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Economics of Money: Chapter 20

front 1

His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports.

  1. A) John Maynard Keynes
  2. B) Sir John Hicks
  3. C) Milton Friedman
  4. D) Paul A. Samuelson

back 1

Answer: A

front 2

Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining

  1. A) the hyperinflations of the 1920s.
  2. B) why the Great Depression occurred.
  3. C) the high unemployment in Great Britain before World War I.
  4. D) the high unemployment in Great Britain after World War II.

back 2

Answer: B

front 3

Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

  1. A) aggregate output; wages
  2. B) aggregate output; employment
  3. C) wage rates; wages
  4. D) wage rates; employment

back 3

Answer: B

front 4

Keynes was especially concerned with explaining the

  1. A) recession of 1920-21.
  2. B) low levels of output and employment during the Great Depression.
  3. C) strong economic growth of the 1920s.
  4. D) high unemployment in Great Britain during the 1920s.

back 4

Answer: B

front 5

Keynes was especially concerned with explaining the ________ level of output and employment during the ________.

  1. A) low; 1920s
  2. B) low; 1930s
  3. C) high; 1920s
  4. D) high; 1930s

back 5

Answer: B

front 6

In the simple Keynesian model, equilibrium aggregate output is determined by

  1. A) aggregate demand.
  2. B) aggregate supply.
  3. C) the national demand for labor.
  4. D) the price level.

back 6

Answer: A

front 7

Under Keynesian analysis, aggregate demand can be written as

  1. A) Yad= C + I + G + NX.
  2. B) Yad= C + I + G - NX.
  3. C) Yad= C - I - G - NX.
  4. D) Yad= C + I - G - NX.

back 7

Answer: A

front 8

Keynes reasoned that consumer expenditure is most closely related to

  1. A) the level of interest rates.
  2. B) the price level.
  3. C) disposable income.
  4. D) the marginal tax rate.

back 8

Answer: C

front 9

In the Keynesian model of income determination, consumer expenditure includes spending by

  1. A) consumers on personal computers.
  2. B) businesses on personal computers.
  3. C) governments on personal computers.
  4. D) foreigners on domestic personal computers.

back 9

Answer: A

front 10

The marginal propensity to consume (mpc) can be defined as the fraction of

  1. A) a change in income that is spent.
  2. B) a change in income that is saved.
  3. C) income that is spent.
  4. D) income that is saved.

back 10

Answer: A

front 11

If the consumption function is expressed as C = a + mpc × YD, then "mpc" represents

  1. A) autonomous consumer expenditure.
  2. B) the marginal propensity to consume.
  3. C) the expenditure multiplier.
  4. D) disposable income.

back 11

Answer: B

front 12

If the consumption function is expressed as C = a + mpc × YD, then "a" represents

  1. A) autonomous consumer expenditure.
  2. B) the marginal propensity to consume.
  3. C) the expenditure multiplier.
  4. D) disposable income.

back 12

Answer: A

front 13

If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by

  1. A) $25.
  2. B) $70.
  3. C) $50.
  4. D) $100.

back 13

Answer: C

front 14

If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by

  1. A) $58.
  2. B) $64.
  3. C) $80.
  4. D) $100.

back 14

Answer: C

front 15

Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals

  1. A) $80.
  2. B) $200.
  3. C) $800.
  4. D) $1000.

back 15

Answer: D

front 16

Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals

  1. A) 0.2.
  2. B) 0.6.
  3. C) 0.8.
  4. D) 1.0.

back 16

Answer: B

front 17

Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal $800, then autonomous consumption is equal to

  1. A) $0.
  2. B) $200.
  3. C) $800.
  4. D) $1000.

back 17

Answer: B

front 18

Everything else held constant, if total consumption increases from $600 to $800 because of an increase of disposable income of $400, then the mpc is equal to

  1. A) 0.2.
  2. B) 0.4.
  3. C) 0.5.
  4. D) 0.6.

back 18

Answer: C

front 19

Everything else held constant, if consumption expenditure increases by 65 for a 100 increase in disposable income, the mpc is

