Macro CH 11

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Question 1 Multiple Choice 0 points Modify Remove
Question
The changes in the economy of Ft. Myers, Florida, between 2003 and 2008 provides an example of:
Answer
the risk associated with an agricultural economy.
positive and negative multiplier effects.
how public assistance programs can stimulate the economy.
the benefits of government budget surpluses.
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Question
The real estate market in Ft. Myers, Florida, collapsed by 2008 because:
Answer
houses were over-priced.
most Floridians prefer to rent apartments rather than buy houses.
hurricanes damaged so much property.
climate change has made much of the retiree population leave Florida.
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Question
The marginal propensity to consume is:
Answer
increasing if the marginal propensity to save is increasing.
the proportion of total disposable income that the average family consumes.
the change in consumer spending divided by the change in aggregate disposable income.
the change in consumer spending less the change in aggregate disposable income.
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Question
The marginal propensity to consume is equal to:
Answer
the proportion of consumer spending as a function of aggregate disposable income.
the change in saving divided by the change in aggregate disposable income.
the change in consumer spending divided by the change in aggregate disposable income.
the change in saving divided by the change in consumer spending.
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Question
The MPS plus the MPC must equal:
Answer
zero.
one.
income.
saving.
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Question
If the MPS =.1, then the value of the multiplier equals:
Answer
1.
5.
9.
10.
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If the multiplier equals 4, then the marginal propensity to save must be equal to:
Answer
1/4.
1/2.
3/4.
the marginal propensity to consume.
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Question
Suppose that the marginal propensity to consume is 0.8, and investment spending increases by $100 billion. The increase in aggregate
demand is:
Answer
$100 billion, the amount of investment spending.
$125 billion, composed of $100 billion in investment spending and $25 billion in consumption.
$80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion.
$500 billion, composed of $100 billion in investment spending and $400 billion in consumption.
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Question
If the marginal propensity to save is 0.3, the size of the multiplier is:
Answer
3.3.
2.3.
1.3.
0.7.
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Question
The marginal propensity to save is:
Answer
savings divided by aggregate income.
the fraction of an additional dollar of disposable income that is saved.
1 +MPC.
savings divided by aggregate income or 1 +MPC.
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Question
The multiplier is:
Answer
1/[1MPC].
MPS/MPC.
1/[MPC].
1[1+MPC].
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Question
If the MPC is 0.8, then the multiplier is:
Answer
4.
5.
8.
10.
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Question
The marginal propensity to consume (MPC) is equal to the change in:
Answer
consumer spending divided by the change in disposable income.
consumer spending divided by the change in investment spending.
consumer spending divided by the change in gross domestic product.
disposable income divided by the change in consumer spending.
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Question
If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume is
equal to:
Answer
20.
0.8.
1.25.
9.
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Question
Suppose the marginal propensity to consume is equal to 0.90 and investment spending increases by $50 billion. Assuming no taxes
and no trade, by how much will real GDP change?
Answer
$450 billion increase
$500 billion decrease
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Question
Page 2of 48
The spending multiplier is equal to:
Answer
MPC/MPS.
1/(1 MPS).
MPC +MPS.
1/(1 MPC).
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Question
Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80.
Assuming no taxes and no trade, by how much will real GDP change?
Answer
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Question
The MPC is the:
Answer
change in saving divided by the change in disposable income.
change in disposable income divided by the change in consumption.
change in disposable income divided by the change in saving.
change in consumption divided by the change in disposable income.
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Question
If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is:
Answer
0.2.
0.4.
0.6.
0.8.
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Question
If your disposable personal income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $13,000, your
MPC is:
Answer
0.2.
0.4.
0.6.
0.8.
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The MPC plus the MPS must:
Answer
equal each other.
equal 1.
be less than 1.
be greater than 1.
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The value of MPC is:
Answer
equal to 1.
greater than 1.
greater than 0 and less than 1.
less than 0 and greater than 1.
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An increase in the MPC:
Answer
increases the multiplier.
shifts the autonomous investment line upward.
decreases the multiplier.
shifts the autonomous investment line downward.
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Question
Figure: Consumption and Real GDP
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Reference: Ref 11-01
(Figure: Consumption and Real GDP) The slope of the consumption function is called the:
Answer
marginal propensity to save.
average propensity to consume.
marginal propensity to consume.
marginal consumption increment.
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Question
(Figure: Consumption and Real GDP) The marginal propensity to consume in this example is:
Answer
0.
0.5
1.0.
2.0.
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Question
(Figure: Consumption and Real GDP) If real GDP is $4 trillion, consumption is _______ trillion.
Answer
$0.75
$1
$3
$4
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(Figure: Consumption and Real GDP) If real GDP were $12 trillion, consumption would be _______ trillion.
Answer
$5
$7
$9
$11
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Question
(Figure: Consumption and Real GDP) If real GDP is $8 trillion, consumption is _______ trillion and saving is _______ trillion.
Answer
$4; $4
$5; $3
$6; $2
$7; $1
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Question
Which of the following most accurately depicts the formula for the expenditure multiplier?
Answer
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Question
If MPC =.9, the multiplier is:
Answer
10.
90.
9.
1
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Question
The _______ the _______ , the _______ the multiplier.
Answer
smaller; level of wealth; greater
greater; MPS; greater
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greater; MPC; smaller
greater; MPC; greater
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Question
Suppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The
investment multiplier is:
Answer
8.
10.
4.
1/4.
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Question
Suppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The value of
the MPC is:
Answer
0.8.
0.4.
0.75.
4.
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Question
If the multiplier is 4, and investment spending falls by $100 billion, the change in equilibrium income will be:
Answer
$400 billion.
$400 billion.
$25 billion.
$25 billion.
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Question
Suppose the government increases its spending by $100 billion as a stimulus package. If the MPC is 0.6, then equilibrium income will:
Answer
decrease by $250 billion.
increase by $250 billion.
increase by $600 billion.
decrease by $400 billion.
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Question
According to the National Bureau of Economic Research, the U.S. economy is going through a severe recession. Most households are
trying to save more of their income than before. This increase in private spending will lead to:
Answer
an increase in aggregate income as more saving means more funds for business investment.
a fall in aggregate income as more saving means people will spend less.
no change in aggregate income because there is no saving multiplier.
an increase in aggregate income as an increase in saving will make people wealthier.
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Question
If the size of MPS is small, it will:
Answer
make the multiplier smaller.
make the multiplier larger.
not affect the value of the multiplier.
increase the interest rate.
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Question
You and a co-worker have been trying to develop a linear equation that describes the local household consumption function. Your co-
worker has sent you a very short email that simply says he has finished the project and the consumption function is: C =100 +.75(YD).
Your job is to explain this result to your supervisor. According to this consumption function, what is the marginal propensity to
consume?
Answer
100
0.75
4
0.25
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Question
You and a co-worker have been trying to develop a linear equation that describes the local household consumption function. Your co-
worker has sent you a very short email that simply says he has finished the project and the consumption function is: C =100 +.75(YD).
Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would
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occur if a household had disposable income of $1000?
Answer
$750
$4000
$850
$350
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Question
Suppose the marginal propensity to consume changes from 0.75 to 0.90. How will this affect the consumption function?
Answer
The slope will get steeper.
Autonomous consumption will increase.
The function will exhibit a parallel shift upward.
The slope will get steeper and autonomous consumption will increase.
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Question
Figure: Consumption and Disposable Personal Income
(Figure: Consumption and Disposable Personal Income) When disposable personal income is $1,200 billion, consumption is _______
billion.
Answer
$600
$800
$1,200
$2,000
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Question
(Figure: Consumption and Disposable Personal Income) When disposable personal income is $2,000 billion, consumption is _______
billion.
