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Chapter 10—Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy MULTIPLE CHOICE 1. According to Keynes, what households plan to save a. always equals what firms plan to invest. b. sometimes equals what firms plan to invest. c. is always greater than what firms plan to invest. d. is always less than what firms plan to invest.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 2. If households purchase $60,000 worth of consumer goods and firms produce $50,000 worth of consumer goods, then a. inventory changes are -$10,000. b. inventory changes are +$10,000. c. new capital goods expenditures (by firms) are $10,000. d. consumer goods expenditures are $10,000.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 3. If total production is greater than total expenditures, a. there will be an increase in saving. b. there will be an increase in inventories. c. firms will then increase production. d. firms will then increase prices.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 4. When total production is greater than total expenditures, __________ is produced than households want to buy, which leads to __________ in inventory, which signals firms that they have __________, which causes firms to cut back production. a. less; decreases; underproduced b. less; increases; overproduced c. more; decreases; underproduced d. more; increases; overproduced ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 5. If people buy more than has been produced, a. the economy is in equilibrium. b. total expenditures are greater than total production. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

c. there will be an increase in inventory. d. there will be a decrease in total output.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 6. When the economy is in equilibrium, a. there are increases in inventory. b. there are decreases in inventory. c. total expenditures equal total production. d. people want to buy more than will be produced.

ANS: C PTS: 1 NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension

DIF: Difficulty: Easy LOC: DISC: Equilibrium

7. When there is economy-wide equilibrium, there is a tendency for a. total output to rise. b. total output to fall. c. total output to remain unchanged. d. prices to fall. e. prices to rise.

ANS: C PTS: 1 NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension

DIF: Difficulty: Easy LOC: DISC: Equilibrium

8. When total expenditures are greater than total production, __________ is produced than households want to buy, which leads to __________ in inventory, which signals firms that they have __________, which causes firms to increase production. a. less; decreases; underproduced b. more; increases; underproduced c. less; increases; underproduced d. more; decreases; overproduced ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 9. If total production is less than total expenditures, then business firms a. have overproduced. b. will cut back on production. c. will raise production. d. will experience increases in inventory. e. a and d ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 10. If total production is greater than total expenditures, then business firms a. have underproduced. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. c. d. e.

will step up production. will lower production. will experience decreases in inventory. a and b

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 11. The two major curves or lines in the TE-TP diagram are: a. the total expenditure curve and the 45-degree line. b. the supply and demand curves. c. the total expenditures and national income curves. d. the total production and national income curves.

ANS: A PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge Exhibit 10-1

12. Refer to Exhibit 10-1. At all points on the 45-degree line, a. TP = Real GDP. b. TP > Real GDP. c. TP < Real GDP. d. all of the above are possible.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 13. Refer to Exhibit 10-1. Equilibrium Real GDP occurs at a. Q1. b. Q2. c. Q3. d. Q1 and Q3. e. none of the above ANS: B

PTS: 1

DIF: Difficulty: Easy

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NAT: BUSPROG: Analytic KEY: Bloom's: Comprehension

LOC: DISC: Equilibrium

14. Refer to Exhibit 10-1. At Q3, a. TE > TP, and there are decreases in inventory. b. TE = TP, and there are no changes in inventory. c. TP > TE, and there are increases in inventory. d. TE > TP, and there are increases in inventory.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 15. Refer to Exhibit 10-1. At Q1, a. TE > TP, and there are decreases in inventory. b. TP > TE, and there are increases in inventory. c. TE = TP, and there are no changes in inventory. d. TE > TP, and there are increases in inventory.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 16. Refer to Exhibit 10-1. At Q3, there is a tendency for Real GDP to a. rise. b. fall. c. remain unchanged. d. There is not enough information to answer this question.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 17. Refer to Exhibit 10-1. At Q2, there is a tendency for Real GDP to a. rise. b. fall. c. remain unchanged. d. There is not enough information to answer this question.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 18. Refer to Exhibit 10-1. At Q1, there is a tendency for Real GDP to a. rise. b. fall. c. remain unchanged. d. There is not enough information to answer this question.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

19. Consumption and disposable income are a. indirectly related. b. directly related. c. not related. d. sometimes directly and sometimes indirectly related, depending upon whether consumption is planned or unplanned.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 20. The classical economists believed __________ determined savings, while Keynes said it was __________. a. interest rates; income b. income; investment c. investment; interest rates d. interest rates; investment ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 21. The horizontal investment curve used to derive the TE curve means investment is a. directly related to Real GDP. b. indirectly related to Real GDP. c. independent of Real GDP. d. sometimes directly and sometimes indirectly related to Real GDP, depending upon whether it is planned capital or planned inventory investment.

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension Exhibit 10-2

22. Refer to Exhibit 10-2. Equilibrium Real GDP occurs at a. $3,000 billion. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. c. d. e.

$1,500 billion. $7,500 billion. $4,000 billion. $4,500 billion.

ANS: E PTS: 1 NAT: BUSPROG: Analytic KEY: Bloom's: Application

DIF: Difficulty: Easy LOC: DISC: Equilibrium

23. Refer to Exhibit 10-2. At M, a. TP = TE. b. TP > TE. c. TE > TP. d. the relationship between TP and TE cannot be determined.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 24. Refer to Exhibit 10-2. Which of the following is correct about point M? a. TE is $4,500 billion and TP is only $1,500 billion. b. TP is $4,500 billion and TE is only $1,500 billion. c. TE is $7,500 and TP is only $5,500 billion. d. TP is only $7,500 billion and TE is only $5,500 billion. e. TE is $3,000 billion and TP is only $1,500 billion.

ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 25. Refer to Exhibit 10-2. If autonomous consumption increases, the TE curve will shift ____________ and the new level of equilibrium Real GDP will be ___________ than $4,500. a. downward; greater b. downward; less c. upward; less d. upward; greater ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 26. Refer to Exhibit 10-2. If autonomous investment decreases, the TE curve will shift ____________ and the new level of equilibrium Real GDP will be ___________ than $4,500. a. downward; greater b. downward; less c. upward; less d. upward; greater ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

