chapter 10

Question 1

asdasa

Answer 1

sadasdaasd

Question 2

ohn Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:
low levels of capital.
an untrained labor force. 
inadequate technology
. low aggregate demand.


Answer 2

. low aggregate demand.

Question 3

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

aggregate demand; aggregate supply
aggregate supply; aggregate demand
monetary policy; fiscal policy
fiscal policy; monetary policy

Answer 3

aggregate supply; aggregate demand

Question 4

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

consumption function.
interest rate.
price level.
nominal money supply.

Answer 4

interest rate.

Question 5

In the IS-LM model, which two variables are influenced by the interest rate?
supply of nominal money balances and demand for real balances
demand for real balances and government purchases
supply of nominal money balances and investment spending
demand for real money balances and investment spending

Answer 5

demand for real money balances and investment spending

Question 6

Two interpretations of the IS–LM model are that the model explains:

the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.
the short-run quantity theory of income, or the short-run Fisher effect.
the determination of investment and saving, or what shifts the liquidity preference schedule.
changes in government spending and taxes or the determination of the supply of real money balances.

Answer 6

the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.

Question 7

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income; goods and services
the price level; goods and services
national income; money
the price level; money

Answer 7

national income; goods and services

Question 8

For the purposes of the Keynesian cross, planned expenditure consists of:
planned investment.
planned government spending.
planned investment and government spending.
planned investment, government spending, and consumptio

Answer 8

planned investment, government spending, and consumptio

Question 9

In the Keynesian-cross model, actual expenditures equal:

GDP.
the money supply.
the supply of real balances. unplanned inventory investment.

Answer 9

GDP.

Question 10

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

liquidity preference.
the government-purchases multiplier.
 unplanned inventory investment.
real money balances.


Answer 10

unplanned inventory investment.

Question 11

Planned expenditure is a function of:

planned investment.
planned government spending and taxes.
planned investment, government spending, and taxes.
national income and planned investment, government spending, and taxes

Answer 11

national income and planned investment, government spending, and taxes

Question 12

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

zero.
between zero and one.
one.
greater than one.

Answer 12

between zero and one.

Question 13

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

right with a slope less than one. right with a slope greater than one. left with a slope less than one.
left with a slope greater than one.

Answer 13

right with a slope less than one.

Question 14

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

income equals consumption plus investment plus government spending.
planned expenditure equals consumption plus planned investment plus government spending.
actual expenditure equals planned expenditure.
actual saving equals actual investment.

Answer 14

actual expenditure equals planned expenditure.

Question 15

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; decumulation
right; accumulation
left; decumulation
left; accumulation

Answer 15

right; accumulation

Question 16

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

income falls.
planned expenditure falls.
unplanned inventory investment is negative.
prices rise.

Answer 16

unplanned inventory investment is negative.

Question 17

When firms experience unplanned inventory accumulation, they typically:

build new plants.
lay off workers and reduce production.
hire more workers and increase production
call for more government spending.

Answer 17

lay off workers and reduce production.

Question 18

The Keynesian cross shows:

determination of equilibrium income and the interest rate in the short run.
determination of equilibrium income and the interest rate in the long run.
equality of planned expenditure and income in the short run.
equality of planned expenditure and income in the long run.

Answer 18

equality of planned expenditure and income in the short run.

Question 19

Question
Exhibit: Keynesian Cross
Reference: Ref 10-1
(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are:

Y1 and PE1. 
Y2 and PE2. 
Y3 and PE3. 
Y3 and PE4.

Answer 19

Y2 and PE2.

Question 20

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

the budget deficit
consumption
income
real balances

Answer 20

income

Question 21

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

one unit.
∆G.
∆G divided by the quantity one minus the marginal propensity to consume.
∆G multiplied by the quantity one plus the marginal propensity to consume.

Answer 21

∆G divided by the quantity one minus the marginal propensity to consume.

Question 22

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income.

increase by 100
increase by more than 100 decrease by 100
increase, but by less than 100

Answer 22

increase by 100

Question 23

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

increases by 250.
increases by more than 250. decreases by 250.
increases, but by less than 250.

Answer 23

increases by more than 250.

Question 24

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

increases the amount of money in the economy.
changes income, which changes consumption, which further changes income.
is government spending and, therefore, more powerful than private spending.
changes the interest rate.

Answer 24

changes income, which changes consumption, which further changes income.

