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Question 1 of 20 Feedback

Multiple Choice: Please select the best answer and click "submit." The correct answer is: at each
round of the multiplier process,
The economic reason that a larger MPC results in a larger multiplier is: the leakage into savings is
smaller when the MPC is
larger than it is when
the MPC is smaller. This leads
A. Autonomous consumption spending depends on disposable income. to greater consumption when
the MPC is larger. According to
B. At each round of the multiplier process, the leakage into savings is the aggregate expenditure
smaller when the MPC is larger than it is when theMPC is smaller. equation:
This leads to greater consumption when theMPC is larger.
Y = (1/(1 - b)) (a + I + G +
NX) - (b/(1 - b))T
C. They are inversely related.
If autonomous expenditure
increases by $1, income
D. Autonomous consumption spending depends on the size of the increases by 1/(1 - b) times $1.
multiplier. We call 1/(1 - b) the spending
multiplier. Since b is the MPC,
E. At each round of the multiplier process, the leakage into savings is which is less than 1, the
greater when the MPC is larger than it is when theMPC is smaller,. spending multiplier will always
This leads to less consumption when the MPCis larger. be greater than one. The
change in autonomous
expenditure causes a larger
change in GDP. Let's see how
this happens. Suppose the
government significantly
increases its spending, but
doesn't increase taxes. When
government spending
increases, the additional
spending creates additional
income. When people earn
additional income, they save
part of the income and spend
part. We can use the MPC to
calculate how much they
spend. Their spending results
in income for other people,
income that is then partly
saved and partly spent, and so
on. This process will generate
more

Question 2 of 20
Multiple Choice: Please select the best answer and click "submit."

Keynes asserted that as disposable income rises, people are likely to increase their consumption
expenditures:

A. More than the increase in their income.

B. Less than the increase in their income.


C. By the same amount as their income increases.

D. Only if they expect this higher income to be permanent.

E. But the increase is temporary.

Feedback
The correct answer is: less than the increase in their income. The increase in consumption is less than the increase in
disposable income. This is due to the marginal propensity to consume. The consumption function, C = a + bY D, says
that as disposable income increases, consumption increases as well. The slope of the line is b. Since b is the share of
additional income spent on consumption (MPC), b is less than 1 and the slope of the consumption function is also less
than 1. Therefore the increase in consumption is less than the increase in disposable income.

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Question 3 of 20
Multiple Choice: Please select the best answer and click "submit."
A movement from C1 to C2 could be caused by:

A. A lower tax rate.

B. A decrease in the marginal propensity to consume.

C. A decrease in the marginal propensity to save.

D. A decrease in income

E. A higher tax rate.


Feedback
The correct answer is: a decrease in the marginal propensity to consume. The slope of the consumption curve is the
marginal propensity to consume (MPC). If the MPC does change, the slope of the consumption curve will change. A
lower value of b results in a flatter curve and a slight upward shift, because bTdecreases.

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Question 4 of 20
Multiple Choice: Please select the best answer and click "submit."
The graph shows a simple economy without a government sector or a foreign sector. It shows consumption
and investment (on the vertical axis) and RGDP (on horizontal axis) in billions of dollars. The desired
investment level in this economy is:

A. $50 billion.

B. $150 billion.

C. $250 billion.

D. $200 billion.

E. $100 billion.
Feedback
Correct. The desired investment level is the difference between the consumption function (C) and the sum of
consumption and investment: C + I. Since the difference is equal to $50 billion, this is the desired level of investment.

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Question 5 of 20
Multiple Choice: Please select the best answer and click "submit."

Keynesian equilibrium occurs when:

A. Investments equal savings.

B. The aggregate expenditure line intersects the 45-degree line.

C. Aggregate expenditure equals income.

D. Aggregate expenditure equals output.


E. All of the above.

Feedback
The correct answer is: all of the above. Keynesian equilibrium can be defined with any of the four options listed.
Keynesian equilibrium is the point where the aggregate expenditures line intersects the 45-degree line. The 45-degree
line represents all the points where the aggregate expenditures equal GDP. In equilibrium, AE = GDP, so in other
words, AE equals both income and output. It's also true that in equilibrium investments are equal to savings. Therefore,
all four of the options are correct ways of defining Keynesian equilibrium.

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Question 6 of 20
Multiple Choice: Please select the best answer and click "submit."

