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8 May, 2015 - 10:02

The extent to which the actual aggregate expenditure exceeds the full employment level of aggregate expenditure is called the inflationary gap because such excess demand can only cause inflation as businesses already are producing at full capacity.

Review Quiz

  1. In the aggregate expenditure schedule, the equilibrium is verified because if the production by businesses is such that aggregate output is smaller than aggregate expenditure, then
    1. inventories are depleted,
    2. inventories accumulate,
    3. demand pulled inflation occurs,
    4. production needs to be cut.
  2. Investment demand will shift with
    1. taxes,
    2. costs,
    3. technology,
    4. changes in all answers are correct.
  3. True or False: A major thrust of Keynesian economics is to show that a small change in NNP will cause a large change in AD.
    1. true,
    2. false,
    3. no valid answer.
  4. The Keynesian multiplier is equal to
    1. MPS/(1-MPC),
    2. (1-MPC)-1,
    3. (1-MPC)/MPS,
    4. 1/(1-MPC).
  5. True or False: Actual investment is equal to planned investment, plus unintended accumulation of inventory.
  6. True or False: If consumer indebtedness is very high, it means that consumers will be forced to cut on spending.
    1. true,
    2. false,
    3. no valid answer.
  7. The extent to which aggregate expenditure falls short of full-employment level of aggregate expenditure, is called
    1. recessionary gap,
    2. propensity to consume,
    3. inflationary gap,
    4. Keynesian multiplier effect.
  8. In the Keynesian model, aggregate expenditure is
    1. current year,
    2. planned not actual,
    3. household only,
    4. prior year.
  9. In Keynesian view, investment is unstable due to
    • uncontrollable money supply,
    • changing weather during year,
    • irregular pattern of innovations,
    • all answers are correct.
  10. In Keynesian aggregate demand graph, the consumption schedule is upsloping because people spend more when the following is higher:
    1. temperature,
    2. age,
    3. income,
    4. advertising.
  11. In the paradox of thrift, an increase in saving causes
    1. an increase in NNP,
    2. an increase in C,
    3. a decrease in I,
    4. a decrease in NNP.
  12. The fact that when a society tries to save more, it ends up saving the same amount (or even less), is known as
    1. fiscal policy,
    2. cost push inflation,
    3. real balance effect,
    4. paradox of thrift.
  13. True or False: In the Keynesian model, real aggregate national output is equal to aggregate national income.
    1. false,
    2. true,
    3. no valid answer.
  14. The relationship between MPS and MPC is
    1. MPC=MPS+1,
    2. MPC=MPS-1,
    3. MPS=1-MPC,
    4. MPS=1+MPC.
  15. If an inflationary gap is present, the policy needed is to
    1. expand I,
    2. contract S,
    3. expand AD,
    4. contract AD.
  16. Which of the following is NOT a non-income determinant of consumption?
    1. indebtedness,
    2. profit volatility.
    3. stock of durable goods,
    4. price level,
  17. The willingness or propensity to save a given proportion of the last dollar earned, is
    1. APS,
    2. MPS,
    3. MPC,
    4. APC.
  18. True or False: The Keynesian multiplier only works for increases in NNP, not for decreases.
    1. true,
    2. false,
    3. no valid answer.
  19. True or False: In Keynesian view, interest rates are not free, but influenced by controls on money supply by monetary authorities.
    1. true,
    2. false,
    3. no valid answer.
  20. The (Keynesian) word used to refer to saving and all other forms of diversion of income from expenditure, is ...............


  1. A
  2. D
  3. B
  4. D
  5. A
  6. A
  7. A
  8. B
  9. C
  10. C
  11. D
  12. D
  13. B
  14. C
  15. D
  16. B
  17. B
  18. B
  19. A


  1. Draw the aggregate expenditure graph. Show where the equilibrium is. Explain why this is an equilibrium.
  2. Draw the leakage-injection graph. Show where the equilibrium is. Explain why this is an equilibrium.
  3. Draw the aggregate expenditure graph. Show the multiplier effect. Explain what is taking place in the multiplier effect.
  4. Outline the process called multiplier effect. Show how it is calculated. Mention complex multipliers.
  5. Explain the lesson of the paradox of thrift. Show how it ties in with the concept of multiplier.
  6. Draw a consumption line in the aggregate expenditure graph. Explain what Keynes is showing with it.
  7. Draw a consumption line in the aggregate expenditure graph. Is it stable? What causes it to shift?
  8. How is saving presented in the Keynesian model? Where and how is it shown in the aggregate expenditure graph?
  9. Explain how investment is presented in the Keynesian model. Mention its determinants. Why are the determinants external to the model.
  10. Explain why investment in Keynesian view is independent of income.