  1. A) 0.
  2. B) 0.5.
  3. C) 0.65.
  4. D) 1.

back 19

Answer: C

front 20

Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 150, the mpc is

  1. A) 0.
  2. B) 0.15.
  3. C) 0.5.
  4. D) 0.75.

back 20

Answer: D

front 21

Everything else held constant, if consumption expenditure falls by 160 when disposable income falls by 200, the mpc is

  1. A) 0.
  2. B) 0.2.
  3. C) 0.4.
  4. D) 0.8.

back 21

Answer: D

front 22

Economists define investment as the purchase of

  1. A) a new physical asset such as a new machine or a new house.
  2. B) any physical asset, whether new or not, used by business to increase production.
  3. C) any physical asset used by business to increase production and the repurchase of common stock.
  4. D) business spending on capital and household spending on durable goods.

back 22

Answer: A

front 23

Planned investment spending, a component of aggregate demand, is equal to

  1. A) fixed investment plus actual inventory investment.
  2. B) fixed investment plus unplanned inventory investment.
  3. C) fixed investment.
  4. D) fixed investment plus planned inventory investment.

back 23

Answer: D

front 24

There are two types of investment: ________ investment—the spending by business firms on equipment and structures, and planned spending on residential houses—and ________ investment—spending by business firms on additional holdings of raw materials, parts, and finished goods.

  1. A) planned; gross
  2. B) planned; inventory
  3. C) fixed; gross
  4. D) fixed; inventory

back 24

Answer: D

front 25

A fall in inventories is synonymous with ________ investment.

  1. A) negative fixed
  2. B) positive fixed
  3. C) positive inventory
  4. D) negative inventory

back 25

Answer: D

front 26

A difference between inventory investment and fixed investment is that

  1. A) fixed investment is never unplanned.
  2. B) fixed investment is never planned.
  3. C) inventory investment is never unplanned.
  4. D) unplanned inventory investment is always zero.

back 26

Answer: A

front 27

Keynes mentioned two factors that influenced planned investment spending

  1. A) interest rates and disposable income.
  2. B) interest rates and business expectations about the future.
  3. C) disposable income and business expectations about the future.
  4. D) interest rates and business expectations about inflation.

back 27

Answer: B

front 28

Factors that influenced planned investment spending include

  1. A) real interest rates.
  2. B) financial frictions.
  3. C) emotional waves of optimism and pessimism.
  4. D) all of the above.
  5. E) A and C.

back 28

Answer: D

front 29

Planned investment spending is higher

  1. A) when real interest rate is higher.
  2. B) during financial frictions.
  3. C) when businesses are optimistic.
  4. D) all of the above.
  5. E) A and C.

back 29

Answer: C

front 30

Aggregate demand in an economy with no government or foreign trade is

  1. A) consumer expenditure plus actual investment.
  2. B) consumer expenditure plus planned investment.
  3. C) consumer expenditure plus inventory investment.
  4. D) consumer expenditure plus fixed investment.

back 30

Answer: B

front 31

If unplanned investment is positive, firms will ________ production and output will ________.

  1. A) cut; rise
  2. B) cut; fall
  3. C) increase; rise
  4. D) increase; fall

back 31

Answer: B

front 32

If unplanned investment is negative, firms will ________ production and output will ________.

  1. A) cut; rise
  2. B) cut; fall
  3. C) increase; rise
  4. D) increase; fall

back 32

Answer: C

front 33

In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.

  1. A) negative; lower
  2. B) negative; raise
  3. C) positive; lower
  4. D) positive; raise

back 33

Answer: B

front 34

In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to raise production.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

back 34

Answer: A

front 35

In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to lower production.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

back 35

Answer: D

front 36

In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain positive and firms will continue to ________ production.

  1. A) below; lower
  2. B) above; lower
  3. C) below; raise
  4. D) above; raise

back 36

Answer: B

front 37

In the Keynesian framework, as long as output is above the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.

  1. A) negative; lower
  2. B) negative; raise
  3. C) positive; lower
  4. D) positive; raise

back 37

Answer: C

front 38

In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain negative and firms will continue to ________ production.

  1. A) below; lower
  2. B) above; lower
  3. C) below; raise
  4. D) above; raise

back 38

Answer: C

front 39

In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain negative, firms will continue to ________ production, and output will continue to ________.

