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Chapter 8
1.
A)
B)
C)
D)
Expenditures that change as income changes are called
autonomous expenditures.
total expenditures.
induced expenditures.
aggregate expenditures.
2. In a aggregate expenditure model, if the mpc is 0.75 and autonomous investment increased by
$20 billion, equilibrium income would increase by
A) $20 billion.
B) $40 billion.
C) $80 billion.
D) $120 billion.
3.
A)
B)
C)
D)
The multiplier equation can be used to determine how changes in
autonomous expenditures affect consumption.
autonomous expenditures affect income.
output affect consumption.
output affect autonomous expenditures.
4.
A)
B)
C)
D)
The function that expresses the relationship between expenditures and income is called
the aggregate production function.
the income function.
the expenditures function.
the multiplier function.
5. According to the aggregate expenditure model, if the mpc is 0.75, a $50 billion upward shift in
aggregate expenditures will cause equilibrium income to increase by
A) $37.5 billion.
B) $50 billion.
C) $200 billion.
D) $500 billion.
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6.
A)
B)
C)
D)
As a result of the appreciation of the Japanese currency in 1995, the Japanese AE curve likely
became steeper.
became flatter.
shifted up.
shifted down.
7. If autonomous expenditures are $500, income is $750 and the marginal propensity to consume is
1/3, then total expenditures according to the expenditures function will be
A) $250.
B) $500.
C) $750.
D) $1,500.
Use the following to answer question 8:
Income
$0
100
200
300
400
8.
A)
B)
C)
D)
Expenditures
(in billions of dollars)
$100
150
200
250
300
Given the above table, what are autonomous expenditures for the economy?
$50 billion.
$100 billion.
$150 billion.
$300 billion.
Use the following to answer question 9:
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Income
$
0
1,000
2,000
3,000
4,000
5,000
Expenditures
$1,000
1,800
2,600
3,400
4,200
5,000
9.
A)
B)
C)
D)
Given the above table, what is the level of autonomous expenditures?
$800
$1,000
$2,600
$5,000
10.
A)
B)
C)
D)
Keynes thought that
supply and demand forces are independent.
supply creates its own demand.
demand creates its own supply.
supply and demand forces are interdependent.
11. The aggregate expenditure model
A) provides numerical estimates of how equilibrium output changes in response to changes in the
price level.
B) provides numerical estimates of how equilibrium output changes in response to changes in
aggregate expenditures.
C) is inconsistent with the AS/AD model if the price level is fixed.
D) identifies the factors that cause the AS curve to shift over time.
12.
A)
B)
C)
D)
The marginal propensity to consume is
the change in consumption expenditures times the change income.
the change in consumption expenditures divided by the change in income.
the change in consumption expenditures divided by income.
consumption expenditures divided by the change in income.
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13. Suppose autonomous expenditures equal 1,000 and the mpc is 0.6. Now suppose the mpc rises
to 0.8. Using the multiplier equation, we know that equilibrium income will
A) increase by 200.
B) decrease by 200.
C) increase by 800.
D) increase by 2,500.
14.
A)
B)
C)
D)
Keynesian and Classical economists disagree about all of the following except
the role of government policy in the short run.
the flexibility of wages and prices in the short run.
the role of aggregate demand in the business cycle.
the distinction between aggregate supply and aggregate demand.
Use the following to answer question 15:
AE0
Real expenditures
AE1
AE2
AE3
Real income
15. Refer to the graph above. A major technological advance would be expected to shift the
aggregate expenditure schedule from
A) AE1 to AE3.
B) AE1 to AE2.
C) AE0 to AE1.
D) AE0 to AE3.
16.
A)
B)
C)
D)
According to the multiplier equation, an increase in the marginal propensity to consume
raises output because it leads to an increase in autonomous expenditure.
reduces aggregate expenditure because it reduces the multiplier.
increases output because it increases the multiplier.
increases aggregate expenditure because it increases autonomous expenditure.
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17. Suppose the marginal propensity to consume in Canada is 0.8, the marginal tax rate is 0.2, and
the marginal propensity to import is 0.3. Thus, the multiplier is
A) 5.
B) 1.2.
C) 10.
D) 538.
18. In the aggregate expenditure model if autonomous exports fall by 40 and the mpc is .5, what
happens to equilibrium income?
A) Income rises by 20.
B) Income falls by 20.
C) Income rises by 80.
D) Income falls by 80.