27. Total production a. always equals total expenditures. b. equals total expenditures in equilibrium. c. is always greater than total expenditures. d. is always less than total expenditures.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 28. When total production is greater than total expenditures, a. the economy is in disequilibrium. b. there are increases in inventory. c. total output will decrease. d. all of the above ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 29. John Maynard Keynes drew many economists ______________ the classical view. The classical view held that a market economy __________ regulate itself to avoid periods of excessive unemployment. a. toward; can b. toward; cannot c. away from; can d. away from; cannot ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 30. In a recessionary gap, the implications of downward wage inflexibility are that there will be a. further leftward shifts of AD that worsen unemployment. b. no further leftward shifts of AD, allowing the shifts in SRAS to close the gap. c. no further leftward shifts of SRAS, allowing the shifts in AD to close the gap. d. no rightward shifts of SRAS, allowing for persistent high unemployment.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 31. The efficiency wage model is an explanation of wage __________ and thus a support for __________ macroeconomics. a. flexibility; Keynesian b. flexibility; classical c. inflexibility; Keynesian d. inflexibility; classical ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

32. According to the efficiency wage model, firms tend to pay workers a. the market-clearing wage that efficiently equates labor supplied and demanded. b. in excess of the market-clearing wage to provide an incentive for productivity and efficiency. c. less than the market-clearing wage to assure themselves a pool of workers ready to replace workers who quit. d. less than the market-clearing wage to minimize labor cost per unit of production.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 33. The efficiency wage model contains the assumption that labor productivity __________ the wage rate, so that a firm maximizing its profits __________ pay workers an above-market wage rate. a. is independent of; may b. is independent of; will never c. depends on; may d. depends on; will never ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 34. Two economists, Smith and Jones, are discussing the currently high unemployment rate. Smith says that something ought to be done quickly because the economy may not be able to restore itself to full employment. Jones says that it is better to take a "hands-off" approach. Which of the following is most likely to be true? a. Smith and Jones are most likely both Keynesian economists with a few minor differences of opinion. b. Smith and Jones are most likely both classical economists with a few minor differences of opinion. c. Jones is likely to be a Keynesian economist and Smith is likely to be a classical economist. d. Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist. e. none of the above.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 35. Keynesian macroeconomists believe that the time it takes for falling wages and prices to eliminate a recessionary gap is __________ enough to say that the economy is __________. a. long; not self-regulating b. long; self-regulating c. short; not self-regulating d. short; self-regulating ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 36. Keynes’s major work, The General Theory of Employment, Interest and Money, was published during the a. late 1800s. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. mid-1700s. c. 1930s. d. Panic of 1907.

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge NOT: New 37. Who would be most likely to agree that "People do not always save more as interest rates rise"? a. a classical economist b. John Maynard Keynes c. an efficiency wage theorist d. a and b e. a, b, and c ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 38. Autonomous consumption is a. the change in consumption that results as a person's (or nation's) income increases or decreases. b. that portion of total consumption that is dependent upon the level of income. c. the steady increase in the consumption of goods and services that automatically occurs as a person grows from a child to an adult. d. that portion of total consumption that is independent of the level of income.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 39. Keynes believed that saving is a. more responsive to changes in income than to changes in interest rates. b. less responsive to changes in income than to changes in interest rates. c. equally responsive to changes in income and to changes in interest rates. d. dependent only on changes in interest rates.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 40. Keynes believed that investment is a. dependent on a number of factors, including business expectations. b. mainly determined by changes in interest rates. c. unrelated to business expectations. d. related to business expectations only during recessionary periods.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 41. Keynes believed that © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

a. b. c. d.

Say's law would hold in a laissez-faire economy. the economy would always be near or on its production possibilities frontier. wages and prices are often inflexible in the downward direction. the equilibrium level of output will always be at the full-employment level of output.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 42. Which of the following statements is false? a. Keynes believed that monopolistic elements in the economy will prevent immediate price declines. b. Keynes believed that during periods of high unemployment, labor unions will prevent wages from falling fast enough to restore full employment. c. Keynes believed that interest rate flexibility will ensure that saving is equal to investment. d. Keynes did not believe in Say's law.

ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 43. Keynes believed that a. the internal structure of the economy is extremely competitive and that wage-price flexibility exists. b. monopolistic elements in the economy prevent immediate and sharp price declines in response to falling demand. c. even though there are monopolistic elements in the economy, wage-price flexibility exists. d. in spite of the competitiveness of the economy, wage-price flexibility does not exist.

ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 44. Which statement is consistent with what Keynes believed about consumption and disposable income? a. Consumption depends upon disposable income and falls as disposable income rises. b. Consumption rises by the same amount as disposable income rises. c. Consumption rises by less than disposable income rises. d. Disposable income depends upon consumption.

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 45. If income rises from $1,000 to $1,400 and consumption rises from $800 to $1,168, the marginal propensity to consume is __________ percent. a. 8 b. 85 c. 15 d. 92 ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NOT: New 46. The consumption function is a function showing the relationship between consumption and a. disposable income. b. exports. c. interest rates. d. investment.

ANS: A PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 47. According to the Keynesian consumption function, an increase in disposable income will result in a. a decrease in consumption. b. an increase in consumption. c. a decrease in investment. d. an increase in investment.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 48. The ratio of the change in consumption to the change in income is called the a. marginal utility of consumption. b. average utility of consumption. c. marginal propensity to consume. d. average propensity to consume.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 49. The marginal propensity to consume plus the marginal propensity to save is a. equal to zero. b. greater than zero but less than one. c. equal to one. d. greater than one.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 50. If income rises from $1,000 to $1,400 and consumption rises from $1,100 to $1,440, the marginal propensity to save (MPS) is a. 0.15. b. 0.85. c. 0.25. d. 0.20.

ANS: A PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

51. Here is a consumption function: C = C0 + MPC(Yd). The C0 term is usually defined as a. autonomous consumption. b. point-zero consumption. c. mandatory consumption. d. propensitory consumption. e. none of the above ANS: A PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 52. Here is a consumption function: C = C0 + MPC(Yd). If MPC is 0.80, then we know that a. as Yd rises by $1, Co rises by $0.80. b. as Yd rises by $1, C rises by $0.80. c. Yd rises by $0.80. d. as C0 rises by $0.80, Yd rises by $1.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 53. Here is a consumption function: C = C0 + MPC(Yd). If C0 = $200, then we know that a. if Yd is zero, C will be $200. b. when Yd rises, C rises by $200. c. when Yd falls, C falls by MPC times C0. d. C will always equal C0.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 54. If autonomous consumption rises by $20 and, as a result, Real GDP rises by $200, then the multiplier is a. 4. b. 5. c. 6. d. 10. e. none of the above ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 55. If autonomous consumption rises by $60 and, as a result, Real GDP rises by $240, then the marginal propensity to consume is a. 0.25. b. 0.75. c. 0.05. d. 0.95. e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic

DIF: Difficulty: Challenging

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LOC: DISC: Understanding and applying economic models NOT: New