  1. A) lower; fall
  2. B) lower; rise
  3. C) raise; fall
  4. D) raise; rise

back 39

Answer: D

front 40

In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to raise production, and output will continue to rise.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

back 40

Answer: A

front 41

In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to lower production, and output will continue to fall.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

back 41

Answer: D

front 42

An increase in unplanned inventory investment for the entire economy equals the excess of

  1. A) output over aggregate supply.
  2. B) output over aggregate demand.
  3. C) aggregate supply over output.
  4. D) aggregate demand over output.

back 42

Answer: B

front 43

A decrease in unplanned inventory investment for the entire economy equals the excess of

  1. A) output over aggregate supply.
  2. B) output over aggregate demand.
  3. C) aggregate supply over output.
  4. D) aggregate demand over output.

back 43

Answer: D

front 44

If aggregate demand is less than the level of aggregate output, then ________ inventory investment will be ________.

  1. A) planned; positive
  2. B) actual; positive
  3. C) actual; negative
  4. D) planned; negative

back 44

Answer: B

front 45

If aggregate demand falls short of current output, business firms will ________ production to ________ inventories.

  1. A) cut; keep from accumulating
  2. B) expand; keep from accumulating
  3. C) cut; build up
  4. D) expand; build up

back 45

Answer: A

front 46

If aggregated demand is less than actual output, unplanned inventory ________ will cause output to ________.

  1. A) accumulation; rise
  2. B) depletion; fall
  3. C) depletion; rise
  4. D) accumulation; fall

back 46

Answer: D

front 47

If actual output is less than equilibrium output, firms will ________ output to keep from ________ inventories.

  1. A) increase; accumulating
  2. B) increase; depleting
  3. C) decrease; depleting
  4. D) decrease; accumulating

back 47

Answer: B

front 48

If actual output is greater than equilibrium output, firms will ________ output to keep from ________ inventories.

  1. A) increase; accumulating
  2. B) increase; depleting
  3. C) decrease; depleting
  4. D) decrease; accumulating

back 48

Answer: D

front 49

When the level of unplanned inventory investment is equal to zero, the economy is

  1. A) in disequilibrium.
  2. B) in a recession.
  3. C) in equilibrium.
  4. D) overheating

back 49

Answer: C

front 50

If aggregate demand equals output,

  1. A) the economy is in a recession.
  2. B) output will increase.
  3. C) output will fall.
  4. D) the economy is at its equilibrium level.

back 50

Answer: D

front 51

Situation 20-1

Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

Using the information in Situation 20-1, if aggregate output is equal to $10,000, then unplanned inventory investment equals

  1. A) -$1000
  2. B) -$100
  3. C) $0
  4. D) $100

back 51

Answer: D

front 52

Situation 20-1

Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

Using the information in Situation 20-1, if aggregate output equals $8,000, the unplanned inventory investment equals

  1. A) -$100
  2. B) $0
  3. C) $100
  4. D) $500

back 52

Answer: A

front 53

Situation 20-1

Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

Using the information in Situation 20-1, the equilibrium level of aggregate output is

  1. A) $900
  2. B) $8,000
  3. C) $9,000
  4. D) $10,000

back 53

Answer: C

front 54

Situation 20-1

Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

Using the information contained in Situation 20-1, if autonomous consumption increases by $100, then equilibrium aggregate output will change by

  1. A) -$1,000.
  2. B) -$100.
  3. C) $100.
  4. D) $1,000.

back 54

Answer: D

front 55

Situation 20-1

Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

Using the information contained in Situation 20-1, if planned investment decreases by $100, the equilibrium aggregate output will change by

  1. A) -$1,000.
  2. B) $-100.
  3. C) $100.
  4. D) $1,000.

back 55

Answer: A

front 56

Keynes believed that changes in autonomous spending were dominated by changes in

  1. A) consumer expenditure.
  2. B) autonomous consumer expenditure.
  3. C) investment spending.
  4. D) taxes.
  5. E) none of the above.

back 56

Answer: C

front 57

Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________, which are influenced by emotional waves of optimism and pessimism—factors he referred to as "animal spirits."

