
2,400
2,360
68. Refer to Exhibit 10-3. When disposable income equals $2,000, saving equals
a.
-$20.
b.
-$40.
c.
0.
d.
$40.
e.
$20.
b
1
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69. Refer to Exhibit 10-3. When disposable income equals $2,300, saving equals
a.
-$20.
b.
-$10.
c.
0.
d.
$10.
e.
$20.
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b
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70. Refer to Exhibit 10-3. The marginal propensity to save (MPS) is
a.
b.
c.
d.
e.
71. Refer to Exhibit 10-3. The multiplier is
a.
b.
c.
d.
e.
b
1
Moderate
Bloom’s: Application
72. Refer to Exhibit 10-3. The marginal propensity to consume (MPC) is
a.
0.80.
b.
0.75.
c.
0.20.
d.
0.25.
e.
0.90.
1
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73. Which of the following is not an aspect of Keynesian economics?
a.
Wages and prices tend to be inflexible downward.
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b.
Supply does not necessarily generate its own demand.
c.
The interest rate is important in determining the level of investment, but not as important as other variables.
d.
Unemployment above natural unemployment is always a brief and temporary phenomenon.
74. If the multiplier is 5, then the MPC must be
a.
1/5.
b.
1/6.
c.
3/4.
d.
4/5.
e.
2/3.
d
1
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75. If an economy consumes 75 percent of any increase in disposable income, then an increase in autonomous investment
of $1 billion could result in an increase in total spending of as much as
a.
$1.0 billion..
b.
$4.0 billion.
c.
$5.0 billion.
d.
$1.8 billion.
e.
$6.0 billion.
b
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76. If we graph the consumption function such that it cuts the vertical axis at a point above the origin, this is because we
are assuming that
a.
the MPC is positive.
b.
the MPS is positive.
c.
autonomous consumption is positive.
d.
induced consumption is positive.
d
1
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Exhibit 10-4
77. Refer to Exhibit 10-4. If the present level of disposable income is Yd1, autonomous consumption is equal to
a.
C0.
b.
C1.
c.
C2.
d.
C1 – C0.
e.
C2 – C1.
United States – BUSPROG: Analytic
78. Refer to Exhibit 10-4. Marginal propensity to consume is equal to
a.
AF divided by C0A.
b.
C0A divided by AF.
c.
AF divided by C0F.
d.
C0F divided by AF.
e.
none of the above
Bloom’s: Application
79. Refer to Exhibit 10-4. Let Yd1 denote the present level of disposable income. An increase in disposable income is
most likely to, ceteris paribus, cause a movement to point
a.
A.
b.
B.
c.
F.
d.
D.
e.
E.
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Exhibit 10-5
80. Refer to Exhibit 10-5 above. The equilibrium level of Real GDP is
a.
$200 billion.
b.
$400 billion.
c.
$600 billion.
d.
$800 billion.
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81. Refer to Exhibit 10-5 When TE is $700 billion, what state is the economy in?
a.
TE < TP, individuals are buying less output than firms produce.
b.
TE > TP, individuals are buying more output than firms produce.
c.
TE = TP, the economy is in equilibrium.
d.
TE < TP, individuals are buying more output than firms produce.
e.
TE > TP, individuals are buying less output than firms produce.
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82. Refer to Exhibit 10-5 When TE is $200 billion, what state is the economy in?
a.
TE < TP, individuals are buying less output than firms produce.
b.
TE > TP, individuals are buying more output than firms produce.
c.
TE = TP, the economy is in equilibrium.
d.
TE < TP, individuals are buying more output than firms produce.
e.
TE > TP, individuals are buying less output than firms produce.
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83. Refer to Exhibit 10-5. When TE is $700 billion, what will firms most likely do next?
a.
Firms will increase production to increase inventories to their optimum levels.
b.
Firms will neither increase nor decrease production since the economy is in equilibrium.
c.
Firms will cut back production to reduce inventories to their optimum levels.
d.
It is impossible to determine what firms are likely to do based on this information.