KEY: Bloom's: Application

56. The larger the marginal propensity to save, a. the smaller the multiplier. b. the larger the multiplier. c. the smaller the change in Real GDP, given a change in autonomous consumption. d. a and c e. none of the above ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 57. The total expenditure (TE) curve has the same slope as the __________ curve. a. C (consumption) b. I (investment) c. G (government purchases) d. NE (net exports) ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 58. On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line exceeds the vertical distance to the 45-degree line. This Real GDP is __________ its equilibrium level, with __________. a. above; TE > TP b. above; TE < TP c. below; TE > TP d. below; TE < TP ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 59. On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line is less than the vertical distance to the 45-degree line. This Real GDP is __________ its equilibrium level, with __________. a. above; TE > TP b. above; TE < TP c. below; TE > TP d. below; TE < TP ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 60. Suppose the MPC = 0.60 and government purchases increase by $40 billion. In Keynesian theory, which of the following is true? a. The TE curve shifts downward by $40 billion and Real GDP decreases by $40 billion. b. The TE curve shifts upward by $40 billion, and Real GDP increases by $40 billion. c. The TE curve shifts downward by $40 billion, and Real GDP decreases by $100 billion. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

d. The TE curve shifts upward by $40 billion, and Real GDP increases by $100 billion.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 61. Considering both the Keynesian and the aggregate demand-supply frameworks, if households as a group experience an increase in wealth at a given price level, then the TE curve shifts __________, the AD curve shifts __________, and Real GDP __________. a. downward; leftward; decreases b. downward; rightward; decreases c. upward; rightward; increases d. upward; leftward; increases ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 62. When the MPC = 0.9, the multiplier is a. 0.20. b. 1.25. c. 2.50. d. 5.00. e. 10.00.

ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 63. When the MPC = 0.80, the multiplier is a. 5.00. b. 0.25. c. 4.00. d. 7.50.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 64. When the MPC = 0.6, the multiplier is a. 0.40. b. 2.50. c. 1.67. d. 6.00.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 65. How is the multiplier expressed in terms of the MPS? a. 1 - MPS b. 1/MPS c. 1/(1 - MPS) © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

d. 1/(1 + MPS) ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 66. A rise in MPC makes the total expenditures (TE) curve __________ and __________ the multiplier. a. steeper; raises b. steeper; lowers c. flatter; raises d. flatter; lowers ANS: A PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 67. Keynes argued that a. monopolistic elements in the economy will prevent an immediate sharp fall in prices as a result of decreasing demand. b. wages and prices are not flexible in a downward direction. c. a and b d. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 68. Keynes assumed consumption is a. inversely related to the rate of interest. b. directly related to disposable income. c. directly related to investment. d. less than disposable income. e. both b and d ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension Exhibit 10-3 Disposable Income Yd

Consumption C

$2,000

$2,040

2,100

2,120

2,200

2,200

2,300

2,280

2,400

2,360

69. Refer to Exhibit 10-3. When disposable income equals $2,000, saving equals © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

a. b. c. d. e.

-$20.

-$40.

0. $40. $20.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 70. Refer to Exhibit 10-3. When disposable income equals $2,300, saving equals a. -$20. b. -$10. c. 0. d. $10. e. $20.

ANS: E PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 71.

Refer to Exhibit 10-3. The marginal propensity to consume (MPC) is a. 0.75. b. 0.80. c. 0.90. d. 1.00. e. none of the above ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 72. Refer to Exhibit 10-3. The marginal propensity to save (MPS) is a. 0. b. 0.10. c. 0.20. d. 0.25. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 73. Refer to Exhibit 10-3. The multiplier is a. 4. b. 5. c. 10. d. 1. e. none of the above ANS: B PTS: 1 NAT: BUSPROG: Analytic

DIF: Difficulty: Moderate

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LOC: DISC: Understanding and applying economic models

KEY: Bloom's: Application

74. Which of the following is not an aspect of Keynesian economics? a. Wages and prices tend to be inflexible downward. b. Supply does not necessarily generate its own demand. c. The interest rate is important in determining the level of investment, but not as important as other variables. d. Unemployment above natural unemployment is always a temporary phenomenon.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 75. If the multiplier is 5, then the MPC must be a. 1/5. b. 1/6. c. 3/4. d. 4/5. e. 2/3.

ANS: D PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 76. If an economy consumes 75 percent of any increase in income, then an increase in autonomous investment of $1 billion could result in an increase in Real GDP of as much as a. $1.0 billion.. b. $4.0 billion. c. $5.0 billion. d. $1.8 billion. e. $6.0 billion.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 77. If we graph the consumption function such that it starts above the origin, this is because we are assuming that a. the MPC is positive. b. the MPS is positive. c. autonomous consumption is positive. d. induced consumption is positive.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application Exhibit 10-4

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

78. Refer to Exhibit 10-4. If the present level of disposable income is Yd1, autonomous consumption is equal to a. C0. b. C1. c. C2. d. C1 - C0. e. C2 - C1.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 79. Refer to Exhibit 10-4. Marginal propensity to consume is equal to a. AF divided by C0A. b. C0A divided by AF. c. AF divided by C0F. d. C0F divided by AF. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 80. Refer to Exhibit 10-4. Let Yd1 denote the present level of disposable income. An increase in disposable income is likely to, ceteris paribus, cause a movement to point a. A. b. B. c. F. d. D. e. E. ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application Exhibit 10-5 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

81. Refer to Exhibit 10-5 above. The equilibrium level of Real GDP is a. $200 billion. b. $400 billion. c. $600 billion. d. $800 billion.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 82. Refer to Exhibit 10-5 When TE is $700 billion, what state is the economy in? a. TE < TP, individuals are buying less output than firms produce. b. TE > TP, individuals are buying more output than firms produce. c. TE = TP, the economy is in equilibrium. d. TE < TP, individuals are buying more output than firms produce. e. TE > TP, individuals are buying less output than firms produce.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 83. Refer to Exhibit 10-5 When TE is $200 billion, what state is the economy in? a. TE < TP, individuals are buying less output than firms produce. b. TE > TP, individuals are buying more output than firms produce. c. TE = TP, the economy is in equilibrium. d. TE < TP, individuals are buying more output than firms produce. e. TE > TP, individuals are buying less output than firms produce.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 84. Refer to Exhibit 10-5. When TE is $700 billion, what will firms most likely do next? a. Firms will increase production to increase inventories to their optimum levels. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. Firms will neither increase nor decrease production since the economy is in equilibrium. c. Firms will cut back production to reduce inventories to their optimum levels. d. It is impossible to determine what firms are likely to do based on this information.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 85. Refer to Exhibit 10-5. When TE is $300 billion, what will firms most likely firms do next? a. Firms will increase production to increase inventories to their optimum levels. b. Firms will neither increase nor decrease production since the economy is in equilibrium. c. Firms will cut back production to reduce inventories to their optimum levels. d. It is impossible to determine what firms are likely to do based on this information.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 86. Refer to Exhibit 10-5. When TE is $300 billion, what happens to inventories? a. Inventories are at their optimum levels. b. Inventories will fall, then rise above their optimum levels. c. Inventories will fall below optimum levels. d. Inventories will rise above optimum levels.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 87. Refer to Exhibit 10-5. When TE is $800 billion, what happens to inventories? a. Inventories are at their optimum levels. b. Inventories will fall, then rise above their optimum levels. c. Inventories will fall below optimum levels. d. Inventories will rise above optimum levels.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 88. In the real world, we should expect the multiplier process to work itself out a. almost instantaneously. b. within a few days. c. within about one month. d. only over many months, perhaps even years.

