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# Principles of Macroeconomics 11th Edition by Karl E. Case Ray C. Fair Sharon E. Oster Test bank

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Principles of Macroeconomics, 11e TB1 (Case/Fair/Oster)
Chapter 8 Aggregate Expenditure and Equilibrium Output

8.1 The Keynesian Theory of Consumption

1) The MPC is
A) the change in consumption divided by the change in income.
B) consumption divided by income.
C) the change in consumption divided by the change in saving.
D) the change in saving divided by the change in income.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Definition
Learning Outcome: Macro-6

2) The MPS is
A) the change in saving divided by the change in income.
B) 1 + MPC.
C) income divided by saving.
D) total saving divided by total income.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Definition
Learning Outcome: Macro-6

3) Saving equals
A) Y C.
B) Y planned I.
C) Y actual I.
D) inventory changes.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Definition
Learning Outcome: Macro-8

4) If the MPS is 0.60, MPC
A) is 1.60.
B) is 0.40.
C) is 0.30.
D) cannot be determined by the given information.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6
5) If you earn additional \$500 in disposable income one week for painting your neighbors house,
A) the total of your consumption and saving will increase by more than \$500.
B) the total of your consumption and saving will increase by \$500.
C) the total of your consumption and saving will increase by less than \$500.
D) your consumption will increase by more than \$500, even if your MPS is 0.1.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

6) If Logan received a \$2,500 bonus and his MPS is 0.20, his consumption rises by \$________ and his saving rises by \$________.
A) 500; 100
B) 2,500; 200
C) 2,000; 500
D) 2,500; 20
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

7) Uncertainty about the future is likely to
A) increase current spending.
B) have no impact on current spending.
C) decrease current spending.
D) either increase or decrease current spending.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

8) Higher interest rates are likely to
A) have no effect on consumer spending or saving.
B) decrease consumer spending and increase consumer saving.
C) decrease both consumer spending and consumer saving.
D) increase consumer spending and decrease consumer saving.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

9) Consumption is
A) positively related to household income and wealth and households expectations about the future, but negatively related to interest rates.
B) negatively related to household income and wealth, interest rates, and households expectations about the future.
C) determined only by income.
D) positively related to household income and wealth, interest rates, and households expectations about the future.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

10) In a closed economy with no government, aggregate expenditure is
A) consumption plus investment.
B) saving plus investment.
C) consumption plus the MPC.
D) MPC + MPS.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

11) If Wandas income is reduced to zero after she loses her job, her consumption will be ________ and her saving will be ________.
A) less than zero; less than zero
B) greater than zero; greater than zero
C) less than zero; greater than zero
D) greater than zero; less than zero
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

Refer to the information provided in Figure 8.1 below to answer the questions that follow.

Figure 8.1

12) Refer to Figure 8.1. The MPS for this household is ________ and the MPC is ________.
A) 0.4; 0.6
B) 0.5; 0.5
C) 0.2; 0.8
D) 0.3; 0.7
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

13) Refer to Figure 8.1. The equation for this households saving function is
A) S = -200 + 0.8Y.
B) S = -300 + 0.25Y.
C) S = -500 + 0.5Y.
D) S = -1,000 + 0.8Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

14) Refer to Figure 8.1. At income level \$1,500, this households saving is ________ than (to) zero and this households consumption is ________ zero.
A) less than; greater than
B) equal to; equal to
C) greater than; less than
D) greater than; greater than
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

15) Refer to Figure 8.1. This households consumption function is
A) C = 200 + 0.2Y.
B) C = 300 + 0.75Y.
C) C = 500 + 0.5Y.
D) C = 1,000 + 0.2Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

16) Refer to Figure 8.1. This household saves -\$300 at an income level of
A) \$400.
B) \$300
C) \$250.
D) \$125.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

17) Refer to Figure 8.1. This household consumes \$2,000 at an income level of
A) \$3,000.
B) \$2,275.
C) \$2,000.
D) \$1,840.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

18) Refer to Figure 8.1. An increase in the amount of consumption this household makes when this households income is zero
A) makes the consumption function steeper.
B) makes the saving function flatter.
C) shifts the consumption function downward.
D) shifts the saving function downward.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

19) Refer to Figure 8.1. An increase in the MPC
A) makes the consumption function flatter.
B) makes the saving function flatter.
C) shifts the consumption function upward.
D) shifts the saving function downward.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

Refer to the information provided in Figure 8.2 below to answer the questions that follow.