  1. A) unplanned investment spending
  2. B) actual investment spending
  3. C) planned investment spending
  4. D) autonomous consumer expenditures

back 57

Answer: C

front 58

In the simple Keynesian framework, declines in planned investment spending that produce high unemployment can be offset by raising

  1. A) taxes.
  2. B) government spending.
  3. C) consumer confidence.
  4. D) business confidence.

back 58

Answer: B

front 59

The Keynesian framework indicates that government can play an important role in determining aggregate output by

  1. A) changing the level of government spending or taxes.
  2. B) raising consumer confidence.
  3. C) raising investor confidence.
  4. D) changing the money supply and interest rates.

back 59

Answer: A

front 60

A tax cut initially

  1. A) increases consumption expenditure by an amount greater than the tax cut.
  2. B) increases consumption expenditure by an amount equal to the tax cut.
  3. C) increases consumption expenditure by an amount that is less than the value of the tax cut.
  4. D) has no effect on consumption expenditure.
  5. E) reduces consumption expenditure by an amount that is less than the value of the tax cut.

back 60

Answer: C

front 61

Assume equilibrium at full employment for an economy characterized by the simple Keynesian model. If the government raises taxes to eliminate a budget deficit, then

  1. A) the rate of unemployment will increase.
  2. B) the level of aggregate output will increase.
  3. C) the price level will increase.
  4. D) the rate of interest will fall.

back 61

Answer: A

front 62

Situation 20-2

Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.

Using the information in situation 20-2, if government spending increases by $100, then the equilibrium aggregate output will change by

  1. A) -$1,000.
  2. B) -$100.
  3. C) $100.
  4. D) $1,000.

back 62

Answer: D

front 63

Situation 20-2

Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.

Using the information in Situation 20-2, if taxes increase by $10, then the equilibrium aggregate output will change by

  1. A) -$90.
  2. B) -$10.
  3. C) $10.
  4. D) $90.

back 63

Answer: A

front 64

Situation 20-2

Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.

Using the information in situation 20-2, if government increases their spending by $50 and increases net taxes by 50, then equilibrium aggregate output will change by

  1. A) -$100.
  2. B) -$50.
  3. C) $50.
  4. D) $100.

back 64

Answer: C

front 65

In a closed economy, aggregate demand is the sum of

  1. A) consumer expenditure, actual investment spending, and government spending.
  2. B) consumer expenditure, planned investment spending, and government spending.
  3. C) consumer expenditure, actual investment spending, government spending, and net exports.
  4. D) consumer expenditure, planned investment spending, government spending, and net exports.

back 65

Answer: B

front 66

In an open economy, aggregate demand is the sum of

  1. A) consumer expenditure, actual investment spending, and government spending.
  2. B) consumer expenditure, planned investment spending, and government spending.
  3. C) consumer expenditure, actual investment spending, government spending, and net exports.
  4. D) consumer expenditure, planned investment spending, government spending, and net exports.

back 66

Answer: D

front 67

If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output increases by

  1. A) 100.
  2. B) 250.
  3. C) 400.
  4. D) 750.

back 67

Answer: C

front 68

If net exports increase by 250 and the mpc is 0.75, equilibrium aggregate output increases by

  1. A) 250.
  2. B) 500.
  3. C) 750.
  4. D) 1000.

back 68

Answer: D

front 69

If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output

  1. A) increases by 1000.
  2. B) increases by 750.
  3. C) decreases by 750.
  4. D) decreases by 1000.

back 69

Answer: D

front 70

Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending.

  1. A) negatively; negatively
  2. B) negatively; positively
  3. C) positively; negatively
  4. D) positively; positively

back 70

Answer: D

front 71

Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to the level of taxes.

  1. A) negatively; negatively
  2. B) negatively; positively
  3. C) positively; negatively
  4. D) positively; positively

back 71

Answer: C

front 72

Aggregate output is increased by a decrease in

  1. A) autonomous consumption.
  2. B) government spending.
  3. C) planned investment.
  4. D) net taxes.

back 72

Answer: D

front 73

Equilibrium output is reduced by an increase in

  1. A) planned investment.
  2. B) taxes.
  3. C) government spending.
  4. D) net exports.

back 73

Answer: B

front 74

Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model, explain how a fall in investment affects equilibrium output.

back 74

Answer: A fall in investment will reduce aggregate output by a greater amount that the initial fall in investment. This happens because of the multiplier effect.

front 75

If the interest rate falls, other things being equal, investment spending will

  1. A) fall.
  2. B) rise.
  3. C) either rise, fall, or remain unchanged.
  4. D) not be affected.

back 75

Answer: B

front 76

When the interest rate rises

  1. A) planned investment falls.
  2. B) planned investment rises.
  3. C) planned investment will be unaffected.
  4. D) equilibrium income increases.

back 76

Answer: A

front 77

When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________.