ANS: D PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 89. The multiplier process following a drop in autonomous spending is a. just as powerful as for a rise in autonomous spending. b. more powerful than for a rise in autonomous spending. c. less powerful than for a rise in autonomous spending. d. nonexistent, because the multiplier applies only to a rise in autonomous spending. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 90. John Maynard Keynes believed that wages may be inflexible in the downward direction. Consequently, an economy a. could get stuck in long-run equilibrium. b. could get stuck in a recessionary gap. c. could get stuck in an inflationary gap. d. would always produce more than Natural Real GDP. e. b and c ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 91. The more firms that pay efficiency wages, the a. more likely the economy will get stuck in a recessionary gap. b. less likely the economy will get stuck in a recessionary gap. c. more likely the economy will get stuck in an inflationary gap. d. more likely (over time) the economy will produce Natural Real GDP. e. b and c ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 92. According to efficiency wage models, labor productivity depends on a. the number of employees at a firm; the smaller the number of employees, the more productive each employee is. b. the amount of capital that employees have to work with. c. the wage rate the firm pays its employees; a cut in wages can cause labor productivity to decline. d. whether or not the economy is currently producing Natural Real GDP. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 93. Which of the following statements is true? a. Keynes believed wages are inflexible downward but prices (of goods and services) are flexible. b. Keynes believed an economy could get stuck in a recessionary gap. c. Keynes originated the idea of efficiency wages. d. Keynes believed the economy is self-regulating. e. b and c ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

94. According to Keynes, aggregate demand could be too low in an economy. What does this mean? a. It means there is not enough purchasing power in the economy to maintain stable prices. b. It means there are too many of some goods produced and too few of other goods produced. c. It means spending in the economy is too low to bring about full employment. d. It means that wages may get stuck in a recessionary gap because there is not enough demand (in the economy) to increase them. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 95. For Say's law to hold in a money economy, a. funds invested must give rise to an equal amount of funds spent. b. funds saved must give rise to an equal amount of funds invested. c. funds spent must give rise to an equal amount of output produced. d. interest rates must fall when saving decreases. e. b and c ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 96. Which of the following is consistent with the classical view of Say's law? a. Saving increases by $2 billion and investment decreases by $2 billion. b. Saving increases by $2 billion and consumption rises by $2 billion. c. Saving increases by $2 billion, consumption decreases by $2 billion, and investment rises by something less than $2 billion. d. Saving decreases by $2 billion and consumption decreases by more than $2 billion. e. none of the above ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 97. Which of the following is consistent with Keynes's view of Say's law? a. Saving increases by $3 billion, consumption falls by $3 billion, and investment rises by $3 billion. b. Consumption rises by $3 billion and saving rises by more than $3 billion. c. Saving rises by $3 billion, consumption falls by $3 billion, and investment rises by something less than $3 billion. d. Saving rises by $3 billion, consumption falls by $3 billion, and investment rises by $6 billion. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 98. Which of the following is good evidence against the classical view of Say's law? a. Investment does not always rise as interest rates fall. b. Consumption falls by the amount that saving increases. c. Exports are usually greater than imports. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

d. People save more at higher interest rates than lower interest rates. e. none of the above ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 99. How does the classical position on saving differ from Keynes's position? a. Classical position: people save more at lower interest rates. Keynes's position: people save less at lower interest rates. b. Classical position: changes in the interest rate are irrelevant to saving decisions. Keynes's position: saving is directly related to the interest rate. c. Classical position: saving is directly related to the interest rate. Keynes's position: at times, saving may be inversely related to the interest rate. d. Classical position: saving can be inversely related to the interest rate. Keynes's position: consumption rises as saving rises. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 100. Which of the following statements is false? a. Keynes believed that the level of investment depends on more than just the interest rate. b. Saving is the difference between disposable income and consumption. c. Keynes believed that saving is more responsive to changes in income than to changes in the interest rate. d. According to Keynes, wage rates may fall too quickly when the economy is in a recessionary gap.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 101. If consumption is $1,230 when disposable income is $1,420, and consumption is $1,400 when disposable income is $1,620, then the marginal propensity to consume (MPC) is a. 1.15. b. 0.15. c. 6.67. d. 0.85.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 102. Here is a consumption function: C = C0 + MPC(Yd). Which of the following is true about the consumption function? a. Consumption will rise if autonomous consumption or disposable income rise. b. Consumption will fall if autonomous consumption falls or if the MPC rises. c. Consumption will rise if autonomous consumption rises, MPC declines, or disposable income rises. d. For every $1 rise in autonomous consumption, consumption will also rise by $1. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

e. a and d ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 103. Here is a consumption function: C = C0 + MPC(Yd). If consumption is $3,300, MPC =0.85, and disposable income is $2,100, what does autonomous consumption equal? a. $899.15 b. $450 c. $1,515 d. $4,785 e. none of the above ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 104. Which of the following statements is false? a. MPC plus MPS equals 1. b. MPC is additional saving divided by additional disposable income. c. The MPS is the ratio of the change in saving to the change in disposable income. d. If MPC equals 0.80, autonomous consumption equals $400, and disposable income equals $600, then consumption equals $880. e. none of the above ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 105. If total production (TP) is greater than total expenditures (TE), it follows that a. producers have produced more than individuals buy. b. optimum inventory levels rise. c. firms have underproduced. d. actual inventory levels unexpectedly rise. e. a and d ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 106. If total production (TP) is less than total expenditures (TE), it follows that a. optimum inventory levels fall. b. firms have underproduced. c. firms increase the quantity of goods they produce. d. b and c e. a, b, and c ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

107. Inventory levels unexpectedly rise and firms cutback on production. Which of the following is consistent with these two occurrences? a. TP is greater than TE. b. TP is less than TE. c. TP is equal to TE. d. TP is equal to TE minus the rise in inventories above the optimum inventory level. e. none of the above ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 108. Inventory levels unexpectedly fall and firms increase the quantity of goods and services they produce.