Figure 8.2

20) Refer to Figure 8.2. The line segment BD represents Jerrys
A) consumption when income equals Y1.
B) saving when income equals zero.
C) saving when income is Y1.
D) consumption when income equals zero.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

21) Refer to Figure 8.2. Jerrys consumption equals his income at Point
A) A.
B) B.
C) C.
D) D.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
22) Refer to Figure 8.2. Jerrys saving equals zero at income level
A) zero.
B) Y1.
C) Y2.
D) Y2 Y1.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

23) Refer to Figure 8.2. Along the line segment AC, Jerrys
A) consumption equals his income.
B) consumption is greater than his income.
C) saving is zero.
D) saving is positive.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

24) Refer to Figure 8.2. Along the segment AB, Jerrys
A) consumption is less than his income.
B) saving is positive.
C) consumption equals his income.
D) saving is negative.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

25) Refer to Figure 8.2. Positive saving occurs along the line segment
A) BC.
B) DC.
C) AC.
D) BA.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

26) Refer to Figure 8.2. An increase in Jerrys income is represented by
A) an upward shift in Jerrys consumption function.
B) an increase in the slope of Jerrys consumption function.
C) a movement from Point B to A.
D) none of the above
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

27) Refer to Figure 8.2. Suppose Jerrys MPC increases, and the vertical intercept of the consumption function does not change. At income Y1, Jerrys
A) consumption will be greater than his income.
B) consumption will be less than his income.
C) saving will be zero.
D) all of the above
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

28) The fraction of a change in income that is consumed or spent is called
A) the marginal propensity of income.
B) the marginal propensity to save.
C) the marginal propensity to consume.
D) average consumption.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Definition
Learning Outcome: Macro-6

29) If you save \$80 when you experience a \$400 rise in your income,
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

30) If consumption is \$30,000 when income is \$35,000, and consumption increases to \$36,000 when income increases to \$43,000, the MPC is
A) 0.65.
B) 0.75.
C) 0.80.
D) 0.95.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

31) If consumption is \$10,000 when income is \$10,000, and consumption increases to \$11,000 when income increases to \$12,000, the MPS is
A) 0.10.
B) 0.25.
C) 0.50.
D) 0.90.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

32) Suppose consumption is \$5,000 when income is \$8,000 and the MPC equals 0.9. When income increases to \$10,000, consumption is
A) \$2,700.
B) \$4,500.
C) \$6,800.
D) \$7,200.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

33) Suppose saving is \$1,400 when income is \$10,000 and the MPC equals 0.8. When income increases to \$12,000, saving is
A) \$1,680.
B) \$1,800.
C) \$2,200.
D) \$3,000.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
34) Suppose consumption is \$60,000 when income is \$90,000 and the MPS equals 0.25. When income increases to \$100,000, consumption is
A) \$90,250.
B) \$85,000.
C) \$70,000.
D) \$67,500.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

35) If the MPS is 0.22, the MPC is
A) -0.22.
B) 0.66.
C) 0.78.
D) 1.22.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

36) If the MPS is 0.05, the MPC is
A) -0.05.
B) 0.95.
C) 1.05.
D) 2.25.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

37) If the consumption function is of the form C = 80 + 0.4Y, the MPS equals
A) -0.6.
B) -0.4.
C) 0.4.
D) 0.6.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6
38) If the saving function is of the form S = -20 + 0.3Y, consumption at an income level of 200 is
A) 80.
B) 120.
C) 160.
D) 180.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

39) If Lilys consumption function is of the form C = 100 + 0.8Y, her saving equals zero at an income level of
A) 180.
B) 500.
C) 800.
D) cannot be determined from the given information
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

40) If Zanders saving function is of the form S = -150 + 0.5Y, his consumption equals his income at an income level of
A) 150.
B) 225.
C) 300.
D) 1,500.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
Refer to the information provided in Table 8.1 below to answer the questions that follow.

Table 8.1

41) Refer to Table 8.1. The equation for the aggregate consumption function is
A) C = 80 + 0.95Y.
B) C = 80 + 0.9Y.
C) C = 80 + 0.75Y.
D) C = -80 + 0.45Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

42) Refer to Table 8.1. Societys MPC is
A) 0.95.
B) 0.90.
C) 0.80.
D) 0.05.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

43) Refer to Table 8.1. Societys MPS is
A) 0.05.
B) 0.10.
C) 0.20.
D) 0.95.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

44) Refer to Table 8.1. At an aggregate income level of \$100, aggregate saving would be
A) -\$70.
B) -\$30.
C) \$50.
D) \$70.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

45) Refer to Table 8.1. Assuming societys MPC is constant at an aggregate of income of \$300, aggregate consumption would be
A) \$425.
B) \$350.
C) \$325.
D) \$305.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

Refer to the information provided in Table 8.2 below to answer the questions that follow.