  1. A) high; few; high
  2. B) high; few; low
  3. C) low; few; high
  4. D) low; many; low
  5. E) high; many; high

back 77

Answer: B

front 78

When interest rates rise in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.

  1. A) falls; less; fall
  2. B) falls; more; rise
  3. C) rises; more; fall
  4. D) rises; less; fall

back 78

Answer: C

front 79

When interest rates fall in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.

  1. A) falls; less; fall
  2. B) falls; less; rise
  3. C) falls; more; fall
  4. D) rises; less; fall

back 79

Answer: B

front 80

An increase in interest rates

  1. A) increases the value of the dollar, net exports, and equilibrium output.
  2. B) increases the value of the dollar, reducing net exports and equilibrium output.
  3. C) reduces the value of the dollar, net exports, and equilibrium output.
  4. D) reduces the value of the dollar, increasing net exports and equilibrium output.

back 80

Answer: B

front 81

A decrease in interest rates

  1. A) increases the value of the dollar, net exports, and equilibrium output.
  2. B) increases the value of the dollar, reducing net exports and equilibrium output.
  3. C) reduces the value of the dollar, net exports, and equilibrium output.
  4. D) reduces the value of the dollar, increasing net exports and equilibrium output.

back 81

Answer: D

front 82

The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope.

  1. A) IS; upward
  2. B) IS; downward
  3. C) LM; downward
  4. D) LM; upward

back 82

Answer: B

front 83

Points on the IS curve satisfy ________ market equilibrium.

  1. A) money
  2. B) goods
  3. C) stock
  4. D) bond

back 83

Answer: B

front 84

The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded.

  1. A) LM curve
  2. B) IS curve
  3. C) consumption function
  4. D) investment schedule

back 84

Answer: B

front 85

The ________ describes points for which the goods market is in equilibrium.

  1. A) LM curve
  2. B) IS curve
  3. C) consumption function
  4. D) investment schedule

back 85

Answer: B

front 86

Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.

  1. A) supply; fall
  2. B) supply; rise
  3. C) demand; fall
  4. D) demand; rise

back 86

Answer: A

front 87

Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.

  1. A) supply; fall
  2. B) supply; rise
  3. C) demand; fall
  4. D) demand; rise

back 87

Answer: D

front 88

Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________.

  1. A) right; fall
  2. B) right; rise
  3. C) left; fall
  4. D) left; rise

back 88

Answer: A

front 89

Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________.

  1. A) right; fall
  2. B) right; rise
  3. C) left; fall
  4. D) left; rise

back 89

Answer: D

front 90

Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall.

  1. A) right; supply
  2. B) right; demand
  3. C) left; supply
  4. D) left; demand

back 90

Answer: A

front 91

Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________.

  1. A) right; fall
  2. B) right; rise
  3. C) left; fall
  4. D) left; rise

back 91

Answer: D

front 92

Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall.

  1. A) right; supply
  2. B) right; demand
  3. C) left; supply
  4. D) left; demand

back 92

Answer: A

front 93

Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to rise.

  1. A) right; supply
  2. B) right; demand
  3. C) left; supply
  4. D) left; demand

back 93

Answer: D

front 94

The Federal Reserve increases interest rates when it wants to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand?

back 94

Answer: Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount.

front 95

Other things equal, a decrease in autonomous consumption shifts the ________ curve to the ________.

  1. A) IS; right
  2. B) IS; left
  3. C) LM; left
  4. D) LM; right

back 95

Answer: B

front 96

In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

back 96

Answer: D

front 97

In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

back 97

Answer: A

front 98

In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

back 98

Answer: B

front 99

In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

back 99

Answer: C

front 100

In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

back 100

Answer: C

front 101

In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

back 101

Answer: B

front 102

An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; LM; left
  4. D) fall; IS; left

back 102

Answer: B

front 103

A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

back 103

Answer: C

front 104

Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending

  1. A) merely causes a movement along the IS curve and not a shift.
  2. B) is crowded out by higher taxes.
  3. C) is crowded out by higher government spending.
  4. D) is crowded out by lower consumer expenditures.

back 104

Answer: A

front 105

A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

back 105

Answer: B

front 106

A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

back 106

Answer: C

front 107

In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

back 107

Answer: D

front 108

In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

back 108

Answer: A

front 109

In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

back 109

Answer: B

front 110

In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

back 110

Answer: C

front 111

In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

back 111

Answer: C

front 112

In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

back 112

Answer: B

front 113

A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________.

