A)

AE = C – I + G + (X + M)

B)

AE = C + I + G + (X – M)

C)

AE = C + I – G + (X – M)

D)

AE = C – I + G – (X + M)

2.

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

A)

disposable income; saving

B)

disposable income; consumption

C)

saving; consumption

D)

saving; investment

3.

If disposable income is $3,000 and saving is $1,200, how much is consumption?

A)

−$1,200

B)

$1,800

C)

$2,100

D)

$4,200

4.

If disposable income increases from $250 to $300 and saving increases from $40 to $50, how much is the average propensity to save?

A)

0.133

B)

0.16

C)

0.167

D)

0.2

5.

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

A)

0.5; varies with the level of income

B)

$5,000; is $5,000

C)

$10,000; is $35,000

D)

2; varies with the level of income

6.

(Figure: Consumption Spending)

At point A:

A)

saving is $20.

B)

consumption is zero.

C)

saving is zero.

D)

consumption exceeds income by $20.

Disposable Income

Consumption

$1,000

$1,200

$1,200

$1,300

$1,400

$1,400

$1,600

$1,500

$1,800

$1,600

7.

(Table) When disposable income is $1,200, what is the value of the average propensity to save?

A)

−0.5

B)

−1.5

C)

−1.083

D)

−0.083

8.

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

A)

0.5

B)

−0.5

C)

1.5

D)

−1.5

9.

If the marginal propensity to save is 0.25 and income increases by $7,540, what is the increase in consumption?

A)

$5,655

B)

$1,885

C)

$10,053

D)

$30,160

10.

If you spend $35,000 and your income is $60,000, what is your average propensity to save?

A)

0.7

B)

0.3

C)

0.58

D)

0.42

11.

Personal consumption expenditures:

A)

constitute 30% of GDP.

B)

can be found by subtracting saving from disposable income.

C)

primarily depend on interest rates, according to Keynes.

D)

are very unstable as a percentage of GDP over time.

12.

Saving is equal to:

A)

disposable income minus consumption.

B)

consumption minus disposable income.

C)

investment minus government taxes.

D)

government taxes minus investment.

13.

Keynes believed that saving is a function of:

A)

the interest rate.

B)

income.

C)

GDP.

D)

the price of money.

14.

Classical economists claim that ______ is the primary determinant of saving, and Keynes claimed that ______ is the primary determinant of saving.

A)

the interest rate; income

B)

income; the interest rate

C)

taxes; government spending

D)

GDP; disposable income

15.

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

A)

MPC + MPS = 1

B)

APC + MPS = 1

C)

APC + APS = 1

D)

Y = C + S

16.

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

A)

$11,000

B)

$1,000

C)

$900

D)

$100

17.

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion, the marginal propensity to save is:

A)

0.2.

B)

0.25.

C)

0.75.

D)

There is not enough information to answer this question.

18.

If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will:

A)

fall by $25 billion.

B)

fall by $125 billion.

C)

rise by $25 billion.

D)

rise by $125 billion.

19.

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)

1.25

B)

0.8

C)

1.09

D)

0.91

20.

If income grows from $3,000 per month to $3,500 per month and savings rise from $200 per month to $400 per month, what is the marginal propensity to save?

A)

1.25

B)

0.8

C)

2.5

D)

0.4

21.

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

A)

their total profit.

B)

the productivity of the workers assigned to the projects.

C)

the interest rate.

D)

before-tax rate of return.

22.

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)

Keynesians

B)

classical economists

C)

interventionists

D)

Marxists

23.

If the marginal propensity to consume is 0.85, how much is the spending multiplier?

A)

0.15

B)

1.17

C)

5.1

D)

6.67

24.

If the marginal propensity to consume is 0.8, by how much will total income increase after an initial $200 is spent?

A)

$40

B)

$160

C)

$200

D)

$1,000

25.

When withdrawals equal injections, the economy:

A)

is losing money.

B)

still has to adjust to bring both down to zero.

C)

is in a recession.

D)

is in equilibrium.

26.

The idea of the spending multiplier is that:

A)

one person's spending becomes another person's income, which stimulates more spending.

B)

people spend money on some items, such as food and toiletries, multiple times.

C)

people tend to spend a greater amount (a multiple) in stores than they originally intend.