United States – BUSPROG: Analytic
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84. Refer to Exhibit 10-5. When TE is $300 billion, what will firms most likely firms do next?
a.
Firms will increase production to increase inventories to their optimum levels.
Bloom’s: Application
b.
Firms will neither increase nor decrease production since the economy is in equilibrium.
c.
Firms will cut back production to reduce inventories to their optimum levels.
d.
It is impossible to determine what firms are likely to do based on this information.
85. Refer to Exhibit 10-5. When TE is $300 billion, what happens to inventories?
a.
Inventories are at their optimum levels.
b.
Inventories will fall, then rise above their optimum levels.
c.
Inventories will fall below optimum levels.
d.
Inventories will rise above optimum levels.
United States – BUSPROG: Analytic
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86. Refer to Exhibit 10-5. When TE is $800 billion, what happens to inventories?
a.
Inventories are at their optimum levels.
b.
Inventories will fall, then rise above their optimum levels.
c.
Inventories will fall below optimum levels.
d.
Inventories will rise above optimum levels.
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87. In the real world, we should expect the multiplier process to work itself out
a.
almost instantaneously.
b.
within a few days.
c.
within about one month.
d.
over many months, perhaps even years.
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88. The multiplier process following a drop in autonomous spending is
a.
just as powerful as for a rise in autonomous spending.
b.
more powerful than for a rise in autonomous spending.
c.
less powerful than for a rise in autonomous spending.
d.
nonexistent, because the multiplier applies only to a rise in autonomous spending.
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89. John Maynard Keynes believed that wages may be inflexible in the downward direction. Consequently, an economy
a.
could get stuck in long-run equilibrium.
b.
could get stuck in a recessionary gap.
c.
could get stuck in an inflationary gap.
d.
would always produce more than Natural Real GDP.
e.
b and c
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90. The more firms that pay efficiency wages, the
a.
more likely the economy will get stuck in a recessionary gap.
b.
less likely the economy will get stuck in a recessionary gap.
c.
more likely the economy will get stuck in an inflationary gap.
d.
more likely (over time) the economy will produce Natural Real GDP.
e.
b and c
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91. According to efficiency wage models, labor productivity depends on
a.
the number of employees at a firm; the smaller the number of employees, the more productive each employee
Bloom’s: Knowledge
is.
b.
the amount of capital that employees have to work with.
c.
the wage rate the firm pays its employees; a cut in wages can cause labor productivity to decline.
d.
whether or not the economy is currently producing Natural Real GDP.
e.
none of the above
92. Which of the following statements is true?
a.
Keynes believed wages are inflexible downward but prices (of goods and services) are flexible.
b.
Keynes believed an economy could get stuck in a recessionary gap.
c.
Keynes originated the idea of efficiency wages.
d.
Keynes believed the economy is self-regulating.
e.
b and c
b
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93. According to Keynes, aggregate demand could be too low in an economy. What does this mean?
a.
It means there is not enough purchasing power in the economy to maintain stable prices.
b.
It means there are too many of some goods produced and too few of other goods produced.
c.
It means spending in the economy is too low to bring about full employment.
d.
It means that wages may get stuck in a recessionary gap because there is not enough demand (in the economy)
to increase them.
e.
none of the above
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94. For Say’s law to hold in a money economy,
a.
funds invested must give rise to an equal amount of funds spent.
b.
funds saved must give rise to an equal amount of funds invested.
c.
funds spent must give rise to an equal amount of output produced.
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d.
interest rates must fall when saving decreases.
e.
b and c
95. Which of the following is consistent with the classical view of Say’s law?
a.
Saving increases by $2 billion and investment decreases by $2 billion.
b.
Saving increases by $2 billion and consumption rises by $2 billion.
c.
Saving increases by $2 billion, consumption decreases by $2 billion, and investment rises by something less
than $2 billion.
d.
Saving decreases by $2 billion and consumption decreases by more than $2 billion.
e.
none of the above
1
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96. Which of the following is consistent with Keynes’s view of Say’s law?
a.