Answer
$400
$1,000
$1,200
$1,600
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Question
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(Figure: Consumption and Disposable Personal Income) The slope of the consumption function is:
Answer
0.25.
0.50.
0.60.
0.67.
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Question
Table: Income and Consumption
(Table: Income and Consumption) When disposable personal income is $200, the MPC is:
Answer
0.00.
0.20.
0.80.
1.40.
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Question
(Table: Income and Consumption) When disposable personal income is $300, the MPC is:
Answer
0.80.
0.92.
0.95.
1.00.
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Question
(Table: Income and Consumption) When disposable personal income is $400, the level of personal saving is:
Answer
$40.
$20.
$0.
$20.
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Question
The most important determinant of consumer spending is:
Answer
the government budget deficit or surplus.
the price of gasoline.
the trade deficit.
disposable income.
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Question
Scenario: Consumption Spending
Suppose that the consumption function is: C =$500 +0.8 YD where YD is disposable income.
(Scenario: Consumption Spending) Autonomous consumption is:
Answer
$500.
0.
0.8 of disposable income.
$1,300, if disposable income is $1,000.
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Question
(Scenario: Consumption Spending) The marginal propensity to consume is:
Answer
$500.
0.
0.8.
0.2.
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Question
(Scenario: Consumption Spending) The marginal propensity to save is:
Answer
$500.
0
0.8.
0.2.
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Question
(Scenario: Consumption Spending) If income increases by $2,000, consumption will increase by:
Answer
$500.
$2,000.
$1,600.
$400
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Question
(Scenario: Consumption Spending) If disposable income is $1000, saving is:
Answer
$500.
$1300.
$300.
$300.
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Question
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?
Answer
C =1.2 YD.
C =0.95 YD.
C =$500 +0.7 YD.
C =$500 +1,000 YD.
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Question
Consumer spending in the United States normally accounts for approximately ______ of the economy.
Answer
1/3.
1/2.
2/3.
3/4.
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Question
The following is an algebraic representation of the consumption function: C =A +MPC YD. Which of the following represents the
slope of the function?
Answer
C
A
MPC
YD
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Question
According to the table below, the MPC and autonomous consumption are ________ and ________, respectively, for Bob.
Answer
0.6; $10,000
0.4; $13,000
0.6; $9,000
0.4; $9,000
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Question
The most important factor affecting a household's consumer spending is:
Answer
its expected future disposable income.
its current disposable income.
its wealth.
the current interest rate.
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Question
In the consumption function, an individual household's consumer spending:
Answer
is positively related to its current disposable income.
is negatively related to its autonomous consumption and its marginal propensity to consume.
is positively related to the interest rate.
is determined by the accelerator principle.
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Question
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:
Answer
$20,000.
$25,000.
$30,000.
$45,000.
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Question
For the economy as a whole it holds true that:
Answer
C =MPC +(A YD).
C =A +(MPC YD).
C =(A +MPC) YD.
C =(A MPS) +(MPC YD).
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Question
Answer
the slope of the consumption function.
the intercept of the consumption function.
the inverse of the consumption function.
autonomous.
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Question
If the aggregate consumption equals $100,000,000 +.75 YD, then the marginal propensity to consume is:
Answer
0.75.
0.25.
$75,000,000.
$100,000,000.
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Question
If the aggregate consumption equals $100,000,000 +.75 YD, then the marginal propensity to save is:
Answer
0.75.
0.25.
$75,000,000.
$100,000,000.
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Question
If the aggregate consumption equals $100,000,000 +.75 YD, then autonomous consumption is:
Answer
0.75.
0.25.
$75,000,000.
$100,000,000.
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Question
The aggregate consumption function:
Answer
relates household consumption and interest rates.
describes what people would like to buy.
describes the relationship of spending to family wealth.
relates disposable income and total consumer spending.
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Question
The following is an algebraic representation of the consumption function: C =A +MPC YD. Which of the following represents
autonomous consumption?
Answer
C
A
MPC
YD
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Question
David receives a tax refund of $800. He spends $600 and saves $200. David's marginal propensity to consume is:
Answer
0.6.
0.75.
0.25.
0.20.
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Question
If the MPC is greater than zero but less than one, then we can be sure that when disposable income rises by $1 consumption will:
Answer
not be affected.
will rise by more than $1.
will rise by less than $1.
will rise by exactly $1.
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Question
If the consumption function were plotted on the vertical axis of a graph, with disposable income on the horizontal axis:
Answer
the slope of the line would be negative and determined by the marginal propensity to save.
the horizontal axis intercept would be determined by the level of autonomous consumption.
the slope of the line would be positive and determined by the marginal propensity to consume.
the vertical axis intercept would be determined by the current interest rate.
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Question
Page 11of 48
Answer
consumption divided by disposable income.
a change in consumption divided by a change in disposable income.
income divided by consumption.
a change in income divided by a change in consumption.
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Question
If the marginal propensity to save decreases from 0.6 to 0.5:
Answer
the slope of the consumption function increases from 0.4 to 0.5.
the vertical axis intercept changes from 0.6 to 0.5.
the slope of the consumption function decreases from 0.6 to 0.5.
the horizontal axis intercept changes from 0.4 to 0.5.
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Question
The consumption function will shift up if:
Answer
households expect an increase in the minimum wage in the future.
households expect a decrease in the minimum wage in the future.
the marginal propensity to consume decreases.
the marginal propensity to save increases.
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Question
Other things being equal, expectations of lower disposable income in the future would ________ and shift the consumption function
_________.
Answer
increase autonomous consumption; up
decrease the marginal propensity to consume; down
decrease autonomous consumption; down
increase the marginal propensity to consume; up
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Question
Assume that currently the marginal propensity to consume is 0.5, aggregate autonomous consumption is $10,000, and aggregate
disposable income is $40,000. If disposable income were expected to increase in the future, the aggregate consumption function might
take the form of:
Answer
C =10,000 +(40,000 0.5).
C =12,000 +(40,000 0.5).
C =10,000 +(40,000 0.7).
C =10,000 +(42,000 0.5).
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Question
When future disposable income rises, then current consumption:
Answer
falls.
rises.
is unaffected.
is autonomous.
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Question
Which of the following will shift the aggregate consumption function upward?
Answer
Disposable income rises.
Consumer expectations turn more pessimistic about the future.
The stock market is strong and wealth is rising.
Disposable income falls.
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Question
Figure: Consumption Functions
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(Figure: Consumption Functions) Curve C' compared with curve C, would most likely result from a(n):
Answer
decrease in wealth.
higher price level.
decrease in expected future disposable income.
increase in wealth.
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Question
Figure: Consumption Functions
(Figure: Consumption Functions) Curve C", compared with curve C, would most likely result from:
Answer
higher expected future disposable income.
higher expected future GDP growth estimates.
a drop in wealth.
an increase in wealth.
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Question
An increase in the wealth of households, all other things unchanged, may be expected to result in _______ the aggregate consumption
function.
Answer
no effect on
an upward shift in
a downward shift of
a movement to the right along
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Question
An upward shift in the aggregate consumption function can be caused by:
Answer
expectations of higher future incomes.
expectations of less income in the future.
a stock market crash.
a reduction in the wealth of households.
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Question
A downward shift in the consumption function can be caused by:
Answer
expectations of higher future incomes.
an increase in the MPC.
a decline in consumer wealth.
an increase in the wealth of households.
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Question
An upward shift in the consumption function can be caused by:
Answer
an increase in consumer wealth.
a drop in consumer wealth.
pessimistic expectations about the future.
an increase in disposable personal income.