Which of the following is consistent with these two occurrences? a. TP is greater than TE. b. TP is less than TE. c. TE is equal to TP minus the rise in inventories above the optimum inventory level. d. TP is equal to TE. e. b and c ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 109. Which of the following statements is true? a. When TP = TE (total production = total expenditures), the economy is necessarily producing Natural Real GDP. b. When TP is greater than TE, inventory levels unexpectedly fall. c. When TE is greater than TP, inventory levels unexpectedly rise. d. b and c e. none of the above ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 110. Government purchases rise by $100 billion and the MPC is equal 0.75. Assuming that idle resources exist at each expenditure round, and the multiplier is operative, the change in Real GDP equals a. $40 billion. b. $75 billion. c. $400 billion. d. $750 billion. e. $250 billion.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 111. Which of the following is true? a. If MPC = 0.50, then the multiplier is 2.00. b. If MPC = 0.82, then the multiplier is 1.25. c. If MPS = 0.35, then the multiplier is 2.86. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

d. If MPC = 0.97, then the multiplier is 3.33. e. a and c ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 112. The economy is in equilibrium, TP = TE. Then, autonomous consumption rises. As a result, __________ rises, the __________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the quantity of goods and services they produce. a. consumption; TE; downward; fall; increase b. consumption; TE; upward; fall; increase c. consumption; TE; upward; rise; decrease d. investment; TE; upward; fall; increase e. investment; TP; leftward; fall; increase ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 113. The economy is in equilibrium, TP = TE. Then, net exports fall. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, and business firms __________ the quantity of good and services they produce. a. TE; upward; rise; increase b. TP; rightward; rise; decrease c. TE; downward; rise; decrease d. TE; downward; rise; increase e. none of the above ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 114. The economy is in equilibrium, TP = TE, and Real GDP is $4,555 billion. The MPC is 0.80, the multiplier is operative, and idle resources exist at each expenditure round. Government purchases rise by $10 billion. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, business firms ___________ the quantity of goods and services they produce, and Real GDP __________ by __________. a. TE; downward; fall; increase; rises; $10 billion. b. TP; rightward; fall; decrease; falls; $50 billion c. TE; upward; fall; increase; rises; $50 billion d. TE; downward; rise; increase; rises, $50 billion ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 115. The economy is in equilibrium, TP = TE, and Real GDP is $4,000 billion. The MPC is 0.70, the multiplier is operative, and idle resources exist at each expenditure round. Government purchases fall by $17 billion. As a result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________. a. downward; rise; decrease; falls; approximately $56.7 billion © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. c. d. e.

downward; fall; increase; falls; approximately $56.7 billion upward; rise; decrease; falls; $17 billion upward; fall; decrease; rises; $17 billion downward; rise; decrease; falls; approximately $11.9 billion

ANS: A PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 116. The economy is in equilibrium, TP = TE, and Real GDP is $4,000 billion. The MPC is 0.60, the multiplier is operative, and idle resources exist at each expenditure round. Autonomous investment spending rises by $13 billion. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________. a. TE, downward, rise, increase, rises, $32.5 billion b. TE, upward, fall, increase, rises, $101.5 billion c. TE, upward, fall, decrease, rises, $32.5 billion d. TE, upward, fall, increase, rises, $32.5 billion e. TP, upward, fall, increase, rises, $101.5 billion ANS: D PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 117. The answer is: "It is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates." What is the question? a. What do efficiency wage models imply? b. What do classical economists say? c. What is the central tenet of Say's law? d. What did John Maynard Keynes say was the reason for inflexible wages? e. none of the above ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 118. If consumption is greater than disposable income, it follows that a. interest rates are rising. b. the budget deficit is shrinking. c. saving is negative. d. the multiplier is inoperative. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 119. The change in disposable income is $200 and the change in saving is $50.What is the marginal propensity to consume (MPC)? a. 0.25 b. 0.50 c. 0.66 d. 0.75 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

e. There is not enough information to answer the question.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 120. Autonomous spending rises by $10 billion and Real GDP rises by $50 billion. What does the marginal propensity to save equal? a. 0.10 b. 0.20 c. 0.80 d. 0.90 e. 0.50 ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 121. There are no idle resources, the multiplier is operative, and autonomous spending rises. It follows that a. Real GDP will not increase. b. Real GDP will rise. c. prices will rise. d. a and c e. a, b, and c ANS: D PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 122. The answer is: 1/(1 - MPC). What is the question? a. What is the marginal propensity to save? b. What is the efficiency wage model? c. What does consumption equal if the economy is in equilibrium? d. What is the multiplier? e. What does disposable income equal if the economy is in equilibrium?

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 123. Which of the following statements would Keynes be most likely to agree with? a. Saving is more responsive to changes in interest rates than to changes in income. b. Say's law holds in both a barter and money economy. c. The internal structure of the economy is not always competitive enough to allow prices to fall. d. Investment is exclusively dependent upon the interest rate. e. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

124. The economy is in equilibrium, TP = TE, and Real GDP is $2,000 billion. The MPC is 0.75, the multiplier is operative, and idle resources exist at each expenditure round. Autonomous investment spending falls by $10 billion. As a result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________. a. downward; rise; decrease; falls; $7.5 billion b. downward; fall; increase; rises; $40 billion c. downward; rise; decrease; falls; $40 billion d. upward; rise; decrease; falls; $40 billion e. downward; fall; decrease; falls; $7.5 billion ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 125. The economy is in equilibrium, TP = TE, and Real GDP is $500 billion. The MPC is 0.95, the multiplier is operative, and idle resources exist at each expenditure round. Autonomous investment spending rises by $4 billion. As a result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________. a. upward; fall; increase; rises; $3.8 billion b. upward; fall; increase; rises; $8 billion c. downward; rise; decrease; falls; $80 billion d. upward; fall; increase; rises; $80 billion e. downward; fall; decrease; falls; $3.8 billion ANS: D PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 126. If autonomous consumption rises, the TE curve shifts __________, the marginal propensity to consume __________, and the TP curve __________. a. upward; rises; shifts downward b. upward; remains unchanged; remains unchanged c. downward; rises; remains unchanged d. upward; remains unchanged; shifts downward e. none of the above ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 127. In the Keynesian analysis of changes from one Real GDP level to another, which of the following plays a critical role? a. changes in prices b. the relationship between optimum inventory levels and current inventory levels c. the long-run aggregate supply (LRAS) curve d. the relationship between total expenditures (TE) and the aggregate demand (AD) curve e. none of the above ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