Saving increases by $3 billion, consumption falls by $3 billion, and investment rises by $3 billion.
b.
Consumption rises by $3 billion and saving rises by more than $3 billion.
c.
Saving rises by $3 billion, consumption falls by $3 billion, and investment rises by something less than $3
billion.
d.
Saving rises by $3 billion, consumption falls by $3 billion, and investment rises by $6 billion.
e.
none of the above
1
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97. Which of the following is good evidence against the classical view of Say’s law?
a.
Investment does not always rise as interest rates fall.
b.
Consumption falls by the amount that saving increases.
c.
Exports are usually greater than imports.
d.
People save more at higher interest rates than lower interest rates.
e.
none of the above
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98. How does the classical position on saving differ from Keynes’s position?
a.
Classical position: people save more at lower interest rates. Keynes’s position: people save less at lower
interest rates.
b.
Classical position: changes in the interest rate are irrelevant to saving decisions. Keynes’s position: saving is
directly related to the interest rate.
c.
Classical position: saving is directly related to the interest rate. Keynes’s position: at times, saving may be
inversely related to the interest rate.
d.
Classical position: saving can be inversely related to the interest rate. Keynes’s position: consumption rises as
saving rises.
e.
none of the above
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99. Which of the following statements is false?
a.
Keynes believed that the level of investment depends on more than just the interest rate.
b.
Saving is the difference between disposable income and consumption.
c.
Keynes believed that saving is more responsive to changes in income than to changes in the interest rate.
d.
According to Keynes, wage rates may fall too quickly when the economy is in a recessionary gap.
d
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100. If consumption is $1,230 when disposable income is $1,420, and consumption is $1,400 when disposable income is
$1,620, then the marginal propensity to consume (MPC) is
a.
1.15.
b.
0.15.
c.
6.67.
d.
0.85.
d
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101. Here is a consumption function: C = C0 + MPC(Yd). Which of the following is true about the consumption function?
a.
Consumption will rise if autonomous consumption or disposable income rise.
b.
Consumption will fall if autonomous consumption falls or if the MPC rises.
c.
Consumption will rise if autonomous consumption rises, MPC declines, or disposable income rises.
d.
For every $1 rise in autonomous consumption, consumption will also rise by $1.
e.
a and d
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102. Here is a consumption function: C = C0 + MPC(Yd). If consumption is $3,300, MPC =0.85, and disposable income is
$2,100, what does autonomous consumption equal?
a.
b.
c.
d.
e.
1
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103. Which of the following statements is false?
a.
MPC plus MPS equals 1.
b.
MPC is additional saving divided by additional disposable income.
c.
The MPS is the ratio of the change in saving to the change in disposable income.
d.
If MPC equals 0.80, autonomous consumption equals $400, and disposable income equals $600, then
consumption equals $880.
e.
none of the above
b
1
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New
104. If total production (TP) is greater than total expenditures (TE), it follows that
a.
producers have produced more than individuals buy.
b.
optimum inventory levels rise.
c.
firms have underproduced.
d.
actual inventory levels unexpectedly rise.
e.
a and d
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105. If total production (TP) is less than total expenditures (TE), it follows that
a.
optimum inventory levels fall.
b.
firms have underproduced.
c.
firms increase the quantity of goods they produce.
d.
b and c
e.
a, b, and c
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106. Inventory levels unexpectedly rise and as a result firms reduce the level of production. Which of the following is
consistent with these two occurrences?
a.
TP is greater than TE.
b.
TP is less than TE.
c.
TP is equal to TE.
d.
TP is equal to TE minus the rise in inventories above the optimum inventory level.
e.
none of the above
Understanding and applying economic models
Bloom’s: Application
107. Inventory levels unexpectedly fall and as a result firms increase the quantity of goods and services they produce.
Which of the following is consistent with these two occurrences?
a.
TP is greater than TE.
b.
TP is less than TE.
c.
TE is equal to TP minus the rise in inventories above the optimum inventory level.
d.
TP is equal to TE.
e.
b and c
108. Which of the following statements is true?
a.
