ECON CHAPTER 10

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

The consumption schedule 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

The increase in income that results from an increase in investment spending would be greater the: A. smaller the MPS. B. smaller the APC. C. larger the MPS. D. smaller the MPC.

A

The multiplier shows the relationship between changes in a component of spending, say, investment, and the consequent changes in real income and output. A. true B. false

A

Which of the following will not cause the consumption schedule to shift? A. a sharp increase in the amount of wealth held by households B. a change in consumer incomes C. the expectation of a recession D. a growing expectation that consumer durables will be in short supply

B

(Advanced analysis) Answer the next question(s) on the basis of the following consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. Refer to the above data. At an $800 level of disposable income, the level of saving is: A. $180. B. $740. C. $60. D. $18.

C

As aggregate income decreases, the APC: A. and APS will both increase. B. will decrease, but the APS will increase. C. will increase, but the APS will decrease. D. and APS will both decrease.

C

Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by: A. $3 billion. B. $2/3 billion. C. $6 billion. D. $2 billion.

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

The multiplier is useful in determining the: A. full-employment unemployment rate. B. level of business inventories. C. rate of inflation. D. change in GDP resulting from a change in spending.

D

The saving schedule 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

Investment is highly stable; it rarely changes. A. true B. false

B

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

C

The MPC for an economy is: A. the slope of the consumption schedule or line. B. the slope of the savings schedule or line. C. 1 divided by the slope of the consumption schedule or line. D. 1 divided by the slope of the savings schedule or line.

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

A specific investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i. A. true B. false

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

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

If Trent's MPC is .80, this means that he will: A. spend eight-tenths of any increase in his disposable income. B. spend eight-tenths of any level of disposable income. C. break even when his disposable income is $8,000. D. save two-tenths of any level of disposable income.

A

If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will: A. increase by $10 billion. B. increase by $2.10 billion. C. decrease by $4.29 billion. D. increase by $4.29 billion.

A

If the consumption schedule is linear, then the: A. saving schedule will also be linear. B. MPS will decline as income rises. C. MPC will decline as income rises. D. APC will be constant at all levels of income.

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

A

The wealth effect is shown graphically as a: A. shift of the consumption schedule. B. movement along an existing consumption schedule. C. shift of the investment schedule. D. movement along an existing investment schedule.

A

Which of the following is correct? A. APC + APS = 1. B. APC + MPS = 1. C. APS + MPC = 1. D. APS + MPS = 1.

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 the Hennige family's marginal propensity to consume is 0.70, then it will necessarily consume seven-tenths of its total income. A. true B. false

B

If the MPC is constant at various levels of income, then the APC must also be constant at all of those income levels. A. true B. false

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

One can determine the amount of any level of total income that is consumed by: A. multiplying total income by the slope of the consumption schedule. B. multiplying total income by the APC. C. subtracting the MPS from total income. D. multiplying total income by the MPC.

B

The APC is calculated as: A. change in consumption / change in income. B. consumption / income. C. change in income / change in consumption. D. income / consumption.

B

The MPC can be defined as that fraction of a: A. change in income that is not spent. B. change in income that is spent. C. given total income that is not consumed. D. given total income that is consumed.

B

The average propensity to consume is defined as income divided by consumption. A. true B. false

B

The consumption schedule 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 aggregate income.

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 multiplier applies to: A. investment but not to net exports or government spending. B. investment, net exports, and government spending. C. increases in spending but not to decreases in spending. D. spending by the private sector but not by the public sector.

B

The multiplier effect: A. reduces the MPC. B. magnifies changes in spending into larger changes in output and income. C. promotes stability of the general price level. D. lessens upswings and downswings in business activity.

B

The multiplier is equal to the reciprocal of the MPC. A. true B. false

B

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: A. save is three-fifths. B. consume is one-half. C. consume is three-fifths. D. consume is one-sixth.

C

If a consumption schedule shifts upward, this necessarily means that the: A. MPC has increased. B. MPS has decreased. C. APC is now higher at each level of disposable income. D. APC is now lower at each level of disposable 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. an increase in the equilibrium GDP.

C

If the MPC is .6, the multiplier will be: A. 4.0. B. 6.0. C. 2.5. D. 1.67.

C

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

C

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when: A. r falls. B. i is greater than r. C. r is greater than i. D. i rises.

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

Other things equal, the real interest rate and the level of investment are: A. related only when saving equals planned investment. B. unrelated. C. inversely related. D. directly related.

C

The average propensity to consume indicates the: A. amount by which income exceeds consumption. B. relationship between a change in saving and the consequent change in consumption. C. percentage of total income that will be consumed. D. percentage of a change in income that will be consumed.

C

The consumption schedule is such that: A. both the APC and the MPC increase as income rises. B. the APC is constant and the MPC declines as income rises. C. the MPC is constant and the APC declines as income rises. D. the MPC and APC must be equal at all levels of income.

C

The investment demand slopes downward and to the right because lower real interest rates: A. expand consumer borrowing, making investments more profitable. B. boost expected rates of returns on investment. C. enable more investment projects to be undertaken profitably. D. create tax incentives to invest.

C

The multiplier effect means that: A. consumption is typically several times as large as saving. B. a change in consumption can cause a larger increase in investment. C. an increase in investment can cause GDP to change by a larger amount. D. a decline in the MPC can cause GDP to rise by several times that amount.

C

The multiplier is defined as: A. 1-MPS. B. change in GDP × initial change in spending. C. change in GDP/initial change in spending. D. change in GDP - initial change in spending.

C

An upward shift of the saving schedule suggests: A. nothing with respect to changes in the APC and APS. B. that the APC and APS have both decreased at each GDP level. C. that the APC and APS have both increased at each GDP level. D. that the APC has decreased and the APS has increased at each GDP level.

D

At the point where the consumption schedule intersects the 45-degree line: A. the MPC equals 1. B. the APC is zero. C. saving equals income. D. saving is zero.

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

The APC can be defined as the fraction of a: A. change in income that is not spent. B. change in income that is spent. C. specific level of total income that is not consumed. D. specific level of total income that is consumed.

D

The consumption schedule shows: A. that the MPC increases in proportion to GDP. B. that households consume more when interest rates are low. C. that consumption depends primarily on the level of business investment. D. the amounts households intend to consume at various possible levels of aggregate income.

D

(Advanced analysis) Answer the next question(s) on the basis of the following consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. Refer to the above data. The MPC is: A. .45. B. .20. C. .50. D. .90.

D

If the MPC is .8 and disposable income is $200, then: A. consumption and saving cannot be determined from the information given. B. saving will be $20. C. personal consumption expenditures will be $80. D. saving will be $40.

A

If the MPS is 1, the multiplier will be 1. A. true B. false

A

The multiplier: A. occurs only in response to a change in the level of investment spending. B. can be found by taking the reciprocal of the MPS. C. occurs only when intended investment increases as GDP increases. D. is measured by the slope of the saving schedule.

B

The numerical value of the multiplier will be smaller the: A. larger the average propensity to consume. B. larger the slope of the saving schedule. C. larger the slope of the consumption schedule. D. smaller the slope of the saving schedule.

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

The multiplier: A. varies directly with the slope of the investment demand schedule. B. is unrelated to the slope of the saving schedule. C. will be greater, the smaller is the slope of the saving schedule. D. will be greater, the steeper is the slope of the saving schedule.

C