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© 2014 Pearson Canada Inc.#
Equilibrium output is reduced by an increase in ____.
A) planned investment
B) taxes
C) government spending
D) net exports
Answer: B
Diff: 2 Type: MC Page Ref: 546 - 547
Skill: Applied
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output
Keynes believed that unstable investment caused the Great Depression. Using the simple
Keynesian model, explain how a fall in investment affects equilibrium output.
Answer: A fall in investment will reduce aggregate output by a greater amount that the initial
fall in investment. This happens because of the multiplier effect.
Diff: 2 Type: SA Page Ref: 546 - 547
Skill: Applied
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output
Describe Keynes's equilibrium condition and what it implies.
Answer: Equilibirum occurs when the total quantity of the output equals the total amount of
aggregate demand or planned expenditure. When Y = YAD producers are able to sell all their
output and have no reason to change their production because there is no unplanned inventory
investment.
Diff: 2 Type: SA Page Ref: 546
Skill: Applied
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output
- Define the IS curve.
Answer: The IS curve shows the relationship between aggregate output and the real interest rate
when the goods market is in equilibrium.
Diff: 2 Type: SA Page Ref: 547
Skill: Applied
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output