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Question
A downward shift in the consumption function can be caused by:
Answer
a decrease in disposable income.
an increase in disposable income.
expectations of higher permanent income.
a decrease in wealth.
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Question
If the stock market crashes:
Answer
the aggregate consumption function will shift up.
the aggregate consumption function will shift down.
unplanned inventory investment will be negative.
GDP will increase.
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Question
Which of the following is NOT a determinate of consumer spending?
Answer
current disposable income
expected future disposable income
wealth
investment spending
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Question
Other things being equal, an increase in aggregate wealth would ________ and shift the consumption function _________.
Answer
increase autonomous consumption; up
decrease the marginal propensity to consume; down
decrease autonomous consumption; down
increase the marginal propensity to consume; up
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Question
The aggregate consumption function depends on:
Answer
disposable income.
expected future disposable income.
wealth.
disposable income, expected future disposable income, and wealth.
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Question
Wealth affects consumer spending because:
Answer
wealthier people have higher incomes.
wealthier people have better connections to buy in-demand goods.
people try to smooth their consumption over their life-cycle.
people try to consume as early in their lives as they can.
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Question
An increase in aggregate wealth:
Answer
increases the consumption of each individual.
increases the aggregate consumption function.
decreases the consumption of each individual.
decreases the aggregate consumption function.
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Question
The life-cycle hypothesis of consumer spending says that consumers plan their spending:
Answer
based only on current disposable income.
based on interest rates.
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over their life time.
fluctuations in the stock market.
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The consumption function shifts when:
Answer
disposable income changes.
expected future disposable income changes.
people receive a pay raise.
disposable income goes down.
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The life-cycle hypothesis suggests that consumers:
Answer
spend in response to current income.
plan spending over their lifetime.
spend more when income rises.
save more when incomes rise.
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Question
Based on the life-cycle hypothesis, people save more:
Answer
as they get closer to retirement.
in their peak earnings years.
the older they get.
in their old age.
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Question
Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by: C =
500 +.80Y, where Y is income. The autonomous consumer spending in this economy is:
Answer
1000.
800.
500.
not possible to calculate.
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Question
Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by: C =
500 +.80Y, where Y is income. The marginal propensity to consume in Behr is:
Answer
0.75.
500.
0.80.
1.00.
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Question
Which one of the following will increase the aggregate consumption function?
Answer
Increase in aggregate wealth.
Increase in aggregate disposable income.
Decrease in aggregate wealth.
Decrease in expected future disposable income.
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Question
If the disposable income increases, then:
Answer
the consumption function will shift upwards.
there will be a rightward movement along the consumption function.
there will be a leftward movement along the consumption function.
the consumption function will shift downwards.
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Question
If the disposable income increases by $1000 and the consumer spending increases by $800, then the marginal propensity to consume
is:
Answer
0.80.
1.00.
1.25.
0.75.
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Question
If MPC=.75, then the MPS is:
Answer
1.75.
0.25.
0.25.
1.25.
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Table: Disposable Income and Consumption
(Table: Disposable Income and Consumption) Referring to the table provided, the autonomous consumer spending is:
Answer
200.
100.
120.
0.
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Question
Table: Disposable Income and Consumption
(Table: Disposable Income and Consumption) Use the information in the table, the MPC is equal to:
Answer
.80.
2.
1.20
.60.
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Question
Consumption function has a slope that is equal to the slope of:
Answer
the 45-degree line.
the aggregate expenditure line.
the aggregate demand curve.
the short run aggregate supply curve.
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Question
Consider a simple economy: MPC =0.75, income =$400 billion and aggregate consumption spending=$400 billion. The autonomous
consumption is:
Answer
0.
$100 billion.
$300 billion.
$200 billion.
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Question
Planned investment spending depends on all of the following, EXCEPT:
Answer
the rate of interest.
the expected future level of real GDP.
the current productive capacity in the economy.
the current level of real GDP.
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Question
The Accelerator Principle states that:
Answer
investment spending by the firms is positively related to the expected future growth of real GDP.
investment spending by the firms is negatively related to the expected future growth of real GDP.
investment spending by the firms is negatively related to the current level of real GDP.
investment spending by the firms is positively related to the current level of real GDP.
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Question
Which one of the following accurately describes actual investment spending?
Answer
Actual Investment =Planned Investment +Unplanned Investment
Actual Investment =Planned Investment Unplanned Investment
Actual Investment =Planned Investment +Unplanned Investment +Inventory Investment
Actual Investment =Planned Investment Unplanned Investment Inventory Investment
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Question
Inventory investment is:
Answer
a part of the planned investment spending and is always positive.
a part of the unplanned investment spending and may either be positive or negative.
not a part of the investment spending by firms as it can't be properly planned ahead of time.
a part of the consumption spending as these are unsold goods.
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Question
The Federal Reserve, the central bank of the U.S., has been cutting the interest rate in order to stimulate the recessionary economy.
Fed's interest cuts are supposed to:
Answer
lower savings rate in the economy and stop the leakages.
increase government spending on the economic infrastructure and thus increase GDP through the multiplier process.
increase the cash holding by the general public thus lowering their dependence on credit.
increase the investment spending and thus increase GDP via the multiplier.
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Question
Planned investment spending is:
Answer
positively related to existing productive capacity and the interest rate.
negatively related to existing productive capacity and the interest rate.
positively related to the interest rate and expected future GDP.
negatively related to the interest rate and expected future GDP.
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Question
Which of the following is NOT one of the three principle factors upon which investment spending depends?
Answer
the interest rate
the expected future level of real GDP
the current level of production capacity
the current level of real GDP
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Question
All of the following factors determine investment spending EXCEPT:
Answer
expected future real GDP.
expectations about the future disposable income.
the market interest rate.
production capacity.
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Answer
actual investment in a period.
investment spending less depreciation in a period.
investment spending that businesses plan to undertake during a period.
always equal to savings.
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Planned investment spending depends on:
Answer
the market interest rate.
wealth.
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the life-cycle hypothesis.
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Most recessions originate from:
Answer
an increase in aggregate demand.
a decrease in aggregate demand.
an increase in aggregate supply.
a decrease in aggregate supply.
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Question
Investment spending:
Answer
fluctuates more than consumption.
fluctuates less than consumption.
changes about the same as changes in consumption.
changes about the same as changes in interest rates.
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Question
An important factor determining investment spending is:
Answer
company profits.
the prices of final products.
expected future spending.
expected future real GDP.
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If the Federal Reserve increases interest rates to reduce inflation:
Answer
planned investment spending is most likely to increase.
planned investment spending is most likely to decrease.
planned investment spending is most likely to remain the same.
unplanned investment in inventories is likely to be negative.
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Question
The supply of loanable funds increases because people decide to be more thrifty. Which of the following is most likely to occur?
Answer
Interest rates increase, and investment spending increases.
Interest rates increase, and investment spending decreases.
Interest rates decrease, and investment spending increases.
Interest rates decrease, and investment spending decreases.
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Question
Which of the following is true regarding the tradeoff a firm makes when it spends money on an investment project?
Answer
Borrowing money will always be more expensive than using retained earnings.
Using retained earnings will always be cheaper than using borrowed money.
The tradeoff a firm faces when using retained earnings or borrowed funds is the same.
Retained earnings has a higher opportunity cost than does using borrowed money because retained earnings come from
past profits.
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Question
A fall in the market interest rate makes any investment project:
Answer
less profitable if the funds were borrowed and more profitable if it came from retained earnings.
less profitable, regardless of whether the funds were borrowed or came from retained earnings.
more profitable, regardless of whether the funds were borrowed or came from retained earnings.
more profitable only if the funds were borrowed
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Planned investment spending:
Answer
is positively related to the interest rate.
is negatively related to the interest rate.
is independent of the interest rate.
moves in the same direction as does the market interest rate.