Table 8.2

46) Refer to Table 8.2. The equation for the aggregate saving function is
A) S = -100 + 0.15Y.
B) S = -100 + 0.1Y.
C) S = -150 + 0.2Y.
D) S = -150 + 0.85Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

47) Refer to Table 8.2. Societys MPC is
A) 0.1.
B) 0.2.
C) 0.8.
D) 0.9.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

48) Refer to Table 8.2. Societys MPS is
A) 0.1.
B) 0.2.
C) 0.3.
D) 0.9.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

49) Refer to Table 8.2. Assuming societys MPC is constant, at an aggregate income level of \$900, aggregate consumption would be
A) \$665.
B) \$910.
C) \$1,200.
D) \$1,750.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

50) Refer to Table 8.2. Assuming societys MPC is constant, at an aggregate income of \$1,200 aggregate saving would be
A) \$0.
B) \$20.
C) \$55.
D) \$150.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
Refer to the information provided in Figure 8.3 below to answer the questions that follow.

Figure 8.3

51) Refer to Figure 8.3. The equation for the aggregate consumption function is
A) C = 140 + 0.5Y.
B) C = 60 + 0.7Y.
C) C = 80 + 0.6Y.
D) C = 60 + 0.4Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

52) Refer to Figure 8.3. The equation for the aggregate saving function is
A) S = -60 + 0.3Y.
B) S = -200 + 0.6Y.
C) S = -140 + 0.5Y.
D) S = -80 + 0.4Y
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

53) Refer to Figure 8.3. In this economy, aggregate saving will be zero if income is
A) \$100 billion.
B) \$200 billion.
C) \$300 billion.
D) \$400 billion.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
54) Refer to Figure 8.3. For this society, aggregate saving is positive if aggregate income is
A) above zero.
B) between \$0 and \$150 billion.
C) equal to \$200 billion.
D) above \$200 billion.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

55) Refer to Figure 8.3. If aggregate income is \$1,000 billion, then in this society aggregate saving is ________ billion.
A) \$240
B) \$300
C) \$320
D) \$550
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

56) Refer to Figure 8.3. Which of the following statements is FALSE?
A) Aggregate saving is negative for all income levels below \$400 billion.
B) For all aggregate income levels above \$200 billion, aggregate consumption is less than aggregate income.
C) If consumption is the only expenditure, this economy would be in equilibrium at an aggregate income level of \$200 billion.
D) Saving is negative at all income levels below \$200 billion.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

Refer to the information provided in Figure 8.4 below to answer the questions that follow.

Figure 8.4

57) Refer to Figure 8.4. The aggregate consumption functions C1 and C2
A) have the same MPC values.
B) imply different MPS values.
C) have the same autonomous consumption values.
D) have the same break-even values.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

58) Refer to Figure 8.4. Which consumption function has the largest MPC?
A) C1.
B) C2.
C) C3.
D) cannot be determined from the figure
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

59) Refer to Figure 8.4. Suppose the consumption function for C1 = 10 + 0.8Y, the consumption function that best fits C2 is
A) C2 = 20 + 0.8Y.
B) C2 = 10 + 0.4Y.
C) C2 = 40 + 0.5Y.
D) C2 = 20 + 0.1Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
60) Refer to Figure 8.4. Suppose the consumption function for C1 = 20 + 0.5Y, the consumption function that best fits C3 is
A) C3 = 20 + 0.8Y.
B) C3 = 20 + 0.4Y.
C) C3 = 40 + 0.5Y.
D) C3 = 40 + 0.4Y.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

61) Refer to Figure 8.4. If income is Y1, aggregate consumption is the greatest when the aggregate consumption function is
A) C3.
B) C2.
C) C1.
D) cannot be determined from the figure
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

62) Refer to Figure 8.4. If income is Y2
A) the societys saving is negative along C1, C2, and C3.
B) the societys consumption is equal along C2 and C3.
C) the societys saving is positive along C2 and C3.
D) the societys savings is negative along C1.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

63) If the consumption function is below the 45-degree line,
A) consumption is less than income and saving is positive.
B) consumption is less than income and saving is negative.
C) consumption exceeds income and saving is positive.
D) consumption exceeds income and saving is negative.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

Refer to the information provided in Figure 8.5 below to answer the questions that follow.

Figure 8.5

64) Refer to Figure 8.5. The MPS for this saving function is
A) 5.
B) 4.
C) 0.5.
D) 0.25.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

65) Refer to Figure 8.5. If aggregate income is \$400 billion, aggregate saving is ________ billion.
A) -\$300
B) -\$100
C) \$0
D) \$500
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

66) Refer to Figure 8.5. If aggregate income is \$900 billion, aggregate consumption
A) is \$25 billion.
B) is \$800 billion.
C) is \$875 billion.
D) cannot be determined from this information.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
Refer to the information provided in Figure 8.6 below to answer the questions that follow.