  1. A) IS; right
  2. B) IS; left
  3. C) LM; left
  4. D) LM; right

back 113

Answer: B

front 114

An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

back 114

Answer: B

front 115

A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) fall; IS; left
  3. C) fall; LM; left
  4. D) rise; IS; right

back 115

Answer: B

front 116

The IS curve shifts to the left when

  1. A) taxes increase.
  2. B) government spending increases.
  3. C) the money supply increases.
  4. D) autonomous planned investment spending increases.

back 116

Answer: A

front 117

A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________, everything else held constant.

  1. A) raises; LM; right
  2. B) lowers; IS; left
  3. C) raises; IS; right
  4. D) lowers; LM; left

back 117

Answer: C

front 118

A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.

  1. A) increases; increases; right
  2. B) increases; decreases; left
  3. C) decreases; increases; left
  4. D) decreases; decreases; left

back 118

Answer: D

front 119

A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.

  1. A) increases; increases; right
  2. B) increases; decreases; right
  3. C) decreases; increases; left
  4. D) decreases; decreases; left

back 119

Answer: A

front 120

If American college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant.

  1. A) fall; LM
  2. B) fall; IS
  3. C) rise; LM
  4. D) rise; IS

back 120

Answer: B

front 121

If young business professionals in America suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to ________, everything else held constant.

  1. A) fall; fall
  2. B) fall; rise
  3. C) rise; fall
  4. D) rise; rise

back 121

Answer: A

front 122

An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports, everything else held constant.

  1. A) cheaper; decline
  2. B) cheaper; rise
  3. C) more expensive; decline
  4. D) more expensive; rise

back 122

Answer: B

front 123

An autonomous appreciation of the U.S. dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S.

  1. A) less; decreases
  2. B) less; increases
  3. C) more; decreases
  4. D) more; increases

back 123

Answer: C

front 124

A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant.

  1. A) decreases; rise
  2. B) decreases; fall
  3. C) increases; rise
  4. D) increases; fall

back 124

Answer: B

front 125

Everything else held constant, a shift in tastes in the U.S. toward Mexican goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico.

  1. A) decrease; rise
  2. B) decrease; fall
  3. C) increase; rise
  4. D) increase; fall

back 125

Answer: A

front 126

A shift in tastes toward American goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant.

  1. A) decreases; rise
  2. B) decreases; fall
  3. C) increases; rise
  4. D) increases; fall

back 126

Answer: C

front 127

Everything else held constant, a shift in tastes in the U.S. towards American goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico.

  1. A) decrease; rise
  2. B) decrease; fall
  3. C) increase; rise
  4. D) increase; fall

back 127

Answer: D

front 128

A shift in tastes toward American goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant.

  1. A) decreases; right
  2. B) decreases; left
  3. C) increases; right
  4. D) increases; left

back 128

Answer: C

front 129

A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant.

  1. A) decreases; right
  2. B) decreases; left
  3. C) increases; right
  4. D) increases; left

back 129

Answer: B

front 130

A depreciation of the U.S. dollar makes American goods cheaper relative to foreign goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant.

  1. A) fall; leftward
  2. B) rise; leftward
  3. C) fall; rightward
  4. D) rise; rightward

back 130

Answer: D

front 131

An appreciation of the U.S. dollar makes foreign goods cheaper relative to American goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant.

  1. A) fall; leftward
  2. B) rise; leftward
  3. C) fall; rightward
  4. D) rise; rightward

back 131

Answer: A

front 132

Which of the following does NOT shift the IS curve?

  1. A) an increase in autonomous consumption
  2. B) an increase in government spending
  3. C) a decline in government spending
  4. D) a fall in the interest rate

back 132

Answer: D