Title: Equilibrium in the Income-Expenditure Model
Course: TEST Course

Q: The income-expenditure model illustrates when what is out of balance or inefficient?
- price levels
- net exports
- levels of output or national income
A: levels of output or national income

Q: When ________ are inefficient or off balance, using the income-expenditure model reveals this inefficiency.
- price levels
- net exports
- levels of output or national income
A: levels of output or national income

Q: What is the term used when the income=expenditure line (i.e. the 45 degree line) and the aggregate expenditure line are combined on a graph?
- The economic equilibrium graph.
- The aggregate expenditure cluster.
- The Keynesian Cross
A: The Keynesian Cross

Q: The combination of the aggregate expenditure line and the income=expenditure line (i.e. the 45 degree line) is called ________.
- the macro equilibrium
- output aggregate expenditure
- the Keynesian Cross
A: the Keynesian Cross

Q: Macro equilibrium in the income-expenditure model occurs where aggregate expenditure is equal to national income; this occurs where the aggregate expenditure schedule crosses the ________.
- real GDP (Y) line
- potential GDP line
- 45-degree line
A: 45-degree line

Q: Equilibrium occurs in the macroeconomy with the income-expenditure model where national income and aggregate expenditure are equal. Where does this equilibrium occur?
- Where the aggregate expenditure schedule crosses the real GDP (Y) line.
- Where the aggregate expenditure schedule crosses the potential GDP line.
- Where the aggregate expenditure schedule crosses the 45-degree line.
A: Where the aggregate expenditure schedule crosses the 45-degree line.

Q: What is the income=expenditure line called in the Keynesian Cross Diagram?
- Macroeconomic equilibrium line
- Potential GDP line
- 45-degree line
A: 45-degree line

Q: Considering the Keynesian Cross Diagram, the income=expenditure line is also called the ________.
- macroeconomic equilibrium
- potential GDP line
- 45-degree line
A: 45-degree line

Q: To find macro equilibrium in a table, the numbers for ________ and ________ should equal each other.
- Keynesian Cross; taxes
- exports; imports
- aggregate expenditure; GDP/national income
A: aggregate expenditure; GDP/national income

Q: What factors should equal each other in order to find macro equilibrium in a table?
- taxes and the Keynesian Cross
- imports and exports
- gdp/national income and aggregate expenditure
A: gdp/national income and aggregate expenditure

Q: Where is the macro equilibrium found in the income-expenditure model graphically?
- At the level of GDP where AD equals AS.
- At the market level where demand equals supply.
- At the level of GDP where national income equals aggregate expenditure.
A: At the level of GDP where national income equals aggregate expenditure.

Q: When looking at the graph of an income-expenditure model where would the macro equilibrium be found?
- At the level of GDP where AS equals AD.
- At the market level where supply equals demand.
- At the level of GDP where aggregate expenditure equals national income.
A: At the level of GDP where aggregate expenditure equals national income.

Q: Considering the figure, the macro equilibrium which is where aggregate expenditure is equal to national income is represented by ________.
- point a
- point c
- point d
- point b
A: point b

Q: Looking at the figure, what represents the macro equilibrium where aggregate expenditure is equal to national income?
- point a
- point c
- point d
- point b
A: point b

Q: Considering the figure, the macro equilibrium occurs where the real GDP (Y) equals ________.
- $5,000
- $7,000
- $6,000
A: $6,000

Q: Using the figure, when the real GDP (Y) equals ________ it is at the macro equilibrium.
- $5,000
- $7,000
- $6,000
A: $6,000

Q: Suppose an economy is defined by the following: C = 210 + 0.8 (Yd). This algebraic equation represents the ________.
- autonomous consumption
- marginal propensity to consume
- consumption function
A: consumption function

Q: Say that an economy is defined by the following algebraic equation: C = 322 + 0.7 (Yd). What does the algebraic equation represent?
- autonomous consumption
- the marginal propensity to consume
- the consumption function
A: the consumption function

Q: Suppose an economy is defined by the following: C = 108 + 0.6 (Yd). The 108 in this algebraic equation represents the ________.
- consumption function
- marginal propensity to consume
- autonomous consumption
A: autonomous consumption

Q: Suppose an economy is defined by the following: C = 150 + 0.7 (Yd). The 0.6 in this algebraic equation represents the ________.
- autonomous consumption
- consumption function
- marginal propensity to consume
A: marginal propensity to consume

