Chapter 18 Tutorial
The Keynesian Model
©2000 South-Western College Publishing
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1. The French classical economist Jean Baptiste
Say transformed the equality of production
and spending into a law that can be expressed
as follows:
a. The invisible hand creates its own supply.
b. Wages always fall to the subsistence level.
c. Supply creates its own demand.
d. Aggregate output does not always equal
consumption.
C. Says law was developed in the early
1800s and is the cornerstone of
classical economics.
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2. Autonomous consumption is
a. positively related to the level of
consumption.
b. negatively related to the level of
consumption.
c. positively related to the level of
disposable income.
d. independent of the level of disposable
income.
D. Autonomous consumption is the amount of
spending from savings or borrowing that
occurs even when disposable income is zero.
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3. The consumption function represents the
relationship between consumer expenditures
and
a. interest rates.
b. saving.
c. the price level.
d. disposable income.
D. Keynes argued the most important
determinant of aggregate spending for
consumer goods is personal income
after taxes.
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4. John Maynard Keynes’s proposition that a
dollar increase in disposable income will
increase consumption, but by less than the
increase in disposable income, implies a
marginal propensity to consume that is
a. greater than or equal to one.
b. equal to one.
c. less than one, but greater than zero.
d. negative.
C. Each dollar change in disposable
income is divided between changes in
consumption and saving.
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5. Above the break-even disposable income for
the consumption function, which of the
following occurs?
a. Dissaving.
b. Saving.
c. Neither (a) nor (b).
d. Both (a) and (b).
B. Dissaving occurs below the break-even
point on the consumption function.
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10
The Consumption Function
C
C = Yd
8
7
6
5
4
Real Consumption
Trillions of $ per year
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Dissaving
DC
DYd
3
Saving
2
Real Disposable Income
Trillions of $ per year
1
45°
0
7
1
2
3
4
5
6
7
8
9
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6. Which of the following changes produces an
upward shift in the consumption function?
a. An increase in consumer wealth.
b. A decrease in consumer wealth.
c. A decrease in autonomous consumption.
d. Both (b) and (c) .
A. Decreases in wealth and autonomous
consumption shift the consumption
function downward.
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10
The Consumption Function
C=Yd
8
7
6
5
4
Real Consumption trillions
of $ per year
9
C1
3
2
1
0
Real Disposable Income
trillions of $ per year
45o
1
2
3
4
5
6
7
8
9
9
10
10
The Consumption Function
C=Yd
8
7
6
5
Real Consumption
trillions of $ per year
9
C2
C1
4
3
2
1
0
Real Disposable Income
trillions of $ per year
45o
1
2
3
4
5
6
7
8
9
10
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7. An upward shift in the consumption schedule,
other things being equal, could be caused by
households
a. becoming optimistic about the state of the
economy.
b. becoming pessimistic about the state of the
economy.
c. expecting future income and wealth to
decline.
d. none of the above.
A. If consumers expect good economic
ties ahead, they increase spending at
each level of disposable income in the
current time period.
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8. The investment demand curve represents
the relationship between business spending
for investment goods and
a. GDP.
b. interest rates.
c. disposable income.
d. saving.
B. As the interest rate declines, more business
investment projects become profitable and
investment spending increases.
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Shift in the firm’s
investment demand curve
12%
8%
4%
Interest rate
16%
I1
Real investment
5
10
15
20
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9. Which of the following changes produces a
leftward shift in the investment demand curve?
a. A wave of optimism about future
profitability.
b. Technological change.
c. High plant capacity utilization.
d. An increase in business taxes.
D. Technological change and high plant
capacity increase the investment curve.
An increase in business taxes decreases
after-tax profits on investment projects
and businesses invest less at various
possible interest rates.
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Shift in the firm’s
investment demand curve
12%
8%
4%
Interest rate
16%
I1
Real investment
5
10
15
20
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Shift in the firm’s
investment demand curve
12%
8%
4%
Interest rate
16%
I1
I2
Real investment
5
10
15
20
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10. The aggregate expenditures function (AE)
represents which of the following?
a. The consumption function only.
b. Autonomous consumption only.
c. The investment demand curve only.
d. All three of the above combined.
e. A combination of (a) and (c) .
D.
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10
9
8
Exhibit 11
Aggregate Expenditures
Schedule and Function
AE
C
7
E
6
5
4
3
2
Real Disposable Income
trillions of dollars per year
1
0
1
2
3
4
5
6
7
8
9
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10
11. In Exhibit 11, what is the households’
marginal propensity to consume (MPC)?
a. 0.5.
b. 0.67.
c. 0.75.
d. 0.80.
A. MPC is the change in consumption divided
by the change in disposable income. In this
case, the change in consumption to
disposable income is three to six, or 0.50.
(hint: start at autonomous consumption of
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$2 trillion)
12. In Exhibit 11, aggregate disposable
income will equal consumption plus
investment (aggregate expenditures) and
the economy will be in equilibrium when
real disposable income is
a. $2.33 trillion.
b. $3 trillion.
c. $6 trillion.
d. $10 billion.
C. The AE curve crosses the 45 degree line
at $6 trillion.
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END
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