Quiz
The Keynesian Model in Action
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1. At the equilibrium level of real GDP, which of the following is true?

a. Unplanned inventory investment is positive.
b. Unplanned inventory investment is negative.
c. Aggregate output equals aggregate expenditures.
d. Aggregate output plus consumption spending equals aggregate expenditures.

2. Which of the following most completely describes the workings of the Keynesian model?

a. If aggregate expenditures are less than aggregate output, then there is unplanned inventory accumulation, and real GDP will decrease.
b. If aggregate expenditures are greater than aggregate output, then there is unplanned inventory depletion, and real GDP will increase.
c. Aggregate output generates an equal amount of aggregate spending.
d. Both a. and b. above are correct.
e. Both a., b., and c. above are correct.

3. TRUE OR FALSE: According to Keynesian theory, once an equilibrium is established between aggregate expenditures and aggregate output, there is no tendency for the economy to change, even when the equilibrium level of GDP is considerably below the full-employment level, as during the Great Depression.

a. True.
b. False.

4. Which of the following correctly describes the Keynesian spending multiplier?

a. The initial change in aggregate expenditure (either consumption, investment, government, or net exports) divided by the change in equilibrium output.
b. An initial increase in aggregate demand divided by the change in equilibrium output.
c. An initial decrease in aggregate demand divided by the change in equilibrium output.
d. The change in equilibrium output divided by the initial change in aggregate expenditure (either consumption, investment, government, or net exports).

5. Which of the following correctly describes the mechanics of the Keynesian multiplier?

a. An initial increase aggregate expenditure, such as an increase in government spending, shifts the aggregate expenditure curve up vertically.
b. After the aggregate expenditure curve shifts upwards, the economy is out of equilibrium since aggregate expenditures now exceed aggregate output, leading to inventory depletion.
c. Real GDP increases in response to inventory depletion, eventually leading to a new Keynesian equilibrium at a higher level of real GDP.
d. Answers a., b., and c. above are all correct.

6. Which of the following is the correct formula for the Keynesian spending multiplier?

a. (1-MPC)/1.
b. 1/(1-MPC).
c. MPS/(1-MPC).
d. 1/MPC.

7. TRUE OR FALSE: The larger the marginal propensity to consume (MPC), the larger the percentage of disposable income that people consume rather than save, and the larger is the ultimate increase in real GDP from an initial increase in aggregate expenditure such as government spending.

a. True.
b. False.

8. If the marginal propensity to consume (MPC) is 0.80, then the Keynesian spending multiplier is which of the following?

a. 8.
b. 5.
c. 2.
d. 0.80.

9. If the current equilibrium level of real GDP is less than the full-employment level of real GDP, what must we do to help increase the equilibrium level of real GDP to full employment levels, according to the Keynesian model?

a. Decrease government spending.
b. Increase business taxes.
c. Increase government spending.
d. None of the above.

10. TRUE OR FALSE: A recessionary gap is the amount that autonomous aggregate expenditures must rise to cause the equilibrium level of real GDP to shift to the full-employment level of real GDP.

a. True.
b. False.

11. If the equilibrium level of real GDP is $100,000 below the full employment level of real GDP and the spending multiplier is 4, how much of an increase in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium to the full-employment level of real GDP?

a. $400,000.
b. $200,000.
c. $100,000.
d. $25,000.
e. $10,000.

12. TRUE OR FALSE: An inflationary gap is the amount that autonomous aggregate expenditures must rise to cause the equilibrium level of real GDP to shift to the full-employment level of real GDP.

a. True.
b. False.

13. If the equilibrium level of real GDP is $400,000 above the full employment level of real GDP and the spending multiplier is 4, how much of a decrease in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium down to the full-employment level of real GDP?

a. $400,000.
b. $200,000.
c. $100,000.
d. $25,000.
e. $10,000.

14. TRUE OR FALSE: Inflationary gaps tend to occur during recessions, while recessionary gaps tend to occur during peak growth periods in the economy.

a. True.
b. False.

15. If the marginal propensity to consume (MPC) shrinks, then which of the following is true?

a. It takes the same increase in autonomous aggregate expenditures to shift equilibrium real GDP upward to the full employment level.
b. It takes a smaller decrease in autonomous aggregate expenditures to shift equilibrium real GDP downward to the full employment level.
c. It takes a larger increase in autonomous aggregate expenditures to shift equilibrium real GDP upward to the full employment level.
d. It takes the same decrease in autonomous aggregate expenditures to shift equilibrium real GDP downward to the full employment level.




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