Q: Suppose an economy is defined by the following: C = 136 + 0.9 (Yd). The (Yd) in this algebraic equation represents the ________.
- pre-tax income
- discretionary income
- disposable income
A: disposable income

Q: If an economy is defined by the following algebraic equation: C = 209 + 0.6 (Yd). What does the (Yd) in this algebraic equation represent?
- pre-tax income
- discretionary income
- disposable income
A: disposable income

Q: Imagine the economy is defined by the consumption function of C = 140 + 0.9 (Yd) where 140 is autonomous consumption, 0.9 is marginal propensity to consume, and Yd is disposable income (after taxes) and Yd=Y-T, where Y is national income (or GDP) and T=Tax Revenues=0.3Y (0.3 is the avg. income tax rate). To find the macro equilibrium use the following equation Y = C + I + G + (X - M). Where C=140 + 0.9(Yd), I=400, G=800, X=600, M=0.15Y. What is the aggregate expenditure for this economy? [Remember Y=AE]
- Y = 4042
- Y = 3079
- Y = 3730
A: Y = 3730

Q: Imagine the economy is defined by the consumption function of C = 200 + 0.9 (Yd) where 200 is autonomous consumption, 0.9 is marginal propensity to consume, and Yd is disposable income (after taxes) and Yd=Y-T, where Y is national income (or GDP) and T=Tax Revenues=0.3Y (0.3 is the avg. income tax rate). Find the macro equilibrium using the following equation Y = C + I + G + (X - M) where C=200 + 0.9(Yd), I=600, G=1000, X=600, M=0.1Y. What is the equilibrium for this economy? [Remember Y=AE]
- Y = 4286
- Y = 3810
- Y = 5454
A: Y = 5454

Q: The potential GDP line is a vertical line on the ________ indicating where GDP is at potential on the horizontal axis.
- individual supply and demand graph
- microeconomic equilibrium graph
- Keynesian Cross diagram
A: Keynesian Cross diagram

Q: The potential GDP line is a ________ on the Keynesian Cross diagram which indicates GDP at its potential on the horizontal axis.
- sloping upward line
- horizontal line
- vertical line
A: vertical line

Q: Of these statements about the potential GDP line, which is incorrect?
- The potential GDP line is a vertical line.
- The potential GDP line indicates the quantity of output the economy can produce
- The potential GDP line makes the assumption that it is at less than full employment of its physical capital and labor.
A: The potential GDP line makes the assumption that it is at less than full employment of its physical capital and labor.

Q: Which of the following statements is incorrect regarding the potential GDP line?
- It is a vertical line
- It refers to the quantity of output the economy can produce
- It assumes less than full employment of its labor and physical capital.
A: It assumes less than full employment of its labor and physical capital.

Q: Potential real GDP is defined as ________.
- the quantity of output that the economy can produce when it is at less than potential employment of its resources
- the quantity of output that the economy can produce when it is above the natural rate of unemployment
- the quantity of output that the economy can produce when it is at full employment of its labor and physical capital
A: the quantity of output that the economy can produce when it is at full employment of its labor and physical capital

Q: The quantity of output that the economy can produce when it is at full employment of its labor and physical capital is the definition for
- gap GDP
- equilibrium GDP
- potential real GDP.
A: potential real GDP.

Q: and the y axis labeled Aggregate Expenditure (dollars). The x and y axis have points 0, 200, 400, 600, 700, 800, and 1,000. There are 4 lines. Line 1 is vertical with the plot point of 800,0, line 2 is an upward sloping line starting at 0,0 and ending at 800,800. Line 3 and 4 are upward sloping lines that start at around 0,400. There are two dotted lines that meet at point 700,700.) In the figure, which line is the potential GDP Line?
- line 2
- line 3
- line 4
- line 1
A: line 1

Q: and the y axis labeled Aggregate Expenditure (dollars). The x and y axis have points 0, 200, 400, 600, 700, 800, and 1,000. There are 4 lines. Line 1 is vertical with the plot point of 800,0, line 2 is an upward sloping line starting at 0,0 and ending at 800,800. Line 3 and 4 are upward sloping lines that start at around 0,400. There are two dotted lines that meet at point 700,700.) Of the lines in this graph, which indicates is the line for potential GDP?
- line 2
- line 3
- line 4
- line 1
A: line 1

Q: In a Keynesian cross diagram, what name is given to the distance between an output level that is below potential GDP?
- expenditure-output
- inflationary gap
- recessionary gap
A: recessionary gap

Q: In a Keynesian cross diagram, what name is given to the distance between an output level that is above potential GDP?
- expenditure-output
- recessionary gap
- inflationary gap
A: inflationary gap

Q: Causes of a recessionary gap include ________.
- a decline in savings
- an increase in government spending
- a decline in consumption
A: a decline in consumption

Q: Which of the following is a cause for a recessionary gap?
- Prices are low.
- Government spending has increased.
- Consumption is on the decline.
A: Consumption is on the decline.