128. The Keynesian aggregate supply curve is a. vertical. b. upward sloping. c. horizontal until Natural Real GDP (QN) and vertical at QN. d. sometimes upward sloping and sometimes horizontal. e. downward sloping.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 129. In the simple Keynesian model, an increase in aggregate demand leads to an increase in a. Real GDP and the price level. b. the price level and no change in Real GDP for levels of Real GDP below Natural Real GDP. c. the price level and a decrease in Real GDP. d. Real GDP and no change in the price level for levels of Real GDP below Natural Real GDP. e. There is not enough information to answer the question.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 130. According to Keynes, the private sector (by itself) a. can always move the economy out of a recessionary gap. b. cannot always move the economy out of a recessionary gap. c. can never move the economy out of a recessionary gap. d. can only move the economy out of a recessionary gap if the SRAS curve drops. e. can only move the economy out of a recessionary gap if the SRAS curve rises.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 131. Given that the economy is operating in the horizontal section of the aggregate supply curve in the simple Keynesian model, an increase in autonomous spending will ____________________ (assuming that the economy remains in the horizontal section of the aggregate supply curve). a. increase Real GDP and raise the price level b. decrease Real GDP and raise the price level c. increase Real GDP and leave the price level unchanged d. increase Real GDP and lower the price level ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 132. Suppose the multiplier is 4. Ceteris paribus, a change in autonomous spending will change Real GDP more if the aggregate supply curve is __________ than if it is __________. a. horizontal; upward sloping b. upward sloping; horizontal c. upward sloping; downward sloping d. downward sloping; upward sloping e. There is not enough information to answer the question. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 133. John Maynard Keynes was a very famous economist from a. the United States. b. England. c. Germany. d. Ireland.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 134. The more nearly horizontal the aggregate supply curve, the a. greater the change in Real GDP for a given change in autonomous spending. b. smaller the change in Real GDP for a given change in autonomous spending. c. larger the multiplier. d. smaller the multiplier. e. a and c ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 135. In the simple Keynesian model, there are three simplifying assumptions. One of these assumptions is: a. no consumption b. no investment c. no exports or imports d. a and b e. a, b, and c ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 136. In the simple Keynesian model, there are three simplifying assumptions. Among these assumptions is: a. the price level is flexible b. no foreign sector c. the price level is constant until the economy reaches its full-employment level d. the money supply always rises e. b and c ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application Exhibit 10-6

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

137. Refer to Exhibit 10-6. Which of the following is consistent with the economy producing Q2? a. Total expenditures (TE) is less than total production (TP). b. Firms are currently holding their optimum inventory levels. c. Autonomous spending is greater than zero. d. Total expenditures (TE) are equal to total production (TP). e. none of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 138. Refer to Exhibit 10-6. If government purchases decrease, it follows that a. the TE curve will shift upward, possibly passing through point 2. b. the TE curve will shift downward, possibly passing through point 3. c. the TE curve will not change but the economy will move from point 1 to point 3. d. the TE curve will not change but the economy will move from point 1 to point 2. e. At the new equilibrium position, Real GDP will necessarily be Q3.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 139. Refer to Exhibit 10-6. If investment increases, it follows that a. the TE curve will shift upward, possibly passing through point 2. b. the TE curve will shift downward, possibly passing through point 3. c. the TE curve will not change but the economy will move from point 1 to point 3. d. the TE curve will not change but the economy will move from point 1 to point 2. e. At the new equilibrium position, Real GDP will necessarily be Q1.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

140. Refer to Exhibit 10-6. If total production (TP) is greater than total expenditures (TE), the economy is currently producing a level of Real GDP that is a. equal to or lower than Q3. b. equal to or greater than Q3. c. less than Q2. d. between Q2 and Q1. e. greater than Q3.

ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 141. John Maynard Keynes was the son of a. one of the first female students to attend Cambridge University. b. Russian ballerina Lydia Lopokova. c. the mayor of London. d. an eminent economist. e. a and d ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application MSC: Economics 24/7 142. If Keynes’s theory is correct, wage rates may be _______________ in a _____________ direction which means that the __________ curve will not shift to the __________ to remove the economy from a recessionary gap as it would in a self-regulating economy. a. inflexible; downward; AD; right b. flexible; upward; SRAS; right c. flexible; downward; AD; right d. inflexible; upward; SRAS; left e. inflexible; downward; SRAS; right ANS: E PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 143. Most economists think that the Keynesian position is that a. the wage rate will never fall and the price level will never adjust downward if the economy is in a recessionary gap. b. the time required before wages and prices adjust downward is short enough for the economy to be called self-regulating. c. the time required before wages and prices adjust downward is long enough for the economy to exist in a recessionary gap for a long time. d. the time required before wages and prices adjust downward if the economy is in a recessionary gap is rather long, but short enough for the economy to be considered self-regulating.

ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 144. Which of the following is a characteristic of consumption according to Keynes? © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

a. b. c. d. e.

consumption depends on disposable income consumption and disposable income have a direct relationship when disposable income changes, consumption changes by less a and c a, b, and c

ANS: E PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application

Exhibit 10-7

Price Level

AS

AD 2 AD 1

AD 4 AD 3

Q

Real GDP

145. Refer to Exhibit 10-7. If autonomous consumption increases, which of the following is possible? a. The AD curve will shift rightward from AD1 to AD2, the price level will remain constant, and Real GDP will rise. b. The AD curve will shift leftward from AD4 to AD3, the price level will fall, and Real GDP will remain constant. c. The AD curve will shift rightward from AD3 to AD4, the price level will remain constant, and Real GDP will rise. d. The AD curve will shift rightward from AD1 to AD2, the price level will rise, and Real GDP will remain constant.

ANS: A PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 146. Refer to Exhibit 10-7. If investment decreases, which of the following is possible? a. The AD curve shifts leftward from AD2 to AD1, the price level falls, and Real GDP remains constant. b. The AD curve shifts leftward from AD4 to AD3, the price level falls, and Real GDP remains constant. c. The AD curve shifts rightward from AD1 to AD2, the price level remains constant, and Real GDP rises. d. The AD curve shifts rightward from AD3 to AD4, the price level rises, and Real GDP remains constant. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

e. c and d ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 147. Refer to Exhibit 10-7. If government purchases decrease, which of the following is possible? a. The AD curve shifts leftward from AD2 to AD1, the price level remains constant, and Real GDP falls. b. The AD curve shifts leftward from AD4 to AD3, the price level falls, and Real GDP remains constant. c. The AD curve shifts rightward from AD1 to AD2, the price level remains constant, and Real GDP rises. d. The AD curve shifts rightward from AD3 to AD4, the price level rises, and Real GDP remains constant. e. a and b ANS: E PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 148. In the TE-TP framework, total production a. always equals total expenditures. b. equals Real GDP. c. is always greater than total expenditures. d. is always less than total expenditures.

