A)

the rate of return on capital.

B)

tax incentives.

C)

strong government demand.

D)

high levels of consumption in the economy.

2.

The reason business investment is sensitive to interest rates is that:

A)

most funds used for investment are borrowed, so firms incur an interest charge.

B)

firms charge interest on any investment they make.

C)

interest rates are a lagging indicator, so they signal to firms the state of the economy.

D)

interest rates indicate how aggressive government policy is about fighting recessions.

3.

The following table shows data on consumption at various levels of income.

The value of the MPC is:

A)

0.75.

B)

0.90.

C)

0.25.

D)

0.80.

Disposable Income

Consumption

$1,000

$1,200

$1,200

$1,300

$1,400

$1,400

$1,600

$1,500

$1,800

$1,600

4.

(Table) When disposable income increases from $1,000 to $1,200, what is the value of the marginal propensity to save?

A)

1.5

B)

0.5

C)

−1.5

D)

−0.5

5.

Firms decide how much to invest by comparing the rate of return on their projects with:

A)

the interest rate.

B)

before-tax rate of return.

C)

the productivity of the workers assigned to the projects.

D)

their total profit.

6.

According to the simple Keynesian model, which of the following statements is NOT correct?

A)

APC + MPS = 1

B)

APC + APS = 1

C)

Y = C + S

D)

MPC + MPS = 1

7.

At equilibrium, if spending increases by $300 and the corresponding increase in income is $1,500, what is the multiplier?

A)

5

B)

0.8

C)

1

D)

0.2

8.

The following table shows some data on consumption at various levels of income.

Investment spending is $600. If there is no government spending or net exports, the equilibrium income level is:

A)

$3,000.

B)

$4,000.

C)

$2,000.

D)

$1,000.

9.

Disposable income equals:

A)

income plus government spending.

B)

income plus taxes.

C)

income minus taxes.

D)

income minus government spending.

10.

In the simple Keynesian model of the private economy, which of the following is assumed?

A)

There is considerable slack in the economy.

B)

The aggregate price level can change.

C)

The consumer price index can rise or fall.

D)

Households and firms are savers.

11.

Suppose economists observe that an increase in government purchases of $10 billion raises aggregate expenditures by $40 billion. These economists would estimate that the marginal propensity to save is:

A)

0.75.

B)

30.

C)

0.25.

D)

4.

12.

Which one of the following helps determine consumption and saving in the Keynesian model?

A)

government regulations

B)

technology

C)

wealth

D)

imports

13.

At equilibrium in the simple Keynesian model, income is $6 million and consumption spending is $5 million. Which of the following is correct?

A)

There is no saving in this economy.

B)

The economy will go into disequilibrium because consumption is not equal to income.

C)

Investment is $1 million.

D)

The information provided is insufficient to determine the level of investment spending.

Income

Consumption

$0

$500

$1,000

$1,250

$2,000

$2,000

$3,000

$2,750

$4,000

$3,500

14.

(Table) The table shows data on consumption at various levels of income. The value of the APS at equilibrium is:

A)

0.083.

B)

0.125.

C)

0.

D)

−0.25.

15.

If income grows from $3,000 per month to $3,500 per month and consumption rises from $2,800 per month to $3,200 per month, what is the marginal propensity to consume?

A)

1.09

B)

0.91

C)

0.8

D)

1.25

16.

(Figure: Consumption Spending)

At point A:

A)

saving is zero.

B)

consumption exceeds income by $20.

C)

consumption is zero.

D)

saving is $20.

17.

In the simple Keynesian model, if desired investment is greater than desired saving:

A)

actual savings will fall as the economy moves to a lower output level.

B)

interest rates will fall.

C)

the multiplier effect will move the economy to a lower income level.

D)

income and output will rise.

18.

Which of the following statements is CORRECT?

A)

Keynesian economics was developed by the Scholastic School at Salamanca in the late medieval period.

B)

The classical school of economics was developed during the classical age of Greece.

C)

Classical economics approaches the economy as three separate but interrelated sectors, while Keynesian economics looks at the economy as a whole.

D)

Keynesian economics is unrelated to the events of the Great Depression.

19.

The following table shows data on consumption at various levels of income. Investment spending is $500 for all levels of income.

If there is no government spending or net exports, the equilibrium income level is:

A)

$4,000.

B)

$3,000.

C)

$1,000.

D)

$2,000.

20.

The increase in aggregate spending needed to bring an economy to full employment is called:

A)

the inflationary gap.

B)

gap closure spending.

C)

the recessionary gap.

D)

goal-oriented spending.

21.

When household debt levels rise:

A)

families are less able to spend in the current period.

B)

tax payments will be higher.