Keynes disagreed with the proposition that:

A. Demand creates supply.

B. The economy does not move toward full employment immediately.


C. A fairly stable equilibrium at a level of RGDP below full employment is possible.

D. Wages would (eventually) adjust to the level where full employment is reached.

E. The interest rate is the major determinant of savings.

Feedback
The correct answer is: the interest rate is the major determinant of savings. According to Keynes, once the size of
investment is determined in the economy, it's fixed. We also know that the level of savings in the economy must be
equal to the investment. Therefore the amount of savings in the economy is fixed and independent of the interest rate.

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Question 7 of 20
Multiple Choice: Please select the best answer and click "submit."

If government spending is increased by $100 billion and taxes are raised by the same amount, the
Keynesian model predicts that:
A. RGDP will increase by the amount of the government spending increase.

B. RGDP will decrease by less than $100 billion.

C. RGDP will increase by more than $100 billion.

D. Output will not change.

E. RGDP will decline by the amount of the tax increase.

Feedback
Correct. The increase in government spending will increase output, and the increase in taxes will decrease output.
There are two effects here: both government spending and taxes increase, and the spending effect is slightly greater
than the tax effect. (changed to make these two items parallel in construction) According to the aggregate expenditure
equation:

Y = (1/(1 - b)) (a + I + G + NX)- (b/(1 - b))T

If government spending increases by $1, income increases by 1/(1 -b) times $1. On the other hand, if taxes increase by
$1, income will decrease by b/(1 - b) times $1. Therefore, if taxes and government spending increase by the same
amount, the multiplier effect is:

(1/(1 - b)) - (b/(1 - b)) = 1


so the change in real GDP equals the change in government spending, which equals the change in taxes.

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Question 8 of 20
Multiple Choice: Please select the best answer and click "submit."

A lower tax rate on personal income will:

A. Shift the consumption curve upward.

B. Make the consumption curve steeper.

C. Shift the consumption curve downward.

D. Will not affect the consumption curve.

E. Make the consumption curve flatter.


Feedback
Correct. Decreases in taxes increase consumption, shifting the curve upward. Changes in taxes result in changes in
disposable income. More taxes mean less disposable income and less consumption spending. Fewer taxes mean more
disposable income and more consumption spending.

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Question 9 of 20 Feedback
Multiple Choice: Please select the best answer and click "submit." The correct answer is: share of
any additional disposable
The marginal propensity to consume (MPC) represents the: income spent on consumption.
The marginal propensity to
consume is the share of
additional disposable income
A. Difference between new consumption and total consumption. spent on consumption. In other
words, it's the percentage of
B. another dollar of income that's
Ratio of consumption to income. spent rather than saved.

C. Click Next to Continue


Consumption level relative to the income level.

D. Share of any additional disposable income spent on consumption.

E. Change in consumption divided by the change in disposable income.


Question 10 of 20 Feedback
True-False: Please select true or false Correct. MPC is
and click "submit." the slope of the
At all points along a given consumption consumption
curve, the marginal propensity to curve. Therefore
it's constant
consume is constant.
along the curve.
A. True. Click Next to
Continue

B. False.

Question 11 of 20
Multiple Choice: Please select the best answer and click "submit."
In this graph, the aggregate expenditure curve shifts from AE1 to AE2 when there is:

A. A decrease in autonomous consumption.

B. An increase in net exports.

C. A decrease in the level of investments.

D. An increase in taxes.

E. A decrease in government spending.


Feedback
The correct answer is: an increase in net exports. An increase in net exports would have a positive effect on aggregate
expenditure, and theAE curve would shift upward. Let's see why:

Y = (1/(1 - b)) (a + I + G + NX)- (b/(1 - b))T

According to the equation above, an increase in net exports increases income by (1/(1 - b))and shifts the AE curve
upward.

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Question 12 of 20
Multiple Choice: Please select the best answer and click "submit."
The graph shows the macroeconomic equilibrium of an open economy. Which of the following would
reduce equilibrium real GDP?

A. An increase in autonomous consumption expenditure.

B. An increase in the prices of domestic goods and services.

C. An increase in the prices of foreign goods and services.

D. An increase in autonomous investment.

E. An increase in government spending.


Feedback
The correct answer is: an increase in the prices of domestic goods and services. Higher domestic prices affect
consumption, investment, and net exports. Let's look at the last of the list, net exports. Higher domestic prices increase
the demand for foreign goods, since they become cheaper relative to the domestic goods. Net exports decrease as the
demand for foreign goods increases, since we start to import more and export less. A decrease in net exports shifts the
aggregate expenditure line downward and decreases real GDP.

