Basic Macroeconomic Relationships

A decline in the real interest rate will: A. increase the amount of investment spending. B. shift the investment schedule downward. C. shift the investment demand curve to the right. D. shift the investment demand curve to the left.

A

A high rate of inflation is likely to cause a: A. high nominal interest rate. B. low nominal interest rate. C. low rate of growth of nominal GDP. D. decrease in nominal wages.

A

As disposable income increases, consumption: A. and saving both increase. B. and saving both decrease. C. decreases and saving increases. D. increases and saving decreases.

A

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal: A. investment will take place until i and r are equal. B. investment will take place until r exceeds i by the greatest amount. C. r will rise as more investment is undertaken. D. i will fall as more investment is undertaken.

A

Investment spending in the United States tends to be unstable because: A. profits are highly variable. B. the price level fluctuates rapidly. C. investment spending is affected by interest rates. D. capital wears out quickly and must be replaced often.

A

The consumption forecast directly relates: A. consumption to the level of disposable income. B. saving to the level of disposable income. C. disposable income to domestic income. D. consumption to saving.

A

Which of the following would increase investment? A. a lower interest rate B. a higher interest rate C. lower expected returns on investment D. higher expected returns on investment

A

Other things equal, if the real interest rate falls and business taxes rise: A. investment will rise until it is equal to saving. B. we will be uncertain as to the resulting change in investment. C. we can be certain that investment will rise. D. we can be certain that investment will fall.

B

The investment demand curve suggests: A. that changes in the real interest rate will not affect the amount invested. B. there is an inverse relationship between the real rate of interest and the level of investment spending. C. that an increase in business taxes will tend to stimulate investment spending. D. there is a direct relationship between the real rate of interest and the level of investment spending.

B

The most important determinant of consumption and saving is the: A. level of bank credit. B. level of income. C. interest rate. D. price level.

B

The real interest rate is: A. the percentage increase in money that the lender receives on a loan. B. the percentage increase in purchasing power that the lender receives on a loan. C. also called the after-tax interest rate. D. usually higher than the nominal interest rate.

B

Which of the following would shift the investment demand curve for the worst? A. a lower interest rate B. lower expected rates of return on investment C. a higher interest rate D. higher expected rates of return on investment

B

Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of: A. an increase in disposable income. B. an increase in household wealth. C. an increase in personal taxes. D. the expectation of a recession.

C

Capital goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending. A. nondurable; instability B. nondurable; stability C. durable; instability D. durable; stability

C

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is: A. 18 percent. B. 24 percent. C. 12 percent. D. 6 percent.

C

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal: A. more investment will be forthcoming when i exceeds r. B. less investment will be forthcoming when r rises. C. r will fall as more investment is undertaken. D. r will exceed i at all possible levels of investment.

C

The saving schedule is such that as aggregate income increases by a certain amount saving: A. increases by the same amount as the increase in income. B. does not change. C. increases, but by a smaller amount. D. increases by an even larger amount.

C

If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is: A. 2 percent. B. zero percent. C. 10 percent. D. 22 percent.

D

In annual percentage terms, investment spending in the United States is: A. less variable than real GDP. B. less variable than consumption spending. C. less variable than the price level. D. more variable than real GDP.

D

Investment spending in the United States tends to be unstable because: A. expected profits are highly variable. B. capital goods are durable. C. innovation occurs at an irregular pace. D. all of these contribute to the instability.

D

Given the expected rate of return on all possible investment opportunities in the economy: A. an increase in the real rate of interest will reduce the level of investment. B. a decrease in the real rate of interest will reduce the level of investment. C. a change in the real interest rate will have no impact on the level of investment. D. an increase in the real interest rate will increase the level of investment.

A

The greater is the marginal propensity to consume, the: A. smaller is the marginal propensity to save. B. higher is the interest rate. C. smaller is the average propensity to consume. D. lower is the price level.

A

The immediate determinants of investment spending are the: A. expected rate of return on capital goods and the real interest rate. B. level of saving and the real interest rate. C. marginal propensity to consume and the real interest rate. D. interest rate and the expected price level.

A

The investment demand curve will shift to the lower level as a result of: A. an increase in the excess production capacity available in industry. B. a decrease in business taxes. C. increased business optimism with respect to future economic conditions. D. a decrease in labor costs.

A

The relationship between the real interest rate and investment can be shown by the: A. investment demand schedule. B. consumption of fixed capital schedule. C. saving schedule. D. aggregate supply curve.