Question 25

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will: decrease equilibrium income by ∆T. decrease equilibrium income by ∆T/(1 – MPC). decrease equilibrium income by (∆T)(MPC)/(1 – MPC). not affect equilibrium income at all.

Answer 25

decrease equilibrium income by (∆T)(MPC)/(1 – MPC).

Question 26

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. increase by 100 increase by more than 100 decrease by 100 increase, but by less than 100

Answer 26

increase, but by less than 100

Question 27

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: ncreases by 250. increases by more than 250. decreases by 250. increases, but by less than 250.

Answer 27

increases by more than 250.

Question 28

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes. the budget deficit consumption income real balances

Answer 28

income

Question 29

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. is larger than equals is smaller than is the inverse of the

Answer 29

is larger than

Question 30

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ____. $1 billion; more than $1 billion $0.75 billion; more than $0.75 billion $0.75 billion; $0.75 billion $1 billion; $1 billion

Answer 30

$0.75 billion; more than $0.75 billion

Question 31

After the Kennedy tax cut in 1964, real GDP: fell and unemployment rose. rose and unemployment fell and unemployment both rose. and unemployment both fell.

Answer 31

rose and unemployment fell

Question 32

Both Keynesians and supply-siders believe a tax cut will lead to growth: and both agree it works through incentive effects. but Keynesians believe it works through incentive effects whereas supply-siders believe it works through aggregate demand. but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects. and both agree it works through aggregate demand.

Answer 32

but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.

Question 33

Tax cuts stimulate ______ by improving worker's incentive and expand ______ by raising households' disposable income. ``` elocity; demand for loanable funds demand for loanable funds; velocity aggregate demand; aggregate supply aggregate supply; aggregate demand  ```

Answer 33

aggregate supply; aggregate demand

Question 34

In the Keynesian-cross model, the equilibrium level of income is determined by: the factors of production. the money supply. planned spending. liquidity preference.

Answer 34

planned spending.

Question 35

n the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending? planned spending the interest rate production the price level

Answer 35

production

Question 36

The Keynesian-cross analysis assumes planned investment: is fixed and so does the IS analysis. depends on the interest rate and so does the IS analysis. is fixed, whereas the IS analysis assumes it depends on the interest rate. depends on expenditure and so does the IS analysis

Answer 36

is fixed, whereas the IS analysis assumes it depends on the interest rate.

Question 37

The simple investment function shows that investment ______ as ______ increases. decreases; the interest rate increases; the interest rate decreases; government spending increases; government spending

Answer 37

decreases; the interest rate

Question 38

An increase in the interest rate: reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects. increases planned investment, because people who make money from interest have more money to invest. has no effect on investment. may be caused by a drop in investment demand.

Answer 38

reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.

Question 39

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income increases; downward increases; upward decreases; upward decreases; downward

Answer 39

decreases; downward

Question 40

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. increases; increases increases; decreases decreases; decreases decreases; increases

Answer 40

increases; increases

Question 41

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally: is vertical. is horizontal. slopes upward and to the right. slopes downward and to the right.

Answer 41

slopes downward and to the right.

Question 42

Along any given IS curve: ax rates are fixed, but government spending varies. government spending is fixed, but tax rates vary. both government spending and tax rates vary. both government spending and tax rates are fixed.

Answer 42

both government spending and tax rates are fixed.

Question 43

The IS curve shifts when any of the following economic variables change except: the interest rate. government spending. tax rates. the marginal propensity to consume.

Answer 43

the interest rate.

Question 44

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: downward and to the left. upward and to the right. upward and to the left. downward and to the right.

Answer 44

upward and to the right.

Question 45

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: downward and to the left. upward and to the right. upward and to the left. downward and to the right.

Answer 45

downward and to the left.

Question 46

Based on the Keynesian model, one reason to support spending increases over tax cuts as measures to increase output is that: government spending increases the MPC more than tax cuts. the government-spending multiplier is larger than the tax multiplier. government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. increases in government spending increase planned spending, but tax cuts reduce planned spending.

Answer 46

the government-spending multiplier is larger than the tax multiplier.

Question 47

Gary Becker's criticism of government spending on infrastructure as part of President Obama's stimulus plan was that:  spending on infrastructure would not increase production in the economy. there is a conflict between where spending on infrastructure would benefit employment and where infrastructure is most needed. government spending on infrastructure is less effective in increasing production than an equal amount of private spending on infrastructure. government spending on infrastructure only increases demand, but tax cuts increase demand and supply.