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 149. Here is a consumption function: C = C0 + MPC(Yd). If MPC is 0.75, then we know that a. as Yd rises by $1, Co rises by $0.75. b. as Yd rises by $1, C rises by $0.75. c. Yd rises by $0.75. d. as C0 rises by $0.75, Yd rises by $1.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 150. Here is a consumption function: C = C0 + MPC(Yd). If MPC is 0.95, then we know that a. as Yd rises by $1, Co rises by $0.95. b. as Yd rises by $1, C rises by $0.95. c. Yd rises by $0.95. d. as C0 rises by $0.05, Yd rises by $1.

ANS: B PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 151. Here is a consumption function: C = C0 + MPC(Yd). If C0 = $300, then we know that a. if Yd rises by $1, then Co rises by $1. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. if Yd rises by $1, then C rises by $300. c. as C0 rises by $15, C rises by $15. d. as C0 rises by $15, Yd rises by $15.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 152. Here is a consumption function: C = C0 + MPC(Yd). If consumption is $2,000, MPC =0.75, and disposable income is $2,000, what does autonomous consumption equal? a. $950 b. $3,500 c. $500 d. $4,500 e. none of the above ANS: C PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 153. John Maynard Keynes wrote which of the following? a. Das Kapital b. The Scope and Method of Political Economy c. Wealth of Nations d. The General Theory of Employment, Interest and Money e. all of the above ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application Exhibit 10-8

Disposable Income $0 500 1,000 1,500 2,000 2,500 3,000

Consumption $300 675 1,050 1,425 1,800 2,175 2,550

154. Refer to Exhibit 10-8. The marginal propensity to consume (MPC) is a. 0.90. b. 0.10. c. 0.80. d. 0.95. e. 0.75. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 155. Refer to Exhibit 10-8. The marginal propensity to save (MPS) is a. 0.90. b. 0.10. c. 0.75. d. 0.25. e. 4.00.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 156. Refer to Exhibit 10-8. The multiplier is a. 0.90. b. 10.00. c. 0.10. d. 4.00. e. 0.75.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 157. Refer to Exhibit 10-8. The consumption function is a. C = 0.75(Yd). b. C = $3,000 + 0.90(Yd). c. C = $300 + 0.25 (Yd). d. C = $300 + 0.75(Yd).

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 158. Refer to Exhibit 10-8. When disposable income equals $2,000, saving equals a. $1,800. b. $2,100. c. $200. d. -$200.

ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 159. Refer to Exhibit 10-8. Autonomous consumption (Co) is equal to © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

a. b. c. d.

$3 $30 $300. $3,000.

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 160. Refer to Exhibit 10-8. When disposable income equals $500, saving equals a. $125. b. $500. c. $175. d. -$175.

ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New Exhibit 10-9

Marginal Propensity to Consume (MPC) 0.92 (C) 0.85 (G)

Marginal Propensity to Save (MPS) (A) (D) (E) 0.20

Multiplier (m) (B) 10 (F) (H)

161. Refer to Exhibit 10-9. What is the value of the marginal propensity to save (MPS) that would correctly fill in blank (A) and the multiplier that would correctly fill in blank (B)? a. 0.20; 5 b. 0.08; 8 c. 0.08; 12.5 d. 0.05; 0.95 ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 162. Refer to Exhibit 10-9. What is the value of the marginal propensity to consume (MPC) that would correctly fill in blank (C) and the marginal propensity to save (MPS) that would correctly fill in blank (D)? a. 0.90; 0.10 b. 0.10; 10 c. 0.90; 9 d. 0.01; 100 ANS: A PTS: 1 NAT: BUSPROG: Analytic

DIF: Difficulty: Moderate

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LOC: DISC: Understanding and applying economic models NOT: New

KEY: Bloom's: Application

163. Refer to Exhibit 10-9. What is the value of the marginal propensity to save (MPS) that would correctly fill in blank (E) and the multiplier that would correctly fill in blank (F)? a. 0.012; 0.83 b. 0.12; 88 c. 0.15; 15 d. 0.15; 6.67 ANS: D PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New 164. Refer to Exhibit 10-9. What is the value of the marginal propensity to consume (MPC) that would correctly fill in blank (G) and the value of the multiplier that would correctly fill in blank (H)? a. 0.80; 20 b. 0.80; 5 c. 0.20; 0.80 d. 0.50; 0.50 e. There is not enough information given to answer this question.

ANS: B PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 165. Which of the following is a basic point that Keynes made about consumption? a. Consumption and disposal income are inversely related. b. When disposable income changes, consumption changes by a greater amount. c. Consumption is dependent upon disposable income. d. b and c e. all of the above ANS: C PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application 166. In the simple Keynesian model, a rightward shift in the aggregate demand curve __________ result in a change in the price level when the economy is in the horizontal segment of the AS curve and ___________ result in a change in the price level if the economy is in the vertical segment of the AS curve. a. will not; will b. will not; will not c. will; will not d. will; will ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

167. Economist Brown believes that changes in aggregate demand affect only the price level, and economist Black believes that changes in aggregate demand affect only Real GDP. What does the aggregate supply (AS) curve look like for each economist? a. For economist Brown the AS curve is vertical and for economist Black the AS curve is horizontal. b. For economist Brown the AS curve is horizontal and for economist Black the AS curve is vertical. c. For economist Brown the AS curve is upward sloping and for economist Black the AS curve is downward sloping. d. For economist Brown the AS curve is downward sloping and for economist Black the AS curve is upward sloping.

ANS: A PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application NOT: New TRUE/FALSE 1. Keynes believed that saving is more responsive to changes in income than to changes in interest rates.

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 2. The work of John Maynard Keynes led to a major revolution in economic thought.

ANS: T PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 3. According to Keynes, the economy is inherently unstable and may get stuck in a recessionary gap.

ANS: T PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 4. One similarity between the beliefs of the classical economists and Keynes is that increased saving would necessarily stimulate an equal amount of increased investment spending.

ANS: F PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension 5. Keynes asserted that investment is more responsive to business expectations, technological changes and innovation, than to changes in interest rates.

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6. In Keynes' view, labor unions would resist wage cuts, but individual employees would go along with wage cuts initiated by his/her employer.