When TP = TE (total production = total expenditures), the economy is necessarily producing Natural Real
GDP.
b.
When TP is greater than TE, inventory levels unexpectedly fall.
c.
When TE is greater than TP, inventory levels unexpectedly rise.
d.
b and c
e.
none of the above
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109. Government purchases rise by $100 billion and the MPC equals 0.75. Assuming that idle resources exist at each
expenditure round, and the multiplier is operative, the change in Real GDP equals
a.
$40 billion.
b.
$75 billion.
c.
$400 billion.
d.
$750 billion.
e.
$250 billion.
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110. Which of the following is true?
b
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a.
If MPC = 0.50, then the multiplier is 2.00.
b.
If MPC = 0.82, then the multiplier is 1.25.
c.
If MPS = 0.35, then the multiplier is 2.86.
d.
If MPC = 0.97, then the multiplier is 3.33.
e.
a and c
111. The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result, __________ rises, the
__________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the
quantity of goods and services they produce.
a.
consumption; TE; downward; fall; increase
b.
consumption; TE; upward; fall; increase
c.
consumption; TE; upward; rise; decrease
d.
investment; TE; upward; fall; increase
e.
investment; TP; leftward; fall; increase
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112. The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the __________ curve shifts
__________, inventory levels unexpectedly __________, and business firms __________ the quantity of good and
services they produce.
a.
TE; upward; rise; increase
b.
TP; rightward; rise; decrease
c.
TE; downward; rise; decrease
d.
TE; downward; rise; increase
e.
none of the above
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113. The economy is in equilibrium, TP = TE, and Real GDP is $4,555 billion. The MPC is 0.80, the multiplier is
operative, and idle resources exist at each expenditure round. Government purchases rise by $10 billion. As a result, the
United States – BUSPROG: Analytic
Bloom’s: Application
__________ curve shifts __________, inventory levels unexpectedly __________, business firms ___________ the
quantity of goods and services they produce, and Real GDP __________ by __________.
a.
TE; downward; fall; increase; rises; $10 billion.
b.
TP; rightward; fall; decrease; falls; $50 billion
c.
TE; upward; fall; increase; rises; $50 billion
d.
TE; downward; rise; increase; rises, $50 billion
114. The economy is in equilibrium, TP = TE, and Real GDP is $4,000 billion. The MPC is 0.70, the multiplier is
operative, and idle resources exist at each expenditure round. Government purchases fall by $17 billion. As a result, the
TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of
goods and services they produce, and Real GDP __________ by __________.
a.
downward; rise; decrease; falls; approximately $56.7 billion
b.
downward; fall; increase; falls; approximately $56.7 billion
c.
upward; rise; decrease; falls; $17 billion
d.
upward; fall; decrease; rises; $17 billion
e.
downward; rise; decrease; falls; approximately $11.9 billion
Challenging
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115. The economy is in equilibrium, TP = TE, and Real GDP is $4,000 billion. The MPC is 0.60, the multiplier is
operative, and idle resources exist at each expenditure round. Autonomous investment spending rises by $13 billion. As a
result, the __________ curve shifts __________, inventory levels unexpectedly __________, business firms __________
the quantity of goods and services they produce, and Real GDP __________ by __________.
a.
TE, downward, rise, increase, rises, $32.5 billion
b.
TE, upward, fall, increase, rises, $101.5 billion
c.
TE, upward, fall, decrease, rises, $32.5 billion
d.
TE, upward, fall, increase, rises, $32.5 billion
e.
TP, upward, fall, increase, rises, $101.5 billion
1
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116. The answer is: “It is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium
wage rates.” What is the question?
a.
What do efficiency wage models imply?
b.
What do classical economists say?
c.
What is the central tenet of Say’s law?
d.
What did John Maynard Keynes say was the reason for inflexible wages?
e.
none of the above
117. If consumption is greater than disposable income, it follows that
a.
interest rates are rising.
b.
the budget deficit is shrinking.
c.
saving is negative.
d.
the multiplier is inoperative.
e.
none of the above
1
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118. The change in disposable income is $200 and the change in saving is $50.What is the marginal propensity to
consume (MPC)?
a.