19. In the aggregate expenditure model, to determine equilibrium income, first determine the
multiplier and then multiply it by
A) aggregate production.
B) the sum of all expenditures.
C) the sum of all autonomous expenditures.
D) the sum of all induced expenditures.
Use the following to answer question 20:
Real income
in thousands of dollars
7
6
5
4
3
2
1
0
AE Curve
1
2
3
4
5
6
7
Real output
in thousands of dollars
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20.
A)
B)
C)
D)
Refer to the graph above. The mpc equals
0.5.
0.9.
1.
2.
Use the following to answer question 21:
AP
Real expenditures
AE0
AE1
Real income
21.
A)
B)
C)
D)
Refer to the graph above. A shift in the AE curve from AE0 to AE1 could be due to
a decrease in government spending.
an increase in autonomous expenditures.
an increase in government spending.
a decrease in taxes.
22.
A)
B)
C)
D)
The multiplier is greater than 1 because
the marginal propensity to consume less than 1.
the marginal propensity to consume greater than 1.
the marginal propensity to save is 1.
the marginal propensity to consume is 1.
23. In the aggregate expenditure model if autonomous exports fall by 40 and government spending
increases by 20, and the mpc is .5, what happens to the income?
A) Income rises by 120.
B) Income falls by 120.
C) Income rises by 40.
D) Income falls by 40.
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24. In the aggregate expenditure model if autonomous consumption increases by 100 and the AE
curve is upward sloping, income
A) will rise by 100.
B) will rise by more than 100.
C) will fall by 100.
D) may rise or fall. We cannot tell without more information.
25.
A)
B)
C)
D)
Keynesian economists think that
government policies do not affect economic activity.
government can implement policy proposals that can positively impact the economy.
most government policies would probably make things worse.
the economy ought to be left to market forces.
26.
A)
B)
C)
D)
If AE = 300 + .75Y, what is the equilibrium level of real income?
$ 800.
$1,000.
$1,200.
$1,400.
27.
A)
B)
C)
D)
In the short-run, an increase in saving might
raise aggregate demand by increasing investment.
raise aggregate demand by increasing consumption.
reduce aggregate demand by reducing investment.
reduce aggregate demand by reducing consumption.
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Use the following to answer question 28:
28.
A)
B)
C)
D)
Refer to the graph above. If autonomous expenditures rose by 50 equilibrium income would be
250.
400.
1,200.
1,500.
29. Which of the following would be expected to cause an upward shift in the aggregate expenditure
curve?
A) Reduced business expectations.
B) An increase in the interest rate.
C) An increase in consumer wealth.
D) An increase in income.
30.
A)
B)
C)
D)
Given AE = $1000 + 0.8Y, when income equals $6000, induced expenditures will be
$ 500.
$1,000.
$4,800.
$5,800.
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31.
A)
B)
C)
D)
If saving increases at a particular income level, it follows that
consumption and total expenditures must decrease.
consumption must decrease but total expenditure need not.
total expenditure must decrease but consumption need not.
neither consumption nor total expenditure need decrease.
32.
A)
B)
C)
D)
In the circular flow model, a shortage arises when
investment and other spending injections exceed saving and other spending withdrawals.
saving and other spending withdrawals exceed investment and other spending injections.
saving increases relative to investment.
imports increase relative to exports.
Use the following to answer question 33:
33. Refer to the graph above. If autonomous expenditures were to change to $300, equilibrium real
income would be
A) greater than $600.
B) $600.
C) less than $600.
D) indeterminate.
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34.
A)
B)
C)
D)
Graphically, equilibrium in the aggregate expenditure model occurs where
the aggregate production curve crosses the 45° line.
the expenditures function crosses the aggregate production curve.
the aggregate supply curve crosses the expenditures function.
the aggregate demand curve crosses the aggregate production curve.
35. In 1984, the personal savings rate rose more than 40%. If the additional savings were not
translated into investment, Keynes would predict that aggregate income would
A) decline and remain there.
B) rise indefinitely.
C) decline, but rise in the future.
D) would rise and remain there.
36.
A)
B)
C)
D)
An increase in autonomous expenditures will
have a greater effect on real income when the price level is flexible.
have less effect on real income when the price level is fixed.
decrease the price level when prices are flexible.
have a greater effect on real income when the price level is fixed.
37. 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.
38.
A)
B)
C)
D)
In the aggregate expenditure model, if the mpc is 0.2, then the multiplier is
1.25.