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Page 18of 48
Question
The current level of productive capacity ________________ investment spending.
Answer
has no impact on
is positively related to
is negatively related to
varies directly with
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Question
Planned investment spending is _______ to the interest rate because ______.
Answer
positively related; a fall in the market interest rate decreases the supply of loanable funds
negatively related; a rise in the market interest rate makes any given investment project less profitable
positively related; a fall in the market interest rate decreases the opportunity cost of investing
negatively related; a rise in the market interest rate causes consumption to crowd outinvestment
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Question
If households increase savings in their bank accounts, _______ and the interest rate _______, therefore increasing investment
spending.
Answer
the supply of loanable funds shifts right; rises
the demand of loanable funds shifts right; rises
the supply of loanable funds shifts right; falls
the demand of loanable funds shifts left; falls
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Question
Other things being equal, investment spending ________ when ________.
Answer
decreases; firms expect sales to fall
increases; firms have excessive production capacity
increases; the rate of growth of real GDP is low
decreases; the obsolete or worn out physical capital increases
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Question
Other things being equal, investment spending ________ as long as ________.
Answer
decreases; technological innovation develops faster than technological obsolescence
increases; sales exceed the existing production capacity
increases; the rate of growth of real GDP is lower than the marginal propensity to save
decreases; the rate of growth of physical capital is positive
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Question
Retained earnings are:
Answer
past earnings that firms keep to pay taxes.
past earnings firms retain to pay dividends.
past earnings firms retain to finance investments.
past off-the-book earnings that firms do not pay taxes due on.
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Question
If a CD store has 10,000 CDs at the start of the period and it has 15,000 CDs at the end of the period, then during the period its
inventory investment was:
Answer
5,000.
0.67.
1.5.
5,000.
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Question
If the interest rate rises, then:
Answer
planned investment spending rises.
more investment projects have a rate of return greater than the interest rate.
the opportunity cost of investment is greater.
excess capacity will increase.
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Question
Positive unplanned inventory investment occurs when:
Page 19of 48
Answer
actual depreciation is less than expected depreciation.
actual sales are less than expected sales.
actual depreciation is more than expected depreciation.
actual sales are more than expected sales.
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Question
If a firm pays for investment spending out of retained earnings:
Answer
the interest rate is irrelevant.
past profits are adjusted downward.
current profits are adjusted downward.
the firm forgoes interest it could have received.
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Question
The higher the current production capacity of the economy:
Answer
the higher is investment spending.
the lower is investment spending.
the higher is actual production.
the lower is current production.
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Question
According to the accelerator principle:
Answer
a higher growth rate of real GDP leads to higher planned investment spending.
a higher growth rate of real GDP causes immigration to increase.
higher budget deficits lead to even larger deficits.
the more money people make, the faster they spend it.
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Question
If planned investment spending is $2 trillion and inventories decrease by $0.5 trillion then, actual investment spending is:
Answer
$2.5 trillion.
$1.5 trillion.
$2 trillion.
impossible to determine without more information.
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Question
Inventory investment can be:
Answer
negative.
zero.
positive.
either negative, zero, or positive.
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Question
Actual investment spending equals:
Answer
planned investment plus unplanned investment.
planned investment minus unplanned investment.
unplanned investment, even if there is a positive amount of planned investment.
unplanned investment minus planned investment
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Question
Rising inventories typically indicate _______ unplanned inventory investment and a _________ economy.
Answer
positive; slowing
negative; slowing
positive; expanding
negative; expanding
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Question
According to the accelerator principle, a _______ rate of growth in real GDP leads to _______.
Answer
lower; lower unplanned inventory investment
higher; higher inventory investment
higher; higher planned investment spending
lower; higher inventory investment
Page 20of 48
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Question
In 2005, Airbus Co. purchased raw materials worth $400 million in order 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:
Answer
$900 million.
$500 million.
$400 million.
$100 million.
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Question
Actual investment spending is equal to:
Answer
the difference between unplanned investment spending and planned investment spending.
the difference between planned investment spending and unplanned investment spending.
the sum of planned investment spending and unplanned investment spending.
the ratio of planned investment spending to unplanned investment spending.
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Question
If during one month we observe overall inventories rise due to unplanned inventory investment, we can safely conclude that:
Answer
the economy is slowing down.
sales were more than had been forecast.
inventory investment is negative.
the accelerator principle was contradicted.
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Question
When planned investment is less than actual investment, then there must be:
Answer
unplanned inventory investment.
unplanned inventory disinvestments.
unplanned depreciation.
unplanned technological progress.
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Question
According to the _____, there is a positive relationship between planned investment spending and the expected future growth rate of
real GDP.
Answer
paradox of thrift
life-cycle hypothesis
multiplier effect
accelerator principle
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Question
Planned investment spending will decrease if:
Answer
the interest rate rises.
firms expect the growth of real GDP to increase.
firms are currently producing near full capacity.
consumer expectations about future wealth grow more optimistic.
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Question
According to the accelerator principle:
Answer
there is a positive relationship between expected future growth and planned investment spending.
there is a negative relationship between expected future growth and planned investment spending.
there is a positive relationship between unplanned inventory investment and planned investment spending.
there is a positive relationship between the interest rate and planned investment spending.
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Question
Which of the following will cause a decrease in unplanned inventory investment?
Answer
an increase in interest rates
an unexpected increase in consumer spending
an increase in the growth rate of real GDP
a sudden decrease in consumer wealth
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Page 21of 48
Question
Investment equals:
Answer
planned investment plus unplanned investment.
planned investment minus unplanned investment.
unplanned investment minus planned investment.
planned investment in a free market economy.
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Question
Negative inventory investment occurs when companies:
Answer
add to their inventories when sales fall.
add to their inventories by increasing production.
reduce their inventories by decreasing production.
reduce their inventories when sales increase.
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Question
Rising inventories usually indicate:
Answer
an unexpectedly growing economy.
an unexpectedly slowing economy.
an unexpected spurt in sales.
an inflationary cycle.
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Question
Falling inventories indicate ______ unplanned inventory investment and a ______ economy.
Answer
positive; growing
positive; slowing
negative; slowing
negative; growing
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Question
In an economy with no international trade, government expenditure, transfers, or taxes, planned aggregate spending is equal to:
Answer
GDP minus disposable income plus planned investment spending.
consumption plus planned investment spending.
disposable income plus planned investment spending.
GDP minus consumption plus unplanned investment spending.
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Question
Because in an economy with no international trade, government expenditure, transfers, or taxes, disposable income is equal to GDP, it
follows that:
Answer
as GDP increases, planned aggregate spending decreases.
consumption is equal to investment spending.
as GDP decreases, planned aggregate spending decreases.
investment spending is equal to the disposable income.
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Question
Planned aggregate expenditures are represented by a line that is:
Answer
upward sloping.
not sloped.
vertical.
horizontal.
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Question
The slope of the planned aggregate spending line is determined by:
Answer
the marginal propensity to consume.
the level of unplanned investment spending.
the level of planned investment spending.
the level of autonomous consumption.
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Question
Use this scenario to answer questions 155163.
Scenario: Income-Expenditure Equilibrium
GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is
0.8.
Page 22of 48
(Scenario: Income-Expenditure Equilibrium) What is the consumption function?
Answer
C =8,000 +.8 YD
C =8,700 +.2 YD
C =500 +0.8 YD
C =1,700 +.2 YD
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) How much is consumption?
