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a.the planned aggregate expenditures on goods and services will equal the current rate of output.

b.business inventories will be increasing.

c.full employment must be present.

d.the actual rate of unemployment must equal the natural rate of unemployment.

3.The Great Depression provided support for the declaration of John Maynard Keynes that

a.government action was necessary to ensure interest rates remained at the equilibrium level.

b.prolonged periods of unemployment were possible.

c.falling resource prices would bring the economy out of a recession.

d.lower interest rates would quickly restore the full-employment equilibrium of an economy.

4.The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $5 billion, real GDP will

a.increase by less than $5 billion if the economy was initially operating well below capacity.

b.increase by more than $5 billion if the economy was initially operating well below capacity.

c.increase by more than $5 billion if the economy was initially operating at full-employment capacity.

d.decline if the marginal propensity to consume is less than 1.

5.When the planned spending of consumers, businesses, government, and foreigners (net exports) is less than the current level of output, the Keynesian model suggests that

a.the economy’s output will fall short of its potential.

b.prices will rise.

c.equilibrium real GDP will increase.

d.inventories will decline.

6.Which of the following is the primary source of changes in output within the framework of the Keynesian model?

a.changes in the price level

b.changes in aggregate expenditures

c.changes in interest rates

d.changes in wage rates

7.According to Say’s law, a general overproduction of goods and services cannot happen because

a.there will always be foreign countries willing to buy the excess output.

b.the production of goods generates enough income to buy the total output.

c.government will redistribute the excess output to the poor.

d.excess output leads to rising prices, which then provides the income necessary to buy the surplus goods.

8.Within the Keynesian model, if the output of an economy is less than the full-employment level,

a.a reduction in government expenditures will direct the economy back to full-employment equilibrium.

b.a reduction in wage rates and resource prices will quickly restore full-employment equilibrium.

c.a reduction in the real interest rate will soon restore full-employment equilibrium.

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