The Short Run: Goods Market Practice Quiz (10 questions)

Question 1

1. When prices and wages are fixed, what sequence describes how a change in demand can affect economic activity from year to year?

Demand changes affect production, production changes income, and income changes demand.

Production changes affect demand, demand changes income, and income changes production.

Income changes affect production, production changes demand, and demand changes income.

Demand changes affect income, income changes production, and production changes demand.

Explanation

With prices and wages fixed, a change in demand affects production; production then changes income, which feeds back into demand. The alternative sequence placing income between demand and production does not match this stated mechanism.

Answer

Demand changes affect production, production changes income, and income changes demand.

Question 2

2. A firm purchases new equipment to expand its productive capacity. Which GDP expenditure component does this purchase represent?

Government spending, because equipment contributes to the economy's productive capacity.

Financial investment, because the purchase is an allocation of funds to an asset.

Economic investment, which includes fixed investment and inventory investment.

Consumption, because the equipment is a good purchased by an organization.

Explanation

Purchasing equipment to expand productive capacity is fixed investment, a component of economic investment. Financial investment refers to financial assets rather than additions to productive capacity.

Answer

Economic investment, which includes fixed investment and inventory investment.

Question 3

3. In a closed economy with no exports or imports, which expression gives total goods demand?

Z \equiv C + I + G + X - IM

Z \equiv C + I + G

Z \equiv C + G + X - IM

Z \equiv C + I - G

Explanation

When the economy is closed, exports and imports are zero, so total goods demand is consumption plus investment plus government spending. The expression including exports and imports gives the general formula rather than its closed-economy form.

Answer

$$Z \equiv C + I + G$$

Question 4

4. If disposable income is zero, what does the linear consumption function imply about consumption?

Consumption equals zero because income provides the basis for all consumer spending.

Consumption equals

c_0

, the consumption level at zero disposable income.

Consumption equals

c_1

, the propensity to consume expressed as an amount.

Consumption equals government transfers less taxes, regardless of

c_0

.

Explanation

Substituting zero disposable income into $C = c_0 + c_1Y_D$ leaves consumption equal to $c_0$ . The propensity to consume, $c_1$ , is the coefficient on disposable income, not the consumption level at zero income.

Answer

Consumption equals $$c_0$$, the consumption level at zero disposable income.

Question 5

5. What does the multiplier measure in the equilibrium-output model?

The amount of government spending needed to balance the public budget

The ratio of the equilibrium output change to the initial change in autonomous spending

The share of disposable income that consumers spend rather than save

The difference between planned expenditure and actual production

Explanation

The multiplier captures how an initial change in autonomous spending expands into a larger change in equilibrium output through successive rounds of spending. The propensity to consume is the share of disposable income spent, not the multiplier itself.

Answer

The ratio of the equilibrium output change to the initial change in autonomous spending

Question 6

6. Which economist presented an alternative model focused on investment and saving in 1936?

John Maynard Keynes

Irving Fisher

Alfred Marshall

Milton Friedman

Explanation

John Maynard Keynes presented the investment-and-saving model in 1936 in *The General Theory of Employment, Interest and Money*. Irving Fisher is associated with other economic contributions, not this specific attribution.

Answer

John Maynard Keynes

Question 7

7. What role does the fallacy of composition play in explaining the paradox of thrift?

It highlights that individual efforts to save more can reduce aggregate demand and output, so the outcome for the whole economy may differ from the outcome for each person.

It describes how consumers coordinate their saving decisions to raise total demand across the economy.

It explains why public saving rises whenever households increase their private saving, regardless of changes in government policy.

It shows that investment adjusts automatically to preserve output when consumers reduce their spending.

Explanation

The fallacy of composition warns that a result true for individuals need not hold for the economy as a whole; collectively, attempts to save more can depress demand and output. The claim that public saving rises with household saving is not implied, since public saving depends on taxes and government spending.

Answer

It highlights that individual efforts to save more can reduce aggregate demand and output, so the outcome for the whole economy may differ from the outcome for each person.

Question 8

8. Which concern about fiscal policy describes a risk that can emerge over the long run after tax cuts or higher government spending?

They can contribute to large budget deficits and rising public debt.

They can ensure output remains at its new level in the medium run.

They can make investment and imports easier to predict.

They can prevent expectations from influencing policy effects.

Explanation

Tax cuts or increased government spending can lead to large budget deficits and public debt in the long run. Difficulty assessing investment and import changes is a separate challenge, not something policy necessarily makes easier to predict.

Answer

They can contribute to large budget deficits and rising public debt.

Question 9

9. How do government spending and government transfers differ in their treatment as GDP expenditure components?

Government spending counts purchases of domestic goods, while purchases of imported goods are excluded.

Government spending counts transfers to households, while purchases of goods and services are excluded.

Government spending counts purchases by federal governments, while state and local purchases are excluded.

Government spending counts purchases of goods and services, while transfers are excluded.

Explanation

Government spending in GDP includes government purchases of goods and services at federal, state, and local levels, but excludes transfers. Transfers are payments rather than government purchases of goods or services, so they are not directly included as this expenditure component.

Answer

Government spending counts purchases of goods and services, while transfers are excluded.

Question 10

10. Which expression defines disposable income in the consumption model?

Income after subtracting taxes, with taxes defined net of government transfers

Income remaining after subtracting consumption and private investment

Income before taxes, adjusted for exports and imports

Income after subtracting government purchases from total production

Explanation

Disposable income is defined as income minus taxes, where taxes are net of government transfers. Subtracting government purchases instead confuses fiscal spending with the household tax measure used in the model.

Answer

Income after subtracting taxes, with taxes defined net of government transfers

The Short Run: Goods Market Practice Quiz (10 questions)

All questions and answers

1. When prices and wages are fixed, what sequence describes how a change in demand can affect economic activity from year to year?

2. A firm purchases new equipment to expand its productive capacity. Which GDP expenditure component does this purchase represent?

3. In a closed economy with no exports or imports, which expression gives total goods demand?

4. If disposable income is zero, what does the linear consumption function imply about consumption?

5. What does the multiplier measure in the equilibrium-output model?

6. Which economist presented an alternative model focused on investment and saving in 1936?

7. What role does the fallacy of composition play in explaining the paradox of thrift?

8. Which concern about fiscal policy describes a risk that can emerge over the long run after tax cuts or higher government spending?

9. How do government spending and government transfers differ in their treatment as GDP expenditure components?

10. Which expression defines disposable income in the consumption model?

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