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Question 13 of 20
Multiple Choice: Please select the best answer and click "submit."
According to graph, when the AE curve shifts from AE1 to AE2, equilibrium income rises by:

A. $500 billion.

B. $200 billion.

C. $100 billion.

D. $400 billion.

E. $300 billion.
Feedback
The correct answer is: $200 billion. The increase in income is equal to $200 billion. An economy is in equilibrium
when the aggregate expenditures line intersects the 45-degree line (the 45-degree line represents all the points where
aggregate expenditures equal RGDP). The initial equilibrium before any changes is at $300 billion. When the AE curve
shifts, the new AEline intersects the 45-degree line at $500 billion. This is the new equilibrium; therefore the increase
in income is the difference between $500 billion and $300 billion, which is $200 billion.

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Question 14 of 20
Multiple Choice: Please select the best answer and click "submit."
According to the graph, when the aggregate expenditure curve shifts from AE1 toAE2, autonomous spending
increases by:

A. $100 billion.

B. $400 billion.

C. $500 billion.

D. $200 billion.

E. $300 billion.
Feedback
Correct. The increase in autonomous spending is equal to $100 billion. When the autonomous spending increases, the
line shifts upward. The increase is then equal to the difference between AE1 and AE2at any given level of real GDP.
You can find this by looking at the vertical distance between the curves.

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Question 15 of 20
Multiple Choice: Please select the best answer and click "submit."
According to the graph (which shows consumption and investment in billions of dollars on the vertical axis
and RGDP in billions of dollars on the horizontal axis), the equilibrium level of output in this economy is:

A. $100 billion.

B. $300 billion.

C. $200 billion.

D. $150 billion.

E. $250 billion.
Feedback
The correct answer is: $200 billion. The equilibrium level of output is where aggregate expenditures are equal to real
GDP. This could happen at any point along the line marked 45°, because that line represents all the points at
which AE could equal RGDP. In this graph, the two curves intersect at $200 billion. At that level the economy is in
equilibrium, since real GDP is equal to aggregate expenditures.

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Question 16 of 20
Multiple Choice: Please select the best answer and click "submit."
According to the graph, the spending multiplier is equal to:

A. 1.

B. 2.

C. 4.

D. impossible to calculate from the information given.

E. 3.
Feedback
The correct answer is: 2. The spending multiplier is equal to the increase in real GDP divided by the autonomous
expenditure increase. Here, the increase in real GDP is $200 billion, and the increase in autonomous expenditure is
$100 billion. Therefore the spending multiplier should be $200/$100 = 2.

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Question 17 of 20
Multiple Choice: Please select the best answer and click "submit."
The graph shows a simple two-sector economy whose current output level is Y1. Which of the statements
below correctly describes how the economy moves toward the equilibrium income Y*?

A. At Y1, firms will experience unexpected increases in inventories and will reduce production until
equilibrium GDP has been attained.

B. At Y1, firms will experience an unexpected decrease in inventories. In response, they will increase
production, and therefore output will rise.

C. Since aggregate expenditures at Y1 are greater than real GDP, investment will decrease and real output will
fall.

D. At Y1, firms will experience unexpected increases in inventories and will increase production until the
economy reaches equilibrium.

E. Since aggregate expenditures are less than real GDP at Y1, output will fall.
Feedback
The correct answer is: At Y1, firms will experience an unexpected decrease in inventories. In response, they will
increase production, and therefore output will rise. An economy is in equilibrium when aggregate expenditures are
equal to real GDP (Y*). At any level below Y*, aggregate expenditures will exceed real GDP. This means that spending
on goods and services is greater than production, so inventories will decrease. Given time to adjust, firms will increase
output to match this increased demand.

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Question 18 of 20
Multiple Choice: Please select the best answer and click "submit."

Suppose taxes decrease by $100 billion. If everything else stays constant and the marginal propensity to
consume is 0.8, the value of equilibrium output increases by:

A. $500 billion.

B. $100 billion.

C. $80 billion.
D. $320 billion.

E. $400 billion.

Feedback
The correct answer is: $400 billion. The value of equilibrium output will increase by $400 billion. To figure the
increase in output, you first need to calculate the tax multiplier by using theMPC. When MPC is equal to 0.8 the tax
multiplier will be equal to:

MPC/(1 - MPC) = 0.8/(1 - 0.8) = 4

Therefore, the increase in output will be equal to the decrease in taxes multiplied by four. Since the decrease in taxes is
equal to $100, the increase in equilibrium output will be $400 billion.