Q: If the economy is experiencing an inflationary gap, the equilibrium level of GDP is
- less than potential GDP.
- equal to potential GDP.
- greater than potential GDP.
A: greater than potential GDP.

Q: How does an economist know if the economy is experiencing an inflationary gap?
- The equilibrium level of GDP is less than potential GDP.
- The equilibrium level of GDP is equal to potential GDP.
- The equilibrium level of GDP is greater than potential GDP.
A: The equilibrium level of GDP is greater than potential GDP.

Q: If the macroeconomy is experiencing a recessionary gap, what actions would a Keynesian economist suggest be taken to adjust the economy?
- a decrease in government spending
- an increase in taxesa
- an increase in government spending.
A: an increase in government spending.

Q: If the macroeconomy is experiencing an inflationary gap, what actions would a Keynesian economist suggest be taken to adjust the economy?
- decrease taxes
- increase government spending
- decrease government spending
A: decrease government spending

Q: If a Keynesian economist is advocating the current economic policy be to increase government spending, what is the state of the current economy?
- The economy is experiencing an inflationary gap.
- The economy is experiencing natural unemployment at potential GDP.
- The economy is experiencing a recessionary gap.
A: The economy is experiencing a recessionary gap.

Q: The current economic policy being implemented by the Keynesian economists in government is moving the economy bach toward potential GDP through increased taxation. Knowing this policy, what would you say is the current state of the economy?
- The economy is experiencing natural unemployment at potential GDP.
- The economy is experiencing a recessionary gap.
- The economy is experiencing an inflationary gap.
A: The economy is experiencing an inflationary gap.

Q: What is the best explanation for the relatively horizontal area of the short run aggregate supply curve?
- An increase in aggregate demand causes both real output and the price level to increase.
- An increase in aggregate demand when the economy is operating at potential output causes the price level to rise, with little or no effect on real output.
- An increase in aggregate demand when the economy is operating below potential output causes real output to grow, with little or no effect on the price level.
A: An increase in aggregate demand when the economy is operating below potential output causes real output to grow, with little or no effect on the price level.

Q: Of the following explanations of the short run aggregate supply curve, which best explains the relatively horizontal area?
- An increase in aggregate demand causes both the price level and real output to increase.
- With an economy operating at potential output, an increase in aggregate demand causes a rise in the price level, but has no or little effect on real output.
- With an economy operating below potential output, an increase in aggregate demand causes real output to increase with no or little effect on the price level.
A: With an economy operating below potential output, an increase in aggregate demand causes real output to increase with no or little effect on the price level.

Q: The pure Keynesian AD-AS model assumes that for any level of GDP below potential, any change in AD affects real GDP, but NOT the ________.
- spending level
- output level
- price level
A: price level

Q: According to a Keynesian AD-AS model, when any level of GDP is below potential, real GDP is affected with any change in AD, but the ________ remains unaffected.
- spending level
- export level
- price level
A: price level

Q: A horizontal AS curve means that changes in GDP will be caused by:
- cyclical unemployment
- changes in potential output.
- changes in aggregate demand.
A: changes in aggregate demand.

Q: For the GDP to change when the AS curve is horizontal, means it must change through:
- cyclical unemployment
- increases or decreases in potential output.
- increases or decreases in aggregate demand.
A: increases or decreases in aggregate demand.

Q: When potential GDP is reached, aggregate supply becomes vertical for ________.
- the income-expenditure model
- the traditional AD-AS model
- both the income-expenditure model and the traditional AD-AS model
A: both the income-expenditure model and the traditional AD-AS model

Q: What takes place when the economy reaches potential GDP and the aggregate supply becomes vertical?.
- The potential GDP is vertical only in the income-expenditure model.
- The potential GDP is vertical only the traditional AD-AS model.
- c, The potential GDP is vertical only in both the income-expenditure model and the traditional AD-AS model.
A: c, The potential GDP is vertical only in both the income-expenditure model and the traditional AD-AS model.