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Homework answers / question archive / Florida International University - MACRO ECO2013 Chapter 11(26) 1)The changes in the economy of Ft

Florida International University - MACRO ECO2013 Chapter 11(26) 1)The changes in the economy of Ft

Economics

Florida International University - MACRO ECO2013

Chapter 11(26)

1)The changes in the economy of Ft. Myers, Florida, between 2003 and 2010 provide an example of:

 

 

 

 

 

A)

the risk associated with an agricultural economy.

 

B)

positive and negative multiplier effects.

 

C)

how public assistance programs can stimulate the economy.

 

D)

the benefits of government budget surpluses.

 

 

2.

The real estate market in Ft. Myers, Florida, had collapsed by 2008 because:

 

A)

houses were overpriced.

 

B)

most Floridians prefer to rent apartments rather than buy houses.

 

C)

hurricanes damaged so much property.

 

D)

climate change has made much of the retiree population leave Florida.

 

 

3.

The main reason that speculators bought houses in Ft. Myers in the early 2000s was:

 

A)

to profit by reselling them at much higher prices.

 

B)

to live in them.

 

C)

to demolish them and build a shopping mall.

 

D)

to rent them to students.

 

 

4.

The expansion and collapse of the housing market in Ft. Myers between 2003 and 2010 is primarily an example of how:

 

A)

too much government regulation is harmful to the economy.

 

B)

changes in investment spending can affect consumer spending and the entire economy.

 

C)

immigration affects local economies.

 

D)

high tax rates can decrease economic activity in an area.

 

 

5.

The marginal propensity to consume is:

 

A)

increasing if the marginal propensity to save is increasing.

 

B)

the proportion of total disposable income that the average family consumes.

 

C)

the change in consumer spending divided by the change in aggregate disposable income.

 

D)

the change in consumer spending minus the change in aggregate disposable income.

 

 

6.

The marginal propensity to consume equals the:

 

A)

proportion of consumer spending as a function of aggregate disposable income.

 

B)

change in savings divided by the change in aggregate disposable income.

 

C)

ratio of the change in consumer spending to the change in aggregate disposable income.

 

D)

change in savings divided by the change in consumer spending.

 

 

7.

The marginal propensity to save plus the marginal propensity to consume must equal:

 

A)

zero.

 

B)

one.

 

C)

income.

 

D)

savings.

 

 

8.

If the MPS = 0.1, then the multiplier equals:

 

A)

1.

 

B)

5.

 

C)

9.

 

D)

10.

 

 

9.

If the multiplier equals 4, then the marginal propensity to save must be equal to:

 

A)

0.25.

 

B)

0.5.

 

C)

0.75.

 

D)

the marginal propensity to consume.

 

 

10.

Suppose that the marginal propensity to consume is 0.8 and investment spending increases by $100 billion. The increase in real GDP is:

 

A)

$100 billion, the same amount as investment spending.

 

B)

$125 billion, composed of $100 billion in investment spending and $25 billion in consumption.

 

C)

$80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion.

 

D)

$500 billion, composed of $100 billion in investment spending and $400 billion in consumption.

 

 

11.

If the marginal propensity to save is 0.3, the size of the multiplier is:

 

A)

3.3.

 

B)

2.3.

 

C)

1.3.

 

D)

0.7.

 

 

12.

The marginal propensity to save is:

 

A)

savings divided by aggregate income.

 

B)

the fraction of an additional dollar of disposable income that is saved.

 

C)

1 + MPC.

 

D)

savings divided by aggregate income, or 1 + MPC.

 

 

13.

The multiplier is:

 

A)

1 / (1  – MPC).

 

B)

MPS / MPC.

 

C)

1 / (MPC).

 

D)

1(1 + MPC).

 

 

14.

If the marginal propensity to consume is 0.8, then the multiplier is:

 

A)

4.

 

B)

5.

 

C)

8.

 

D)

10.

 

 

15.

The marginal propensity to consume (MPC) equals the change in _____ divided by the change in _____.

 

A)

consumer spending; disposable income

 

B)

consumer spending;  investment spending

 

C)

consumer spending;  gross domestic product

 

D)

disposable income;  consumer spending

 

 

16.

If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume equals:

 

A)

20.

 

B)

0.8.

 

C)

1.25.

 

D)

9.

 

 

17.

Suppose the marginal propensity to consume equals 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, real GDP will _____ by _____.

 

A)

increase; $450 billion

 

B)

increase; $90 billion

 

C)

increase; $500 billion

 

D)

decrease; $500 billion

 

 

18.

Assuming no taxes and no trade, the multiplier equals:

 

A)

MPC / MPS.

 

B)

1 / (1 – MPS).

 

C)

MPC + MPS.

 

D)

1 / (1 – MPC).

 

 

19.

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.8. Assuming no taxes and no trade, real GDP  will _____ by _____.

 

A)

decrease; $500 billion

 

B)

decrease; $200 billion

 

C)

decrease; $800 billion

 

D)

increase; $400 billion

 

 

20.

The marginal propensity to consume is the change in _____ divided by the change in _____.

 

A)

savings; disposable income

 

B)

disposable income; consumption

 

C)

disposable income; savings

 

D)

consumption; disposable income

 

 

21.

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your marginal propensity to consume is:

 

A)

0.2.

 

B)

0.4.

 

C)

0.6.

 

D)

0.8.

 

 

22.

If your disposable personal income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $13,000, your marginal propensity to consume is:

 

A)

0.2.

 

B)

0.4.

 

C)

0.6.

 

D)

0.8.

 

 

23.

The marginal propensity to consume plus the marginal propensity to save must:

 

A)

equal each other.

 

B)

equal 1.

 

C)

be less than 1.

 

D)

be greater than 1.

 

 

24.

The value of the marginal propensity to consume is:

 

A)

1.

 

B)

greater than 1.

 

C)

between 0 and 1.

 

D)

less than 0 and greater than –1.

 

 

25.

An increase in the marginal propensity to consume:

 

A)

increases the multiplier.

 

B)

shifts the autonomous investment line upward.

 

C)

decreases the multiplier.

 

D)

shifts the autonomous investment line downward.

 

 

26.

Which of the following most accurately depicts the formula for the expenditure multiplier?

 

A)

 

B)

 

C)

 

D)

 

 

27.

If MPC = 0.9, the multiplier is:

 

A)

10.

 

B)

90.

 

C)

9.

 

D)

1.

 

 

28.

The _____ the _____, the _____ the multiplier.

 

A)

smaller; level of wealth; bigger

 

B)

bigger; marginal propensity to save; bigger

 

C)

bigger; marginal propensity to consume; smaller

 

D)

bigger; marginal propensity to consume; bigger

 

 

29.

Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The investment multiplier is:

 

A)

8.

 

B)

10.

 

C)

4.

 

D)

0.25.

 

 

30.

Suppose investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The value of the marginal propensity to consume is:

 

A)

0.8.

 

B)

0.4.

 

C)

0.75.

 

D)

4.

 

 

31.

If the multiplier is 4 and investment spending falls by $100 billion, the change in real GDP will be:

 

A)

–$400 billion.

 

B)

$400 billion.

 

C)

$25 billion.

 

D)

–$25 billion.

 

 

32.

Suppose the government increases spending by $100 billion as a stimulus package. If the marginal propensity to consume is 0.6, then real GDP will:

 

A)

decrease by $250 billion.

 

B)

increase by $250 billion.

 

C)

increase by $600 billion.

 

D)

decrease by $400 billion.

 

 

33.

Suppose that the U.S. economy is in a severe recession. Most households are trying to save more of their income than before. This increase in private savings will lead to:

 

A)

an increase in real GDP, as more savings means more funds for business investment.

 

B)

a fall in real GDP, as more savings means people will spend less.

 

C)

no change in real GDP, because there is no savings multiplier.

 

D)

an increase in real GDP, as an increase in savings will make people wealthier.

 

 

34.

If the marginal propensity to save is small, it will:

 

A)

make the multiplier smaller.

 

B)

make the multiplier larger.

 

C)

not affect the value of the multiplier.

 

D)

increase the interest rate.

 

 

35.

The marginal propensity to consume is the increase in consumer spending when _____ increase(s) by $1.

 

A)

investment spending

 

B)

taxes

 

C)

disposable income

 

D)

savings

 

 

36.

The marginal propensity to save is the increase in household savings when _____ increase(s) by $1.

 

A)

investment spending

 

B)

taxes

 

C)

consumption

 

D)

disposable income

 

 

37.