2.
5.
20.
Use the following to answer question 39:
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Income
$
0
1,000
2,000
3,000
4,000
5,000
39.
A)
B)
C)
D)
Expenditures
$1,000
1,800
2,600
3,400
4,200
5,000
In the table above, if income rises from $1,000 to $2,000, autonomous expenditures
remain equal to $1,000.
remain equal to 0.
rise by $800.
rise to $1,000.
Use the following to answer question 40:
Real income
in thousands of dollars
DC
3
2.5
2
B
1.5
A
1
0.5
0
.5
1
1.5 2
2.5 3
Real output
in thousands of dollars
40. Refer to the graph above. The graphical representation of the equation AE = 500 + (1/3)Y is
shown by which curve?
A) A.
B) B.
C) C.
D) D.
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41.
A)
B)
C)
D)
The level of income where the expenditures function intersects the 45-degree line is
the point of zero inventories.
the point at which there are no changes in inventories.
the point at which inventories are rising.
the point at which inventories are falling.
Use the following to answer question 42:
Income
$
0
1,000
1,500
2,000
2,500
42.
A)
B)
C)
D)
Expenditures
$ 500
1,167
1,500
1,833
2,167
Given the table above, what is the level of induced expenditures if income is $2,000?
$500
$833
$1,333
$1,833
43. If the price level is partially flexible and autonomous expenditures increase, the aggregate
expenditure model will predict
A) a larger increase in output than in the case when the price level was fixed.
B) the same increase in output as in the case when the price level was fixed.
C) a smaller increase in output than when the price level was fixed.
D) no change in output.
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Use the following to answer question 44:
44.
A)
B)
C)
D)
Refer to the graph above. If the mpc were to change to 1/3, equilibrium real income would be
greater than $600.
$600.
less than $600.
indeterminate.
Use the following to answer question 45:
Income
$
0
1,000
1,500
2,000
2,500
45.
A)
B)
C)
D)
Expenditures
$ 500
1,167
1,500
1,833
2,167
In the table above, if income rises from $2,000 to $2,500, induced expenditures
remain equal to $500.
remain equal to $1,833.
rise by $334.
rise to $2,167.
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46. 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.
47.
A)
B)
C)
D)
The Classical economists argued that
a market economy will not experience unemployment.
if unemployment occurs it will cure itself because wages and prices will fall.
aggregate expenditures may be too low.
if inflation occurs it will cure itself because prices, wages, and interest rates will rise.
Use the following to answer question 48:
48.
A)
B)
C)
D)
Refer to the graph above. Planned expenditures exceed production at
income levels above $1,200.
income levels below $1,200.
income level of $1,200.
no income level since planned expenditures equals production.
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49. If real wealth increases because the stock market is booming, we might expect the expenditures
function to
A) become steeper.
B) become flatter.
C) shift up.
D) shift down.
50.
A)
B)
C)
D)
The paradox of thrift occurs when
an increase in saving raises output.
an increase in saving reduces output.
a decrease in saving raises output.
a decrease in saving reduces output.
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Answer Key
1. C
Response:
See the definition of induced expenditures in the text.
2. C
Response:
The change in income equals the multiplier (1/(1-mpc)) times the change in autonomous
expenditures.
3. B
Response:
See the multiplier equation in the text.
4. C
Response:
See the definition of the expenditures function in the text.
5. C
Response:
The increase in income equals the multiplier times the change in autonomous expenditures (4 ×
50).
6. D
Response:
The appreciation decreased Japan's net exports, shifting the AE curve down.
7. C
Response:
According to the expenditures function, AE = AE0 + mpc Y = $500 + (1/3) × $750 = 500+250.
8. B
Response:
Autonomous expenditures are those expenditures that occur when income is zero.
9. B
Response:
Autonomous expenditures are expenditures that occur when income is zero.
10. D
Response:
Keynes believed that if producers expected low demand, they would decrease supply, which
would lower income and aggregate demand, creating a multiplier effect.
11. B
Response:
The aggregate expenditure model assumes the price level is fixed and explains what happens to
output when aggregate expenditures change.
12. B
Response:
The marginal propensity to consume is the fraction of additional income that is consumed. It
can be calculated by dividing the change in consumption expenditures by the change income.
13. D
Response:
Using the multiplier equation, we know that equilibrium income is 2,500 when the mpc = 0.6
and 5000 when the mpc = 0.8.
