Macro Test 3 Study Guide

Spending by federal, state, and local governments has grown from _____ of GDP in the 1930s to more than _____ today.

10%; 30%

If MPC = 0.6, what is the spending multiplier?

2.5

If the marginal propensity to save is 0.2, the value of the spending multiplier will be:

5

If the marginal propensity to consume is 0.85, the value of the spending multiplier will be:

6.67

Approximately what share of U.S. GDP is consumption?

70%

The 45-degree line in the Keynesian model represents:

AE = Y ( Total Output)

According to the simple Keynesian model, which of the following statements is NOT correct?

APC + MPS = 1

Which of the following is NOT true regarding the Keynesian model?

Aggregate spending is always less than aggregate income.

What does the "paradox of thrift" say?

An economy that saves too much can end up with lower total savings.

How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected?

An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

If disposable income is $3,000 and saving is $1,200, how much is consumption?

$1,800

If you spend $100 and the MPC is 0.9, how much spending will this $100 generate in the economy?

$1000

If disposable income increases from $250 to $300 and saving increases from $40 to $50, how much is the average propensity to save when disposable income is $300?

0.167

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion, the marginal propensity to save is:

0.25

Which of the following marginal propensities to consume results in the flattest consumption line in an aggregate expenditures model?

0.4

If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume?

0.6

If income rises from $10,000 to $20,000 and consumption increases from $9,000 to $16,000, then the marginal propensity to consume is:

0.70

If disposable income is $250 and saving is $50, how much is the average propensity to consume?

0.8

If income is $5,000 per month and consumption spending is $4,500 per month, what is the average propensity to consume?

0.9

What are the components of aggregate expenditures?

C + I + G + (X - M)

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?

Income will increase by $50,000.

What is the main claim of the aggregate expenditures model?

Spending will generate income, which allows for more spending

Which of the following did classical economists believe would happen if the economy experienced a downturn?

The economy would self correct

Personal consumption expenditures:

can be found by subtracting saving from disposable income.

Along the 45-degree line in the graph of consumption and disposable income:

consumption is equal to disposable income.

A luxury car manufacturer is contemplating investing in its assembly plants. It learns that the probability of a recession in the next few years has increased dramatically because of adverse international events. Its investment demand will:

decrease because lower investment returns are expected.

If the stock market collapses, consumption will:

decrease because people feel less wealthy.

Saving is equal to:

disposable income minus consumption

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

disposable income; consumption

The average propensity to consume is:

equal to consumption divided by income.

When household debt levels rise:

families are less able to spend in the current period.

In the Aggregate Expenditures model, the price level is ___________; in the Aggregate Demand and Aggregate Supply model, the price level is

fixed; flexible

If there is no government and no foreign sector in the economy:

gross domestic product equals consumption plus investment.

Which of the following are considered withdrawals from an economy?

imports; taxes; savings

In the Keynesian model, the principal determinant of saving is:

income

Keynes believed that saving is a function of:

income

As income increases, consumption _____.

increases at a slower rate

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ exists, and will require a _____ in spending to bring the economy back to full employment.

inflationary gap; decrease

When the consumption schedule lies below the 45-degree reference line, saving:

is positive

The marginal propensity to consume:

is the change in consumption associated with a change in income.

A stronger U.S. dollar will shift the U.S. Aggregate Demand curve to the _____ and _____ output demanded.

left; decrease

Generally, which group of people has the highest marginal propensity to consume?

low income people

The short-run aggregate supply curve is positively sloped because:

many input prices are slow to change in the short run

If aggregate expenditures equals $6,200 and aggregate income equals $5,800, businesses will produce:

more, raising both employment and income.

If the British Pound Sterling appreciates against the U.S. dollar, England buys ______ U.S. goods, causing the U.S. aggregate demand curve to shift to the ______.

more; right

The reason business investment is sensitive to interest rates is that:

most funds used for investment are borrowed, so firms incur an interest charge.

Which of the following is NOT a determinant of investment?

past stock and bond prices

In the Keynesian aggregate expenditure model, prices are assumed to be fixed because:

resources are underutilized.

Cost-push inflation occurs when:

rising resource costs reduce short-run aggregate supply.

Consumer Spending is:

spending by individuals and households on both durable and nondurable goods.

Which of the following is NOT a reason the Aggregate Demand curve is negatively sloped?

substitution effect

Investment spending:

tends to be volatile.

One implication of a straight-line aggregate expenditure curve is that:

the marginal propensity to consume is constant.

Aggregate expenditures are equal to:

the total of consumption plus investment plus government expenditures plus exports minus imports.

A depression economy has considerable slack, therefore:

unemployment is high.

When consumer confidence falls in an economy, _____ increase in an economy and this amount is _____ by the multiplier.

withdrawals; enhanced

If your income is $35,000 and the average propensity to save is 0.46, what is consumption?

$625

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

$900