In a simple economy with no taxes, government spending, exports, or imports, if disposable income increases by $100 and $70 is consumed, _____ is saved.

 

A)

$30

 

B)

$70

 

C)

$100

 

D)

$170

 

 

38.

In a simple economy with no taxes, government spending, exports, or imports, if disposable income increases by $100 and $30 is saved, _____ is consumed.

 

A)

$30

 

B)

$70

 

C)

$100

 

D)

$170

 

 

39.

A $50 million increase in investment spending will eventually cause equilibrium real GDP to:

 

A)

decrease by $50 million.

 

B)

increase by $50 million.

 

C)

increase by more than $50 million.

 

D)

increase by less than $50 million.

 

 

40.

A $70 million decrease in investment spending will cause real GDP to:

 

A)

decrease by $70 million.

 

B)

increase by $70 million.

 

C)

decrease by less than $70 million.

 

D)

decrease by more than $70 million.

 

 

41.

An initial change in the desired level of spending by firms, households, or government at a given level of real GDP is a(n):

 

A)

autonomous change in aggregate spending.

 

B)

multiplier-induced change in spending.

 

C)

endogenous spending.

 

D)

budget surplus.

 

 

42.

In an economy with no taxes or imports, if the marginal propensity to save is 0.2, the marginal propensity to consume must be:

 

A)

0.2

 

B)

0.8

 

C)

1.2

 

D)

0.16

 

 

43.

In an economy with no taxes or imports, if the marginal propensity to consume is 0.7, the marginal propensity to save must be:

 

A)

1.7

 

B)

0.7

 

C)

0.3

 

D)

0.21

 

 

44.

In an economy with no taxes or imports, if the marginal propensity to consume increases, the marginal propensity to save will:

 

A)

increase.

 

B)

decrease.

 

C)

remain constant.

 

D)

fluctuate randomly.

 

 

45.

In an economy with no taxes or imports, if the marginal propensity to save decreases, the marginal propensity to consume will:

 

A)

increase.

 

B)

decrease.

 

C)

remain constant.

 

D)

fluctuate randomly.

 

 

46.

In an economy with no taxes or imports, if disposable income increases by $1,000 and consumption increases by $600, the marginal propensity to consume is:

 

A)

$600.

 

B)

$400.

 

C)

1.67.

 

D)

0.60.

 

 

47.

In an economy with no taxes or imports, if disposable income increases by $1,000 and consumption increases by $600, the marginal propensity to save is:

 

A)

$600.

 

B)

$400.

 

C)

2.5.

 

D)

0.40.

 

 

48.

In an economy with no taxes or imports, if disposable income increases by $1,000 and consumption increases by $600, the multiplier is:

 

A)

$600.

 

B)

0.6.

 

C)

2.5.

 

D)

0.40.

 

 

49.

In an economy with no taxes and no imports, disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the marginal propensity to consume is:

 

A)

$600.

 

B)

0.71.

 

C)

0.60.

 

D)

0.50.

 

 

50.

In an economy with no taxes and no imports, disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the marginal propensity to save is:

 

A)

$600.

 

B)

$400.

 

C)

0.80.

 

D)

0.40.

 

 

51.

In an economy with no taxes and no imports, disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the multiplier is:

 

A)

6.

 

B)

2.5.

 

C)

0.60.

 

D)

0.40.

 

 

52.

In an economy with no taxes and no imports, disposable income decreases from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the marginal propensity to consume is:

 

A)

–0.75.

 

B)

–0.20.

 

C)

0.75.

 

D)

1.

 

 

53.

In an economy with no taxes and no imports, disposable income decreases from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the marginal propensity to save is:

 

A)

0.25.

 

B)

–0.25.

 

C)

1.125.

 

D)

0.75.

 

 

54.

In an economy with no taxes and no imports, disposable income decreases from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the multiplier is:

 

A)

0.25.

 

B)

4.

 

C)

1.125.

 

D)

–4.

 

 

55.

If the marginal propensity to consume increases, the multiplier will:

 

A)

increase.

 

B)

decrease.

 

C)

remain constant.

 

D)

fluctuate randomly.

 

 

56.

If the marginal propensity to save increases, the multiplier will:

 

A)

increase.

 

B)

decrease.

 

C)

remain constant.

 

D)

fluctuate randomly.

 

 

57.

If the marginal propensity to consume is 0.8, the multiplier is:

 

A)

0.8.

 

B)

0.2.

 

C)

1.25.

 

D)

5.

 

 

58.

If the marginal propensity to consume is 0.5, the multiplier is:

 

A)

5.

 

B)

2.

 

C)

1.

 

D)

0.5.

 

 

59.

If the marginal propensity to save is 0.2, the multiplier is:

 

A)

0.8.

 

B)

0.2.

 

C)

1.25.

 

D)

5.

 

 

60.

If the marginal propensity to save is 0.5, the multiplier is:

 

A)

5.

 

B)

2.

 

C)

1.

 

D)

0.5.

 

 

61.

If the multiplier is 4, the marginal propensity to consume is:

 

A)

3.

 

B)

0.80.

 

C)

0.75.

 

D)

0.25.

 

 

62.

If the multiplier is 4, the marginal propensity to save is:

 

A)

3.

 

B)

0.80.

 

C)

0.75.

 

D)

0.25.

 

 

63.

If the multiplier is 4 and autonomous government spending increases by $100 billion, real GDP will:

 

A)

increase by $400 billion.

 

B)

decrease by $400 billion.

 

C)

increase by $100 billion.

 

D)

increase by $25 billion.

 

 

64.

If the multiplier is 4 and autonomous government spending decreases by $100 billion, real GDP will:

 

A)

increase by $400 billion.

 

B)

decrease by $400 billion.

 

C)

increase by $100 billion.

 

D)

increase by $25 billion.

 

 

Use the following to answer questions 65-69:

 

Figure: Consumption and Real GDP

 

 

 

65.

(Figure: Consumption and Real GDP) Look at the figure Consumption and Real GDP. The slope of the consumption function is called the:

 

A)

marginal propensity to save.

 

B)

average propensity to consume.

 

C)

marginal propensity to consume.

 

D)

marginal consumption increment.

 

 

66.

(Figure: Consumption and Real GDP) Look at the figure Consumption and Real GDP. The marginal propensity to consume is:

 

A)

0.

 

B)

0.5.

 

C)

1.0.

 

D)

2.0.

 

 

67.

(Figure: Consumption and Real GDP) Look at the figure Consumption and Real GDP. If real GDP is $4 trillion, consumption is _____ trillion.

 

A)

$0.75

 

B)

$1

 

C)

$3

 

D)

$4

 

 

68.

(Figure: Consumption and Real GDP) Look at the figure Consumption and Real GDP. If real GDP is $12 trillion, consumption is _____ trillion.

 

A)

$5

 

B)

$7

 

C)

$9

 

D)

$11

 

 

69.

(Figure: Consumption and Real GDP) Look at the figure Consumption and Real GDP. If real GDP is $8 trillion, consumption is _____ trillion and savings is _____ trillion.

 

A)

$4; $4

 

B)

$5; $3

 

C)

$6; $2

 

D)

$7; $1

 

 

70.

You and a coworker have been trying to develop a linear equation that describes the local household consumption function. Your coworker has sent you a very short email that simply says he has finished the project and the consumption function is C = 100 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, what is the marginal propensity to consume?

 

A)

100

 

B)

0.75

 

C)

4

 

D)

0.25

 

 

71.

You and a coworker have been trying to develop a linear equation that describes the local household consumption function. Your coworker has sent you a very short email that simply says he has finished the project and the consumption function is C = 100 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would occur if a household had disposable income of $1,000?

 

A)

$750

 

B)

$4,000

 

C)

$850

 

D)

$350

 

 

72.

Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function?

 

A)

The slope will get steeper.

 

B)

Autonomous consumption will increase.

 

C)

The function will shift downward.

 

D)

The slope will get steeper and autonomous consumption will increase.

 

 

Use the following to answer questions 73-78:

 

 

 

73.

(Table: Individual and Aggregate Consumption Functions) Look at the table Individual and Aggregate Consumption Functions. Which of the following represents Andy's individual consumption function?

 

A)

C = 0.15YD

 

B)

C = 150 + 0.5YD

 

C)

C = 150 + 0.8YD

 

D)

C = 0.95YD

 

 

74.

(Table: Individual and Aggregate Consumption Functions) Look at the table Individual and Aggregate Consumption Functions. Which of the following represents Fred's individual consumption function?