Answer
$500
$8,000
$700
$6,900
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) How much is planned aggregate spending?
Answer
$7,100
$6,400
$8,000
$700
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) How much is unplanned inventory investment?
Answer
$1,100
$900
$900
0
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) Given this situation, firms will tend to:
Answer
raise prices.
hire more people.
increase output.
decrease output.
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) If GDP is $3,000, planned aggregate spending is:
Answer
$2,400.
$2,900
$3,100
$3,000
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Page 23of 48
Question
0.8.
(Scenario: Income-Expenditure Equilibrium) If GDP is $3,000, how much is unplanned inventory investment?
Answer
0
$600
$100
$100
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) Income-expenditure equilibrium is achieved when GDP is:
Answer
$8,000.
$7,000.
$3,500.
$700.
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Question
0.8.
(Scenario: Income-Expenditure Equilibrium) The multiplier is:
Answer
0.8.
0.2.
5.
1.25.
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Question
Table: The Economy of Albernia
(Table: The Economy of Albernia) What is the consumption function for Albernia?
Answer
C =600 +.3 YD
C =600 +0.75 YD
C =400 +0.6 YD
C =400 +0.75 YD
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Question
(Table: The Economy of Albernia) What is the income-expenditure equilibrium GDP?
Answer
$1,000 billion
$1,500 billion
Page 24of 48
$2,000 billion
$2,500 billion
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Question
(Table: The Economy of Albernia) If GDP is $1,500 billion, then the level of unplanned inventories will be equal to:
Answer
$400 billion.
$400 billion.
$600 billion.
$600 billion.
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Question
(Table: The Economy of Albernia) If real GDP is $3,000 billion, then unplanned investment will be:
Answer
zero.
$100 billion.
$200 billion.
$300 billion.
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Question
Figure: The Aggregate Consumption Function and Planned Aggregate Spending
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If current disposable income increases in this
economy, then the:
Answer
AE will shift up.
AE will shift down.
economy will move upward along the AE.
economy will move downward along the AE.
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Page 25of 48
Question
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If current disposable income decreases in this
economy, then the:
Answer
AE will shift up.
AE will shift down.
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Question
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If expected future disposable income increases in
this economy, then the:
Answer
AE will shift up.
AE will shift down.
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Question
Page 26of 48
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If expected future disposable income decreases in
this economy, then the:
Answer
AE will shift up.
AE will shift down.
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Question
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If aggregate wealth increases in this economy, then:
Answer
AE will shift up.
AE will shift down.
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Question
Page 27of 48
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) If aggregate wealth decreases in this economy, then
the:
Answer
AE will shift up.
AE will shift down.
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Question
Whenever GDP exceeds planned aggregate expenditure, unplanned investment is _______; whenever GDP falls short of planned
aggregate expenditure, unplanned investment is _________.
Answer
positive; negative
negative; positive
zero; positive
zero; negative
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Question
Whenever planned aggregate spending exceeds GDP:
Answer
unplanned inventory investment is negative.
unplanned inventory investment is zero.
unplanned inventory investment is positive.
planned investment spending exceeds consumption.
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Question
Whenever GDP exceeds planned aggregate spending:
Answer
firms reduce production, thereby reducing GDP.
households increase consumption, thereby increasing disposable income.
firms increase production, thereby increasing GDP.
households decrease consumption, thereby decreasing disposable income.
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Question
Income-expenditure equilibrium GDP is:
Answer
the level of GDP at which the unemployment rate is zero.
the level of GDP at which GDP equals planned aggregate spending.
the level of GDP at which there are no savings.
the level of GDP at which autonomous consumption equals planned inventory investment.
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Question
Income-expenditure equilibrium is when:
Answer
GDP is equal to planned aggregate spending.
GDP is equal to actual aggregate spending.
GDP is equal to unplanned aggregate expenditure.
consumption and investment are equal.
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Question
If GDP is smaller than planned aggregate spending, then:
Answer
unplanned inventory investment is positive.
GDP will fall.
the economy is in equilibrium.
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Question
If GDP is greater than planned aggregate spending, then:
Answer
GDP will fall.
the economy is in equilibrium.
GDP will rise.
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Question
At the income-expenditure equilibrium:
Page 28of 48
Answer
investment net of depreciation is zero.
planned investment is zero.
unplanned inventory investment is zero.
inventory investment is zero.
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Question
Unplanned inventory investment leads to:
Answer
prices increasing.
production increasing.
firms hiring more workers.
production decreasing.
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Question
An unplanned fall in inventories leads to:
Answer
prices falling.
production falling.
production increasing.
interest rates increasing.
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Question
The Keynesian cross was developed by:
Answer
J ohn Maynard Keynes.
Paul Samuelson.
Adam Smith.
Robert Heilbroner
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Question
Income-expenditure equilibriumcan be defined as a situation in which:
Answer
there are no inventories.
there is no unplanned inventory investment.
inventory investment is equal to consumption.
there are no savings.
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Question
Figure: Income-Expenditure Equilibrium
(Figure: Income-Expenditure Equilibrium) If investment spending increases in this economy, then the:
Answer
AE will shift up, increasing the income-expenditure equilibrium.
AE will shift down, decreasing the income-expenditure equilibrium.
economy will move upward along the AE, increasing the income-expenditure equilibrium.
economy will move downward along the AE, decreasing the income-expenditure equilibrium.
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Question
Page 29of 48
(Figure: Income-Expenditure Equilibrium) If investment spending decreases in this economy, then the:
Answer
AE will shift up, increasing the income-expenditure equilibrium.
AE will shift down, decreasing the income-expenditure equilibrium.
economy will move upward along the AE, increasing the income-expenditure equilibrium.
economy will move downward along the AE, decreasing the income-expenditure equilibrium.
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Question
(Figure: Income-Expenditure Equilibrium) If planned investment spending increases autonomously by $100, GDP will:
Answer
increase by $250.
increase by $100.
increase by $125.
not change.
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Question
Page 30of 48
(Figure: Income-Expenditure Equilibrium) If planned investment spending increases by $100, income-expenditure equilibrium occurs at
GDP of:
Answer
$8,100.
$3,600
$2,250.
$4,000.
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Question
Table: Aggregate Spending
(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers,
real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned
investment (I
planned
). At what level of real GDP will the economy find its income-expenditure equilibrium?
Answer
$2000
$2500
$3500
$4500
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Question
investment (I
planned
). If real GDP is $2500, what is the level of unplanned inventory investment?
Answer
$200
$0
$2700
$200
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Question
investment (I
planned
). The income-expenditure equilibrium real GDP is found at _____ and if planned investment fell to $300, the new
income-expenditure equilibrium real GDP would fall to _____.
Answer
$3500; $2500
$3500; $2000
$3000; $1500
Page 31of 48
$4000; $2500
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Question
Figure: Aggregate Expenditures and Real GDP
(Figure: Aggregate Expenditures and Real GDP) At a real GDP of $9,000 billion:
Answer
planned investment is less than investment.
planned investment equals investment.
planned investment is greater than investment.
there will be no unplanned investment.
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Question
Figure: Aggregate Expenditures and Real GDP
(Figure: Aggregate Expenditures and Real GDP) If the level of real GDP equals $9,000 billion, and if there are no changes in the
consumption function or in planned investment, then we expect that, in the next period, real GDP will:
Answer
rise.
remain unchanged.
fall.
fall, but only if there is an offsetting change in autonomous consumption.
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Question
Figure: Aggregate Expenditures Curve I
(Figure: Aggregate Expenditures Curve I) The equilibrium level of real GDP in the aggregate expenditures model shown in this figure is:
Answer
$800.
