Macro Econ: Chapter 8, Module 3

10) Consumption is A) positively related to household income and wealth and households' expectations about the future, but negatively related to interest rates. B) negatively related to household income and wealth, interest rates, and households' expectations about the future. C) determined only by income. D) positively related to household income and wealth, interest rates, and households' expectations about the future.

A) positively related to household income and wealth and households' expectations about the future, but negatively related to interest rates.

41) Firms react to unplanned inventory reductions by A) reducing output. B) increasing output. C) reducing planned investment. D) increasing consumption.

B) increasing output.

1) The ratio of the change in the equilibrium level of output to a change in some autonomous variable is the A) elasticity coefficient. B) multiplier. C) automatic stabilizer. D) marginal propensity of the autonomous variable.

B) multiplier.

income-expenditure model assumptions

-changes in overall spending lead to changes in aggregate output -interest rate is fixed -government expenditure=0 -net exports=0

MPS

1-MPC

multiplier

1/(1-MPC) or delta y/delta i or 1/MPS

10) If planned investment exceeds actual investment, A) there will be an accumulation of inventories. B) there will be no change in inventories. C) there will be a decline in inventories. D) none of the above

C) there will be a decline in inventories.

43) Aggregate output will increase if there is a(n) A) increase in saving. B) unplanned rise in inventories. C) unplanned fall in inventories. D) decrease in consumption.

C) unplanned fall in inventories.

GDP of a nation(Y)

C+I+G+NX

Equilibrium =

Y = C + I

GDP(output)

Y(income)

Sprivate

Y+TR-C-T

assume closed economy

Y=C+I+G

MPC

delta C / delta Y

≡

identity

aggregate saving

the part of aggregate income that is not consumed

equilibrium occurs when

there is no tendency for change

aggregate income

total income received by all factors of production in a given period

1) The MPC is A) the change in consumption divided by the change in income. B) consumption divided by income. C) the change in consumption divided by the change in saving. D) the change in saving divided by the change in income.

A) the change in consumption divided by the change in income.

2) The MPS is A) the change in saving divided by the change in income. B) 1 + MPC C) income divided by saving. D) total saving divided by total income.

A) the change in saving divided by the change in income.

4) Which of the following is an investment? A) the purchase of a new printing press by a business B) the purchase of a corporate bond by a household C) the purchase of a share of stock by a household D) a leveraged buyout of one corporation by another

A) the purchase of a new printing press by a business

5) If aggregate output equals planned aggregate expenditure, then A) unplanned inventory investment is zero. B) unplanned inventory adjustment is negative. C) unplanned inventory adjustment is positive. D) actual investment is greater than planned investment.

A) unplanned inventory investment is zero.

22) In practice, the actual size of the multiplier is about A) 1. B) 1.4. C) 2. D) 4.

B) 1.4.

8) Assuming no government or foreign sector, the formula for the multiplier is A) 1/MPC. B) 1/MPS. C) 1/(1 + MPC). D) 1 - MPC.

B) 1/MPS.

3) Which of the following is NOT considered investment? A) The acquisition of capital goods B) The purchase of government bonds C) The increase in planned inventories D) The construction of a new factory

B) The purchase of government bonds

9) Higher interest rates are likely to A) have no effect on consumer spending or saving. B) decrease consumer spending and increase consumer saving. C) decrease both consumer spending and consumer saving. D) increase consumer spending and decrease consumer saving.

B) decrease consumer spending and increase consumer saving.

1) In macroeconomics, equilibrium is defined as that point at which A) saving equals consumption. B) planned aggregate expenditure equals aggregate output. C) planned aggregate expenditure equals consumption. D) aggregate output equals consumption minus investment.

B) planned aggregate expenditure equals aggregate output.

5) If you earn additional $500 in disposable income one week for painting your neighbors house, A) the total of your consumption and saving will increase by more than $500. B) the total of your consumption and saving will increase by $500. C) the total of your consumption and saving will increase by less than $500. D) your consumption will increase by more than $500, even if your MPS is 0.1.

B) the total of your consumption and saving will increase by $500.

AE=

C + I

11) If Inventory investment is higher than firms planned, A) actual and planned investment are equal. B) actual investment is less than planned investment. C) actual investment is greater than planned investment. D) actual investment must be negative.