Figure 8.6

67) Refer to Figure 8.6. The MPS for this saving function is
A) 0.4.
B) 0.25.
C) 0.2.
D) 0.1.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

68) Refer to Figure 8.6. If aggregate income is \$800, aggregate saving is
A) -\$100.
B) -\$20.
C) \$20.
D) \$40.
Diff: 2
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

69) Refer to Figure 8.6. If aggregate income is \$1,000, aggregate consumption is
A) \$850.
B) \$910.
C) \$920.
D) \$960.
Diff: 3
Topic: The Keynesian Theory of Consumption
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
70) As interest rates fall, spending decreases.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

71) An expected permanent tax increase is likely to increase current spending.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

72) The marginal propensity to consume is the change in consumption per change in income.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Definition
Learning Outcome: Macro-6

73) If the marginal propensity to consume is 0.8, the marginal propensity to save is 8.
Diff: 1
Topic: The Keynesian Theory of Consumption
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

8.2 Planned Investment (I) versus Actual Investment

1) The Tiny Tots Toy Company manufactures only sleds. In 2012 Tiny Tots manufactured 10,000 sleds, but sold only 8,000 sleds. In 2012 Tiny Tots change in inventory was
A) -2,000 sleds.
B) 1,000 sleds.
C) 2,000 sleds.
D) 3,000 sleds.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
2) The Jackson Tool Company manufactures only tools. In 2012 Jackson Tools manufactured 20,000 tools, but sold 21,000 tools. In 2012 Jackson Tools change in inventory was
A) -2,000 tools.
B) -1,000 tools.
C) 1,000 tools.
D) 3,000 tools.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

3) Which of the following is NOT considered investment?
A) the acquisition of capital goods
B) the purchase of government bonds
C) the increase in planned inventories
D) the construction of a new factory
Diff: 1
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

4) Which of the following is an investment?
A) the purchase of a new printing press by a business
B) the purchase of a corporate bond by a household
C) the purchase of a share of stock by a household
D) a leveraged buyout of one corporation by another
Diff: 1
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

5) Over which component of investment do firms have the least amount of control?
A) purchases of new equipment
B) construction of new factories
C) changes in inventories
D) building new machines
Diff: 1
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8
6) Assume that in Scandia, planned investment is \$80 billion but actual investment is \$60 billion. Unplanned inventory investment is
A) -\$20 billion.
B) -\$10 billion.
C) \$70 billion.
D) \$140 billion.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

7) Assume that in Jabara, planned investment is \$30 billion, but actual investment is \$45 billion. Unplanned inventory investment is
A) -\$75 billion.
B) -\$15 billion.
C) \$15 billion.
D) \$75 billion.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

8) If unplanned business investment is \$20 million and planned investment is \$20 million, then actual investment is
A) -\$20 million.
B) \$20 million.
C) \$40 million.
D) \$200 million.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

9) In 2012 Happylands planned investment was \$90 billion and its actual investment was \$140 billion. In 2012 Happylands unplanned inventory change was
A) -\$115 billion.
B) -\$50 billion.
C) \$50 billion.
D) \$230 billion.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
10) If planned investment exceeds actual investment,
A) there will be an accumulation of inventories.
B) there will be no change in inventories.
C) there will be a decline in inventories.
D) none of the above
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

11) If Inventory investment is higher than firms planned,
A) actual and planned investment are equal.
B) actual investment is less than planned investment.
C) actual investment is greater than planned investment.
D) actual investment must be negative.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8
Refer to the information provided in Figure 8.7 below to answer the questions that follow.

Figure 8.7

12) Refer to Figure 8.7. In Azora, planned investment does not vary with income. Azoras planned investment function is represented by
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

13) Refer to Figure 8.7. In Farley, planned investment varies inversely with income. Farleys planned investment function is represented by
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
14) Without the government or the foreign sector in the income-expenditure model, planned aggregate expenditure equals
A) consumption plus actual investment.
C) consumption minus planned investment.
D) consumption plus planned investment.
Diff: 1
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

15) Related to the Economics in Practice on p. 464: A recent study by economists at Yale University and the University of Chicago suggests that changing retirement plan enrollment options from opt-in systems to opt-out systems increased pension plan enrollment after three months of work from ________ percent of workers to ________ percent of workers.
A) 80; 22
B) 10; 100
C) 65; 98
D) 77; 42
Diff: 1
Topic: Planned Investment: Economics in Practice
Skill: Fact
Learning Outcome: Macro-8

16) Related to the Economics in Practice on p. 464: Early results from the Save More Tomorrow retirement plans have shown ________ in the savings rates of the enrolled.
A) very little change
B) mixed results
C) significant decreases
D) dramatic increases
Diff: 1
Topic: Planned Investment: Economics in Practice
Skill: Fact
Learning Outcome: Macro-8

17) If actual investment is greater than planned investment, unplanned inventories decline.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

18) Firms react to an unplanned inventory investment by increasing output.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

