Question 1

If we consider the equation PAE = A + bY the independent part of the equation that depends on income is:

Accepted Answer

A)   b
B)   Y
C)   A
D)   PAEE) A) and C)
F) None of the above

Question 2

The simplified expenditure multiplier:

Accepted Answer

A)   is calculated as 1/(1 − MP) .
B)   has a positive value.
C)   grows larger as the marginal propensity to consume increases.
D)   All of these are true.E) B) and C)
F) None of the above

Question 3

Which of the following is not a direct determinant of net export spending?

Accepted Answer

A)   Domestic income.
B)   Foreign income.
C)   Interest rates.
D)   Exchange rates.E) All of the above
F) C) and D)

Question 4

If the MPC is 0.8, and the government spends an additional $100b, the overall effect on GDP will be:

Accepted Answer

A)   $400b.
B)   $500b.
C)   $120b.
D)   $180b.E) A) and B)
F) None of the above

Question 5

The multiplier effect suggests that:

Accepted Answer

A)   a ripple effect occurs from one person's initial spending.
B)   government spending $1 will create more than a $1 increase in GDP.
C)   a tax cut will increase GDP by more than the amount of the initial tax cut.
D)   All of these are true.E) All of the above
F) B) and D)

Question 6

If the marginal propensity to consume was 0.75, it would mean that:

Accepted Answer

A)   $0.75 of an additional $1 of individuals' after-tax income is spent on consumption.
B)   $0.75 of an additional $1 of individuals' after-tax income is saved.
C)   $0.25 of an additional $1 of individuals' after-tax income is spent on consumption.
D)   None of these is true.E) None of the above
F) B) and C)

Question 7

Using Figure 2 above, suppose that the economy started at PAE2. A potential change that could cause the economy to go from PAE2 to PAE1 might be:

Accepted Answer

A)   consumption increases.
B)   investment increases.
C)   export increase.
D)   government spending decreases.E) A) and D)
F) None of the above

Question 8

A recessionary output gap is defined to be when:

Accepted Answer

A)   equilibrium aggregate expenditure is below full employment GDP.
B)   equilibrium aggregate expenditure is equal to full employment GDP.
C)   equilibrium aggregate expenditure is above full employment GDP.
D)   government spending is insufficient causing a gap in GDP.E) C) and D)
F) B) and C)

Question 9

Using Figure 3 above the distance between what 2 lines illustrate a recessionary expenditure gap?

Accepted Answer

A)   PAE2 to PAE3
B)   PAE1 to PAE2
C)   Y1 to Y2
D)   Y2 to Y3E) C) and D)
F) B) and C)

Question 10

When PAE increases we expect that economy will be at ______ levels of equilibrium GDP.

Accepted Answer

A)   lower
B)   higher
C)   constant
D)   cyclingE) B) and C)
F) A) and B)

Question 11

What type of relationship exists between expected future income and consumption?

Accepted Answer

A)   Negative
B)   Positive
C)   Indirect
D)   ConstantE) A) and B)
F) A) and C)

Question 12

When we compare PAE and actual output (Y)  if PAE is greater than Y we expect that:

Accepted Answer

A)   inventories to increase.
B)   inventories to decrease.
C)   there will be no change in inventories.
D)   the government will spend more than it has collected in taxes.E) A) and D)
F) None of the above

Question 13

Planned investment is the:

Accepted Answer

A)   spending households engage in based on forecasted budget.
B)   amount that firms decide to allocate to inventory accumulation.
C)   investment that a firm decides upon as a result of temporary market changes.
D)   amount that firms decide to allocate to new capital resources and inventory accumulation.E) B) and D)
F) All of the above

Question 14

The real exchange rate is defined to be the:

Accepted Answer

A)   value of goods in one nation relative to the value a similar set of goods in another country.
B)   rate people exchange goods and services in a domestic market.
C)   rate at which firms in different nations would be willing to exchange goods.
D)   value of goods in one nation relative to the value the same set of goods in another country.E) None of the above
F) All of the above

Question 15

Which of the following could be a direct cause of investment spending decreasing?

Accepted Answer

A)   Real income increases.
B)   Real interest rates increase.
C)   A firms revenues increases while their costs remain constant.
D)   Expected future income increases.E) C) and D)
F) A) and B)

Question 16

One of reasons the government may choose to spend would be the:

Accepted Answer

A)   real interest rates decrease.
B)   real interest rates increase.
C)   government expected to earn a large return on its spending.
D)   beliefs about what citizens may need.E) A) and B)
F) All of the above

Question 17

The component of aggregate expenditure that is not like other components because, in general, it is directly neutral to macroeconomic changes is:

Accepted Answer

A)   consumption spending.
B)   investment spending.
C)   government spending.
D)   net export spending.E) All of the above
F) A) and B)

Question 18

The popular and dominant school of economists in the 1930s who could not explain why the economy went into a depression were the:

Accepted Answer

A)   Classical School.
B)   Austrian School.
C)   Mercantilists.
D)   Ricardians.E) B) and C)
F) B) and D)

Question 19

Using Figure 3 above, suppose that the economy was at Y2. This level of GDP would be considered:

Accepted Answer

A)   inflationary.
B)   recessionary.
C)   a long run level of output.
D)   unsustainable over time.E) None of the above
F) A) and B)

Question 20

When referring to GDP, which is not a common alternative designation economists use?

Accepted Answer

A)   Net National Income
B)   Total Output
C)   National Income
D)   Aggregate ExpenditureE) A) and C)
F) B) and D)

Exam 11: Aggregate Expenditure

What type of relationship exists between expected future income and consumption?

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When we compare PAE and actual output (Y) if PAE is greater than Y we expect that:

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A recessionary output gap is defined to be when:

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Using Figure 2 above, suppose that the economy started at PAE2. A potential change that could cause the economy to go from PAE2 to PAE1 might be:

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Using Figure 3 above, suppose that the economy was at Y2. This level of GDP would be considered:

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Using Figure 3 above the distance between what 2 lines illustrate a recessionary expenditure gap?

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The popular and dominant school of economists in the 1930s who could not explain why the economy went into a depression were the:

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If we consider the equation PAE = A + bY the independent part of the equation that depends on income is:

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When referring to GDP, which is not a common alternative designation economists use?

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If the marginal propensity to consume was 0.75, it would mean that:

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Which of the following could be a direct cause of investment spending decreasing?

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The real exchange rate is defined to be the:

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The multiplier effect suggests that:

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When PAE increases we expect that economy will be at ______ levels of equilibrium GDP.

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If the MPC is 0.8, and the government spends an additional $100b, the overall effect on GDP will be:

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The component of aggregate expenditure that is not like other components because, in general, it is directly neutral to macroeconomic changes is:

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Planned investment is the:

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One of reasons the government may choose to spend would be the:

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Which of the following is not a direct determinant of net export spending?

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The simplified expenditure multiplier:

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