ANS: F PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 7. Classical economists used efficiency wage models to support their belief in a self-regulating economy.

ANS: F PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 8. Efficiency wage models imply that workers are more productive when they are paid a higher wage, as compared to when they are paid a lower wage.

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 9. A simple Keynesian model is representative of a closed economy, with no foreign sector.

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 10. The marginal propensity to consume (MPC) refers to the proportion of disposable income that is spent on consumption.

ANS: F PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 11. A consumption function is a statement that shows the relationship between interest rates and consumption.

ANS: F PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 12. An increase in autonomous consumption, an increase in disposable income, or a decrease in the marginal propensity to consume can all increase consumption.

ANS: F PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Disposable Income 13. When total expenditure (TE) exceeds total production (TP), inventory levels rise unexpectedly, which sends a signal to firms that they have overproduced, so they cut back on production.

ANS: T

PTS: 1

DIF: Difficulty: Moderate

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models

KEY: Bloom's: Application

14. The part of consumption that is dependent on disposable income is called autonomous consumption.

ANS: F PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 15. The marginal propensity to save (MPS) can be found using the equation: (1 - MPC).

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Disposable Income 16. A change in autonomous spending leads to a greater change in Real GDP through the multiplier process.

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Disposable Income 17. In reality, idle resources must exist in the economy in order for the multiplier process to lead to an increase in Real GDP. ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Disposable Income 18. In a simple Keynesian model, the aggregate supply curve is upward sloping.

ANS: F PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 19. Many economists argue that the labor market may take a long time for wages to adjust to new equilibrium level.

ANS: T PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 20. In the simple Keynesian model, the aggregate supply curve has a horizontal segment and a vertical segment at full-employment.

ANS: T PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge 21. The economy can be in equilibrium and in a recessionary gap simultaneously.

ANS: T

PTS: 1

DIF: Difficulty: Easy

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models

KEY: Bloom's: Disposable Income

22. A decline in housing prices can help to push the economy into a recessionary gap.

ANS: T PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application MSC: Economics 24/7 ESSAY 1. Explain the sequence of events that occurs in the economy once total production (TP) is less than total expenditure (TE).

ANS: If TP is less than TE, it indicates that businesses have produced too little relative to what the three sectors of the economy want to buy. The difference between TP and TE would result in an unexpected fall in inventories. Falling inventories send a signal to firms that they have underproduced, so they will increase the quantity of goods they produce. The rise in production causes Real GDP to increase and the levels of TP and TE will move closer together. This cycle will continue until TE and TP are equal.

PTS: 1 DIF: Difficulty: Moderate LOC: DISC: Understanding and applying economic models

NAT: BUSPROG: Analytic KEY: Bloom's: Application

2. Discuss how the Great Depression contributed to the development of Keynesian economics.

ANS: During the Great Depression, high levels of unemployment and contracting Real GDP plagued many countries around the world. The classical assertion in a self-regulating economy, one that could heal itself of its economic ills, was not working out. This led Keynes and his followers to conclude that laissez-faire was not a viable policy stance, and that the economy was inherently unstable.

PTS: 1 DIF: Difficulty: Moderate LOC: DISC: Understanding and applying economic models

NAT: BUSPROG: Analytic KEY: Bloom's: Application

3. Explain the process by which a change in autonomous spending can lead to an even greater change in Real GDP. ANS: When autonomous spending increases, the multiplier process causes Real GDP to grow by some multiple of the initial increase in spending. This occurs because an increase in spending generates an equal increase in income. As income increases, another round of spending will be generated (MPC  increase in spending), which will lead to yet another increase in income. This spending-income cycle will continue until the dollar amount left to spend becomes very tiny. Theoretically, the resulting change in Real GDP is equal to [1/(1-MPC)] times the initial change in spending.

PTS: 1 DIF: Difficulty: Moderate LOC: DISC: Understanding and applying economic models

NAT: BUSPROG: Analytic KEY: Bloom's: Application

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4. What is the general format of the consumption function? Explain what each term means and use the consumption function to explain the three different ways that consumption can increase.

ANS: The general consumption formula is: C = Co + MPC(Yd). Co is autonomous consumption, which is the part of consumption that is independent of the level of income. It does not change as disposable income changes. MPC is the marginal propensity to consume and it represents the portion of a change in income that is spent. Yd is the symbol for disposable income. This equation shows that consumption can change as a result of a change in autonomous consumption, a change in the marginal propensity to consume, or a change in disposable income. Consumption will rise when any one of these three variables rises.

PTS: 1 DIF: Difficulty: Challenging LOC: DISC: Understanding and applying economic models

NAT: BUSPROG: Analytic KEY: Bloom's: Application

5. Describe Keynes' criticism of Say's law in a money economy.

ANS: In order for Say's law to hold in a money economy, any decrease in saving would have to be offset by an equal increase in investment. According to the Classical economists, this would happen through changes in interest rates. Keynes disagreed with this view and pointed out that added saving would not necessarily lead to an equal amount of added investment. Keynes asserted that people save and invest for a variety of reasons, and not on one single variable such as interest rates. According to Keynes, saving is more responsive to changes in income than to changes in the interest rate, and investment is more responsive to change in technology and business expectations than to changes in interest rate.

PTS: 1 DIF: Difficulty: Challenging LOC: DISC: Understanding and applying economic models

NAT: BUSPROG: Analytic KEY: Bloom's: Application

6. Explain how the Keynesian view differs from the classical view with respect to saving. Explain further how the two views differ with respect to investment.

ANS: Classical economists believed that the amount of money saved and interest rates are directly related.

Therefore, savers would save more at higher interest rates than they would at lower interest rates. The Keynesian view of saving is that savers may not necessarily save more at higher interest rates or save less at lower interest rates. If savers have a given targeted amount that they are saving towards, a higher interest rate will mean that they can actually save a smaller portion of their income to achieve that goal.

Keynes held that saving is more responsive to income than it is to the interest rate.

The classical view of investment is that the amount invested is inversely related to interest rates.

Therefore, businesses invest more at lower interest rates than they would at lower interest rates. The Keynesian view of investment is that the interest rate is not the only factor important in determining investment. Keynes held that other variables, such as business expectations, are also important determining factors in determining investment. If businesses are pessimistic about the future then they are unlikely to increase their level of investment, even if interest rates are relatively low.

PTS: 1 DIF: Difficulty: Challenging LOC: DISC: Understanding and applying economic models

NAT: BUSPROG: Analytic KEY: Bloom's: Application

7. What type of relationship exists between the marginal propensity to consume (MPC) and the multiplier?

Explain why this relationship exists. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.