Multiple Choice Test: Aggregate Demand in the Keynesian System

1) 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

2) If aggregate demand falls short of current output,

1. A) business firms will cut production to keep from accumulating inventories.
2. B) business firms will expand production to keep from accumulating inventories.
3. C) business firms will cut production to build up inventories.
4. D) business firms will expand production to build up inventories.

Answer: A

3) If aggregate expenditure exceeds aggregate output, there will be unplanned inventory _____ causing output to _____.

1. A) accumulation; increase B) accumulation; decrease
2. C) depletion; decrease D) depletion; increase

Answer: D

4) The expenditure multiplier is the ratio of

1. A) the change in equilibrium output to a change in the monetary base.
2. B) the change in the money supply to a change in the monetary base.
3. C) the change in the money supply to a change in the autonomous expenditure.
4. D) the change in equilibrium output to a change in the autonomous expenditure.

Answer: D

5) 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

6) 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) all of the above since computers are consumer durables.

Answer: A

7) Actual investment spending is comprised of two components:

1. A) fixed investment and actual inventory investment.
2. B) planned investment and fixed investment.
3. C) unplanned investment and inventory investment.
4. D) fixed business investment and fixed housing investment.

Answer: A

8) 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 B) above; negative
2. C) below; positive D) above; positive

Answer: A

 

9) 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 B) lower; rise C) raise; fall D) raise; rise

Answer: D

10) An increase in planned investment spending causes aggregate output to

1. A) increase by an amount equal to the change in investment spending.
2. B) increase by an amount less than the change in investment spending.
3. C) increase by an amount greater than the change in investment spending.
4. D) decrease by an amount less than the change in investment spending.

Answer: C

11) Which of the following statements concerning Keynesian analysis are true?

1. A) Keynes’s 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.
2. B) Keynes recognized that equilibrium would occur in the economy when total quantity of output supplied (aggregate output produced, Y) equals quantity of output demanded (Y^ad), that is, when Y = Y^ad.
3. C) Keynes’s analysis involves explaining why aggregate output is at a certain level by understanding what factors affect each component of aggregate demand and how the sum of these components could add up to an output smaller than the economy is capable of producing, resulting in less than full employment.
4. D) All of the above are true.

Answer: D

12) Keynes assumed that the price level was fixed because

1. A) inflation was not a serious problem during the Great Depression.
2. B) his primary focus was on output and employment.
3. C) his primary focus was on interest rates and investment spending.
4. D) of both (a) and (b) of the above.
5. E) of both (a) and (c) of the above.

Answer: D

13) 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 B) planned; inventory
2. C) fixed; gross D) fixed; inventory

Answer: D

14) The multiplier concept is important in the Keynesian model because

1. A) it explains why a large change in autonomous spending has such a small impact on equilibrium output.
2. B) it explains why a small change in autonomous spending can have a large impact on equilibrium output.
3. C) it is crucial to understanding why changes in investment spending are viewed as the root cause of business cycles fluctuations.
4. D) of both (b) and (c) of the above.

Answer: D

15) Like the simplified Keynesian model, the full Keynesian ISLM model

1. A) examines an equilibrium in which aggregate output produced (Y) equals aggregate demand (Y^ad).
2. B) assumes a fixed price level.
3. C) assumes that interest rates are fixed.
4. D) does all of the above.
5. E) does only (a) and (b) of the above.

Answer: E