Macro Chapter 11 Practice Questions

The expenditure multiplier is used to calculate the change in
equilibrium income resulting from an independent change in spending.

Which of the following is a major insight of the Keynesian model?
Fluctuations in aggregate demand are an important potential source of business instability.

If the MPC is 3/4, the simple expenditure multiplier is
4.00.

If consumption equals 800 when disposable income is 1,000, and then consumption increases to 1,000 when disposable income increases to 1,300, the marginal propensity to consume is
2/3.

“If there is unemployment, the average wage rate will decline as the unemployed workers choose lower wages rather than going without a job. The demand curve for labor slopes downward and to the right so that more workers would be hired at the lower wage rate, restoring full employment.” According to the Keynesian view, this quote is
incorrect because wages and prices tend to be highly inflexible downward.

If the federal government runs a budget deficit in order to finance an increase in spending, where do the funds to finance the spending come from?
additional bonds issued by the U.S. Treasury

When the federal government is running a budget surplus,
government revenues exceed government expenditures.

If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
be timed correctly.

Automatic stabilizers are government programs that tend to
reduce the ups and downs in aggregate demand without legislative action.

When the economy enters a recession, automatic stabilizers create
larger budget deficits.

In the Keynesian model, the primary determinant of consumer spending is
disposable income.

Which of the following is most likely to lead to an increase in current consumption?
an increase in one’s expected future income

If the economy is operating at a point where the aggregate expenditure line lies below the 45-degree line (AE = GDP),
b. unwanted business inventories will increase.
c. businesses will reduce their future production.

Keynesian analysis suggests that if planned spending (aggregate demand) were $700 billion but GDP was $800 billion,
businesses would accumulate inventories, and output would fall.

In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
actual output equals planned aggregate expenditures.

Keynesian countercyclical budget policy suggests that
a budget deficit is needed if the economy is operating at less than full employment.

According to Keynesian theory, which of the following would most likely stimulate an expansion in real output if the economy were in a recession?
a budget deficit

The Keynesian macroeconomic model was highly popular for several decades following World War II because it provided an explanation for
the prolonged unemployment of the 1930s.

John Maynard Keynes and his followers argued that the Great Depression was primarily the result of
insufficient aggregate spending on goods and services.

If output is less than full employment in the Keynesian model, what is needed to restore full employment?
an increase in aggregate demand

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
an increase in government expenditures or reduction in taxes, financed by borrowing

In the Keynesian model, equilibrium occurs when
total spending is equal to current output.

Which of the following would a Keynesian economist be most likely to stress?
Businesses will not produce goods and services if they do not think people will buy them.

The expenditure multiplier indicates that
changes in investment, government, or consumption spending can trigger much larger changes in output.

The Great Depression provided support for Keynes’ view that
prolonged periods of unemployment would be present when demand is deficient.

The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $50 billion, real GDP
will increase by more than $50 billion if the economy was initially operating well below capacity.

Rather than seeking to balance the budget, Keynesian economists argue that the government’s tax and spending policies should be determined by the
level of aggregate demand required to achieve full employment of resources.

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend
a reduction in taxes, without any offsetting reduction in government expenditures.

Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?
It is difficult to properly time discretionary changes in fiscal policy.

Within the Keynesian model, if the output of an economy is less than the full-employment level, then
output will tend to remain below full-employment capacity unless fiscal policy is used to increase aggregate demand.

When an economy dips into recession, automatic stabilizers will tend to
enlarge the budget deficit (or reduce the surplus).

A major advantage of built-in or automatic stabilizers is that they
require no Congressional action to be effective.

Stagflation is a combination of: increasing unemployment and increasing inflation. The 1979-1982 recession looked different from the slump at the beginning of the Great Depression because it was: largely caused by events in the Middle East that led to sudden …

Aggregate Expenditures GDP= AE= C + I + G + (X-M) Consumer spending, business investment spending, government spending, & net foreign spending (exports – imports) Some Simplifying Assumptions 1. Simple model of private economy that includes only consumers & businesses …

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