19) Firms react to negative inventory investment by increasing output.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

20) If planned investment increases, equilibrium will be restored only when saving has increased by exactly the amount of the initial increase in planned investment, assuming there is no government or foreign sector.
Diff: 2
Topic: Planned Investment (I) versus Actual Investment
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

8.3 Planned Investment and the Interest Rate (r)

1) If planned investment is perfectly unresponsive to changes in the interest rate, the planned investment schedule
A) has a negative slope.
B) is horizontal.
C) is vertical.
D) has a positive slope.
Diff: 2
Topic: Planned Investment and the Interest Rate (r)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-12

2) If planned investment is perfectly responsive to changes in the interest rate, the planned investment schedule
A) has a negative slope.
B) is horizontal.
C) is vertical.
D) has a positive slope.
Diff: 2
Topic: Planned Investment and the Interest Rate (r)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-12

Refer to the information provided in Figure 8.8 below to answer the questions that follow.

Figure 8.8

3) Refer to Figure 8.8. The amount of planned investment increases if the interest rate
A) drops from 8% to 4%.
B) rises from 4% to 8%.
C) remains at 8%.
D) remains at 4%.
Diff: 2
Topic: Planned Investment and the Interest Rate (r)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-12

4) Refer to Figure 8.8. The amount of planned investment decreases if the interest rate
A) drops from 8% to 4%.
B) rises from 4% to 8%.
C) remains at 8%.
D) remains at 4%.
Diff: 2
Topic: Planned Investment and the Interest Rate (r)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-12

Refer to the information provided in Table 8.3 below to answer the questions that follow.

Table 8.3
A Hypothetical Investment Schedule

5) Refer to Table 8.3. If the interest rate dropped from 15% to 6%, planned investment would ________ by \$________ billion.
A) increase; 120
B) increase; 180
C) decrease; 120
D) decrease; 180
Diff: 2
Topic: Planned Investment and the Interest Rate (r)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-12

6) Keynes used the phrase animal spirits to describe the feelings of entrepreneurs, and he argued that these feelings affect investment decisions.
Diff: 1
Topic: Planned Investment and the Interest Rate (r)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-12

8.4 The Determination of Equilibrium Output (Income)

1) In macroeconomics, equilibrium is defined as that point at which
A) saving equals consumption.
B) planned aggregate expenditure equals aggregate output.
C) planned aggregate expenditure equals consumption.
D) aggregate output equals consumption minus investment.
Diff: 1
Topic: The Determination of Equilibrium Output (Income)
Skill: Definition
Learning Outcome: Macro-8
2) The economy can be in equilibrium if, and only if,
A) planned investment is zero.
B) actual investment is zero.
C) planned investment is greater than actual investment.
D) planned investment equals actual investment.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

3) If aggregate output is greater than planned spending, then
A) unplanned inventory investment is zero.
B) unplanned inventory investment is negative.
C) unplanned inventory investment is positive.
D) actual investment equals planned investment.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

4) If unplanned inventory investment is positive, then
A) planned investment must be zero.
B) planned aggregate spending must be greater than aggregate output.
C) planned aggregate spending must be less than aggregate output.
D) planned aggregate spending must equal aggregate output.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

5) If aggregate output equals planned aggregate expenditure, then
A) unplanned inventory investment is zero.
B) unplanned inventory adjustment is negative.
C) unplanned inventory adjustment is positive.
D) actual investment is greater than planned investment.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8
Refer to the information provided in Table 8.4 below to answer the questions that follow.

Table 8.4

6) Refer to Table 8.4. At an aggregate output level of \$400 billion, planned expenditure equals
A) \$450 billion.
B) \$500 billion.
C) \$550 billion.
D) \$850 billion.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

7) Refer to Table 8.4. At an aggregate output level of \$800 billion, aggregate saving
A) equals -\$50 billion.
B) equals \$0.
C) equals \$50 billion.
D) cannot be determined from this information.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

8) Refer to Table 8.4. At an aggregate output level of \$200 billion, the unplanned inventory change is
A) -\$200 billion.
B) -\$150 billion.
C) -\$50 billion.
D) \$100 billion.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
9) Refer to Table 8.4. At an aggregate output level of \$600 billion, the unplanned inventory change is
A) -\$100 billion.
B) -\$50 billion.
C) \$0.
D) \$50 billion.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

10) Refer to Table 8.4. If aggregate output equals ________, there will be a \$100 billion unplanned decrease in inventories.
A) \$200 billion
B) \$400 billion
C) \$600 billion
D) \$800 billion
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

11) Refer to Table 8.4. The equilibrium level of aggregate output equals
A) \$400 billion.
B) \$600 billion.
C) \$800 billion.
D) \$1,000 billion.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