 

A)

C = 100 + 0.7YD

 

B)

C = 100 + 0.5YD

 

C)

C = 150 + 0.8YD

 

D)

C = 0.80YD

 

 

75.

(Table: Individual and Aggregate Consumption Functions) Look at the table Individual and Aggregate Consumption Functions. Which of the following represents Mark's individual consumption function?

 

A)

C = 200 + 1.1YD

 

B)

C = 450 + 0.5YD

 

C)

C = 0.8YD

 

D)

C = 200 + 0.9YD

 

 

76.

(Table: Individual and Aggregate Consumption Functions) Look at the table Individual and Aggregate Consumption Functions. Autonomous consumption in the aggregate consumption function is:

 

A)

$450.

 

B)

$200.

 

C)

$150.

 

D)

$100.

 

 

77.

(Table: Individual and Aggregate Consumption Functions) The marginal propensity to consume in the aggregate consumption function is:

 

A)

0.5.

 

B)

0.7.

 

C)

0.8.

 

D)

0.9.

 

 

78.

(Table: Individual and Aggregate Consumption Functions) Which of the following represents the aggregate consumption function?

 

A)

C = 450 + 0.7YD

 

B)

C = 150 + 0.9YD

 

C)

C = 250 + 0.8YD

 

D)

C = 450 + 0.8YD

 

 

Use the following to answer questions 79-81:

 

Figure: Consumption and Disposable Personal Income

 

 

 

79.

(Figure: Consumption and Disposable Personal Income) Look at the figure Consumption and Disposable Personal Income. When disposable personal income is $1,200 billion, consumption is _____ billion.

 

A)

$600

 

B)

$800

 

C)

$1,200

 

D)

$2,000

 

 

80.

(Figure: Consumption and Disposable Personal Income) Look at the figure Consumption and Disposable Personal Income. When disposable personal income is $2,000 billion, consumption is _____ billion.

 

A)

$400

 

B)

$1,000

 

C)

$1,200

 

D)

$1,600

 

 

81.

(Figure: Consumption and Disposable Personal Income) Look at the figure Consumption and Disposable Personal Income. The slope of the consumption function is:

 

A)

0.25.

 

B)

0.50.

 

C)

0.60.

 

D)

0.67.

 

 

Use the following to answer questions 82-84:

 

 

 

82.

(Table: Income and Consumption) Look at the table Income and Consumption. When disposable personal income is $200, the marginal propensity to consume is:

 

A)

0.00.

 

B)

0.20.

 

C)

0.80.

 

D)

1.40.

 

 

83.

(Table: Income and Consumption) Look at the table Income and Consumption. When disposable personal income is $300, the marginal propensity to consume is:

 

A)

0.80.

 

B)

0.92.

 

C)

0.95.

 

D)

1.00.

 

 

84.

(Table: Income and Consumption) Look at the table Income and Consumption. When disposable personal income is $400, the level of personal savings is:

 

A)

–$40.

 

B)

–$20.

 

C)

$0.

 

D)

$20.

 

 

85.

The most important determinant of consumer spending is:

 

A)

the government budget deficit or surplus.

 

B)

the price of gasoline.

 

C)

the trade deficit.

 

D)

disposable income.

 

 

Use the following to answer questions 86-90:

 

Scenario: Consumption Spending

Suppose that the consumption function is C = $500 + 0.8 × YD, where YD is disposable income.

 

 

86.

(Scenario: Consumption Spending) Look at the scenario Consumption Spending. Autonomous consumption is:

 

A)

$500.

 

B)

0.

 

C)

four-fifths of disposable income.

 

D)

$1,300 if disposable income is $1,000.

 

 

87.

(Scenario: Consumption Spending) Look at the scenario Consumption Spending. The marginal propensity to consume is:

 

A)

$500.

 

B)

0.

 

C)

0.8.

 

D)

0.2.

 

 

88.

(Scenario: Consumption Spending) Look at the scenario Consumption Spending. The marginal propensity to save is:

 

A)

$500.

 

B)

0.

 

C)

0.8.

 

D)

0.2.

 

 

89.

(Scenario: Consumption Spending) Look at the scenario Consumption Spending. If income increases by $2,000, consumption will increase by:

 

A)

$500.

 

B)

$2,000.

 

C)

$1,600.

 

D)

$400.

 

 

90.

(Scenario: Consumption Spending) Look at the scenario Consumption Spending. If disposable income is $1,000, savings is:

 

A)

–$500.

 

B)

$1,300.

 

C)

–$300.

 

D)

$300.

 

 

91.

When David has no income, he spends $500. If his income increases to $2,000, he spends $1,900. Which of the following represents his consumption function?

 

A)

C = 1.2 × YD

 

B)

C = 0.95 × YD

 

C)

C = $500 + 0.7 × YD

 

D)

C = $500 + 1,000 × YD

 

 

92.

Consumer spending in the United States normally accounts for approximately _____ of the economy.

 

A)

one-third

 

B)

one-half

 

C)

two-thirds

 

D)

three-fourths

 

 

93.

The following is an algebraic representation of the consumption function: C = A + MPC × YD. Which of the following represents the slope of the function?

 

A)

C

 

B)

A

 

C)

MPC

 

D)

YD

 

 

Use the following to answer question 94:

 

Table: Individual Consumption for Bob

Disposable Income

Bob

$        0

$ 9,000

10,000

13,000

 

 

 

94.

(Table: Individual Consumption Function for Bob) Look at the table Individual Consumption Function for Bob. The marginal propensity to consume and autonomous consumption are _____ and _____, respectively, for Bob.

 

A)

0.6; $10,000

 

B)

0.4; $13,000

 

C)

0.6; $9,000

 

D)

0.4; $9,000

 

 

95.

The most important factor affecting a household's consumer spending is:

 

A)

its expected disposable income.

 

B)

its current disposable income.

 

C)

its wealth.

 

D)

the interest rate.

 

 

96.

In the consumption function, an individual household's consumer spending:

 

A)

is positively related to its current disposable income.

 

B)

is negatively related to its autonomous consumption and its marginal propensity to consume.

 

C)

is positively related to the interest rate.

 

D)

is determined by the accelerator principle.

 

 

97.

If the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:

 

A)

$20,000.

 

B)

$25,000.

 

C)

$30,000.

 

D)

$45,000.

 

 

98.

Assuming that A represents autonomous consumption and YD represents disposable income, for the economy as a whole:

 

A)

C = MPC + (A × YD).

 

B)

C = A + (MPC × YD).

 

C)

C = (A + MPC) × YD.

 

D)

C = (AMPS) + (MPC × YD).

 

 

99.

The marginal propensity to consume is _____ of the consumption function.

 

A)

the slope

 

B)

the intercept

 

C)

the inverse

 

D)

independent

 

 

100.

If aggregate consumption equals $100 million + 0.75 × YD, then the marginal propensity to consume is:

 

A)

0.75.

 

B)

0.25.

 

C)

$75 million.

 

D)

$100 million.

 

 

101.

If aggregate consumption equals $100 million + 0.75 × YD, then the marginal propensity to save is:

 

A)

0.75.

 

B)

0.25.

 

C)

–$75 million.

 

D)

–$100 million.

 

 

102.

If the aggregate consumption equals $100 million + 0.75 × YD, then autonomous consumption is:

 

A)

0.75.

 

B)

0.25.

 

C)

$75 million.

 

D)

$100 million.

 

 

103.

The aggregate consumption function:

 

A)

relates household consumption to interest rates.

 

B)

describes what people would like to buy.

 

C)

describes the relationship of spending to family wealth.

 

D)

relates disposable income to total consumer spending.

 

 

104.

In the equation C = A + MPC × YD,    _____ represents autonomous consumption.

 

A)

C

 

B)

A

 

C)

MPC

 

D)

YD

 

 

105.

David receives a tax refund of $800. He spends $600 and saves $200. David's marginal propensity to consume is:

 

A)

0.6.

 

B)

0.75.

 

C)

0.25.

 

D)

0.20.

 

 

106.

If the marginal propensity to consume is greater than zero but less than one, when disposable income rises by $1, consumption will:

 

A)

not be affected.

 

B)

rise by more than $1.

 

C)

rise by less than $1.

 

D)

rise by exactly $1.

 

 

107.

If the consumption function is plotted on the vertical axis of a graph with disposable income on the horizontal axis:

 

A)

the slope of the line will be negative and determined by the marginal propensity to save.

