HW Chapter 10: Keynesian Macroeconomics

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
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.
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
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
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.
e. c and d
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.
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.
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.
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
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.
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
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.
a. TRUE
b. FALSE

If people buy more than has been produced,

a. the economy is in equilibrium.
b. total expenditures are greater than total production.
c. there will be an increase in inventory.
d. there will be a decrease in total output.
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
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
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.
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.
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
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.
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.
Refer to Exhibit 10-8. Autonomous consumption (Co) is equal to
a. 3
b. 30
c. 300
d. 3000
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.
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
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
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.
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.
Keynes believed that
a. Say's law would hold in a laissez-faire economy.
b. the economy would always be near or on its production possibilities frontier.
c. wages and prices are often inflexible in the downward direction.
d. the equilibrium level of output will always be at the full-employment level of output.
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.
When the MPC = 0.80, the multiplier is
a. 5.00.
b. 0.25.
c. 4.00.
d. 7.50.
How is the multiplier expressed in terms of the MPS?
a. 1 - MPS
b. 1/MPS
c. 1/(1 - MPS)
d. 1/(1 + MPS)