12) Refer to Table 8.4. Which of the following statements is FALSE?
A) At output levels greater than \$800 billion, there is a positive unplanned inventory change.
B) If aggregate output equals \$1000 billion, then aggregate saving equals \$100.
C) The MPC for this economy is 0.75.
D) At an output level of \$400 billion, there is a \$150 billion unplanned inventory decrease.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
13) Refer to Table 8.4. Planned saving equals planned investment at an aggregate output level
A) of \$1,000 billion.
B) of \$800 billion.
C) of \$600 billion.
D) that cannot be determined from this information.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

14) Refer to Table 8.4. Planned investment equals actual investment at
A) all income levels.
B) all income levels above \$600 billion.
C) all income levels below \$600 billion.
D) \$1,000 billion.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

Refer to the information provided in Table 8.5 below to answer the questions that follow.

Table 8.5

15) Refer to Table 8.5. At an aggregate output level of \$3,000 million, planned expenditure equals
A) \$2,800.
B) \$3,000.
C) \$3,600.
D) \$4,400.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
16) Refer to Table 8.5. The MPC in this economy is
A) 0.5.
B) 0.6.
C) 0.7.
D) 0.8.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

17) Refer to Table 8.5. At an aggregate output level of \$4,000 million, the unplanned inventory change is
A) \$1,200 million.
B) \$400 million.
C) \$0.
D) -\$400 million.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

18) Refer to Table 8.5. At an aggregate output level of \$7,000 million, the unplanned inventory change is
A) \$400 million.
B) \$0.
C) -\$400 million.
D) -\$1,200 million.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

19) Refer to Table 8.5. If aggregate output equals ________, there will be a \$200 million unplanned decrease in inventories.
A) \$3,000 million
B) \$4,000 million
C) \$5,000 million
D) \$6,000 million
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
20) Refer to Table 8.5. The equilibrium level of aggregate output equals
A) \$3,000 million.
B) \$4,000 million.
C) \$5,000 million.
D) \$6,000 million.
Diff: 1
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

21) Refer to Table 8.5. Which of the following statements is FALSE?
A) At an output level \$4,000 million, there is a \$400 million unplanned inventory decrease.
B) If aggregate output equals \$4,000 million, then aggregate saving equals \$1000 million.
C) The MPC for this economy is 0.8.
D) At an output level of \$3,000 million, there is a \$600 million unplanned inventory decrease.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

22) Refer to Table 8.5. Planned saving equals planned investment at an aggregate output level of
A) \$4,000 million.
B) \$5,000 million.
C) \$6,000 million.
D) \$7,000 million.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

23) Refer to Table 8.5. Planned investment equals actual investment at
A) all income levels.
B) all income levels above \$6,000 million.
C) all income levels below \$6,000 million.
D) an income level of \$6,000 million.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
24) If C = 100 + 0.8Y and I = 50, then the equilibrium level of income is
A) 187.5.
B) 375.
C) 600.
D) 750.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

25) If C = 500 + 0.9Y and I = 400, then the equilibrium level of income is
A) 900.
B) 1,000.
C) 1,800.
D) 9,000.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

26) If S = -200 + 0.2Y and I = 100, then the equilibrium level of income is
A) 1,200.
B) 1,500.
C) 3,000.
D) 4,000.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

27) If C = 1,500 + 0.75Y and I = 500, then planned saving equals planned investment at aggregate output level of
A) 2,666.67.
B) 8,000.
C) 10,000.
D) 20,000.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

Refer to the information provided in Figure 8.9 below to answer the questions that follow.

Figure 8.9

28) Refer to Figure 8.9. What is the equation for the aggregate expenditure function (AE)?
A) AE = 200 + 0.5Y.
B) AE = 150 + 0.25Y.
C) AE = 200 + 0.8Y.
D) AE = 350 + 0.6Y.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

29) Refer to Figure 8.9. Equilibrium output equals
A) 100.
B) 150.
C) 200.
D) 300.
Diff: 1
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

30) Refer to Figure 8.9. At aggregate output level \$300 million, there is a
A) \$75 million unplanned increase in inventories.
B) \$75 million unplanned decrease in inventories.
C) \$100 million decrease in inventories.
D) \$100 million increase in inventories.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
31) Refer to Figure 8.9. At aggregate output level \$100 million, there is a
A) \$75 million unplanned increase in inventories.
B) \$75 million unplanned decrease in inventories.
C) \$100 million decrease in inventories.
D) \$100 million increase in inventories.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

32) Refer to Figure 8.9. How will equilibrium aggregate expenditure and equilibrium aggregate output change as a result of a decrease in investment by \$20 million?
A) AE line shifts down, increasing equilibrium output and equilibrium expenditure.
B) AE line shifts up, increasing equilibrium output and equilibrium expenditure.
C) AE line shifts down, decreasing equilibrium output and equilibrium expenditure.
D) AE line shifts down, increasing equilibrium output and decreasing equilibrium expenditure.
Diff: 3
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

Refer to the information provided in Figure 8.10 below to answer the questions that follow.

