1. In the Keynesian model deviations of output from potential are caused by: 
A. fluctuations in average labor productivity.
B. random output shocks.
C. changing asset prices.
D. fluctuations in aggregate spending.


2. Dave's Mirror Company produces $1,250,000 worth of mirrors this year.  They expect to sell $1,000,000 worth of mirrors over the 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 _______.  
A. $250,000; $150,000
B. $300,000; $200,000
C. $550,000; $450,000
D. $650,000; $550,000


3. When actual investment is greater than planned investment: 
A. firms sold less output than expected.
B. firms sold more output than expected.
C. the quantity of output sold is the amount the firm expected to sell.
D. the economy produces short-run equilibrium output.


4. Data on after-tax income and consumption spending for the Adam Smith family are given below:


Based on these data the Adam Smith family has a marginal propensity to consume of: 
A. 0.9.
B. 0.8.
C. 0.75.
D. 0.6.

5. In Macroland autonomous consumption equals 100, the marginal propensity to consume equals .75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Planned Aggregate Expenditure equals _______ and the short run equilibrium output equals ­­­­­­_______
A. .25Y; $290.
B. 320 + .25Y; $1,600.
C. .75Y; $290.
D. 290 + .75Y; $1160.


6. In the Keynesian cross diagram, the vertical intercept of the expenditure line equals _____ and the slope of the expenditure line equals _____. 
A. induced expenditures; autonomous expenditures
B. autonomous expenditures; induced expenditures
C. planned spending; unplanned spending
D. autonomous expenditures; the mpc.


7. If planned aggregate expenditure (PAE) in an economy equals 2,000 + .8Y and potential output (Y*) equals 11,000, then this economy has: 
A. an expansionary gap.
B. a recessionary gap.
C. no output gap.
D. no autonomous expenditure.


8. For an economy starting from potential output, a decrease in planned investment in the short run results in a(n): 
A. expansionary output gap.
B. recessionary output gap.
C. increase in potential output.
D. decrease in potential output.


9. The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because: 
A. the direct changes in spending change the income of producers which leads to additional changes in spending.
B. multiple deposits are generated when new reserves are produced through fractional reserve banking.
C. autonomous spending supports more output than induced spending.
D. planned changes in inventories signal producers to adjust the level of output.


10. In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be: 
A. increased by $10 billion.
B. decreased by $10 billion.
C. increased by more than $10 billion.
D. decreased by less than $10 billion.


11. Refer to the figure above. Based on the Keynesian cross diagram, if output equals 5,000 planned aggregate expenditure is _____ output and firms will ____ production. 
A. less than; decrease
B. greater than; decrease
C. equal to; not change
D. less than; increase


12. Refer to the figure above. Based on the Keynesian cross diagram, at short-run equilibrium output, 
A. there is a recessionary gap.
B. there is an expansionary gap.
C. output equals potential output.
D. firms will be producing more than they can sell.


13. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ________ to eliminate any output gap. 
A. increase by 10
B. decrease by 100
C. increase by 1000
D. decrease by 1000


14. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then taxes must ________ to eliminate any output gap. 
A. rise by 10
B. fall by more than 100
C. rise by $111.11
D. rise by $100.


15. One drawback in using fiscal policy as a stabilization tool is that fiscal policy: 
A. affects potential output as well as planned aggregate expenditure.
B. effects are frequently offset by automatic stabilizers.
C. is too flexible to use to close output gaps.
D. is not useful for dealing with prolonged episodes of recession.