Answer 47

there is a conflict between where spending on infrastructure would benefit employment and where infrastructure is most needed.

Question 48

One argument in favor of tax cuts over spending on infrastructure to increase production is that: tax cuts increase the MPC by a larger amount than spending on infrastructure. tax cuts increase planned spending, but spending on infrastructure offsets private spending. the tax multiplier is larger than the government spending multiplier. it takes longer to implement spending on infrastructure than to implement tax cuts. 

Answer 48

it takes longer to implement spending on infrastructure than to implement tax cuts.

Question 49

Changes in fiscal policy shift the: LM curve. money demand curve. money supply curve. IS curve.

Answer 49

IS curve.

Question 50

Along an IS curve all of the following are always true except: planned expenditures equal actual expenditures. planned expenditures equal income. the demand for real balances equals the supply of real balances. there are no unplanned changes in inventories.

Answer 50

the demand for real balances equals the supply of real balances.

Question 51

An IS curve shows combinations of: taxes and government spending. nominal money balances and price levels. interest rates and income that bring equilibrium in the market for real balances. interest rates and income that bring equilibrium in the market for goods and services. 

Answer 51

interest rates and income that bring equilibrium in the market for goods and services.

Question 52

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services. inflation and unemployment the price level and real output the interest rate and the level of income the interest rate and real money balances

Answer 52

the interest rate and the level of income

Question 53

The IS curve generally determines: income. the interest rate. both income and the interest rate. neither income nor the interest rate.

Answer 53

neither income nor the interest rate.

Question 54

When the LM curve is drawn, the quantity that is held fixed is: the nominal money supply. the real money supply. government spending. the tax rate.

Answer 54

the real money supply.

Question 55

According to the theory of liquidity preference, the supply of real money balances: decreases as the interest rate increases. increases as the interest rate increases. increases as income increases. is fixed.

Answer 55

is fixed.

Question 56

According to the theory of liquidity preference, the supply of nominal money balances: is chosen by the central bank. depends on the interest rate. varies with the price level. changes as the level of income changes.

Answer 56

is chosen by the central bank.

Question 57

The theory of liquidity preference implies that: as the interest rate rises, the demand for real balances will fall. as the interest rate rises, the demand for real balances will rise. the interest rate will have no effect on the demand for real balances. as the interest rate rises, income will rise.

Answer 57

as the interest rate rises, the demand for real balances will fall.

Question 58

If the interest rate is above the equilibrium value, the: demand for real balances exceeds the supply. supply of real balances exceeds the demand. market for real balances clears. demand for real balances increases

Answer 58

supply of real balances exceeds the demand.

Question 59

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will: sell interest-earning assets in order to obtain non-interest-bearing money. purchase interest-earning assets in order to reduce holdings of non-interest-bearing money. purchase more goods and services. be content with their portfolios.

Answer 59

purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.

Question 60

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will: sell interest-earning assets in order to obtain non-interest-bearing money. purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.? purchase fewer goods and services. be content with their portfolios.

Answer 60

sell interest-earning assets in order to obtain non-interest-bearing money.

Question 61

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: lower the interest rate. raise the interest rate. have no effect on the interest rate. first lower and then raise the interest rate.

Answer 61

lower the interest rate.

Question 62

When Paul Volcker tightened the money supply: the inflation rate immediately fell. nominal interest rates fell in the short run. nominal interest rates fell in the long run. real balances rose in the short run.

Answer 62

nominal interest rates fell in the long run.

Question 63

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run. increase; increase increase; decrease decrease; decrease decrease; increase

Answer 63

increase; decrease

Question 64

Reducing the money supply ______ nominal interest rates in the short run, and ______ nominal interest rates in the long run. produces no change in; raises raises; produces no change in raises; lowers lowers; raises

Answer 64

raises; lowers

Question 65

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply? planned spending the interest rate production the price level

Answer 65

the interest rate

Question 66

The theory of liquidity preference implies that the quantity of real money balances demanded is: negatively related to both the interest rate and income. positively related to both the interest rate and income. positively related to the interest rate and negatively related to income. negatively related to the interest rate and positively related to income.

Answer 66

negatively related to the interest rate and positively related to income.

Question 67

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with: no change in the interest rate. a lower interest rate. a higher interest rate. first a lower and then a higher interest rate.

Answer 67

a higher interest rate.