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Question 19 of 20
Multiple Choice: Please select the best answer and click "submit."

The consumption function shows the relationship between consumption and:


A. Savings.

B. Aggregate wealth.

C. Disposable income.

D. The price level.

E. Unemployment.

Feedback
The correct answer is: disposable income. The consumption function shows the relationship between consumption and
disposable income. Household consumption expenditures are divided into two categories: autonomous consumption
and consumption that depends on income. Autonomous consumption is the automatic spending a household does,
regardless of income level. Other household consumption spending depends on household income. When income
increases, consumption spending also increases. Likewise, when income decreases, consumption spending decreases.
The consumption function is then equal to:
C = a + bY D
The equation tells us that consumption equals autonomous spending plus the share of additional disposable income
spent on consumption. Therefore as disposable income increases, consumption increases as well.
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Question 20 of 20
True-False: Please select true or false and click "submit."

According to the Keynesian model, prices and wages automatically adjust to create equilibrium, and
equilibrium is determined by the quantity of production the economy is capable of.

A. True.

B. False.

Feedback
The correct answer is: Keynes agreed that prices and wages may automatically adjust to create equilibrium, but argued
the adjustment process might take years and years. He believed prices don't automatically adjust in the short run. He
also claimed the level of spending determines short-run economic equilibrium, not the level of production.

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Question 1 of 15
Multiple Choice: Please select the best answer and click "submit."
Which of the following does not characterize the classical view of the economy?

A. The economy will stay out of equilibrium only for short periods.

B. An economy automatically moves to equilibrium at the full-employment level of GDP.

C. Prices and wage variations are the mechanism for short-run adjustments leading to long-run equilibrium.

D. The level of production determines the short-run economic equilibrium.

E. Prices and wages do not automatically adjust in the short run.

Feedback
The correct answer is: Prices and wages do not automatically adjust in the short run. The classical view says two
things:

prices and wages automatically adjust to create equilibrium, and equilibrium is determined by the quantity of
production the economy is capable of. Classical economists believe the economy automatically adjusts to full
employment. Their argument depends on the flexibility of prices and wages. In a world where prices and wages are
completely flexible, everything produced will be purchased. Except for short-term fluctuations in the economy, the
economy automatically moves to equilibrium at the full-employment level of GDP.

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Question 2 of 15
Multiple Choice: Please select the best answer and click "submit."

Suppose the economy is operating below full employment. According to Keynesian theory, if government
spending increases:

A. Prices will increase, without any significant change in output.

B. Output and prices will both increase.

C. Output will increase without any significant change in prices.

D. Output and prices will decrease.

E. Output and prices will remain the same.


Feedback
The correct answer is: output will increase without any significant change in prices.

When government spending increases, aggregate expenditures increase as well. The equilibrium level of real GDP
increases by the increase in government spending times the spending multiplier (the spending multiplier is one over one
minus the marginal propensity to consume). In the Keynesian model, an increase in spending will increase real GDP,
but it will not cause a change in the price level.

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Question 3 of 15
Multiple Choice: Please select the best answer and click "submit."

When an economy is on the flat segment of the aggregate supply curve:

A. Real GDP can increase with no (or very little) effect on the economy's price level.

B. Increases in real GDP can occur only with correspondingly large increases in the economy's price level.

C. The price level and real GDP will be unaffected if aggregate demand changes.

D. The price level can increase without affecting real GDP.

E. There is a negative relationship between real GDP and the price level.
Feedback
Correct. Let's see what happens when aggregate demand increases in the flat segment of the AS curve. Suppose
aggregate demand increases. This is shown as a shift of the AD curve to the right. The new equilibrium point is to the
right of the original equilibrium. The equilibrium level of real GDP increases, but is there any significant change in the
price level? The price level increases only slightly, but real GDP increases a lot. When we're on the flat segment of
the AScurve, an increase in spending will cause a large increase in real GDP, but only a small increase in the price
level. Therefore the flat segment of the aggregate supply curve shows that real GDP can increase without affecting the
economy's price level significantly.

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Question 4 of 15
Multiple Choice: Please select the best answer and click "submit."

According to Keynes:

A. Level of production determines the equilibrium.

B. Prices are flexible and adjust easily to changes in the economy, but wages are not flexible.
C. Prices and wages are flexible and adjust easily to changes in the economy.