A

When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift: A. both the consumption and saving schedules downward. B. both the consumption and saving schedules upward. C. the consumption schedule upward and the saving schedule downward. D. the consumption schedule downward and the saving schedule upward.

A

Dissaving means: A. the same thing as disinvesting. B. that households are spending more than their current incomes. C. that saving and investment are equal. D. that disposable income is less than zero.

B

If a disposable income is $200 and the consumption is $205, then: A. the marginal propensity to save is 2½ percent. B. dissaving is $5. C. the average propensity to save is .20. D. the average propensity to consume is .80.

B

If business taxes are reduced and the real interest rate increases: A. consumption and saving will necessarily increase. B. the level of investment spending might either increase or decrease. C. the level of investment spending will necessarily increase. D. the level of investment spending will necessarily decrease.

B

If the marginal propensity to consume is .9, then the marginal propensity to save must be: A. 1. B. .1. C. 1.1. D. .9.

B

In contrast to investment, consumption is: A. relatively unstable. B. relatively stable. C. measurable. D. unmeasurable.

B

The consumption forecast shows: A. a direct relationship between aggregate consumption and accumulated wealth. B. a direct relationship between aggregate consumption and aggregate income. C. an inverse relationship between aggregate consumption and accumulated financial wealth. D. an inverse relationship between aggregate consumption and the price level.

B

The investment demand curve portrays an inverse (negative) relationship between: A. investment and real GDP. B. the real interest rate and investment. C. the nominal interest rate and investment. D. the price level and investment.

B

Which of the following will not tend to shift the consumption forecast upward? A. a currently small stock of durable goods in the possession of consumers B. the expectation of a future decline in the consumer price index C. a currently low level of household debt D. the expectation of future shortages of essential consumer goods

B

Which one of the following will cause a movement up along an economy's saving schedule? A. an increase in household borrowing B. an increase in disposable income C. an increase in stock prices D. an increase in interest rates

B

A decline in disposable income: A. increases consumption by moving upward along a specific consumption schedule. B. decreases consumption because it shifts the consumption schedule downward. C. decreases consumption by moving downward along a specific consumption schedule. D. increases consumption because it shifts the consumption schedule upward.

C

Dissaving occurs where: A. income exceeds consumption. B. saving exceeds consumption. C. consumption exceeds income. D. saving exceeds income.

C

If for some reason households become increasingly thrifty, we could show this by: A. a downshift of the saving schedule. B. an upward shift of the consumption schedule. C. an upward shift of the saving schedule. D. a movement down along a stable consumption function.

C

If the consumption forecast shifts upward and the shift was not caused by a tax change, the saving forecast: A. will not shift. B. may shift either upward or downward. C. will shift downward. D. will also shift upward.

C

In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the: A. Keynes effect. B. interest-rate effect. C. wealth effect. D. multiplier effect.

C

The consumption forecast is drawn on the assumption that as income increases, consumption will: A. be unaffected. B. increase absolutely, but remain constant as a percentage of income. C. increase absolutely, but decline as a percentage of income. D. increase both absolutely and as a percentage of income.

C

The investment demand curve will shift to the higher level as a result of: A. an increase in the excess production capacity available in industry. B. an increase in business taxes. C. technological progress. D. an increase in the acquisition and maintenance cost of capital goods.

C

The relationship between consumption and disposable income is such that: A. an inverse and stable relationship exists between consumption and income. B. a direct, but very volatile, relationship exists between consumption and income. C. a direct and relatively stable relationship exists between consumption and income. D. the two are usually equal.

C

When we draw an investment demand curve we can hold constant all of the following except: A. the expected rate of return on the investment. B. business taxes. C. the interest rate. D. the present stock of capital goods.

C

. The saving forecast is drawn on the assumption that as income increases: A. saving will decline absolutely and as a percentage of income. B. saving will increase absolutely, but remain constant as a percentage of income. C. saving will increase absolutely, but decline as a percentage of income. D. saving will increase absolutely and as a percentage of income.

D

The most important determinant of consumer spending is: A. the level of household borrowing. B. consumer expectations. C. the stock of wealth. D. the level of income.

D

Which one of the following will cause a movement down along an economy's consumption forecast? A. an increase in stock prices B. a decrease in stock prices C. an increase in consumer indebtedness D. a decrease in disposable income

D