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ECON 1012B
Practice Questions for Chapter 8
Use the following to answer question 1:
AP
Real expenditures
AE
GDP0
GDP1
GDP2
Real income
1. Refer to the graph above. The equilibrium level of GDP corresponds to
A) GDP0.
B) GDP1.
C) GDP2.
D) zero.
2. In the aggregate expenditure model, if autonomous expenditures are $5,000 and the mpc
equals .9, what is the level of income in the economy?
A) $5,000.
B) $10,000.
C) $20,000.
D) $50,000.
3. The change in expenditures produced by the multiplier effect is really a change in
A) induced expenditures.
B) autonomous expenditures.
C) exogenous expenditures.
D) the marginal propensity to consume.
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Use the following to answer question 4:
4. Refer to the graph above. Equilibrium real income is
A) 100.
B) 125.
C) 150.
D) 175.
5. In the aggregate expenditure model, if the marginal propensity to consume is 0.8, a $300
change in income leads to
A) a $60 change in withdrawals.
B) a $240 change in withdrawals.
C) a $300 change in withdrawals.
D) a shift in the entire expenditures function.
6. According to the paradox of thrift, the more people save,
A) the lower the price level will be.
B) the higher the price level will be.
C) the lower equilibrium income will be.
D) the higher equilibrium income will be.
7. "Classical economist" is interchangeable with which term?
A) Laissez-faire economist.
B) Keynesian economist.
C) Activist economist.
D) Marxian economist.
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8. According to the aggregate expenditure model, recessions occur because
A) firms simply produce too much output.
B) households do not save enough.
C) increases in autonomous expenditures fail to be translated into increases in income
and output.
D) decreases in autonomous expenditures are magnified into significantly larger
decreases in income and output.
9. An increase in the marginal propensity to save
A) reduces output by reducing autonomous expenditures.
B) raises output by raising autonomous expenditures.
C) reduces output by reducing induced expenditures.
D) raises output by raising induced expenditures.
10. If the marginal propensity to consume is 0.8, the marginal tax rate is 0.25, and the
marginal propensity to import is 0.1, the multiplier is
A) 1.25.
B) 1.8.
C) 2.1.
D) 10.
11. The mps is larger, other things equal, when
A) the multiplier is larger.
B) the multiplier is smaller.
C) the mpc is larger.
D) the economy is in equilibrium.
12. Given AE = $1,000 + 0.8Y, when income equals $6000, autonomous expenditures will
be
A) $ 500.
B) $1,000.
C) $4,800.
D) $5,800.
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13. In Canada suppose the marginal propensity to consume is 0.8, the marginal tax rate is
0.25, and the marginal propensity to import is 0.1. If the Prime Minister wants to
increase income by 500, his advisers would suggest that he increase government
spending by
A) 58.
B) 138.
C) 238.
D) 538.
14. Keynes thought all of the following except that:
A) the economy sometimes needed outside help to reach its potential income.
B) the forces pushing the economy from a short-run to a long-run equilibrium are
weak.
C) if people stopped buying, firms would decrease their prices and people would buy
more.
D) before a long-run equilibrium income is reached, production changes would push
the economy away from this equilibrium.
15. A decrease in autonomous expenditures will
A) have a greater effect on real income when the price level is flexible.
B) have less effect on real income when the price level is fixed.
C) decrease the price level when prices are flexible.
D) increase the price level when prices are flexible.
16. Say the U.S. cancels China's most favoured nation status and, as a result, China's
exports decline by 400. If the mpc in China is 0.6, total income in China would likely
A) decline by 666.67.
B) decline by 1,000.
C) increase by 666.67.
D) increase by 1,000.
17. Graphically, the equilibrium level of real income occurs where the expenditures
function intersects the
A) horizontal axis.
B) vertical axis.
C) aggregate supply curve.
D) 45-degree line going through the origin.
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18. The consumption of individuals in the aggregate tends to vary
A) more than income.
B) less than income.
C) the same amount as income.
D) in a way that is unrelated to income.
19. Suppose the economy is in equilibrium but then the marginal propensity to save
increases. This change will
A) cause output to rise.
B) cause output to fall.
C) not affect output.
D) will affect output only if the marginal propensity to consume is constant.
20. Suppose a $200 billion decrease in autonomous expenditures causes equilibrium GDP to
decline by $400 billion. What is the multiplier?
A) 0.25.
B) 0.5.
C) 2.
D) 4.
21. The multiplier equals
A) the mpc.
B) 1 / mpc.
C) 1 / (1 - mpc).
D) 1 / (mpc - 1).
Use the following to answer question 22:
AP
Real expenditures
AE0
AE1
Real income
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22. Refer to the graph above. A shift in the AE curve from AE0 to AE1 could be due to
A) a decrease in government spending.
B) an increase in autonomous expenditures.
C) an increase in government spending.
D) a decrease in taxes.
23. In the aggregate expenditure model,
A) production is assumed to be fixed.
B) planned expenditures are assumed to equal actual production.
C) the price level is assumed to be fixed.
D) the price level is assumed to be flexible.
24. Keynesian and Classical economists disagree about all of the following except
A) the role of government policy in the short run.
B) the flexibility of wages and prices in the short run.
C) the role of aggregate demand in the business cycle.
D) the distinction between aggregate supply and aggregate demand.
25. If the marginal propensity to save (mps) is 0.2, a $100 change in income will lead to
A) a $100 change in expenditures.
B) an $80 change in expenditures.
C) a $20 change in expenditures.
D) a shift in the entire expenditures function.
26. The marginal propensity to save (mps) tells us
A) the fraction of income that will be spent.
B) the fraction of income that will not be spent.
C) the fraction of an additional dollar of income that will be spent.
D) the fraction of an additional dollar of income that will not be spent.
27. Which of the following was not a solution to the Depression favoured by Classical
economists?
A) Break up labour unions.
B) Hire unemployed workers for public works programs.
C) Let market forces operate.
D) Stop government measures that held up wages and prices.
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28. If the multiplier were 4, a $750 change in autonomous expenditures would cause
equilibrium income to change by
A) $187.50.
B) $250.
C) $750.
D) $3,000.
29. According to the multiplier equation, an increase in autonomous expenditures
A) reduces aggregate expenditures.
B) increases the multiplier.
C) increases total output.
D) reduces induced expenditures.
30. The slope of the AE curve that represents the equation AE = 500 + 0.3Y equals
A) 0.7.
B) 0.3.
C) 1.33.
D) 3.33.
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