 

B)

the horizontal axis intercept will be determined by the level of autonomous consumption.

 

C)

the slope of the line will be positive and determined by the marginal propensity to consume.

 

D)

the vertical axis intercept will be determined by the marginal propensity to save.

 

 

108.

The marginal propensity to consume equals:

 

A)

consumption divided by disposable income.

 

B)

a change in consumption divided by a change in disposable income.

 

C)

income divided by consumption.

 

D)

a change in income divided by a change in consumption.

 

 

109.

If the marginal propensity to save decreases from 0.6 to 0.5:

 

A)

the slope of the consumption function increases from 0.4 to 0.5.

 

B)

the vertical axis intercept of the consumption function changes from 0.6 to 0.5.

 

C)

the slope of the consumption function decreases from 0.6 to 0.5.

 

D)

the horizontal axis intercept of the consumption function changes from 0.4 to 0.5.

 

 

110.

Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by C = 500 + 0.80Y, where Y is income. The autonomous consumer spending in this economy is:

 

A)

1,000.

 

B)

800.

 

C)

500.

 

D)

not possible to calculate.

 

 

111.

Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by C = 500 + 0.80Y, where Y is income. The marginal propensity to consume in Behr is:

 

A)

0.75.

 

B)

500.

 

C)

0.80.

 

D)

1.

 

 

112.

If disposable income increases:

 

A)

the consumption function will shift upward.

 

B)

there will be a rightward movement along the consumption function.

 

C)

there will be a leftward movement along the consumption function.

 

D)

the consumption function will shift downward.

 

 

113.

If disposable income increases by $1,000 and consumer spending increases by $800, then the marginal propensity to consume is:

 

A)

0.8.

 

B)

1.

 

C)

1.25.

 

D)

0.75.

 

 

114.

If  the marginal propensity to consume is 0.75, then the marginal propensity to save is:

 

A)

1.75.

 

B)

0.25.

 

C)

–0.25.

 

D)

1.25.

 

 

Use the following to answer questions 115-116:

 

Table: Disposable Income and Consumption

Disposable Income

(in Billions)

Consumer Spending

(in Billions)

$       0

$100

200

220

400

340

600

460

800

580

1,000

700

 

 

 

115.

(Table: Disposable Income and Consumption) Look at the table Disposable Income and Consumption. Autonomous consumer spending is:

 

A)

200.

 

B)

100.

 

C)

120.

 

D)

0.

 

 

116.

(Table: Disposable Income and Consumption) Look at the table Disposable Income and Consumption. The marginal propensity to consume equals:

 

A)

0.8.

 

B)

2.

 

C)

1.2.

 

D)

0.6.

 

 

117.

Consider a simple economy: MPC = 0.75, income = $400 billion, and aggregate consumption spending = $400 billion. Autonomous consumption is:

 

A)

0.

 

B)

$100 billion.

 

C)

$300 billion.

 

D)

$200 billion.

 

 

118.

The consumption function will shift up if:

 

A)

households expect an increase in the minimum wage.

 

B)

households expect a decrease in the minimum wage.

 

C)

the marginal propensity to consume decreases.

 

D)

the marginal propensity to save increases.

 

 

119.

If other things are equal, expectations of lower disposable income would _____ and shift the consumption function _____.

 

A)

increase autonomous consumption; up

 

B)

decrease the marginal propensity to consume; down

 

C)

decrease autonomous consumption; down

 

D)

increase the marginal propensity to consume; up

 

 

120.

The marginal propensity to consume is 0.5, aggregate autonomous consumption is $10,000, and aggregate disposable income is $40,000. If disposable income is expected to increase, the aggregate consumption function might take the form of:

 

A)

C = 10,000 + (40,000 × 0.5).

 

B)

C = 12,000 + (40,000 × 0.5).

 

C)

C = 10,000 + (40,000 × 0.7).

 

D)

C = 10,000 + (42,000 × 0.5).

 

 

121.

When future disposable income rises, current consumption:

 

A)

falls.

 

B)

rises.

 

C)

is unaffected.

 

D)

is autonomous.

 

 

122.

Which of the following will shift the aggregate consumption function UPWARD?

 

A)

Disposable income rises.

 

B)

Consumer expectations turn more pessimistic.

 

C)

The stock market is strong and wealth is rising.

 

D)

Disposable income falls.

 

 

Use the following to answer questions 123-124:

 

Figure: Consumption Functions

 

 

 

123.

(Figure: Consumption Functions) Look at the figure Consumption Functions. An economy's consumption function would shift from curve C to curve C? when there is a(n):

 

A)

decrease in wealth.

 

B)

decrease in the price level.

 

C)

increase in expected disposable income.

 

D)

increase in wealth.

 

 

124.

(Figure: Consumption Functions) Look at the figure Consumption Functions. An economy's consumption function would shift from curve C to curve C? when there is a(n):

 

A)

increase in expected disposable income.

 

B)

decrease in expected GDP growth estimates.

 

C)

drop in wealth.

 

D)

increase in the unemployment rate.

 

 

125.

An increase in the wealth of households, all other things unchanged, will result in _____ the aggregate consumption function.

 

A)

no effect on

 

B)

an upward shift in

 

C)

a downward shift of

 

D)

a movement to the right along

 

 

126.

An upward shift in the aggregate consumption function can be caused by:

 

A)

expectations of higher incomes.

 

B)

expectations of less income.

 

C)

a stock market crash.

 

D)

a reduction in the wealth of households.

 

 

127.

A downward shift in the consumption function can be caused by:

 

A)

expectations of higher incomes.

 

B)

an increase in the marginal propensity to consume.

 

C)

a decline in consumer wealth.

 

D)

an increase in the wealth of households.

 

 

128.

An upward shift in the consumption function can be caused by:

 

A)

an increase in consumer wealth.

 

B)

a drop in consumer wealth.

 

C)

pessimistic expectations.

 

D)

an increase in disposable personal income.

 

 

129.

A downward shift in the consumption function can be caused by:

 

A)

a decrease in disposable income.

 

B)

an increase in disposable income.

 

C)

expectations of higher permanent income.

 

D)

a decrease in wealth.

 

 

130.

If the stock market crashes:

 

A)

the aggregate consumption function will shift up.

 

B)

the aggregate consumption function will shift down.

 

C)

unplanned inventory investment will be negative.

 

D)

GDP will increase.

 

 

131.

Which of the following is NOT a determinant of consumer spending?

 

A)

disposable income

 

B)

expected disposable income

 

C)

wealth

 

D)

investment spending

 

 

132.

If other things are equal, an increase in aggregate wealth will _____ and shift the consumption function _____.

 

A)

increase autonomous consumption; up

 

B)

decrease the marginal propensity to consume; down

 

C)

decrease autonomous consumption; down

 

D)

increase the marginal propensity to consume; up

 

 

133.

The aggregate consumption function depends on:

 

A)

disposable income.

 

B)

expected disposable income.

 

C)

wealth.

 

D)

disposable income, expected disposable income, and wealth.

 

 

134.

According to the life-cycle hypothesis, wealth affects consumer spending because:

 

A)

wealthier people have higher incomes.

 

B)

wealthier people have better connections to buy in-demand goods.

 

C)

people try to smooth their consumption over the course of their lives.

 

D)

people try to consume as early in their lives as they can.

 

 

135.

An increase in aggregate wealth:

 

A)

increases consumption by each individual.

 

B)

increases the aggregate consumption function.

 

C)

decreases consumption by each individual.

 

D)

decreases the aggregate consumption function.

 

 

136.

The life-cycle hypothesis of consumer spending says that consumers plan their spending:

 

A)

based only on current disposable income.

 

B)

based on interest rates.

 

C)

over their lifetime.

 

D)

according to fluctuations in the stock market.

 

 

137.

The consumption function shifts when:

 

A)

disposable income changes.

 

B)

expected disposable income changes.

 

C)

people receive a pay raise.

 

D)

disposable income goes down.

 

 

138.

The life-cycle hypothesis suggests that consumers:

 

A)

spend in response to current income.

 

B)

plan spending over their lifetime.

 

C)

always spend more when income rises.

 

D)

always save more when incomes rise.

 

 

139.

People are likely to save the most _____ according to the life-cycle hypothesis.

 

A)

as they get closer to retirement

 

B)

in their peak earnings years

 

C)

the older they get

 

D)

in their old age

 

 

140.