Figure 8.10

33) Refer to Figure 8.10. What is the equation for the aggregate expenditure function (AE)?
A) AE = 600 + 0.1Y.
B) AE = 200 + 0.8Y.
C) AE = 550 + 0.8Y.
D) AE = 100 + 0.9Y.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

34) Refer to Figure 8.10. At an aggregate output level of \$500 million, there is a
A) \$100 million unplanned increase in inventories.
B) \$175 million unplanned decrease in inventories.
C) \$0 change in unplanned inventories.
D) \$100 million unplanned decrease in inventories.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

35) Refer to Figure 8.10. At aggregate output levels above \$1,000 million, there are
A) unplanned increases in inventories and output increases.
B) unplanned decreases in inventories and output increases.
C) unplanned decreases in inventories and output decreases.
D) unplanned increases in inventories and output decreases.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
36) Refer to Figure 8.10. At aggregate output levels below \$1,000 million, there are
A) unplanned decreases in inventories and output increases.
B) unplanned increases in inventories and output increases.
C) unplanned increases in inventories and output decreases.
D) unplanned decreases in inventories and output decreases.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

37) Using the saving/investment approach to equilibrium, the equilibrium condition can be written as
A) C + I = C + S.
B) C = S + I.
C) C S = I.
D) C + S = I.
Diff: 1
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

38) Firms react to unplanned inventory reductions by
A) reducing output.
B) increasing output.
C) reducing planned investment.
D) increasing consumption.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

39) Firms react to unplanned increases in inventories by
A) reducing output.
B) increasing output.
C) increasing planned investment.
D) increasing consumption.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8
40) Aggregate output will increase if there is a(n)
A) increase in saving.
B) unplanned rise in inventories.
C) unplanned fall in inventories.
D) decrease in consumption.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

41) A decrease in planned investment causes
A) output to increase.
B) output to decrease, but by a smaller amount than the decrease in investment.
C) output to decrease, but by a larger amount than the decrease in investment.
D) output to decrease by an amount equal to the decrease in investment.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

42) When aggregate expenditure is greater than aggregate output, there will be an unplanned build up of inventories.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

43) When there is an unplanned draw down of inventories, firms will increase production.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

44) Actual investment equals planned investment plus unplanned changes in inventories.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Definition
Learning Outcome: Macro-8
45) When the economy is in equilibrium, savings equals planned investment.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

46) If aggregate expenditure decreases, then equilibrium output increases.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

47) Assuming there is no government or foreign sector, the economy will be in equilibrium if, and only if, planned investment equals actual investment.
Diff: 2
Topic: The Determination of Equilibrium Output (Income)
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

8.5 The Multiplier

1) The ratio of the change in the equilibrium level of output to a change in some autonomous variable is the
A) elasticity coefficient.
B) multiplier.
C) automatic stabilizer.
D) marginal propensity of the autonomous variable.
Diff: 1
Topic: The Multiplier
Skill: Definition
Learning Outcome: Macro-6
Refer to the information provided in Figure 8.11 below to answer the questions that follow.

Figure 8.11

2) Refer to Figure 8.11. The equation for the aggregate expenditure function AE0 is
A) AE0 = 50 + 0.6Y.
B) AE0 = 80 + 0.6Y.
C) AE0 = 50 + 0.75Y.
D) AE0 = 50 + 0.4Y.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

3) Refer to Figure 8.11. The value of the multiplier is
A) 2.
B) 2.5.
C) 3.
D) 4.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

4) Refer to Figure 8.11. A \$10 million increase in investment changes equilibrium output to
A) \$240 million.
B) \$225 million.
C) \$175 million.
D) \$90 million.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6
5) Refer to Figure 8.11. A \$20 million decrease in autonomous consumption
A) changes equilibrium expenditure to \$120 million.
B) changes equilibrium output to \$180 million.
C) will change the MPC.
D) will change the MPS.
Diff: 3
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

6) Refer to Figure 8.11. If MPC increases to 0.8, equilibrium aggregate output
A) increases to \$250 million.
B) remains at \$200 million.
C) increases to \$400 million.
D) cannot be determined from the given information.
Diff: 3
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

7) Assuming no government or foreign sector, if the MPC is 0.9, the multiplier is
A) 0.1.
B) 5.
C) 9.
D) 10.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

