Keynes believed equilibrium income ___________________ an economy's potential income at any

given time.

A.could be above, below, or at

B. would be always equal to
C. would be always above
D.would always be permanently below

The economy is in a long run equilibrium only at:

A.the intersection point between the SAS Curve and the aggregate demand curve.
B. the intersection point between the SAS Curve and the LAS Curve.
C. the intersection point between the LAS Curve and the aggregate demand curve.
D.any point on the LAS Curve.

In the aggregate expenditures equation AE = $800 + 0.9Y, and Y = $1000:

A.induced expenditures is zero.

B. induced expenditures is $800.
C. autonomous expenditures is 90% of income.
D.autonomous expenditures is $800.

In the AP/AE Model (Multiplier Model), aggregate production creates:

A.an equal amount of expenditures, but not necessarily an equal amount of savings.
B. an equal amount of savings, but not necessarily an equal amount of expenditures.
C. an equal amount of income, but not necessarily an equal amount of expenditures.
D.an equal amount of expenditures, but not necessarily an equal amount of income.

Each of the following will shift the AE Curve for the U.S. except:

A.a rise in the value of the dollar.

B. an advancement in technology.
C. an increase in induced expenditures.
D.an embargo passed by the Chinese government on goods imported from the U.S.
Classical economists tend not to favor government intervention in the market process.

True
False

If autonomous expenditures are $1000, income is $5000, and the marginal propensity to expend is 0.4,
the total aggregate expenditures would be:

A.$3,000
B. $4,000
C. $5,000
D.$13,000

According to the Multiplier Equation, equilibrium income will be equal to the multiplier divided by
autonomous expenditures.

True
False

If productivity increases by 2% but wages increase by 5%, then it is most likely that:

A.the price level will rise by 3 percent.

B. the price level will fall by 3 percent.
C. the price level will rise by 7 percent.
D.the price level will fall by 7 percent.

When the price level rises in the aggregate economy, the:

A.AE Curve shifts up.

B. AE Curve shifts down.
C. AE Curve does not shift at all, but move up along the existing AE Curve.
D.AE Curve does not shift at all, but move down along the existing AE Curve.

As we move along an existing AD Curve, this movement is reflected by a movement along an existing
AE Curve.

True
False
Given AE = $1000 + 0.8Y, when income (Y) is equal to $5000, induced expenditures will be:

A.$500
B. $1,000
C. $4,000
D.$5,000

The phenomenon of individuals attempting to save more to protect themselves from possible future
economic hardship, but in doing so spend less and cause aggregate equilibrium income/output to
decrease (possibly far enough to put themselves right out of a job) is called:

A.the perverse incentive.

B. a liquidity trap.
C. a paradox of thrift.
D.the saving dilemma.

Which of the following statements would a laissez-faire economist agree with most?

A.Government policies do not affect economic activity.

B. Government can implement policy proposals that can positively impact the economy.
C. Most government policies would simply make things worse in the economy.
D.Government intervention in the market or economy is necessary for a smoothly operating economy.

The Long Run Aggregate Supply Curve (LAS) is:

A.horizontal because it shows that an increase in aggregate demand will increase output.
B. upward sloping, but not vertical, because it shows that a higher price level will bring about higher
output.
C. vertical because it shows that a higher price level will not bring about higher output.
D.downward sloping because it shows that an increase in aggregate demand will reduce both the price
level and output.

Suppose the economy is in a recessionary gap. In the absence of any policy intervention by the
government, and assuming that the LAS Curve is stationary and does not shift, the short run aggregate
supply curve (SAS) will eventually shift _________________, causing the price level in the economy to
__________________ and output to ________________.

A.down; fall; rise

B. down; fall; fall
C. down; rise; fall
D.up; fall; rise
When the mpe is less than 1, an increase in income will:

A.not affect expenditures.

B. reduce expenditures.
C. increase expenditures by more than the increase in income.
D.increase expenditures by less than the increase in income.

Which of the responses listed below is not one of the components in the AS/AD Model?

A.The Aggregate Equilibrium Curve.

B. The Short Run Aggregate Supply Curve.
C. The Aggregate Demand Curve.
D.The Long Run Aggregate Supply Curve.

Which of the following is true?

A.Keynes believed aggregate supply and aggregate demand are independent.

B. Keynes believed supply creates its own demand.
C. Since Keynes was a big Star Trek fan, he felt very strongly that aggregate demand was created by
Captain Kirk and aggregate supply by Scotty.
D.Keynes believed aggregate supply and aggregate demand are interdependent.

Traditionally, the marginal propensity to expend (mpe) measures:

A.how much of a given income will be saved.

B. how much expenditures will occur at equilibrium income.
C. how much expenditures will change when income changes.
D.what percentage of total income will go toward charity.