$1,000.
$1,600.
Page 32of 48
$3,200.
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Question
(Figure: Aggregate Expenditures Curve I) The slope of the aggregate expenditures curve in the aggregate expenditures model shown in
this figure is:
Answer
0.25.
0.5.
1.0.
45.
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Question
(Figure: Aggregate Expenditures Curve I) The multiplier in the aggregate expenditures model shown in this figure is:
Answer
1.
2.
3.
5.
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Question
(Figure: Aggregate Expenditures Curve I) Suppose that the consumption function in this economy rises by $100. The result would be a
shift in the:
Answer
aggregate expenditures curve upward by $100.
aggregate expenditures curve upward by $100 times the multiplier.
aggregate expenditures curve downward by $200.
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Page 33of 48
Question
(Figure: Aggregate Expenditures Curve I) Suppose that the consumption function in this economy rises by $100. The result would be an
increase in the equilibrium level of real GDP in the aggregate expenditures model shown here of:
Answer
$100.
$200.
$100 times the multiplier.
$200 or $100 times the multiplier.
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Question
(Figure: Aggregate Expenditures Curve I) Suppose that the government's purchases of goods and services in this economy rise by
$100. Real GDP would:
Answer
decrease by $100.
increase by $200.
increase by $200 times the multiplier.
decrease by $100 times the multiplier.
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Question
Figure: Aggregate Expenditures Curve II
(Figure: Aggregate Expenditures Curve II) The equilibrium level of real GDP in the aggregate expenditures model shown in this figure
is:
Answer
$800.
$1,000.
$2,000.
$4,000.
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Question
Page 34of 48
(Figure: Aggregate Expenditures Curve II) The slope of the aggregate expenditures curve in the aggregate expenditures model shown
in this figure is:
Answer
0.25.
0.5.
0.6.
45.
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Question
(Figure: Aggregate Expenditures Curve II) The multiplier in the aggregate expenditures model shown in this figure is:
Answer
1.0.
2.0.
2.5.
5.0.
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Question
(Figure: Aggregate Expenditures Curve II) Suppose that the consumption function in this figure rises by $100. The result would be a
shift in the:
Answer
aggregate expenditures curve upward by $100 times the multiplier.
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Question
Page 35of 48
(Figure: Aggregate Expenditures Curve II) Suppose that the consumption function in this figure rises by $100. In the aggregate
expenditures model shown here, the result would be an increase in the equilibrium level of real GDP of:
Answer
$100.
$200.
$50.
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Question
(Figure: Aggregate Expenditures Curve II) Suppose that the consumption function in this economy rises by $200. The result would be
an increase in equilibrium real GDP of:
Answer
$100.
$200.
$250.
$500.
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Question
Figure: Aggregate Expenditures Curve III
(Figure: Aggregate Expenditures Curve III) Suppose that the consumption function in this figure rises by $100. The result would be a
shift in the aggregate expenditures curve upward by:
Answer
$100.
$400.
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Question
Figure: Aggregate Expenditures Curve III
Page 36of 48
(Figure: Aggregate Expenditures Curve III) Suppose that the consumption function shifts upward by $100. In the aggregate
expenditures model shown here, the result would be an increase in the equilibrium level of real GDP of:
Answer
$100.
$400.
$400 or $100 times the multiplier.
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Question
In the aggregate expenditures model, if aggregate expenditures are greater than real GDP:
Answer
there will be unplanned decreases in inventories.
employment decreases.
aggregate output decreases.
actual real output is greater than equilibrium real output.
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Question
In the aggregate expenditures model, if aggregate expenditures are less than real GDP:
Answer
there will be unplanned increases in inventories.
employment increases.
aggregate output increases.
actual real output is less than equilibrium real output.
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Question
In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion:
Answer
unplanned inventory accumulation equals $200 billion.
consumption plus investment equals $200 billion.
investment equals $200 billion.
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Question
In the aggregate expenditures model, if real GDP equals $700 billion and aggregate expenditures equal $400 billion:
Answer
consumption plus investment equals $300 billion.
investment equals $300 billion.
investment plus saving equals $300 billion.
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Question
In the aggregate expenditures model, if real GDP exceeds aggregate expenditures, the economy will:
Answer
contract, causing employment to decrease.
expand, causing inflation.
expand, causing employment to increase.
neither contract nor expand, causing employment to remain constant.
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Question
In the aggregate expenditures model, if aggregate expenditures exceed real GDP, the economy will:
Answer
expand, causing an increase in employment.
expand, causing a decrease in prices.
contract, causing a decrease in employment.
neither expand nor contract, causing employment to remain the same.
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Page 37of 48
Question
If the slope of the aggregate expenditures curve =0.8, the multiplier is equal to:
Answer
1.
4.
5.
infinity.
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Question
Answer
1.
4.
5.
10.
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Question
Answer
1.
4.
5.
infinity.
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Question
If investment spending increases, the planned aggregate spending line:
Answer
becomes flatter.
shifts down.
becomes steeper.
shifts up.
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Question
An increase in the expected future disposable income of households:
Answer
shifts down the planned aggregate spending line.
increases the slope of the aggregate spending line.
decreases the slope of the aggregate spending line.
shifts up the planned aggregate spending line.
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Question
The magnitude of the multiplier process that links planned aggregate spending to GDP is determined by:
Answer
the marginal propensity to save.
the interest rate.
the level of autonomous consumption.
the level of planned investment spending.
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Question
If the planned aggregate spending rises by $10 billion and the MPC is .75, then equilibrium GDP changes by:
Answer
$2.5 billion.
$7.5 billion.
$10 billion.
$40 billion.
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Question
If the planned aggregate spending rises by $25 billion and the MPC is .8, then equilibrium GDP changes by:
Answer
$25 billion.
$125 billion.
$200 billion.
$250 billion.
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Question
Aggregate spending increases when:
Answer
there is an increase in prices.
there is a fall in prices.
Page 38of 48
there is an increase in unplanned investment spending.
there is an increase in planned investment spending.
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Question
An autonomous increase in aggregate spending:
Answer
reduces GDP by that amount.
increases GDP by that amount.
reduces GDP by more than that amount.
increases GDP by more than that amount.
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Question
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?
Answer
AE
Planned
=$100 +0.6 YD
AE
Planned
=$250 +0.4 YD
AE
Planned
=$350 +0.6 YD
AE
Planned
=$150 +0.4 YD
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Question
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?
Answer
AE
Planned
=$1,050 +0.75 YD
AE
Planned
=$300 +0.25 YD
AE
Planned
=$750 +0.75 YD
AE
Planned
=$500 +0.25 YD
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Question
Figure: AE1
(Figure: AE1) Consider Figure AE1. The equilibrium real GDP is:
Answer
$500 billion.
$300 billion.
$700 billion.
$625 billion.
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Question
Figure: AE1
Page 39of 48
(Figure: AE1) Refer to Figure AE1. When real GDP is $700 billion, there will be a:
Answer
$125 million increase in unplanned inventory investment.
$125 million decline in unplanned inventory investment.
$200 million decline in unplanned inventory investment.
$200 million increase in unplanned inventory investment.
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Question
If real GDP is less than aggregate expenditure, then inventories will:
Answer
increase and firms will cut back on future production.
fall and firms will increase the prices of their products.
increase and firms will lower their product prices.
fall and firms will increase their future production.
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Question
If real GDP is $1000 billion and the aggregate expenditure is $850 billion, then the change in inventories will be:
Answer
$150 million.
$1,850 million.
$150 million.
$1,850 million.
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Question
Aggregate expenditure line has a slope:
Answer
greater than one.
less than one.
equal to one.
less than zero.