_____ will increase the aggregate consumption function.

 

A)

An increase in aggregate wealth

 

B)

An increase in aggregate disposable income

 

C)

A decrease in aggregate wealth

 

D)

A decrease in expected disposable income

 

 

Use the following to answer questions 141-148:

 

Scenario: Aggregate Consumption Equation

Suppose that the aggregate consumption function is given by the equation C = 200 + 0.8YD, where C represents consumption and YD represents disposable income.

 

 

141.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If disposable income is $500, autonomous consumption is:

 

A)

$0.

 

B)

$200.

 

C)

$400.

 

D)

$600.

 

 

142.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If disposable income is $500, aggregate consumption is:

 

A)

$0.

 

B)

$200.

 

C)

$400.

 

D)

$600.

 

 

143.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If disposable income increases from $500 to $800, autonomous consumption is:

 

A)

$0.

 

B)

$200.

 

C)

$240.

 

D)

$440.

 

 

144.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If disposable income increases from $500 to $800, aggregate consumption is:

 

A)

$840.

 

B)

$440.

 

C)

$240.

 

D)

$200.

 

 

145.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If disposable income increases from $500 to $800, aggregate consumption will increase by:

 

A)

$0.

 

B)

$200.

 

C)

$240.

 

D)

$440.

 

 

146.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If all employers announce in September that they guarantee to give all employees a large bonus in December, which of the following equations could represent the new aggregate consumption function?

 

A)

C = 100 + 0.8YD

 

B)

C = 250 + 0.8YD

 

C)

C = 200 + 0.9YD

 

D)

C = 200 + 0.7YD

 

 

147.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If the stock market crashes suddenly, which of the following equations could represent the new aggregate consumption function?

 

A)

C = 100 + 0.8YD

 

B)

C = 250 + 0.8YD

 

C)

C = 200 + 0.9YD

 

D)

C = 200 + 0.7YD

 

 

148.

(Scenario: Aggregate Consumption Equation) Look at the scenario Aggregate Consumption Equation. If housing prices throughout the United States decrease rapidly because of an increase in mortgage foreclosures, which of the following equations could represent the new aggregate consumption function?

 

A)

C = 100 + 0.8YD

 

B)

C = 250 + 0.8YD

 

C)

C = 200 + 0.9YD

 

D)

C = 200 + 0.7YD

 

 

149.

Planned investment spending depends on all of the following EXCEPT:

 

A)

the rate of interest.

 

B)

the expected level of real GDP.

 

C)

the productive capacity  of the economy.

 

D)

real GDP.

 

 

150.

Which of the following is NOT one of the three principal factors upon which planned investment spending depends?

 

A)

the interest rate

 

B)

the expected level of real GDP

 

C)

the current level of production capacity

 

D)

the current level of aggregate wealth

 

 

151.

All of the following factors determine planned investment spending EXCEPT:

 

A)

expected real GDP.

 

B)

expectations about disposable income.

 

C)

the market interest rate.

 

D)

production capacity.

 

 

152.

Planned investment spending for a given period is:

 

A)

actual investment.

 

B)

investment spending minus depreciation.

 

C)

investment spending that businesses plan to undertake.

 

D)

always equal to savings.

 

 

153.

Planned investment spending depends on:

 

A)

the market interest rate.

 

B)

wealth.

 

C)

expected disposable income.

 

D)

the life-cycle hypothesis.

 

 

154.

Most recessions originate from:

 

A)

an increase in investment spending.

 

B)

a decrease in investment spending.

 

C)

an increase in aggregate supply.

 

D)

a decrease in aggregate supply.

 

 

155.

Investment spending:

 

A)

fluctuates more than consumption.

 

B)

fluctuates less than consumption.

 

C)

fluctuates by the same amount as consumption.

 

D)

is less volatile than consumption.

 

 

156.

An important factor determining planned investment spending is:

 

A)

company profits.

 

B)

the prices of final products.

 

C)

expected spending.

 

D)

expected real GDP.

 

 

157.

If the Federal Reserve increases interest rates to reduce inflation and all other things remain constant:

 

A)

planned investment spending is most likely to increase.

 

B)

planned investment spending is most likely to decrease.

 

C)

planned investment spending is most likely to remain the same.

 

D)

unplanned investment in inventories is likely to be negative.

 

 

158.

Which of the following is TRUE?

 

A)

Borrowing money will always be more expensive than using retained earnings.

 

B)

The cost of retained earnings is unrelated to the cost of borrowing money.

 

C)

The tradeoff a firm faces whether using retained earnings or borrowed funds is the same.

 

D)

Using retained earnings has a higher opportunity cost than does using borrowed money because retained earnings come from past profits.

 

 

159.

A fall in the market interest rate makes any investment project:

 

A)

less profitable if the funds were borrowed and more profitable if it came from retained earnings.

 

B)

less profitable whether the funds were borrowed or came from retained earnings.

 

C)

more profitable whether the funds were borrowed or came from retained earnings.

 

D)

more profitable only if the funds were borrowed.

 

 

160.

Planned investment spending _____ the interest rate.

 

A)

is positively related to

 

B)

is negatively related to

 

C)

is independent of

 

D)

moves in the same direction as

 

 

161.

Planned investment spending is _____ related to the interest rate because a _____ in the market interest rate _____.

 

A)

positively; fall; decreases the supply of loanable funds

 

B)

negatively; rise;  makes any given investment project less profitable

 

C)

positively; fall;  decreases the opportunity cost of investing

 

D)

negatively; rise;  causes consumption to crowd out investment

 

 

162.

Retained earnings are earnings that:

 

A)

firms keep to pay taxes.

 

B)

firms keep to pay dividends.

 

C)

firms keep to finance investments.

 

D)

firms do not pay taxes on.

 

 

163.

If the interest rate rises:

 

A)

planned investment spending rises.

 

B)

more investment projects have a rate of return above that of the interest rate.

 

C)

the opportunity cost of investment is greater.

 

D)

excess capacity will increase.

 

 

164.

If a firm pays for investment spending out of retained earnings:

 

A)

the interest rate is irrelevant.

 

B)

past profits are adjusted downward.

 

C)

current profits are adjusted downward.

 

D)

the firm forgoes interest it could have received.

 

 

165.

Planned investment spending will decrease if:

 

A)

the interest rate rises.

 

B)

firms expect the growth of real GDP to increase.

 

C)

firms are producing near full capacity.

 

D)

consumer expectations about wealth grow more optimistic.

 

 

166.

The accelerator principle states that planned investment spending by firms is:

 

A)

positively related to the expected growth of real GDP.

 

B)

negatively related to the expected growth of real GDP.

 

C)

negatively related to the current level of real GDP.

 

D)

positively related to the current level of real GDP.

 

 

167.

The level of productive capacity _____ planned investment spending.

 

A)

has no  effect on

 

B)

is positively related to

 

C)

is negatively related to

 

D)

varies directly with

 

 

168.

Other things being equal, investment spending _____ when _____.

 

A)

decreases; firms expect sales to fall

 

B)

increases; firms have excessive production capacity

 

C)

increases; the rate of growth of real GDP is low

 

D)

decreases; the obsolete or worn out physical capital increases

 

 

169.

Other things being equal, planned investment spending _____ as long as _____.

 

A)

decreases; technological innovation develops faster than technological obsolescence

 

B)

increases; sales exceed the existing production capacity

 

C)

increases; the rate of growth of real GDP is lower than the marginal propensity to save

 

D)

decreases; the rate of growth of physical capital is positive

 

 

170.

The higher the production capacity of the economy:

 

A)

the higher is planned investment spending.

 

B)

the lower is planned investment spending.

 

C)

the higher is actual production.

 

D)

the lower is current production.

 

 

171.

According to the accelerator principle:

 

A)

a higher growth rate of real GDP leads to higher planned investment spending.

 

B)

a higher growth rate of real GDP increases immigration.

 

C)

higher budget deficits lead to even larger deficits.

 

D)

the more money people make, the faster they spend it.

 

 

172.

According to the accelerator principle, a _____ rate of growth in real GDP leads to _____.

 

A)

lower; lower unplanned inventory investment

 

B)

higher; higher inventory investment

 

C)

higher; higher planned investment spending

 

D)

lower; higher inventory investment

 

 

173.

According to the _____, there is a positive relationship between planned investment spending and the expected growth rate of real GDP.

 

A)

paradox of thrift

 

B)

life-cycle hypothesis

 

C)

multiplier effect

 

D)

accelerator principle

 

 

174.

According to the accelerator principle there is a _____ relationship between _____ and planned investment spending.