D. Wages are flexible and adjust easily to changes in the economy, but prices are not flexible.

E. Wages and prices are not flexible and do not adjust easily to changes in the economy.

Feedback
The correct answer is: wages and prices are not flexible and do not adjust easily to changes in the economy.

Sticky prices and wages are key to Keynesian ideas, and were a big reason for his departure from classical economic
views. Classical economists felt that prices and wages were flexible and free to make adjustments, keeping economy at
the full-employment level of output. Keynes pointed out that this wasn't always true; sometimes prices and wages aren't
free to change, and so the economy could stay below full employment for prolonged times.

In explaining this, Keynes said prices and wages could be sticky. One cause of sticky wages is that workers are
generally not willing to take pay cuts (there are other reasons, too). An example of a sticky price is one advertised in a
catalog. If the cost of changing the catalog (called the menu cost) is high enough, a business won't charge the higher
price until the catalog expires.

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Question 5 of 15
Multiple Choice: Please select the best answer and click "submit."

When the economy is at full employment, an increase in net exports:

A. Increases real GDP, but does not change the price level, in the AD/ASmodel.

B. Increases both real GDP and the price level, in the Keynesian model.

C. Increases real GDP and price level in both models?the Keynesian and the AD/AS.

D. Increases the price level, but does not change real GDP, in the Keynesian model.

E. Increases the price level in the AD/AS model, but does not change it in Keynesian model.

Feedback
The correct answer is: increases the price level in the AD/ASmodel, but does not change it in Keynesian model.

According to the Keynesian model, when spending increases, the AE line shifts upward, and the economy reaches a
new equilibrium. At this new equilibrium, real GDP will be higher than the previous one, but there will be no change in
the price level.
On the other hand, increases in net exports shift the AD curve to the right in the AD/AS model. Suppose the economy is
on the upward-sloping segment of theAS curve and net exports increase. Aggregate demand increases, so the AD curve
shifts to the right. The new equilibrium point is to the right of the original equilibrium. The equilibrium level of real
GDP increases slightly, but there is a significant increase in the price level. Therefore when the economy is at full-
employment level, an increase in net exports increases price level in AD/AS model, but doesn't change it in Keynesian
model.

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Question 6 of 15
Multiple Choice: Please select the best answer and click "submit."

In the section of the aggregate supply curve with a somewhat gentle upward slope (the middle of the
curve), when aggregate demand increases:

A. Real GDP increases, but the price level does not change.

B. Both real GDP and the price level rise.

C. There is no change in real GDP or the price level.

D. Real GDP increases, and the price level falls.

E. Real GDP decreases, and the price level rises.


Feedback
The correct answer is: both real GDP and the price level rise. In the middle segment of the AScurve, a change in
the AD affects both the price level and the real GDP. When AD shifts to the right (increases), the price level and the
real GDP increase.

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Question 7 of 15
Multiple Choice: Please select the best answer and click "submit."

An important similarity between the Keynesian model and the AD/AS model is that:

A. In both models, the price level stays constant when there is a change in spending.

B. In both models real GDP stays constant when there is a change in spending.

C. Both models predict that the economy will move toward full employment automatically.

D. In both models, prices change when there is a change in spending.


E. Both models allow for government intervention in the short run.

Feedback
The correct answer is: both models allow for government intervention in the short run.

An important similarity between the Keynesian and AD/AS model is that both models allow for government
intervention in the short run. Keynes believed that both prices and wages are sticky. Since a sticky price is one that
doesn't adjust easily to changes in the economy, Keynes argued that the economy doesn't automatically move toward
equilibrium?or if it does, it takes a long time to get to full employment?and government intervention may help
significantly. Similarly, in theAD/AS model, the economy can operate well below the full-employment level of real
GDP in short-run equilibrium. So according to the AD/AS model, too, there's room for government intervention in the
short run.

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Question 8 of 15
Multiple Choice: Please select the best answer and click "submit."

Which of the following describes the difference between Keynesian and classical macroeconomics?

A. The classicists thought that prices were inflexible. Keynes thought that prices were flexible.
B. The classicists thought that wages were inflexible downward. Keynes thought that unemployment would
be eliminated by falling wages.

C. Classicists thought that government intervention was necessary. Keynes thought that there would be no
need for government intervention.

D. The classicists thought that savings depended on disposable income. Keynes thought savings depended on
the interest rate.

E. The classicists thought that the economy would move toward full-employment equilibrium. Keynes
thought that an equilibrium level of output less than full employment was possible.