Question 68

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate increase; increase increase; decrease decrease; decrease decrease; increase

Answer 68

increase; increase

Question 69

The LM curve, in the usual case: is vertical. is horizontal. slopes down to the right. slopes up to the right.

Answer 69

slopes up to the right.

Question 70

An explanation for the slope of the LM curve is that as: the interest rate increases, income becomes higher. the interest rate increases, income becomes lower. income rises, money demand rises, and a higher interest rate is required. income rises, money demand rises, and a lower interest rate is required

Answer 70

income rises, money demand rises, and a higher interest rate is required.

Question 71

An LM curve shows combinations of: taxes and government spending. nominal money balances and price levels. interest rates and income, which bring equilibrium in the market for real money balances. interest rates and income, which bring equilibrium in the market for goods and services

Answer 71

interest rates and income, which bring equilibrium in the market for real money balances.

Question 72

A decrease in the real money supply, other things being equal, will shift the LM curve: downward and to the left. upward and to the left. downward and to the right. upward and to the right.

Answer 72

upward and to the left.

Question 73

A decrease in the nominal money supply, other things being equal, will shift the LM curve: upward and to the right. downward and to the right. downward and to the left. upward and to the left.

Answer 73

upward and to the left.

Question 74

A decrease in the price level, holding nominal money supply constant, will shift the LM curve: upward and to the right. downward and to the right. downward and to the left. upward and to the left.

Answer 74

downward and to the right

Question 75

An increase in income raises money ______ and ______ the equilibrium interest rate. demand; raises demand; lowers supply; raises supply; lowers

Answer 75

demand; raises

Question 76

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances. raises lowers does not change may either raise or lower

Answer 76

raises

Question 77

Changes in monetary policy shift the: LM curve. planned spending curve. money demand curve. IS curve.

Answer 77

LM curve.

Question 78

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances. nflation and unemployment the price level and real output the interest rate and the level of income the interest rate and real money balances

Answer 78

the interest rate and the level of income

Question 79

For any given interest rate and price level, an increase in the money supply: lowers income. raises income. has no effect on income. lowers velocity.

Answer 79

raises income.

Question 80

The LM curve generally determines: income. the interest rate. both income and the interest rate. neither income nor the interest rate.

Answer 80

neither income nor the interest rate.

Question 81

The IS and LM curves together generally determine: income only. the interest rate only. both income and the interest rate. income, the interest rate, and the price level.

Answer 81

both income and the interest rate.

Question 82

The interest rate determines ______ in the goods market and money ______ in the money market. government spending; demand government spending; supply investment spending; demand investment spending; supply

Answer 82

investment spending; demand

Question 83

The intersection of the IS and LM curves determines the values of: r, Y, and P, given G, T, and M r, Y, and M, given G, T, and P. r and Y, given G, T, M, and P. p and Y, given G, T, and M.

Answer 83

r and Y, given G, T, M, and P.

Question 84

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances. positively; positively positively; negatively negatively; negatively negatively; positively

Answer 84

negatively; positively

Question 85

The IS-LM model is generally used: only in the short run. only in the long run. both in the short run and the long run. in determining the price level.

Answer 85

only in the short run.

Question 86

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______. ``` saving and investment; planned spending real-money balances; loanable funds goods and services; real money balances real-money balances; goods and services  ```

Answer 86

goods and services; real money balances

Question 87

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6, and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by: 0. 100. 150. 250.

Answer 87

100

Question 88

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y – T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is: 350. 400. 600. 750.

Answer 88

600

Question 89

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y – T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: 200 240 250 260

Answer 89

260

Question 90

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will: not change. be smaller. be bigger. be equal to 1.

Answer 90

be smaller

Question 91

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will: lower equilibrium income by the decrease in the intercept multiplied by the multiplier. lower equilibrium income by the decrease in the intercept. raise equilibrium income by the decrease in the intercept. raise equilibrium income by the decrease in the intercept multiplied by the multiplier

Answer 91

lower equilibrium income by the decrease in the intercept multiplied by the multiplier.

Question 92

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will: increase saving by the decrease in the intercept. lead to no change in saving. decrease saving by the decrease in the intercept lead to an increase in investment.

Answer 92

lead to no change in saving.

Question 93

Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent. 2 4 6 8

Answer 93

6

Question 94

Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: drop by 4 percent. drop by 2 percent. drop by 1 percent. remain unchanged.

Answer 94

drop by 2 percent

Question 95

Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: 2000 1800 1600 1400

Answer 95

1600