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Question
When the economy is in income-expenditure equilibrium:
Answer
exports equal imports.
saving is less than investment spending.
taxes equal transfer payments.
real GDP equals planned aggregate spending.
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Question 233 True/False 0 points Modify Remove
Question
If the consumption function is C =$100,000,000 +.8 YD, then the MPC is $100 million.
Answer
True
False
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Question
The marginal propensity to consume is consumption divided by disposable income.
Answer
True
False
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Page 40of 48
Question
If you expect to get a substantial raise six months from now, this will not affect your current consumption because you haven't received
the money yet.
Answer
True
False
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Question
The aggregate consumption function can shift, due to changes in expected future disposable income and changes in aggregate wealth.
Answer
True
False
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Question
According to the life-cycle hypothesis, consumers plan their spending based on their current disposable income when they are very
young.
Answer
True
False
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Question
People use wealth to smooth consumption over their life-cycle.
Answer
True
False
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Question
The demand for loanable funds is inversely related to the interest rate, because fewer projects are profitable at higher interest rates.
Answer
True
False
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Question
If expected future GDP increases, then planned current investment will increase.
Answer
True
False
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Question
The higher current production capacity is, the higher current planned investment will be.
Answer
True
False
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Question
Planned investment spending and actual investment spending are NOT always equal.
Answer
True
False
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Question
If planned investment is $50 billion and unplanned inventory investment is $10 billion, then actual investment is $40 billion.
Answer
True
False
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Question
Inventories are investment because inventories are a source of future sales.
Answer
True
False
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Question
If GDP is greater than planned expenditure, unplanned inventory investment is negative.
Answer
True
False
Page 41of 48
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Question
Changes in unplanned inventory investment cause the economy to move toward the income-expenditure equilibrium.
Answer
True
False
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Question
Decreases in investment spending are usually offset by increases in consumption through the multiplier process.
Answer
True
False
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Question
If planned aggregate spending rises by $10 billion and the MPC is .8, then the income-expenditure equilibrium increases by 50 billion.
Answer
True
False
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Question
If planned aggregate spending rises by $20 billion, and the MPC is .9, then the income-expenditure equilibrium increases by $18 billion.
Answer
True
False
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Question 250 Essay 0 points Modify Remove
Question
How does a nation's saving rate, as measured by the marginal propensity to save, affect the size of the spending multiplier? Explain
with both intuition and the formula for the multiplier.
Answer The multiplier process relies upon spending at every step. If disposable income rises, consumers increase spending at every
stage of the process, by an amount equal to the marginal propensity to consume multiplied by the increase in disposable
income. If the MPC is large, the MPS is small, and more total spending is multiplied throughout the economy. However, if
consumers decide to increase savings at each stage of the process, the MPS increases, and disposable income leaksout of
the spending multiplier.
The multiplier M=1/(1-MPC). If the MPS increases, the MPC decreases, so (1-MPC) increases. If (1-MPC) increases, 1/(1-
MPC) decreases and the multiplier M falls.
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Question
Table: Disposable Income and Spending
(Table: Disposable Income and Spending) Using the accompanying table, calculate the marginal propensity to consume (MPC). Use
this MPC to compute the spending multiplier.
Answer The MPC =(change in consumer spending)/(change in disposable income) =$40/$50 =.80. The multiplier =1/(1-MPC) =
1/.2 =5.
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Question
Table: Disposable Income and Spending
(Table: Disposable Income and Spending) Use the data in the accompanying table to develop a linear equation of the consumption
function. Use this consumption function to forecast the amount of consumption spending that would occur if disposable income were
equal to $500.
Answer The general equation of the consumption function is: C =A +MPC*(YD). The letter A stands for autonomous consumption, the
level of consumption that occurs when disposable income YD is zero. From the table, A=$10. The MPC is the slope of the line,
MPC=$40/$50 =.80. So C =10 +.80*(YD). If YD=$500, C =$410.
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Question
How can autonomous consumption be greater than zero when disposable income is equal to zero?
Page 42of 48
Answer When YD=0, consumption can still be positive if the consumer spends savings, liquidates some other asset (like selling stock
or property), or by borrowing.
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Question
Suppose you have estimated the consumption function as: C =250 +.90*YD. Knowing this, what is the equation for the corresponding
savings function?
Answer If disposable income is zero, autonomous consumption will be 250. Since C +S =YD, autonomous savings must be 250.
Looking at the consumption function, it is clear that the MPC=.90, which is the slope of the function. Because MPC+MPS=1,
the MPS=.10, the slope of the savings function. So the equation of the savings function is: S=250 +.10*YD.
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Question
Table: Consumption for Four Consumers
(Table: Consumption for Four Consumers) The accompanying table shows the consumption spending of four different consumers,
Brandy, Mandy, Sandy, and Candi, at several levels of disposable income. Use this data to construct the aggregate consumption
function.
Answer Autonomous consumption when disposable income is zero is $3500. When each person has disposable income of $1000,
total income is $4000 and total consumption spending is $6300. When each person has $2000 of disposable income, total
income rises to $8000 and total consumption spending rises to $9100. So collectively the MPC =(91006300)/(80004000) =
2800/4000 =.70.
So the aggregate consumption function is: C =3500 +.70*YD.
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Question
Suppose the economy is currently in income-expenditure equilibrium. How will each of the following affect planned investment and
unplanned inventory investment.
a. The Federal Reserve decreases interest rates.
b. Major economic indicators decrease business optimism about future growth in real GDP.
Answer a. A lower interest rate will increase planned investment and aggregate spending. This will increase planned aggregate
spending above real GDP and inventories will fall. Thus unplanned inventory investment will be negative.
b. Pessimism about the growth rate of the economy will decrease planned investment. This will decrease planned aggregate
spending so that it is less than real GDP and inventories will accumulate. Thus unplanned inventory investment will be
positive.
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Question
In a simple economy with no government and no foreign sector, autonomous consumer spending is $100 and planned investment
spending is $300. The marginal propensity to consume is .75.
a. Solve for the equilibrium level of real GDP.
b. If real GDP is $2000, what is unplanned inventory investment?
Answer a. Given this information, AE
planned
=400 +.75*YD. In equilibrium, AE
planned
=GDP =YD. So we can rewrite YD =400
+.75*YD, or .25*YD =400, and equilibrium YD=GDP =$1600.
b. If GDP =$2000, AE
planned
=400 +.75*(2000) =$1900 so output exceeds spending and so unplanned inventory investment
is $100.
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Question
Table: Real GDP
(Table: Real GDP) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is
equal to disposable income (YD). The data in the accompanying table shows consumption spending (C) and planned investment
(I
planned
).
a. What is the MPC in this economy?
b. At what level of real GDP will the economy find its income-expenditure equilibrium?
Answer a. As YD increases by $1000, C increases by $900, so the MPC =900/1000 =.90.
b. If you create a new column for AE
planned
=C +I
planned
, you will see that real GDP =AE
planned
at $7000.
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Page 43of 48
Question
In a simple economy with no government and no foreign sector, autonomous consumer spending is $250 and planned investment
spending is $500. The marginal propensity to consume is 0.80.
a. Solve for the equilibrium level of real GDP.
b. Suppose that interest rates fall and planned investment increases by $100. What is the new level of equilibrium real GDP?
Answer a. Given this information, AE
planned
=750 +.80*YD. In equilibrium, AE
planned
=GDP =YD. So we can rewrite YD =750 +
0.80*YD, or 0.20*YD =750, and equilibrium YD=GDP =$3750.
b. With the MPC =0.80, the multiplier M =5. So an increase of $100 of new planned investment will increase real GDP by
$500. So the new equilibrium real GDP is $4250.