C) actual investment is greater than planned investment.

5) Over which component of investment do firms have the least amount of control? A) purchases of new equipment B) construction of new factories C) changes in inventories D) building new machines

C) changes in inventories

8) Uncertainty about the future is likely to A) increase current spending. B) have no impact on current spending. C) decrease current spending. D) either increase or decrease current spending.

C) decrease current spending.

24) Related to the Economics in Practice on p. 154 [466]: According to the "paradox of thrift," increased efforts to save will cause a(n) A) increase in income and an increase in overall saving. B) increase in income but no overall change in saving. C) decrease in income and an overall decrease in saving. D) decrease in income but an increase in saving.

C) decrease in income and an overall decrease in saving.

7) Saving is a ________ variable and savings is a ________ variable. A) flow; flow B) stock; stock C) flow; stock D) stock; flow

C) flow; stock

4) If the MPS is .60, MPC A) is 1.60. B) is .30. C) is .40. D) cannot be determined by the given information.

C) is .40.

44) A decrease in planned investment causes A) output to increase. B) output to decrease, but by a smaller amount than the decrease in investment. C) output to decrease, but by a larger amount than the decrease in investment. D) output to decrease by an amount equal to the decrease in investment.

C) output to decrease, but by a larger amount than the decrease in investment.

4) If unplanned inventory investment is positive, then A) planned investment must be zero. B) planned aggregate spending must be greater than aggregate output. C) planned aggregate spending must be less than aggregate output. D) planned aggregate spending must equal aggregate output.

C) planned aggregate spending must be less than aggregate output.

21) If autonomous consumption increases, the size of the multiplier would A) increase. B) decrease. C) remain constant. D) either increase or decrease depending on the size of the change in autonomous consumption.

C) remain constant.

29) The fraction of a change in income that is consumed or spent is called A) the marginal propensity of income. B) the marginal propensity to save. C) the marginal propensity to consume. D) average consumption.

C) the marginal propensity to consume.

3) If aggregate output is greater than planned spending, then A) unplanned inventory investment is zero. B) unplanned inventory investment is negative. C) unplanned inventory investment is positive. D) actual investment equals planned investment.

C) unplanned inventory investment is positive.

AEplanned=

C+Iplanned

consumption function with taxes

C=A+MPC*(Y-Tax)

paradox of thrift

individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth.

factors that drive investment

interest rate expected future of real GDP current level of business capacity

planned investment spending

investment that businesses intend to undertake during a given period

identity

it is always true by definition

even though investment is much smaller than consumer spending...

it tends to drive the booms and busts in the business cycle

unplanned rise in inventory

output falls, more inventory produced than was sold, so you will be wasting money by continuing to produce that much inventory, positive change in inventory

unplanned fall in inventory

output rises, more demand than they planned to supply, so they will rise to fix it, negative change

Output Y refers to

the quantity of goods and services(not $$)

aggregate consumption function

the relationship for the entire economy between aggregate income and aggregate spending

planned aggregate expenditure

total amount the economy plans to spend in a given period

aggregate consumption/spending

total quantity of goods/services produced in an economy in a given period

Overestimated sales

unintended additions to inventories I unplanned is positive

underestimated sales

unintended drops in inventories. I unplanned is negative

1) If actual investment is greater than planned investment, unplanned inventories decline.

FALSE

1) The larger the MPC, the smaller the multiplier.

FALSE

1) When aggregate expenditure is greater than aggregate output, there will be an unplanned build up of inventories.

FALSE

2) Firms react to an unplanned inventory investment by increasing output.

FALSE

2) Uncertainty about the future is likely to increase current spending.

FALSE

4) If planned saving exceeds planned investment, injections are greater than leakages.

FALSE

4) If the marginal propensity to consume is .8, the marginal propensity to save is 8.

FALSE

5) An increase in the MPC, reduces the multiplier.

FALSE

5) If aggregate expenditure decreases, then equilibrium output increases.

FALSE

S+T

I+G

at equilibrium,

S = I

aggregate saving formula

S ≡ Y - C

Spublic

T-G-TR

2) The smaller the MPS, the larger the multiplier.

TRUE

2) When there is an unplanned draw down of inventories, firms will increase production.

