Question 1:

The key assumption of the basic Keynesian model is that in the short run, firms:

Answer

meet demand at preset prices.

adjust prices to bring sales in line with capacity.

change prices frequently.

operate just as they do in the long run.

change prices rather than quantities.

Question 2:

Suppose a household's marginal propensity to consume out of disposable income is 0.75 and its exogenous consumption is $250. If household income is $2000 and taxes are a flat $200, how much will the household save each period?

Answer

$200.

$250.

$400.

$1,000.

$1,500.

Question 3:

A$100 million increase in government purchases will have a bigger impact on equilibrium output

Answer

The larger are the marginal tax rate and marginal propensity to import and the larger is the marginal propensity to consume.

The larger are the marginal tax rate and marginal propensity to import and the smaller is the marginal propensity to consume.

The smaller are the marginal tax rate and marginal propensity to import and the smaller is the marginal propensity to consume.

The smaller are the marginal tax rate and marginal propensity to import and the larger is the marginal propensity to consume.

The smaller are the marginal tax rate and marginal propensity to consume and the larger is the marginal propensity to import.

Question 4:

If the marginal propensity to consume equals 0.75, then a $100 increase in after-tax disposable income leads to a _____ increase in consumption.

$0.25

$0.75

$25

$75

$100

Question 5

Planned aggregate expenditure is total:

value added in the economy.

planned spending on final goods and services.

revenue from the sale of goods and services.

profits in the economy.

output produced by firms

Question 6:

The amount by which consumption increases when disposable income increases by $1 is called:

an automatic stabiliser.

the consumption function.

the marginal propensity to consume.

autonomous expenditure.

the multiplier.

Question 7:

In the basic Keynesian model, all but one of the following are true. Which is the exception?

Answer

Planned consumption always equals actual consumption.

Planned investment always equals actual investment.

Planned government spending always equals actual government spending.

Planned net exports always equal actual net exports.

Planned aggregate expenditure is always equal to output.

Question 8:

If planned aggregate expenditure (PAE) in an economy equals 2000 + 0.8Y and potential output (Y*) equals 9000, then this economy has:

an expansionary gap.

a recessionary gap.

No output gap.

no autonomous expenditure.

no induced expenditure.

Question 9:

In the short-run Keynesian model, in order to close a recessionary gap of $10 billion dollars, government purchases must be

Answer

increased by $10 billion.

decreased by $10 billion.

increased by more than $10 billion.

increased by less than $10 billion.

decreased by $10 billion while taxes must be cut by $10 billion.

Question 10:

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the MPC equals .8, and potential output (Y*) equals 9000, then taxes must ______ by ________ to eliminate any output gap.

Answer

decrease, 20

decrease, 200

increase, 225

increase, 250

increase, 200

Question 11:

Fiscal policy is NOT often used as a stabilisation tool. However, it does have important roles in the economy. Three of these roles are:

Answer

managing income distribution, demographic change, and public debt

managing public assets, defence projects, and public safety

managing government monetary policy, inflation and interest rates

managing collection of taxes, public health and antiterrorism policy

managing full employment, price stability and exchange rates.

Question 12:

Dave's Mirror Company expects to sell $1,000,000 worth of mirror and to produce $1,250,000 worth of mirrors in the coming year. The company purchases $300,000 of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals _____ and planned investment equals _______.

Answer

$250,000; $150,000.

$300,000; $200,000.

$650,000; $550,000.

$850,000; $750,000.

$950,000;$500,000.

Question 13

When actual investment is less than planned investment

Answer

firms are selling less output than expected.

firms are selling more output than expected.

the quantity of output sold is the amount the firm expected to sell.

autonomous expenditure is less than induced expenditure.

the stock of inventories must increase.

Question 14

An increase in government purchases will have a larger effect on real GDP:

Answer

the larger the MPC

the smaller the MPC

the larger a tax increase

the smaller a tax decrease

the larger the MPS.

Question 15:

Because of automatic stabilisers, when GDP fluctuates the:

Answer

government's budget remains in balance

government's deficit fluctuates directly with GDP

government's deficit fluctuates inversely with GDP

the economy will automatically go to full employment

none of the above.

Question 16:

The short-run effect of equilibrium GDP of an equal change in government expenditure and net taxes is a definition of:

Answer

the balanced budget

the balanced budget multiplier

balanced GDP

balanced growth

balanced savings

Question 17:

If bank reserves are 200, the public holds 400 in currency, and the desired reserve/deposit ratio is 0.25, the deposits are ____ and the money supply is _____.

Answer

200; 600

400; 800

600; 1000

800; 1200

none of the above.

Question 18:

When the Reserve Bank sells government securities, the banks'

Answer

reserves will increase and lending will expand, causing an increase in the money supply.

reserves will decrease and lending will contract, causing a decrease in the money supply.

reserve requirements will increase and lending will contract, causing a decrease in the money supply.

reserves/deposit ratio will increase and lending will expand, causing an increase in the money supply.

reserves will increase and lending will contract, causing no change in the money supply.

Question 19:

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981. The one-year interest rate

Answer

rose to 8.5%.

rose to 7.0%.

rose to 6.0%.

remained at 5%.

none of the above.

Question 20:

If real GDP equals 5000, nominal GDP equals 10,000 and the price level equals 2, then what is velocity if the money stock equals 2000?

Answer

2

2.5

4

5

10