Feedback
The correct answer is: The classicists thought that the economy would move toward full-employment equilibrium.
Keynes thought that an equilibrium level of output less than full employment was possible.

Except for short-term fluctuations, classical economists believed that the economy automatically moves to equilibrium
at the full-employment level of GDP. Keynes argued differently. He believed that both prices and wages are sticky.
Since a sticky price is one that doesn't adjust easily to changes in the economy, he concluded that the economy doesn't
automatically move towards equilibrium at full employment? or if it does, it takes so long to get to full employment
that an equilibrium level of output less than full employment was possible.
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Question 9 of 15
Multiple Choice: Please select the best answer and click "submit."

The basic Keynesian model is particularly applicable to situations in which the economy:

A. Is at full employment.

B. Has flexible prices.

C. Has low unemployment.

D. Has flexible wages.

E. Is below the full-employment level.

Feedback
The correct answer is: is below the full-employment level. The basic Keynesian model is particularly applicable to
situations in which the economy is below the full-employment level. When there's a lot of unused capacity, such as
when the economy is well below full employment, it can reach higher levels of output without any inflationary
pressures.

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Question 10 of 15
True-False: Please select true or false and click "submit."

An important distinction between the Keynesian and AD/AS model is that in Keynesian analysis the initial
state of the economy doesn't matter when something changes. The predictions will be the same. In
the AD/AS model, however, it matters very much, since the predictions are very different for an economy
near full employment than for an economy far below full employment.

A. True.

B. False.

Feedback
Correct. In Keynesian analysis the initial state of the economy doesn't matter when something changes. The predictions
will be the same. Keynesian model assumes the economy automatically moves to the point where aggregate
expenditures equal real GDP. There is no adjustment process that relies on the price level. In the AD/ASmodel,
however, it matters very much, since the predictions are very different for an economy near full employment than for
an economy far below full employment. If the economy is below full employment, an increase in aggregate demand
increases real GDP, but changes the price level only slightly. On the other hand, if the economy is near full
employment, an increase in aggregate demand will increase the price level, but change real GDP only slightly.

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Question 11 of 15
Multiple Choice: Please select the best answer and click "submit."

The AD/AS model says that prices:

A. Automatically and rapidly adjust.

B. Influence the equilibrium level of production.

C. Are sticky.

D. Are fixed.

E. Are not important in determining equilibrium.


Feedback
The correct answer is: influence the equilibrium level of production. The AD/AS curves allow for some price and wage
stickiness, but don't discount the importance of prices in influencing the equilibrium level of production.

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Question 12 of 15
Multiple Choice: Please select the best answer and click "submit."

The __________ portion of the AS curve corresponds to Keynesian theory.

A. upward-sloping

B. flat

C. steep

D. No part of the AS curve corresponds to Keynesian theory.


E. entire

Feedback
The correct answer is: flat. In the flat portion of the AS curve, a change in quantity supplied causes very little change in
price. This corresponds to Keynesian theory.

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Question 13 of 15
Multiple Choice: Please select the best answer and click "submit."

Classical economics says that the economy automatically adjusts to full employment, and Keynes said that
the economy does not automatically adjust, or if it does, the process takes too long. What does
the AD/AS model say about adjustment?

A. The economy fully adjusts in the long run.

B. There is room for government intervention.


C. All the above.

D. In short-run equilibrium, the economy can operate at less than full employment.

E. The AD/AS model says that adjustment falls somewhere in between the classical and Keynesian views.

Feedback
The correct answer is: all the above. In the AD/AS model, adjustment is viewed as somewhere between the classical and
the Keynesian perspective. In the AD/AS model, the economy automatically adjusts to full employment in the long run.
In the short run, the economy can operate well below the full-employment level of real GDP in equilibrium. So there's
room for government intervention in the short run, according to the AD/ASmodel too.

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Question 14 of 15
Multiple Choice: Please select the best answer and click "submit."

Economic predictions by the Keynesian model and the AD/AS model depend on where the economy starts.
If the economy is in a recession, the predictions of theAD/AS model are __________ the predictions of the
Keynesian model.
A. similar to

B. the same as

C. The AD/AS model isn't used for economic predictions.

D. very different from

E. The Keynesian model isn't used for economic predictions.

Feedback
Yes! The Keynesian model assumes no price responsiveness. If the economy is in a recession, it's operating in the flat
portion of the AS curve, where there's very little price responsiveness. Therefore, the predictions for the models are
similar along this portion of theAS curve. In fact, this portion of the AS curve is often called the Keynesian portion of
the AScurve.