C)

the ability to get more credit rises.

D)

investment levels rise.

22.

In 2008–2009, the falling stock market reduced wealth of U.S. households, causing the United States:

A)

to shift its consumption schedule downward.

B)

to move up along its consumption schedule.

C)

to shift its consumption schedule upward.

D)

to move down along its consumption schedule.

23.

In the Keynesian model, the principal determinant of saving is:

A)

investment.

B)

interest rates.

C)

income.

D)

tax rates.

24.

The paradox of thrift suggests that when households intend to save more, they will ________ consumption, which will ultimately lead to ____________ actual aggregate saving.

A)

increase; higher

B)

reduce; lower

C)

reduce; higher

D)

increase; lower

25.

About how large was the unemployment rate during the Great Depression?

A)

32%

B)

55%

C)

25%

D)

15%

26.

The slope of the saving schedule is:

A)

the average propensity to save.

B)

the average propensity to consume.

C)

the marginal propensity to consume.

D)

1 minus the marginal propensity to consume.

27.

The largest component of aggregate expenditures is:

A)

consumption spending.

B)

investment spending.

C)

saving.

D)

government spending.

28.

Activities that remove spending from the economy are called:

A)

withdrawals.

B)

reverse spending.

C)

negative spending.

D)

injections.

29.

After the acceptance of Keynesian analysis, government:

A)

actions toward macroeconomic policy grew significantly.

B)

turned to communism as the only solution to the Great Depression.

C)

played a role in setting the interest rate only.

D)

reduced its role in the operation of the economy.

30.

(Table) In the table, the marginal propensity to consume is ________ and the average propensity to consume ________.

A)

$10,000; is $35,000

B)

0.5; varies with the level of income

C)

2; varies with the level of income

D)

$5,000; is $5,000

31.

John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income.

A)

investment

B)

the interest rate

C)

property rights

D)

aggregate spending

32.

Equilibrium in the full Keynesian model requires that:

A)

income exceed expenditures.

B)

the government budget be in balance.

C)

all injections (I + G + X) must equal all withdrawals (S + T + M).

D)

expenditures exceed income.

33.

In the Keynesian aggregate expenditure model, which variable is assumed to be fixed?

A)

unemployment

B)

GDP

C)

the price level

D)

consumption

34.

If the amount of spending in an economy declines by $1,000 and the marginal propensity to consume is 0.8, the effect on the economy is a change of _____ in income or output.

A)

–$1,000

B)

$1,000

C)

–$5,000

D)

–$800

35.

Which of the following is NOT a determinant of investment?

A)

past stock and bond prices

B)

the amount of existing capital goods

C)

business expectations

D)

technological innovations

36.

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

A)

saving; consumption

B)

saving; investment

C)

disposable income; consumption

D)

disposable income; saving

37.

The multiplier effect shows that a change in aggregate spending:

A)

causes output to change even more than the change in aggregate spending.

B)

leaves output unaffected.

C)

will cause output to move in the opposite direction.

D)

causes output to change by something less than the change in aggregate spending.

38.

If the marginal propensity to consume is 0.8, full-employment output is $14 trillion, and current output is $13.5 trillion, then investment spending must _____________________ to reach full-employment output.

A)

decrease by $0.5 trillion

B)

increase by $0.4 trillion

C)

increase by $0.5 trillion

D)

increase by $0.1 trillion

39.

Which two countries currently have the highest savings rates?

A)

China and the United States

B)

Japan and the United States

C)

China and Japan

D)

China and India

40.

In the simple Keynesian model with no government and foreign sectors, assume that the economy is in equilibrium at an output of $2 billion with a marginal propensity to consume of 0.9. If investment spending decreases by $0.05 billion, what is the new equilibrium output level?

A)

$2.5 billion

B)

$1.5 billion

C)

$1.95 billion

D)

$1.9 billion

41.

In the simple Keynesian model, the economy will be in equilibrium when:

A)

savings is greater than income.

B)

investment is equal to income.

C)

savings is greater than investment.

D)

savings is equal to investment.

42.

_____ is the change in consumption associated with a change in income.

A)

The marginal propensity to consume

B)

The marginal propensity to save

C)

The average propensity to consume

D)

The average propensity to save

43.

Which group of economists believed that economic downturns were self-correcting, that is the forces of supply and demand would naturally bring the economy back to equilibrium?

A)

interventionists

B)

Keynesians

C)

Marxists

D)

classical economists

44.

If the marginal propensity to consume is 0.9, what is the size of the multiplier?

A)

1

B)

9

C)

10

D)

0.1

45.

If the marginal propensity to save is 0.2, how much is the spending multiplier?

A)

8

B)

0.8

C)

1.25

D)

5