 

A)

positive; expected growth

 

B)

negative; expected growth

 

C)

positive; unplanned inventory investment

 

D)

positive; the interest rate

 

 

175.

Actual investment equals planned investment:

 

A)

plus unplanned investment.

 

B)

minus unplanned investment.

 

C)

plus unplanned investment  plus inventory investment.

 

D)

times unplanned investment minus inventory investment.

 

 

176.

Inventory investment is:

 

A)

a part of planned investment spending and is always positive.

 

B)

a part of unplanned investment spending and may either be positive or negative.

 

C)

not a part of investment spending, as it can't be properly planned.

 

D)

a part of consumption spending, as these are unsold goods.

 

 

177.

If a store has 10,000 CDs at the start of the period and 15,000 CDs at the end, then its inventory investment during the period was _____ CDs:

 

A)

–5,000.

 

B)

0.67.

 

C)

1.5.

 

D)

5,000.

 

 

178.

Positive unplanned inventory investment occurs when:

 

A)

actual depreciation is less than expected.

 

B)

actual sales are less than expected.

 

C)

actual depreciation is more than expected.

 

D)

actual sales are higher than expected.

 

 

179.

If planned investment spending is $2 trillion and inventories decrease by $0.5 trillion, actual investment spending is:

 

A)

$2.5 trillion.

 

B)

$1.5 trillion.

 

C)

$2 trillion.

 

D)

$1 trillion.

 

 

180.

Inventory investment can be:

 

A)

negative only.

 

B)

zero only.

 

C)

positive only.

 

D)

negative, zero, or positive.

 

 

181.

Actual investment spending equals:

 

A)

planned investment plus unplanned investment.

 

B)

planned investment minus unplanned investment.

 

C)

unplanned investment, even if there is a positive amount of planned investment.

 

D)

unplanned investment minus planned investment.

 

 

182.

Rising inventories typically indicate _____ unplanned inventory investment and a _____ economy.

 

A)

positive; slowing

 

B)

negative; slowing

 

C)

positive; expanding

 

D)

negative; expanding

 

 

183.

In 2005, Airbus Co. purchased raw materials worth $400 million to manufacture airplanes for a total value of $900 million. In that year, Airbus Co. sold airplanes for a total value of $800 million. During 2005, Airbus Co. registered inventory investment of:

 

A)

$900 million.

 

B)

$500 million.

 

C)

$400 million.

 

D)

$100 million.

 

 

184.

Actual investment spending equals:

 

A)

the difference between unplanned investment spending and planned investment spending.

 

B)

the difference between planned investment spending and unplanned investment spending.

 

C)

the sum of planned investment spending and unplanned investment spending.

 

D)

the ratio of planned investment spending to unplanned investment spending.

 

 

185.

If overall inventories rise in a month because of unplanned inventory investment, most likely:

 

A)

the economy is slowing down.

 

B)

sales were above forecasts.

 

C)

inventory investment is negative.

 

D)

the accelerator principle was contradicted.

 

 

186.

When planned investment is less than actual investment, there must be:

 

A)

unplanned inventory investment.

 

B)

unplanned inventory disinvestments.

 

C)

unplanned depreciation.

 

D)

unplanned technological progress.

 

 

187.

Which of the following will cause a decrease in unplanned inventory investment?

 

A)

an increase in interest rates

 

B)

an unexpected increase in consumer spending

 

C)

an increase in the growth rate of real GDP

 

D)

a sudden decrease in consumer wealth

 

 

188.

Actual investment equals:

 

A)

planned investment plus unplanned investment.

 

B)

planned investment minus unplanned investment.

 

C)

unplanned investment minus planned investment.

 

D)

planned investment in a free market economy.

 

 

189.

Negative inventory investment occurs when companies _____ their inventories _____.

 

A)

add to; because sales fall

 

B)

add to; by increasing production

 

C)

reduce; by decreasing production

 

D)

reduce; because sales increase.

 

 

190.

Rising inventories usually indicate an:

 

A)

economy that grows unexpectedly.

 

B)

economy that slows unexpectedly.

 

C)

unexpected spurt in sales.

 

D)

inflationary cycle.

 

 

191.

Falling inventories indicate _____ unplanned inventory investment and a _____ economy.

 

A)

positive; growing

 

B)

positive; slowing

 

C)

negative; slowing

 

D)

negative; growing

 

 

192.

Planned investment spending is _____ related to the interest rate and _____.

 

A)

positively; existing productive capacity

 

B)

negatively; existing productive capacity

 

C)

positively; expected GDP

 

D)

negatively; expected GDP

 

 

193.

The initial impact of an unexpected decrease in consumer spending will be a change in:

 

A)

planned investment spending.

 

B)

unplanned investment spending.

 

C)

both planned and unplanned investment spending

 

D)

neither planned nor unplanned investment spending.

 

 

194.

The initial impact of an unexpected decrease in consumer spending will be a(n) _____ investment spending.

 

A)

decrease in planned

 

B)

decrease in unplanned

 

C)

increase in planned

 

D)

increase in unplanned

 

 

195.

An increase in interest rates on business loans will change _____ investment spending.

 

A)

planned

 

B)

unplanned

 

C)

both planned and unplanned

 

D)

neither planned nor unplanned

 

 

196.

An increase in interest rates on business loans will _____ investment spending.

 

A)

decrease planned

 

B)

decrease unplanned

 

C)

increase planned

 

D)

increase unplanned

 

 

197.

The initial impact of a sudden decrease in the growth rate of GDP will most likely be a change in _____ investment spending.

 

A)

planned

 

B)

unplanned

 

C)

both planned and unplanned

 

D)

neither planned nor unplanned

 

 

198.

The initial impact of a sudden decrease in the growth rate of GDP will most likely be a(n) _____ in _____ investment spending.

 

A)

decrease; planned

 

B)

decrease; unplanned

 

C)

increase; planned

 

D)

increase; unplanned

 

 

199.

In an economy with no international trade, no government expenditure, no transfers, and no taxes, planned aggregate spending equals _____ plus planned investment spending.

 

A)

GDP minus disposable income

 

B)

consumption

 

C)

disposable income

 

D)

GDP minus consumption

 

 

200.

In an economy with no international trade, no government expenditure, no transfers, and no taxes, disposable income equals GDP. Therefore, it follows that:

 

A)

as GDP increases, planned aggregate spending decreases.

 

B)

consumption equals investment spending.

 

C)

as GDP decreases, planned aggregate spending decreases.

 

D)

investment spending equals disposable income.

 

 

201.

Planned aggregate expenditures are represented by a line that is:

 

A)

upward sloping.

 

B)

downward sloping.

 

C)

vertical.

 

D)

horizontal.

 

 

202.

The slope of the planned aggregate spending line is determined by:

 

A)

the marginal propensity to consume.

 

B)

the level of unplanned investment spending.

 

C)

the level of planned investment spending.

 

D)

the level of autonomous consumption.

 

 

203.

If planned investment spending increases, the planned aggregate spending line:

 

A)

becomes flatter.

 

B)

shifts down.

 

C)

becomes steeper.

 

D)

shifts up.

 

 

204.

An increase in the expected disposable income of households _____ the planned aggregate spending line.

 

A)

shifts down

 

B)

increases the slope of

 

C)

decreases the slope of

 

D)

shifts up

 

 

205.

Aggregate spending increases when:

 

A)

prices rise.

 

B)

prices fall.

 

C)

unplanned investment spending increases.

 

D)

planned investment spending increases.

 

 

206.

In an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $250 billion, planned investment spending is $100 billion, and the marginal propensity to consume is 0.6. What is the expression for planned aggregate spending?

 

A)

AEPlanned = $100 + 0.6 × YD

 

B)

AEPlanned = $250 + 0.4 × YD

 

C)

AEPlanned = $350 + 0.6 × YD

 

D)

AEPlanned = $150 + 0.4 × YD

 

 

207.

In an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $750 billion, planned investment spending is $300 billion, and the marginal propensity to consume is 0.75. What is the expression for planned aggregate spending?

 

A)

AEPlanned = $1,050 + 0.75 × YD

 

B)

AEPlanned = $300 + 0.25 × YD

 

C)

AEPlanned = $750 + 0.75 × YD

 

D)

AEPlanned = $500 + 0.25 × YD

 

 

208.

The planned aggregate spending line has a slope:

 

A)

greater than 1.

 

B)

less than 1.

 

C)

equal to 1.

 

D)

less than 0.

 

 

209.

The slope of the consumption function equals the slope of the:

 

A)

45-degree line.