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Question 15 of 15
Multiple Choice: Please select the best answer and click "submit."
Economic predictions by the Keynesian model and the AD/AS model depend on where the economy starts.
If the economy is healthy, the predictions of theAD/AS model are __________ the predictions of the
Keynesian model.

A. similar to

B. the same as

C. very different from

D. The Keynesian model isn't used for economic predictions.

E. The AD/AS model isn't used for economic predictions.

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The correct answer is: very different from. The Keynesian model assumes no price responsiveness. If the economy is in
a healthy state, it isn't operating in the flat portion of the AS curve (the part well below full employment), where there is
very little price responsiveness. Therefore, the predictions for the models will differ along this portion of the AS curve.

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Question 1 of 10
Multiple Choice: Please select the best answer and click "submit."

Use this graph to answer questions 1 through 4.

Which curve will shift if the economy is allowed to adjust on its own in this situation?

A. LRAS

B. AS

C. AD
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That is incorrect; the correct answer is: AS.

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Question 2 of 10
Multiple Choice: Please select the best answer and click "submit."

Use this graph to answer questions 1 through 4.


What would result from the economy adjusting on its own in this situation?

A. Inflation

B. Higher investment

C. Less government spending

D. Increased output
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Correct! A decrease in AS results in an increase in the price level.

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Question 3 of 10
Multiple Choice: Please select the best answer and click "submit."

Use this graph to answer questions 1 through 4.


Which curve will shift if the government pursues a contractionary fiscal policy in this situation?

A. AD

B. AS

C. LRAS
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Correct! A contractionary policy that either raises taxes or cuts government spending reduces aggregate demand.

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Question 4 of 10
Multiple Choice: Please select the best answer and click "submit."

Use this graph to answer questions 1 through 4.


What would result from a contractionary fiscal policy used in this situation?

A. Decreased output

B. More investment

C. Inflation

D. Higher wages
Feedback
Correct! Shifting the AD curve to the left reduces RGDP.

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Question 5 of 10
Fill in the blank: Type your answer in the box and then click "submit."

An economy has an RGDP $100 below the full-employment level. If MPC is 0.8, what increase in
government spending would result in a return to long-run equilibrium? Assume that you are on the
Keynesian portion of the AS curve.

Answer: 20
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That is incorrect; the correct answer is: $20.

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Question 6 of 10
Multiple Choice: Please select the best answer and click "submit."

An economy has an RGDP $50 above the full-employment level. If the MPC is 0.5, what kind of "balanced
budget" change would be needed to return to long-run equilibrium? Assume that you are on the Keynesian
portion of the AS curve.

A. A cut of at least $50 in both taxes and spending

B. A cut of exactly $100 in both taxes and spending

C. A cut of slightly under $50 in both taxes and spending

D. A cut of approximately $10 in both taxes and spending


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Correct! You know that on the upper portion of the AS curve, a larger government response is necessary.

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Question 7 of 10
Multiple Choice: Please select the best answer and click "submit."

An economy is operating near full employment and the government cuts both spending and taxes by $500.
In this situation, the RGDP will decrease by:

A. less than $500.

B. more than $500.

C. exactly $500.
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Correct! When an economy is near full employment, the size of any change in RGDP will be reduced, since part of the
change will affect the price level and part will affect RGDP.

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Question 8 of 10
Multiple Choice: Please select the best answer and click "submit."

Economic indicators show that an economy has output above the full-employment level, which prompts the
government to enact a contractionary fiscal policy. By the time the government increases taxes to pursue a
contractionary policy, the economy has already corrected itself. What results from this delayed
contractionary policy?

A. Increased unemployment

B. Increased price level

C. Increased RGDP
D. Increased aggregate supply

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Correct! By moving the AD curve to the left when an economy is already in long-run equilibrium, the economy is
pushed below the full-employment level.

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Question 9 of 10
Multiple Choice: Please select the best answer and click "submit."

In an economy characterized by low inflation, strong growth, and very low unemployment, the government
decides to cut taxes. What would result from a tax cut in these circumstances?

A. Reduced RGDP

B. Contraction

C. Inflation
D. Increased unemployment

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That is incorrect; the correct answer is: Inflation.

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Question 10 of 10
Multiple Choice: Please select the best answer and click "submit."

In an economy characterized by low inflation, strong growth, and very low unemployment, the government
decides to cut taxes. What else needs to happen to make such a tax reduction have a positive effect on the
economy?