0.25
b.
0.50
c.
0.66
d.
0.75
e.
There is not enough information to answer the question.
d
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119. Autonomous spending rises by $10 billion and Real GDP rises by $50 billion. What does the marginal propensity to
save equal?
a.
0.10
1
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b.
0.20
c.
0.80
d.
0.90
e.
0.50
120. There are no idle resources, the multiplier is operative, and autonomous spending rises. It follows that
a.
Real GDP will not increase.
b.
Real GDP will rise.
c.
prices will rise.
d.
a and c
e.
a, b, and c
d
1
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Bloom’s: Comprehension
121. The answer is: 1/(1 – MPC). What is the question?
a.
What is the marginal propensity to save?
b.
What is the efficiency wage model?
c.
What does consumption equal if the economy is in equilibrium?
d.
What is the multiplier?
e.
What does disposable income equal if the economy is in equilibrium?
d
1
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122. Which of the following statements would Keynes have been most likely to agree with?
a.
Saving is more responsive to changes in interest rates than to changes in income.
b.
Say’s law holds in both a barter and money economy.
c.
The internal structure of the economy is not always competitive enough to allow prices to fall.
d.
Investment is exclusively dependent upon the interest rate.
b
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e.
none of the above
123. The economy is in equilibrium, TP = TE, and Real GDP is $2,000 billion. The MPC is 0.75, the multiplier is
operative, and idle resources exist at each expenditure round. Autonomous investment spending falls by $10 billion. As a
result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the
quantity of goods and services they produce, and Real GDP __________ by __________.
a.
downward; rise; decrease; falls; $7.5 billion
b.
downward; fall; increase; rises; $40 billion
c.
downward; rise; decrease; falls; $40 billion
d.
upward; rise; decrease; falls; $40 billion
e.
downward; fall; decrease; falls; $7.5 billion
United States – BUSPROG: Analytic
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124. The economy is in equilibrium, TP = TE, and Real GDP is $500 billion. The MPC is 0.95, the multiplier is operative,
and idle resources exist at each expenditure round. Autonomous investment spending rises by $4 billion. As a result, the
TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of
goods and services they produce, and Real GDP __________ by __________.
a.
upward; fall; increase; rises; $3.8 billion
b.
upward; fall; increase; rises; $8 billion
c.
downward; rise; decrease; falls; $80 billion
d.
upward; fall; increase; rises; $80 billion
e.
downward; fall; decrease; falls; $3.8 billion
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125. If autonomous consumption rises, the TE curve shifts __________, the marginal propensity to consume __________,
and the TP curve __________.
a.
upward; rises; shifts downward
b.
upward; remains unchanged; remains unchanged
c.
downward; rises; remains unchanged
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d.
upward; remains unchanged; shifts downward
e.
none of the above
126. In the Keynesian analysis of changes from one Real GDP level to another, which of the following plays a critical
role?
a.
changes in prices
b.
the relationship between optimum inventory levels and current inventory levels
c.
the long-run aggregate supply (LRAS) curve
d.
the relationship between total expenditures (TE) and the aggregate demand (AD) curve
e.
none of the above
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127. The Keynesian aggregate supply curve is
a.
vertical.
b.
upward sloping.
c.
horizontal until Natural Real GDP (QN) and vertical at QN.
d.
sometimes upward sloping and sometimes horizontal.
e.
downward sloping.
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128. In the simple Keynesian model, an increase in aggregate demand leads to an increase in
a.
Real GDP and the price level at all levels of Real GDP.
b.
the price level and no change in Real GDP for levels of Real GDP below Natural Real GDP.
c.
the price level and a decrease in Real GDP at all levels of GDP.
d.
Real GDP and no change in the price level for levels of Real GDP below Natural Real GDP.
d
1
United States – BUSPROG: Analytic
Understanding and applying economic models
Bloom’s: Application