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Question
The multiplier process:
Answer
explains how spending continues indefinitely with continuous rounds of spending.
ends after one round of spending and with total spending limited to the initial change in spending.
only occurs when economies are in an expansion phase.
is limited with the total change in real GDP dependent upon the size of the marginal propensity to consume.
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Question
During the Great Depression:
Answer
investment fell, but consumption increased.
investment increased, but consumption decreased.
both consumption and investment decreased.
overall GDP rose.
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Question
The value of the multiplier will be smaller:
Answer
the larger is the value of the MPS.
the larger is the value of the MPC.
if the MPC equals the MPS.
if the MPC +MPS equals 1.
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Question
All of the following impacts consumer spending EXCEPT:
Answer
current disposable income.
wealth.
past disposable income.
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Question
Two thirds of total spending is usually attributed to:
Answer
consumption.
investment.
government spending.
net exports.
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Question
Scenario: Aggregate Consumption Function
Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following
equation: C =1,000 +0.75YD where C stands for consumption and YD stands for disposable income.
(Scenario: Aggregate Consumption Function) Suppose disposable income increases by $100, this means aggregate consumption will
increase by _________ and autonomous consumption _______________.
Answer
$75; remains at $1000
$1000; remains at $75
$100; increases by $100
$175; increases by $100
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Question
Scenario: Aggregate Consumption Function
Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following
equation: C =1,000 +0.75YD where C stands for consumption and YD stands for disposable income.
(Scenario: Aggregate Consumption Function) If aggregate disposable income equals $1000, then aggregate consumption equals:
Page 44of 48
Answer
$1,000.
$1,750.
$2,000.
$1,075.
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Question
Suppose housing prices begin to rise nationwide, this will result, everything else constant, in a(n):
Answer
increase in consumer spending at any given level of disposable income.
decrease in wealth as consumers spend more income on mortgage payments.
decrease in overall aggregate expenditures.
drop in investment spending.
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Question
If an economy experiences a decrease in consumer spending, most economists believe:
Answer
this was preceded by a decrease in investment spending.
investment spending increases occurred before this drop in consumer spending.
the aggregate expenditure function will shift up.
such events are temporary as investment will rise to offset this.
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Question
The marginal propensity to save:
Answer
is the change in consumer saving divided by the change in consumption.
is the change in saving divided by the change in disposable income.
equals MPC +1.
changes when the MPC is constant.
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Question
Alice's disposable income increases by $1,000, and she spends $600 of this increase in disposable income. For Alice, her:
Answer
MPS is 0.40 and she saves $400.
MPC is 0.40 and she saves $400.
MPS is 0.40 and she saves $600.
MPC is 0.60 and she consumes $400.
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Question
When consumers receive more disposable income, one will find that their spending:
Answer
will increase.
will decrease.
will stay the same, but their saving will decrease.
and their saving will both decrease.
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Question
When J ulie Ann's disposable income is $10,000, she spends $10,000 and when her disposable income is $15,000, her spending is
$12,500. J ulie Ann's autonomous consumption is ________ and her ___________.
Answer
$5,000; MPC =0.50
$10,000; MPS =0.50
$0; MPC =0.50
$0; MPS =0.50
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Question
The slope of the consumption function equals:
Answer
1 MPS.
1/(1 MPS).
1 MPC.
MPC/MPS.
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Question
The permanent income hypothesis suggests consumer:
Answer
spending depends on income people expect over the long term rather than on current income.
spending is smoothed over each month in response to changes in their current disposable income.
spending is made up of an autonomous amount and an amount dependent upon disposable income.
Page 45of 48
saving depends on one's lifetime income.
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Question
Vanessa tells people she is consuming more now and probably will continue to do so for some time, but she believes her consumption
will smooth out over her lifetime. Vanessa's consumption pattern mirrors:
Answer
the multiplier hypothesis.
life-cycle income hypothesis.
relative income hypothesis.
accelerator principle.
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Question
Answer
investment firms plan to make during a given time period.
inventory investment changes.
not considered part of GDP.
dependent only on interest rates.
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Question
Interest rates and planned investment spending:
Answer
have a positive relationship.
exhibit a negative relationship.
have no relationship since planned investment is fixed.
have no relationship if the firm has retained earnings.
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Question
A firm has enough retained earnings to finance an investment project. For this firm, the market interest rate:
Answer
is not relevant to their investment decision.
represents the opportunity cost of using their retained earnings.
will help them calculate the rate of return for their project.
has no impact on the profitability of the investment project.
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Question
The belief that a higher rate of growth in real GDP will lead to higher planned investment spending is known as:
Answer
the accelerator principle.
the multiplier effect.
fiscal policy with an emphasis on government spending.
unplanned investment spending.
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Question
The multiplier process assumes that:
Answer
aggregate prices are perfectly flexible.
the economy is open and there is free trade.
the economy is operating with sticky aggregate price levels.
interest rates are constantly changing.
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Question
Use this table to answer questions 281285.
Scenario: A Country's Consumption Function
A country is currently closed with no government sector and aggregate price levels and interest rate levels fixed. Furthermore, the
marginal propensity to consume is constant and the country's consumption function is as follows: C =200 +0.75YD, where YD is
disposable income and C is consumption. Furthermore, assume that planned investment equals 75.
(Scenario: A Country's Consumption Function) Given this consumption function, if this country experienced an increase in income of
$10,000, we know consumption would increase by:
Answer
$10,000.
$7,500.
$200.
$7,700.
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Question
Page 46of 48
(Scenario: A Country's Consumption Function) When real GDP equals 900:
Answer
planned investment equals 900.
autonomous consumption equals 900.
the economy is in income-expenditure equilibrium.
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Question
(Scenario: A Country's Consumption Function) What is the income-expenditure equilibrium for this country?
Answer
900
1100
275
200
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Question
(Scenario: A Country's Consumption Function) Holding everything else constant, what would happen if aggregate wealth decreases by
$100?
Answer
The AE curve shifts downward.
The income-expenditure equilibrium real GDP increases by more than $100.
The multiplier effect on real GDP does not occur since there is a drop in aggregate wealth.
Planned investment will increase.
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Question
(Scenario: A Country's Consumption Function) If real GDP is 1100, then:
Answer
unplanned investment equals zero.
planned investment equals zero.
the AE curve shifts up.
the MPC decreases.
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Question
If the MPC equals 0.75, then based on the simple model presented in this chapter, one would expect a $100 decrease in investment
spending to lead to:
Answer
an increase in spending which will total $100 by the end of all the rounds.
an increase in spending which will total $400 by the end of all the rounds.
a decrease in spending which will total $100 by the end of all the rounds.
a decrease in spending which will total $400 by the end of all the rounds.
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Question
Suppose the level of planned aggregate expenditure in an economy is $1000 while the real GDP is $800. According to the simple
model developed in this chapter, where the aggregate price level is assumed to be constant, we can expect:
Answer
inventories will stay the same since this is part of planned investment.
inventories will decrease.
inventories will increase.
real GDP will fall further.
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Question
If unplanned inventory investment is positive, this most likely means:
Page 47of 48
Answer
the economy is growing rapidly.
aggregate expenditures on goods and services is less than forecasted.
the economy is doing the same since inventory changes have no impact on the economy.
the stock of inventories is declining.
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Question
In the income-expenditure model, inventories are:
Answer
fixed and therefore provide little insight into the direction of the economy.
a long-run event which aids forecasters in understanding where long-run real GDP is.
constantly changing and provide insight into the future state of the economy.
often positive suggesting additions to inventory stocks are a long-run goal.
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