 

B)

aggregate expenditure line.

 

C)

aggregate demand curve.

 

D)

short-run aggregate supply curve.

 

 

210.

Whenever real GDP exceeds planned aggregate expenditure, unplanned investment is _____; whenever real GDP falls short of planned aggregate expenditure, unplanned investment is _____.

 

A)

positive; negative

 

B)

negative; positive

 

C)

zero; positive

 

D)

zero; negative

 

 

211.

Whenever planned aggregate spending exceeds real GDP, unplanned inventory investment is:

 

A)

negative.

 

B)

zero.

 

C)

positive.

 

D)

unpredictable.

 

 

212.

Whenever real GDP exceeds planned aggregate spending:

 

A)

firms reduce production, reducing real GDP.

 

B)

households increase consumption, increasing disposable income.

 

C)

firms increase production, increasing real GDP.

 

D)

households decrease consumption, decreasing disposable income.

 

 

213.

Income–expenditure equilibrium real GDP is the level of real GDP at which:

 

A)

the unemployment rate is zero.

 

B)

GDP equals planned aggregate spending.

 

C)

there is no savings.

 

D)

autonomous consumption equals planned inventory investment.

 

 

214.

Income–expenditure equilibrium occurs when:

 

A)

real GDP equals planned aggregate spending.

 

B)

real GDP equals actual aggregate spending.

 

C)

real GDP equals unplanned aggregate expenditure.

 

D)

consumption and investment are equal.

 

 

215.

If real GDP is smaller than planned aggregate spending:

 

A)

unplanned inventory investment is positive.

 

B)

real GDP will fall.

 

C)

the economy is in equilibrium.

 

D)

unplanned inventory investment is negative.

 

 

216.

If real GDP is greater than planned aggregate spending:

 

A)

unplanned inventory investment is negative.

 

B)

real GDP will fall.

 

C)

the economy is in equilibrium.

 

D)

real GDP will rise.

 

 

217.

At the income–expenditure equilibrium, _____ is zero.

 

A)

investment net of depreciation

 

B)

planned investment

 

C)

unplanned inventory investment

 

D)

inventory investment

 

 

218.

Unplanned inventory investment leads to:

 

A)

prices increasing.

 

B)

production increasing.

 

C)

firms hiring more workers.

 

D)

production decreasing.

 

 

219.

An unplanned fall in inventories leads to:

 

A)

prices falling.

 

B)

production falling.

 

C)

production increasing.

 

D)

interest rates increasing.

 

 

220.

The Keynesian cross was developed by:

 

A)

John Maynard Keynes.

 

B)

Paul Samuelson.

 

C)

Adam Smith.

 

D)

Robert Heilbroner.

 

 

221.

In an income–expenditure equilibrium:

 

A)

there are no inventories.

 

B)

there is no unplanned inventory investment.

 

C)

inventory investment equals consumption.

 

D)

there are no savings.

 

 

Use the following to answer questions 222-223:

 

Figure: Aggregate Expenditures and Real GDP

 

 

 

222.

(Figure: Aggregate Expenditures and Real GDP) Look at the figure Aggregate Expenditures and Real GDP. At a real GDP of $9,000 billion:

 

A)

planned investment is less than actual investment.

 

B)

planned investment equals actual investment.

 

C)

planned investment is greater than actual investment.

 

D)

there will be no unplanned investment.

 

 

223.

(Figure: Aggregate Expenditures and Real GDP) Look at the figure Aggregate Expenditures and Real GDP. If the level of real GDP equals $9,000 billion and there are no changes in the consumption function or in planned investment, then real GDP will _____in the next period.

 

A)

rise

 

B)

remain unchanged

 

C)

fall

 

D)

fall, but only if there is an offsetting change in autonomous consumption

 

 

224.

If aggregate expenditures are higher than real GDP:

 

A)

there are unplanned decreases in inventories.

 

B)

employment decreases.

 

C)

aggregate output decreases.

 

D)

actual real output is greater than equilibrium real output.

 

 

225.

If aggregate expenditures are lower than real GDP:

 

A)

there will be unplanned increases in inventories.

 

B)

employment increases.

 

C)

aggregate output increases.

 

D)

actual real output is less than equilibrium real output.

 

 

226.

If aggregate expenditures equal $800 billion and real GDP equals $600 billion:

 

A)

unplanned inventory accumulation equals $200 billion.

 

B)

unplanned inventory accumulation equals –$200 billion.

 

C)

consumption plus investment equals $200 billion.

 

D)

actual investment equals –$200 billion.

 

 

227.

If real GDP equals $700 billion and planned aggregate expenditures equal $400 billion:

 

A)

consumption plus planned investment equals $300 billion.

 

B)

actual investment equals –$300 billion.

 

C)

actual investment plus savings equals $300 billion.

 

D)

unplanned inventory accumulation equals $300 billion.

 

 

228.

If real GDP exceeds aggregate expenditures, the economy will:

 

A)

contract, reducing employment.

 

B)

expand, causing inflation.

 

C)

expand, increasing employment.

 

D)

neither contract nor expand, holding employment constant.

 

 

229.

If aggregate expenditures exceed real GDP, the economy will:

 

A)

expand, increasing employment.

 

B)

expand, reducing prices.

 

C)

contract, decreasing employment.

 

D)

neither expand nor contract, holding employment the same.

 

 

Use the following to answer questions 230-231:

 

Figure: Aggregate Expenditures I

 

 

 

230.

(Figure: Aggregate Expenditures I) Look at the figure Aggregate Expenditures I. The equilibrium real GDP is:

 

A)

$500 billion.

 

B)

$300 billion.

 

C)

$700 billion.

 

D)

$625 billion.

 

 

231.

(Figure: Aggregate Expenditures I) Look at the figure Aggregate Expenditures I. When real GDP is $700 billion, there will be a _____ in unplanned inventory investment.

 

A)

$125 million increase

 

B)

$125 million decline

 

C)

$200 million decline

 

D)

$200 million increase

 

 

232.

If real GDP is less than aggregate expenditure, then inventories will _____, and firms will _____.

 

A)

increase; cut back on future production

 

B)

fall; increase the prices of their products

 

C)

increase; lower their product prices

 

D)

fall; increase their future production

 

 

233.

If real GDP is $1,000 billion and the aggregate expenditure is $850 billion, then the change in inventories will be:

 

A)

–$150 million.

 

B)

$1,850 million.

 

C)

$150 million.

 

D)

–$1,850 million.

 

 

234.

When the economy is in income–expenditure equilibrium:

 

A)

exports equal imports.

 

B)

savings is less than investment spending.

 

C)

taxes equal transfer payments.

 

D)

real GDP equals planned aggregate spending.

 

 

235.

The Federal Reserve, the central bank of the United States, has been cutting the interest rate to stimulate the recessionary economy. Interest cuts by the Federal Reserve are supposed to:

 

A)

lower the savings rate in the economy and stop leakages.

 

B)

increase government spending on the economic infrastructure and thus increase GDP through the multiplier process.

 

C)

increase cash holding by the general public, thus lowering their dependence on credit.

 

D)

increase planned investment spending and thus increase GDP via the multiplier.

 

 

236.

If the slope of the aggregate expenditures curve is 0.8, the multiplier is:

 

A)

1.

 

B)

4.

 

C)

5.

 

D)

infinity.

 

 

237.

If the slope of the aggregate expenditures curve is 0.9, the multiplier is:

 

A)

1.

 

B)

4.

 

C)

5.

 

D)

10.

 

 

238.

If the slope of the aggregate expenditures curve is 0.75, the multiplier is:

 

A)

1.

 

B)

4.

 

C)

5.

 

D)

infinity.

 

 

239.

The magnitude of the multiplier process that links planned aggregate spending to real GDP is determined by:

 

A)

the marginal propensity to save.

 

B)

the interest rate.

 

C)

the level of autonomous consumption.

 

D)

the level of planned investment spending.

 

 

240.

If planned aggregate spending rises by $10 billion and the marginal propensity to consume is 0.75, then equilibrium real GDP changes by:

 

A)

$2.5 billion.

 

B)

$7.5 billion.

 

C)

$10 billion.

 

D)

$40 billion.

 

 

241.

If planned aggregate spending rises by $25 billion and the marginal propensity to consume is 0.8, then equilibrium real GDP changes by:

 

A)

$25 billion.

 

B)

$125 billion.

 

C)

$200 billion.

 

D)

$250 billion.

 

 

242.

An autonomous increase in aggregate spending _____ real GDP by _____.

