Economics 252

Chapter 9 – Aggregate Spending

(1) The essence of the Keynesian theory of unemployment is:

(a) that unemployment results from inadequate demand for goods and services throughout the economy.

(b) that unemployment is but a temporary deviation from long run full employment.

(c) that short run unemployment problems are self-correcting in capitalistic economies.

(d) that prices and wages will fall to restore demand for goods and services and labor, and restore the economy back to full employment.

(2) Given that C = 1,000 + 0.60 Y, if the level of income is $1,000, the level of saving is:

(a) $-600

(b) $400

(c) $300

(d) -$300

(3) Suppose the MPC in an economy is 0.9, the APC is 0.8 and disposable income is $10 billion. If disposable income increases to $14 billion, what is the level of consumption?

(a) $11.2 billion.

(b) $11.6 billion.

(c) $9 billion.

(d) $12.6 billion.

(4) The marginal propensity to consumer can be found by dividing:

(a) Total consumption by total saving.

(b) Total consumption by the number of people consuming.

(c) The change in total consumption by the change in disposable income.

(d) Disposable income by total consumption.

(5) If, in the aggregate, consumers spend 80 cents out of every extra dollar received:

(a) the APC is 1.25

(b) the APC is 0.80

(c) the MPC is 0.80

(d) the MPS is 0.80

(6) Given that autonomous consumption equals $1,000, income equals $20,000, and the MPC equals 0.90, the level of:

(a) saving equals $10,000.

(b) saving equals $19,000.

(c) consumption equals $18,000.

(d) consumption equals $19,000.

(7) Which of the following would shift the consumption function?

(a) a change in the level of disposable income.

(b) a change in tax policy

(c) a change in the level of investment.

(d) a change in technology.

(8) The investment demand curve would shift to the left because of:

(a) the discovery of more efficient production methods.

(b) expectations of a recession.

(c) higher interest rates.

(d) expectations of an economic expansion.

Consider Figure 1 in answering Questions (9), (10), and (11).

Figure 1

Disposable Income (Yd)

(9) In Figure 1, the equation for the consumption function is:

(a) C = 100 + .75 Yd.

(b) C = 100 + .90 Yd.

(c) C = 100 + .80 Yd.

(d) C = 100 + .50 Yd.

(10) In Figure 1, the break-even level of Disposable Income Yd, where C = Yd is:

(a) 400

(b) 500

(c) 600

(d) 700

(11) In Figure 1, the level of saving or dissaving when Disposable Income Yd is 700 is:

(a) 40

(b) 100

(c) -60

(d) -100

Utilize Figure 2 to answer Questions (12), (13), (14), and (15). Qf refers to the full employment level of real output.

Figure 2

Real

Output

Real

Output

Real

Output

Q2 Qf

AS

(12) In Figure 2, the recessionary GDP gap is:

(a) (P* - P2) in Panel B.

(b) (Qf – Q2) in Panel B.

(c) (Q3-Qf) in Panel C.

(d) (P3 – P*) in Panel C.

(13) In Figure 2, the inflationary GDP gap is:

(a) (P* - P2) in Panel B.

(b) (Qf – Q2) in Panel B.

(c) (Q3 – Qf) in Panel C.

(d) (P3 – P*) in Panel C.

(14) Suppose the economy was at a full employment equilibrium and consumer confidence abruptly fell. Which statement would be correct?

(a) AS would increase and the economy would realize an inflationary GDP gap (Panel C).

(b) AD would decrease and the economy would realize a deflationary GDP gap (Panel A).

(c) AD would decrease and the economy would realize a deflationary GDP gap (Panel B).

(d) AD would increase and the economy would realize an inflationary GDP gap (Panel C).

(15) Suppose the economy was at a full employment equilibrium and the business community expected better economic conditions in the future and investment demand increased. Which statement would be correct?

(a) AD would increase and the economy would realize an inflationary GDP gap (Panel C).

(b) AD would decrease and the economy would realize a deflationary GDP gap (Panel A).

(c) AD would decrease and the economy would realize a deflationary GDP gap (Panel C).

(d) AD would increase and the economy would realize a deflationary GDP gap (Panel B).