The Keynesian Macro Economic Model 

1. The Keynesian Macro model we discussed in class suggests that when National Income (Output) exceeds Aggregate Expenditures:

A. inflationary pressures exist.

B. business firms experience unexpected increases in their inventories.

C. business firms find their inventories decreasing rapidly.

D. desired investment exceeds desired savings.

E. deflation of prices and wages will quickly restore equilibrium.

2. In the simple Keynesian macro model developed in class, equilibrium income is that level of income that:

A. generates enough exports to just equal imports.

B. employs all of the economy's resources.

C. generates enough consumption to equal savings.

D. causes consumption spending to just equal output.

E. the economy would tend to produce throughout time if none of the forces establishing this balance changed.

3. If the marginal propensity to consume is .8 and autonomous taxes are $50, then an increase in national income of $100 will result in:

A. $80 of new consumption spending.

B. $64 of new consumption spending.

C. $50 of new consumption spending.

D. $90 of new consumption spending.

E. none of the above.

4. The Aggregate Expenditures curve (AE):

A. shifts upward when the interest rate increases.

B. is positively sloped because larger income induces more consumption spending.

C. is the potential total value of all domestically produced commodities and services during a given year.

D. is positively related to the marginal propensity to save.

E. falls to zero when income falls to zero.

Use the following information to answer questions 5 and 6

5. Based on the above information, what is equilibrium national output and income equal to (approximately):

A. $2850 B

B. $2950 B

C. $3750 B

D. $4750 B

E. none of the above

6. If national output were equal to $2500, then desired savings would be (approximately) equal to:

A. zero.

B. - $90 B

C. $100 B

D. $90 B

E. none of the above.

7. Suppose consumers show an increased preference for imported, rather than domestic, cars. One would expect that:

A. there will be a movement along the aggregate expenditures (AE) schedule.

B. there will be an upward shift in the AE schedule.

C. there will be a downward shift in the AE schedule.

D. the marginal propensity to consume must increase.

E. Congress will react by enacting trade barriers.

8. Suppose that the economy is initially in equilibrium. As a result of a $50 billion dollar increase in planned investment spending, a new equilibrium income is achieved that is $150 billion higher than the initial level. We can conclude that:

A. the multiplier for this economy is 3.5.

B. the marginal propensity to consume out of national income is 1/3.

C. consumption spending increases by $100 B (assuming imports do not depend upon national income).

D. taxes increase by $50 B.

E. all of the above.

9. Suppose that autonomous taxes are $100 B and the marginal propensity to save out of disposable income is .2, what is the marginal propensity to consume out of national income?

A. .1

B. .2

C. .4

D. .8

E. none of the above.

Use the following information to answer question 10

10. You know that the economy has no exports nor imports. In addition desired levels of consumption (C), investment (I), and government spending (G) are given in the table to the right. All figures are in billions of dollars.

What is the equilibrium level of national income and output (Y) for this economy?

A. 120

B. 100

C. 80

D. 60

E. 40

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