 

A)

reduces; that amount

 

B)

increases; that amount

 

C)

reduces; more than that amount

 

D)

increases; more than that amount

 

 

243.

The primary cause of the recession that ended in late 2001 was:

 

A)

a slump in business investment spending.

 

B)

too much investment spending by households, crowding out business investment spending.

 

C)

an increase in income tax rates.

 

D)

a decrease in government spending.

 

 

244.

The recession began to wind down in late 2001 mainly because of an increase in:

 

A)

tax rates on capital gains.

 

B)

consumer spending on durable goods, especially automobiles.

 

C)

consumer spending on nondurables, especially gasoline and clothing.

 

D)

consumer savings.

 

 

245.

In the last quarter of 2001, when consumer spending was ending the recession, GDP growth was slow at first because:

 

A)

consumer savings also decreased.

 

B)

tax rates increased.

 

C)

inventories, which had built up during the recession, decreased.

 

D)

inventories of consumer goods increased.

 

 

Use the following to answer questions 246-254:

 

Scenario: Income–Expenditure Equilibrium

Real GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.

 

 

246.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. What is the consumption function?

 

A)

C = 8,000 + 0.8 × YD

 

B)

C = 8,700 + 0.2 × YD

 

C)

C = 500 + 0.8 × YD

 

D)

C = 1,700 + 0.2 × YD

 

 

247.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. How much is consumption?

 

A)

$500

 

B)

$8,000

 

C)

$700

 

D)

$6,900

 

 

248.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. How much is planned aggregate spending?

 

A)

$7,100

 

B)

$6,400

 

C)

$8,000

 

D)

$700

 

 

249.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. How much is unplanned inventory investment?

 

A)

$1,100

 

B)

–$900

 

C)

$900

 

D)

0

 

 

250.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. Given this income–expenditure equilibrium, firms will tend to:

 

A)

raise prices.

 

B)

hire more people.

 

C)

increase output.

 

D)

decrease output.

 

 

251.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. If real GDP is $3,000, planned aggregate spending is:

 

A)

$2,400.

 

B)

$2,900.

 

C)

$3,100.

 

D)

$3,000.

 

 

252.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. If real GDP is $3,000, how much is unplanned inventory investment?

 

A)

0

 

B)

$600

 

C)

$100

 

D)

–$100

 

 

253.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. Income–expenditure equilibrium is achieved when GDP is:

 

A)

$8,000.

 

B)

$7,000.

 

C)

$3,500.

 

D)

$700.

 

 

254.

(Scenario: Income–Expenditure Equilibrium) Look at the scenario Income–Expenditure Equilibrium. The multiplier is:

 

A)

0.8.

 

B)

0.2.

 

C)

5.

 

D)

1.25.

 

 

Use the following to answer questions 255-258:

 

Table: The Economy of Albernia

 

Real GDP

(in billions)

Disposable Income

(in billions)

Consumption

(in billions)

Planned Investment

(in billions)

$      0

$     0

$ 400

$600

500

500

700

600

1,000

1,000

1,000

600

1,500

1,500

1,300

600

2,000

2,000

1,600

600

2,500

2,500

1,900

600

3,000

3,000

2,200

600

 

 

 

255.

(Table: The Economy of Albernia) Look at the table The Economy of Albernia. What is the consumption function for Albernia?

 

A)

C = 600 + 0.3 × YD

 

B)

C = 600 + 0.75 × YD

 

C)

C = 400 + 0.6 × YD

 

D)

C = 400 + 0.75 × YD

 

 

256.

(Table: The Economy of Albernia) Look at the table The Economy of Albernia. What is the income–expenditure equilibrium real GDP?

 

A)

$1,000 billion

 

B)

$1,500 billion

 

C)

$2,000 billion

 

D)

$2,500 billion

 

 

257.

(Table: The Economy of Albernia) Look at the table The Economy of Albernia. If real GDP is $1,500 billion, then the level of unplanned inventories is:

 

A)

$400 billion.

 

B)

–$400 billion.

 

C)

$600 billion.

 

D)

–$600 billion.

 

 

258.

(Table: The Economy of Albernia) Look at the table The Economy of Albernia. If real GDP is $3,000 billion, then unplanned investment is:

 

A)

zero.

 

B)

$100 billion.

 

C)

$200 billion.

 

D)

$300 billion.

 

 

Use the following to answer questions 259-262:

 

Figure: Income–Expenditure Equilibrium

 

 

 

259.

(Figure: Income–Expenditure Equilibrium) Look at the table Income–Expenditure Equilibrium. If planned investment spending increases in this economy:

 

A)

aggregate expenditures curve will shift up, increasing the income–expenditure equilibrium.

 

B)

aggregate expenditures curve will shift down, decreasing the income–expenditure equilibrium.

 

C)

economy will move upward along the aggregate expenditures curve, increasing the income–expenditure equilibrium.

 

D)

economy will move downward along the aggregate expenditures curve, decreasing the income–expenditure equilibrium.

 

 

260.

(Figure: Income–Expenditure Equilibrium) Look at the table Income–Expenditure Equilibrium. If investment spending decreases in this economy, then the:

 

A)

aggregate expenditures curve will shift up, increasing the income–expenditure equilibrium.

 

B)

aggregate expenditures curve will shift down, decreasing the income–expenditure equilibrium.

 

C)

economy will move upward along the aggregate expenditures curve, increasing the income–expenditure equilibrium.

 

D)

economy will move downward along the aggregate expenditures curve, decreasing the income–expenditure equilibrium.

 

 

261.

(Figure: Income–Expenditure Equilibrium) Look at the table Income–Expenditure Equilibrium. If planned investment spending increases autonomously by $100, real GDP will:

 

A)

increase by $250.

 

B)

increase by $100.

 

C)

increase by $125.

 

D)

not change.

 

 

262.

(Figure: Income–Expenditure Equilibrium) Look at the table Income–Expenditure Equilibrium. If planned investment spending increases by $100, income–expenditure equilibrium occurs at real GDP of:

 

A)

$8,100.

 

B)

$3,600

 

C)

$2,250.

 

D)

$4,000.

 

 

Use the following to answer questions 263-265:

 

 

 

263.

(Table: Aggregate Spending) Look at the table Aggregate Spending. Suppose the economy has no government spending and no foreign trade. With no taxes or transfers, real GDP equals disposable income (YD). At what level of real GDP will the economy find its income–expenditure equilibrium?

 

A)

$2,000

 

B)

$2,500

 

C)

$3,500

 

D)

$4,500

 

 

264.

(Table: Aggregate Spending) Look at the table Aggregate Spending. Suppose the economy has no government spending and no foreign trade. With no taxes or transfers, real GDP equals disposable income (YD). If real GDP is $2,500, what is the level of unplanned inventory investment?

 

A)

$200

 

B)

$0

 

C)

$2,700

 

D)

–$200

 

 

265.

(Table: Aggregate Spending) Look at the table Aggregate Spending. Suppose the economy has no government spending and no foreign trade. With no taxes or transfers, real GDP equals disposable income (YD). The income–expenditure equilibrium real GDP is found at _____. If planned investment fell to $300, the new income–expenditure equilibrium real GDP would fall to _____.

 

A)

$3,500; $2,500

 

B)

$3,500; $2,000

 

C)

$3,000; $1,500

 

D)

$4,000; $2,500

 

 

Use the following to answer questions 266-271:

 

Figure: Aggregate Expenditures Curve I

 

 

 

266.

(Figure: Aggregate Expenditures Curve I) Look at the figure Aggregate Expenditures Curve I. The equilibrium level of real GDP in the aggregate expenditures model shown in this figure is:

 

A)

$800.

 

B)

$1,000.

 

C)

$1,600.

 

D)

$3,200.

 

 

267.

(Figure: Aggregate Expenditures Curve I) Look at the figure Aggregate Expenditures Curve I. The slope of the aggregate expenditures curve in this figure is:

 

A)

0.25.

 

B)

0.5.

 

C)

1.0.

 

D)

45 degrees.

 

 

268.

(Figure: Aggregate Expenditures Curve I) Look at the figure Aggregate Expenditures Curve I. The multiplier in the aggregate expenditures model shown in this figure is:

 

A)

1.

 

B)

2.

 

C)

3.

 

D)

5.

 

 

269.

(Figure: Aggregate Expenditures Curve I) Look at the figure Aggregate Expenditures Curve I. Suppose that the consumption function in this economy rises by $100. The result would be a shift in the aggregate