TRUE

3) Actual investment equals planned investment plus unplanned changes in inventories.

TRUE

3) Firms react to negative inventory investment by increasing output.

TRUE

3) The marginal propensity to consume is the change in consumption per change in income.

TRUE

4) When the economy is in equilibrium, savings equals planned investment.

TRUE

5) If planned investment increases, equilibrium will be restored only when saving has increased by exactly the amount of the initial increase in planned investment, assuming there is no government or foreign sector.

TRUE

6) Assuming there is no government or foreign sector, the economy will be in equilibrium if, and only if, planned investment equals actual investment.

TRUE

6) Related to the Economics in Practice on p. 154 [466]: The paradox of thrift is that all people deciding to save more could lead to them saving less.

TRUE

Keynesian Cross

a diagram that identifies income-expenditure equilibrium as the point where a planned aggregate spending line crosses the 45-degree line

A=

autonomous consumption

shifts of aggregate consumption function

changes in aggregate wealth changes in expected future disposable income changes in anticipated interest rates

aggregate income is always _______ to the aggregate output

equal

autonomous consumption

expenditures that consumers must make even when they have no disposable income

marginal propensity to consume(MPC)

fraction of a change in income that is consumed or spent

planned investment at equilibrium

=saving

there is only one point when real GDP=

Planned Aggregate Expenditure

C =

A + MPC * Y

aggregate ouput(income)(Y)

A combined term used to remind the exact equality between aggregate output and aggregate income

9) Assuming there is no government or foreign sector, the formula for the multiplier is A) 1/(1 - MPC). B) 1/MPC. C) 1/(1 + MPC). D) 1 - MPC.

A) 1/(1 - MPC).

40) Using the saving/investment approach to equilibrium, the equilibrium condition can be written as A) C + I = C + S. B) C = S + I. C) C - S = I. D) C + S = I.

A) C + I = C + S.

3) Saving equals A) Y - C. B) Y - planned I. C) Y - actual I. D) Inventory changes.

A) Y - C.

64) If the consumption function is below the 45-degree line, A) consumption is less than income and saving is positive. B) consumption is less than income and saving is negative. C) consumption exceeds income and saving is positive. D) consumption exceeds income and saving is negative.

A) consumption is less than income and saving is positive.

11) In a closed economy with no government, aggregate expenditure is A) consumption plus investment. B) saving plus investment. C) consumption plus the MPC. D) MPC + MPS.

A) consumption plus investment.

19) As the MPS decreases, the multiplier will A) increase. B) decrease. C) remain constant. D) either increase or decrease depending on the size of the change in investment.

A) increase.

42) Firms react to unplanned increases in inventories by A) reducing output. B) increasing output. C) increasing planned investment. D) increasing consumption.

A) reducing output.

14) Without the government or the foreign sector in the income-expenditure model, planned aggregate expenditure equals A) consumption plus actual investment. B) consumption plus inventory adjustment. C) consumption minus planned investment. D) consumption plus planned investment.

D) consumption plus planned investment.

16) Related to the Economics in Practice on p. 147 [459]: Early results from the Save More Tomorrow retirement plans have shown ________ in the savings rates of the enrolled. A) very little change B) mixed results C) significant decreases D) dramatic increases

D) dramatic increases

12) If Wanda's income is reduced to zero after she loses her job, her consumption will be ________ and her saving will be ________. A) less than zero; less than zero B) greater than zero; greater than zero C) less than zero; greater than zero D) greater than zero; less than zero

D) greater than zero; less than zero

23) Related to the Economics in Practice on p. 154 [466]: According to the "paradox of thrift," as individuals increase their saving, A) income in the economy increases because there is more money available for firms to invest. B) income in the economy increases because interest rates will fall and the economy will expand. C) income in the economy will remain constant because the change in consumption equals the change in saving. D) income in the economy will fall because the decreased consumption that results from increased saving causes the economy to contract.

D) income in the economy will fall because the decreased consumption that results from increased saving causes the economy to contract.

2) The economy can be in equilibrium if, and only if, A) planned investment is zero. B) actual investment is zero. C) planned investment is greater than actual investment. D) planned investment equals actual investment.

D) planned investment equals actual investment.

1) As interest rates fall, spending decreases.

FALSE