D)

when a person saves money in a bank, the bank lends it out to another person to be spent.

27.

If $1,000 of additional spending occurs (from investment, say) and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.

A)

$800

B)

$1,000

C)

$5,000

D)

$8,000

28.

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)

–$800

B)

–$1,000

C)

$1,000

D)

–$5,000

29.

If the marginal propensity to consume is 0.65, the spending multiplier is:

A)

4.

B)

1.33.

C)

1.54.

D)

2.86.

30.

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)

$1,000.

B)

$2,000.

C)

$3,000.

D)

$4,000.

31.

Suppose the government believes consumers should spend $1 billion more to get the economy out of a recession. The government wants to provide income to households by providing them with jobs and paying them directly. If the marginal propensity to consume is 0.8, the government should increase income by:

A)

$0.8 billion

B)

$1 billion.

C)

$0.2 billion.

D)

This cannot be determined with the information given.

32.

During the millennium scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?

A)

$1,000

B)

0

C)

$4,000

D)

It actually increased $4,000.

33.

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

A)

reduce; lower

B)

reduce; higher

C)

increase; lower

D)

increase; higher

34.

The balanced budget multiplier is:

A)

less than 1.

B)

greater than 1.

C)

equal to 1.

D)

equal to 0.

35.

In an economy with three sectors (household, business, and government), government spending is $5 billion, taxes are $4 billion, and investment is $4 billion. If the economy is in equilibrium, then saving is:

A)

$1 billion.

B)

$4 billion.

C)

$5 billion.

D)

$9 billion.

36.

A tax increase has a smaller impact on the economy than does a decrease in government spending of the same magnitude because:

A)

Congress drags its feet in passing tax increases.

B)

consumers pay for part of the tax increase by reducing their saving.

C)

tax changes have more of a direct impact on income than does an equivalent change in government spending.

D)

fiscal policy is weaker than monetary policy.

37.

If the marginal propensity to consume is 0.8 and the government reduces taxes by $5 billion, equilibrium income will:

A)

fall by $25 billion.

B)

rise by $25 billion.

C)

rise by $20 billion.

D)

fall by $20 billion.

38.

If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will:

A)

rise by $2 billion.

B)

not change.

C)

fall by $2 billion.

D)

rise by $5 billion.

39.

If the government spends $1 billion to create a wetlands preserve, taxes increase $1 billion to pay for it, and the marginal propensity to consume is 0.75, GDP:

A)

remains unchanged.

B)

increases by $1 billion.

C)

increases by $4 billion.

D)

decreases by $1 billion.

40.

Assume that the economy is at equilibrium at $10 trillion, with a marginal propensity to consume of 0.75. If exports rise by $0.5 trillion and imports increase by $0.7 trillion, equilibrium income will:

A)

not change.

B)

fall by $0.2 trillion.

C)

rise by $2 trillion.

D)

fall by $0.8 trillion.

41.

In the Keynesian framework, the way to fight a recession is to:

A)

cut taxes and/or increase government spending.

B)

reduce interest rates.

C)

increase the population with more immigration.

D)

do nothing and wait for the economy to return to full employment on its own.

42.

The spending reduction necessary to bring an overheated economy back to full employment is called the:

A)

recessionary gap.

B)

GDP gap.

C)

inflationary gap.

D)

gap analysis.

43.

Assume that the MPC is 0.8. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. The government is committed to a balanced budget. To achieve full employment, the government should _______ taxes by ____________ and increase government spending by ________.

A)

increase; $100 billion; $100 billion

B)

increase; $20 billion; $100 billion

C)

increase; $25 billion; $100 billion

D)

reduce; $100 billion; $100 billion

44.

Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment?

A)

increase spending by $25 billion

B)

increase spending by $10 billion

C)

reduce spending by $25 billion

D)

reduce spending by $100 billion

45.

Suppose full employment real GDP is $12 trillion, current real GDP is $11 trillion, and the marginal propensity to consume is 0.8. The recessionary gap is:

A)

$1 trillion.

B)

$0.8 trillion.

C)

$0.2 trillion.

D)

$0.5 trillion.

46.

Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is:

A)

$0.2 trillion.

B)

$0.05 trillion.

C)

–$0.2 trillion.

D)

$0.1 trillion.