8) Assuming no government or foreign sector, the formula for the multiplier is
A) 1/MPC.
B) 1/MPS.
C) 1/(1 + MPC).
D) 1 MPC.
Diff: 1
Topic: The Multiplier
Skill: Definition
Learning Outcome: Macro-6
9) Assuming there is no government or foreign sector, the formula for the multiplier is
A) 1/(1 MPC).
B) 1/MPC.
C) 1/(1 + MPC).
D) 1 MPC.
Diff: 1
Topic: The Multiplier
Skill: Definition
Learning Outcome: Macro-6

10) Assuming there is no government or foreign sector, if the multiplier is 10, the MPC is
A) 0.9.
B) 0.8.
C) 0.5.
D) 0.1.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

11) Assume there is no government or foreign sector. If the MPS is 0.05, the multiplier is
A) 0.95.
B) 10.
C) 20.
D) 50.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

12) Assume there is no government or foreign sector. If the multiplier is 10, a \$10 billion increase in planned investment will cause aggregate output to increase by
A) \$1 billion.
B) \$5 billion.
C) \$10 billion.
D) \$100 billion.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
13) Assume there is no government or foreign sector. If the MPS is 0.2, a \$40 billion decrease in planned investment will cause aggregate output to decrease by
A) \$20 billion.
B) \$50 billion.
C) \$80 billion.
D) \$200 billion.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

14) Assume there is no government or foreign sector. If the multiplier is 4, a \$20 billion increase in investment will cause aggregate output to increase by
A) \$5 billion.
B) \$20 billion.
C) \$40 billion.
D) \$80 billion.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
Refer to the information provided in Figure 8.12 below to answer the questions that follow.

Figure 8.12

15) Refer to Figure 8.12. What is the equation for aggregate expenditure AE1?
A) AE1 = 1,000 + 0.5Y.
B) AE1 = 600 + 0.4Y.
C) AE1 = 1,000 + 0.6Y.
D) AE1 = 400 + 0.4Y.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

16) Refer to Figure 8.12. Suppose AE1, AE2 and AE3 are parallel. What is the value of Point B?
A) \$750 million
B) \$800 million
C) \$900 million
D) cannot be determined from the given information
Diff: 3
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

17) Refer to Figure 8.12. Suppose AE1, AE2 and AE3 are parallel. What is the value of Point A?
A) \$450 million
B) \$510 million
C) \$540 million
D) cannot be determined from the given information
Diff: 3
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8
18) Refer to Figure 8.12. Suppose the economys aggregate expenditure line is AE1. A \$10 million increase in planned investment causes aggregate equilibrium output to increase to
A) \$1,010.0 million.
B) \$1,016.7 million.
C) \$1,125.5 million.
D) \$1,215.6 million.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

19) As the MPS decreases, the multiplier will
A) increase.
B) decrease.
C) remain constant.
D) either increase or decrease depending on the size of the change in investment.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

20) Midwest State University in Nebraska is trying to convince Nebraska taxpayers that the tax dollars spent at Midwest State University are well spent. One of the universitys arguments is that for every \$1 spent by Midwest State University an additional \$5 of expenditures are generated within Nebraska. Midwest State University is arguing that the multiplier for their expenditures is
A) 0.2.
B) 1.
C) 4.
D) 5.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-8

21) If autonomous consumption increases, the size of the multiplier would
A) increase.
B) decrease.
C) remain constant.
D) either increase or decrease depending on the size of the change in autonomous consumption.
Diff: 2
Topic: The Multiplier
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6
22) In practice, the actual size of the multiplier is about
A) 1.
B) 1.4.
C) 2.
D) 4.
Diff: 1
Topic: The Multiplier
Skill: Fact
Learning Outcome: Macro-6

23) Related to the Economics in Practice on p. 472: According to the paradox of thrift, as individuals increase their saving,
A) income in the economy increases because there is more money available for firms to invest.
B) income in the economy increases because interest rates will fall and the economy will expand.
C) income in the economy will remain constant because the change in consumption equals the change in saving.
D) income in the economy will fall because the decreased consumption that results from increased saving causes the economy to contract.
Diff: 2
Topic: The Multiplier: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

24) Related to the Economics in Practice on p. 472: According to the paradox of thrift, increased efforts to save will cause a(n)
A) increase in income and an increase in overall saving.
B) increase in income but no overall change in saving.
C) decrease in income and an overall decrease in saving.
D) decrease in income but an increase in saving.
Diff: 2
Topic: The Multiplier: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-8

25) The larger the MPC, the smaller the multiplier.
Diff: 2
Topic: The Multiplier
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6
26) The smaller the MPS, the larger the multiplier.
Diff: 2
Topic: The Multiplier
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

27) If the MPC is 0.75, then the multiplier is 4.
Diff: 2
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

28) If the MPS is 0.1, then the multiplier is 10.
Diff: 1
Topic: The Multiplier
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Macro-6

29) An increase in the MPC, reduces the multiplier.
Diff: 2
Topic: The Multiplier
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Macro-6

30) Related to the Economics in P

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