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

Answer: A

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.

Answer: B

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

Answer: B

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.

Answer: B

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

Answer: B

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.

Answer: A

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.

Answer: A

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.

Answer: C

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.

Answer: A

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.

Answer: A

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.

Answer: B

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.

Answer: A

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.

Answer: C

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.

Answer: C

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.

Answer: D

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.

Answer: B

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.

Answer: B

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.

Answer: C

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.

Answer: C

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.

Answer: D

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.

Answer: D

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.

Answer: A

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.

Answer: D

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

Answer: D

A fall in inventories is synonymous with ________ investment.

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

Answer: D

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.

Answer: A

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.

Answer: B

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.

Answer: D

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.

Answer: C

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.

Answer: B

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

Answer: B

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

Answer: C

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

Answer: B

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

Answer: A

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

Answer: D

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

Answer: B

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

Answer: C

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

Answer: C

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

Answer: D

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

Answer: A

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

Answer: D

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.

Answer: B

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.

Answer: D

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

Answer: B

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

Answer: A

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

Answer: D

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

Answer: B

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

Answer: D

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

Answer: C

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.

Answer: D

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

Answer: D

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

Answer: A

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

Answer: C

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.

Answer: D

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.

Answer: A

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.

Answer: C

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

Answer: C

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.

Answer: B

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.

Answer: A

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.

Answer: C

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.

Answer: A

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.

Answer: D

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.

Answer: A

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.

Answer: C

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.

Answer: B

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.

Answer: D

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.

Answer: C

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.

Answer: D

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.

Answer: D

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

Answer: D

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

Answer: C

Aggregate output is increased by a decrease in

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

Answer: D

Equilibrium output is reduced by an increase in

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

Answer: B

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

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.

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.

Answer: B

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.

Answer: A

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

Answer: B

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

Answer: C

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

Answer: B

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.

Answer: B

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.

Answer: D

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

Answer: B

Points on the IS curve satisfy ________ market equilibrium.

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

Answer: B

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

Answer: B

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

Answer: B

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

Answer: A

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

Answer: D

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

Answer: A

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

Answer: D

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

Answer: A

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

Answer: D

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

Answer: A

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

Answer: D

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?

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.

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

Answer: B

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

Answer: D

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

Answer: A

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

Answer: B

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

Answer: C

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

Answer: C

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

Answer: B

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

Answer: B

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

Answer: C

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.

Answer: A

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

Answer: B

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

Answer: C

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

Answer: D

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

Answer: A

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

Answer: B

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

Answer: C

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

Answer: C

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

Answer: B

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

Answer: B

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

Answer: B

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

Answer: B

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.

Answer: A

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

Answer: C

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

Answer: D

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

Answer: A

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

Answer: B

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

Answer: A

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

Answer: B

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

Answer: C

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

Answer: B

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

Answer: A

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

Answer: C

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

Answer: D

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

Answer: C

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

Answer: B

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

Answer: D

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

Answer: A

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

Answer: D