14. D
Response:
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15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
Classical and Keynesian economists agree that such a distinction exists but disagree about the
implications of this distinction.
C
Response:
Since a major technological advance increases one type of autonomous expenditures
(investment), it shifts the AE curve up.
C
Response:
An increase in the mpc raises the multiplier because it means that more of a given increase in
income is spent. This implies a larger change in output and income for a given change in
autonomous expenditures, which in turn leads to a higher level of induced expenditures and a
greater increase in output.
C
Response:
Plugging in the values in the multiplier formula 1 / ([1-(1-t)(mpc-mpi)], the multiplier is 10.
D
Response:
The multiplier is 2 so the answer is 2 times -40.
C
Response:
The multiplier equation states that equilibrium income equals the multiplier times autonomous
expenditures.
A
Response:
The slope (rise over run) of the AE curve is the mpc. Here that is 1,000/2,000 = 0.5.
A
Response:
Since the AE curve shifted down, autonomous expenditures must have declined. In this case,
only a decrease in net exports reduces autonomous expenditures.
A
Response:
The multiplier is greater than 1 because a rise in expenditures increases income which increases
expenditures, etc.
D
Response:
The multiplier is 2 so the answer is 2 times (-40 + 20) or minus 40.
B
Response:
In the aggregate expenditure model, as long as the mpc is greater than zero, a change in
autonomous expenditures will lead to a change in income that is a multiple of the change in
expenditures.
B
Response:
Keynesian economists advocate activist macroeconomic policies.
C
Response:
Using the multiplier equation, equilibrium real income may be solved for by multiplying
autonomous expenditures (300) by the multiplier (4).
D
Response:
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28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
Aggregate demand will fall if the increase in saving reduces consumption more than it increases
investment.
D
Response:
Solving graphically, draw a curve parallel to the given AE curve but shifted up by 50.
Equilibrium is where the AP and AE curves intersect. To be sure of your answer find the
equation that represents the new AE curve (E= (5/6)Y + 250). Equilibrium is multiplier × 250 =
1500.
C
Response:
Anything that increase a component of autonomous expenditures would shift the AE curve up.
C
Response:
Induced expenditures equal 80 percent of $6000, or $4800.
B
Response:
If people are saving more of a given amount of income, consumption must decline. Total
expenditure need not decline, however, if the increase in saving is channelled into investment.
A
Response:
If spending injections exceed spending withdrawals, the level of spending will be too high and a
shortage will arise.
A
Response:
The AE curve would shift up and its slope would remain the same. This leads to a higher level
of equilibrium real income.
B
Response:
Equilibrium occurs when production equals expenditure, or where the AE and AP curves
intersect.
A
Response:
Keynes believed that if increased savings did not get translated into an equal amount of
investment, a downward spiral would begin resulting in lower equilibrium income.
D
Response:
See discussion in textbook.
B
Response:
If the mps rises, induced expenditures will fall, causing output to contract.
A
Response:
The multiplier is 1/ (1- 0.2) or 1.25.
A
Response:
Autonomous expenditures do not vary with income so they must equal $500 since this is the
level of expenditures when income is zero.
B
Response:
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41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
The Y-intercept is AE0 (500) and the slope of the AE curve is the mpc (1/3).
B
Response:
The intersection of the AE and AP curve determines the equilibrium level of GDP. It is where
planned expenditures equals production and inventories are constant.
C
Response:
Induced expenditures equal the difference between aggregate expenditures ($1833) and
autonomous expenditures ($500)
C
Response:
Any increase in autonomous expenditures in this case will push up the price level, which will
blunt the multiplier effect by producing a drop in real wealth and net exports as well as an
increase in interest rates.
C
Response:
The AE curve would be flatter and the Y-intercept would remain at $200. The intersection of
AE and AP would occur below $600.
C
Response:
As income increases from $2,000 to $2,500, expenditures rise from $1,833 to $2,167, or by
$334. This increase is the change in induced expenditures.
B
Response:
Income would decline by 400 × 1/ (1- 0.6) = 1000.
B
Response:
Classical economists believe that in the short-run, a market economy can experience
unemployment, but only until wages adjust.
B
Response:
Planned expenditures exceed production where the AE curve is above the AP curve. This
occurs at income levels below $1,200.
C
Response:
A higher level of real wealth should lead to a higher level of autonomous consumption and
hence a higher level of aggregate expenditure at each income level.
B
Response:
See the definition in the text.
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