A. A decrease in net exports

B. A decrease in consumption

C. A reduction in investment
D. A cut in government spending

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That is incorrect; the correct answer is: A cut in government spending.

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Question 1 of 10
Multiple Choice: Please select the best answer and click "submit."

Use the data in the table below to answer questions 1 through 5.

Year G T GDP
2002 $800 $600 $1,500
2003 $850 $700 $1,600
2004 $900 $900 $1,800
2005 $900 $950 $2,000
2006 $950 $1,050 $2,000
During which year was there a negative deficit?
A. 2005

B. 2002

C. 2004

D. 2003

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Correct! A negative deficit is a surplus, which is when government spending is below tax revenues.

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Question 2 of 10
Multiple Choice: Please select the best answer and click "submit."

Use the data in the table below to answer questions 1 through 5.

Year G T GDP
2002 $800 $600 $1,500
2003 $850 $700 $1,600
2004 $900 $900 $1,800
2005 $900 $950 $2,000
2006 $950 $1,050 $2,000
The debt first began to shrink in:

A. 2004

B. 2005

C. 2006

D. 2003

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That is incorrect; the correct answer is: 2005.

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Question 3 of 10
Fill in the blank: Type your answer in the box and then click "submit."

Use the data in the table below to answer questions 1 through 5.

Year G T GDP
2002 $800 $600 $1,500
2003 $850 $700 $1,600
2004 $900 $900 $1,800
2005 $900 $950 $2,000
2006 $950 $1,050 $2,000
What is the total debt at the end of 2006?

Answer: 200

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That is incorrect; the correct answer is: $200.
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Question 4 of 10
Fill in the blank: Type your answer in the box and then click "submit."

Use the data in the table below to answer questions 1 through 5.

Year G T GDP
2002 $800 $600 $1,500
2003 $850 $700 $1,600
2004 $900 $900 $1,800
2005 $900 $950 $2,000
2006 $950 $1,050 $2,000
What was the debt-to-GDP ratio in 2006 as a percentage?

Answer: 10

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That is incorrect; the correct answer is: 10%.
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Question 5 of 10
Multiple Choice: Please select the best answer and click "submit."

Use the data in the table below to answer questions 1 through 5.

Year G T GDP
2002 $800 $600 $1,500
2003 $850 $700 $1,600
2004 $900 $900 $1,800
2005 $900 $950 $2,000
2006 $950 $1,050 $2,000
During what period does the severity of the debt decrease without a surplus?

A. From 2003 to 2004

B. From 2004 to 2005

C. From 2005 to 2006

D. From 2002 to 2003


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Correct! There was a balanced budget in 2004 and growth in the GDP, so the debt remained steady, but the severity of
the debt decreased by over 2 percentage points.

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Question 6 of 10
Multiple Choice: Please select the best answer and click "submit."

What is one result of a government deficit?

A. An increase in the price level

B. An increase in interest rates

C. An increase in RGDP

D. An increase in the quantity of loanable funds supplied


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That is incorrect; the correct answer is: An increase in interest rates.

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Question 7 of 10
Multiple Choice: Please select the best answer and click "submit."

What happens when private investment gets crowded out as a result of government borrowing?

A. There's a decrease in the growth of the economy's full-employment level.

B. Aggregate demand decreases slightly.

C. The unemployment level falls and wages increase.

D. The price level for goods and services decreases.


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Correct! When the interest rate goes up as a result of government borrowing, this results in a reduction in private
investment, which decreases the growth of the economy's full-employment level of production.

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Question 8 of 10
Multiple Choice: Please select the best answer and click "submit."

When will crowding out in the market for goods and services be most severe?

A. When there's a drop in the price level

B. When the government increases its spending

C. When RGDP is below the full-employment level

D. When unemployment is low


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That is incorrect; the correct answer is: When unemployment is low.

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Question 9 of 10
Multiple Choice: Please select the best answer and click "submit."

Crowding out of private consumption occurs when increases in government spending result in:

A. an increase in the price level.

B. an increase in the quantity of loanable funds supplied.

C. an increase in interest rates.

D. an increase in the full-employment level of production.


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Correct! Private consumption declines when increased government spending results in higher prices.

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Question 10 of 10
Multiple Choice: Please select the best answer and click "submit."

When does crowding out in the market for goods and services occur?

A. When the AS curve is horizontal

B. When the AS curve is flat

C. When the AS curve is vertical

D. When the AS curve is steep


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That is incorrect; the correct answer is: When the AS curve is steep.

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