Regarding aggregate supply and aggregate demand, Classical economists are generally associated with
________________ while Keynesian economists are typically associated with ___________________.

A.aggregate demand; aggregate supply

B. aggregate supply; aggregate demand
C. aggregate supply; aggregate supply
D.aggregate demand; aggregate demand
Given AE = $1000 + 0.8Y, when Y = $5000, AE equals:

A.$4,000
B. $4,800
C. $5,000
D.$6,000

If the economy is at its potential output in the short run and the long run, and assuming that the LAS
Curve is stationary and does not shift, an expansionary macro policy prescribed by the government will
cause real output to:

A.rise in the long run but not in the short run.

B. fall in the short run and the long run.
C. rise in the short run but not in the long run.
D.fall in the short run but rise in the long run.

Keynesian economics is based largely, but not entirely, upon the work by John Maynard Keynes

True
False

Given AE = $5000 + 0.5Y, where AE is total or aggregate expenditures and Y is income, equilibrium
income in the entire economy will be:

A.$3,000
B. $5,000
C. $8,000
D.$10,000

The multiplier is smaller, other things equal, when:

A.the mpe is larger.

B. the mpe is smaller.
C. the mpe is the same.
D.impossible to tell given the information.
According to Keynes, the multiplier process (or income adjustment mechanism) works because when
aggregate expenditures don't equal aggregate production:

A.business people adjust prices.

B. business people adjust production levels.
C. business people become very confused about what their objectives are.
D.the Government steps in to adjust production levels.

In the equation AE = $1000 + .9Y, autonomous expenditures is equal to 90% of income.

True
False

All of the following will shift the AE Curve except:

A.a change in the price level.

B. an increase in production.
C. an increase in government spending.
D.a decrease in consumer confidence.

An increase in consumer confidence and optimism toward the economy will:

A.shift the AE Curve up.

B. shift the AE Curve down.
C. not shift the AE Curve at all, but move up along the existing AE Curve.
D.not shift the AE Curve at all, but move down along the existing AE Curve.

The short run aggregate supply curve (SAS) is most likely to shift up if:

A.oil prices fall.

B. sales taxes increase.
C. wages fall.
D.productivity rises.

A multiplier of 5 means that for a $100 billion increase in autonomous investment expenditures "I" will:

A.increase equilibrium real GDP by $20 billion.

B. increase equilibrium real GDP by $50 billion.
C. increase equilibrium real GDP by $200 billion.
D.increase equilibrium real GDP by $500 billion.

Say the U.S. cancels China's most favored nation status and as a result China's exports to the U.S.
decline by $100 billion. If the mpe in China is 0.6, total aggregate equilibrium income in China would
likely:

A.decrease by $167 billion.

B. decrease by $250 billion.
C. decrease by $360 billion.
D.decrease by $600 billion.

When the price level falls in the aggregate economy, the:

A.AE Curve shifts up.

B. AE Curve shifts down.
C. AE Curve does not shift at all, but move up along the existing AE Curve.
D.AE Curve does not shift at all, but move down along the existing AE Curve.

For levels of income to the right of the point where aggregate expenditures equal aggregate production
in the AP/AE Model (Multiplier Model):

A.inventories are decreasing.

B. aggregate production exceeds aggregate expenditures.
C. inventories are not changing.
D.aggregate production is less than aggregate expenditures.

Classical economists believed that:

A.the multiplier process magnifies small changes in spending into much larger changes in spending.
B. in the long run we are all dead.
C. when demand fails to keep up with supply, firms react by cutting prices.
D.when demand fails to keep up with supply, firms react by cutting production.
The multiplier effects make the AD Curve's slope typically:

A.flatter.
B. steeper.
C. perfectly horizontal.
D.perfectly vertical.

Induced expenditures:

A.is the level of expenditures that occurs in equilibrium.

B. is the level of expenditures that occurs when income is at the break-even level.
C. is the level of expenditures that occurs when income is zero.
D.change as income changes.

Based on our discussions regarding the AS/AD Model, the Short Run Aggregate Supply Curve (SAS)
assumes that firms adjust:

A.prices but not quantities in the short run.

B. quantities but not prices in the short run.
C. prices and quantities in the short run.
D.neither prices nor quantities in the short run.

If productivity increases by 4% but wages increase by 3%, then it is most likely that:

A.the price level will rise by 1 percent.

B. the price level will fall by 1 percent.
C. the price level will rise by 7 percent.
D.the price level will fall by 7 percent.

Starting from a short and long run equilibrium, and assuming that the LAS Curve remains stationary and
does not shift, an increase in government expenditures increases real output in both the short run and the
long run.

True
False
What is the dominant mechanism in the Multiplier Model?

A.The Interest rate adjustment mechanism.

B. The Price level adjustment mechanism
C. The Income adjustment mechanism.
D.The Deficit adjustment mechanism.