Chapter 11: Income and Expenditure

A $50 million increase in investment spending will eventually cause equilibrium real GDP to: 1.) decrease by $50 million 2.) increase by less than $50 million 3.) increase by more than $50 million 4.) increase by $50 million

3.) increase by more than $50 million

The Federal Reserve, the central bank of the United States, has been cutting the interest rate to stimulate the recessionary economy. Interest cuts by the Federal Reserve are supposed to: 1.) lower the savings rate in the economy and stop leakages 2.) increase government spending on the economy infrastructure and thus increase GDP through the multiplier process 3.) increase planned investment spending and thus increase GDP via the multiplier 4.) increase cash holding by the general public, thus lowering their dependence on credit

3.) increase planned investment spending and thus increase GDP via the multiplier

Whatever planned aggregate spending exceeds real GDP, unplanned inventory investment is: 1.) unpredictable 2.) zero 3.) negative 4.) positive

3.) negative

The life-cycle hypothesis of consumer spending says that consumers plan their spending: 1.) according to fluctuation in the stock market 2.) based on interest rates 3.) over their lifetime 4.) based only on current disposable income

3.) over their lifetime

An increase in interest rates on business loans will change _________ investment spending. 1.) unplanned 2.) both planned and unplanned 3.) planned 4.) neither planned nor unplanned

3.) planned

Look at the figure Aggregate Expenditures and Real GDP. At a real GDP of $9,000 billion: 1.) planned investment equals actual investment 2.) there will be no unplanned investment 3.) planned investment is less than actual investment 4.) planned investment is greater than actual investment

3.) planned investment is less than actual investment

Look at the figure Aggregate Expenditures I. When real GDP is $700 billion, there will be a _________ in unplanned inventory investment. 1.) $125 million increase 2.) $200 million decline 3.) $200 million increase 4.) $125 million decline

1.) $125 million increase

Look at the figure Consumption and Real GDP. If real GDP is $12 trillion, consumption is ________ trillion. 1.) $7 2.) $5 3.) $9 4.) $11

1.) $7

An increase in the marginal propensity to consume: 1.) increases the multiplier 2.) decreases the multiplier 3.) shifts the autonomous investment line downward 4.) shifts the autonomous investment line upward

1.) increases the multiplier

If planned investment spending increases, the planned aggregate spending line: 1.) shifts up 2.) shifts down 3.) becomes steeper 4.) becomes flatter

1.) shifts up

Look at the table Aggregate Expenditure Curve II. Suppose that the consumption function rises by $100. The equilibrium level of real GDP would rise by: 1.) $100 2.) $250 3.) $200 4.) $50

2.) $250

Real GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Look at the scenario Income-Expenditure Equilibrium. If real GDP is $3,000, how much is unplanned inventory investment? 1.) $600 2.) -$100 3.) 0 4.) $100

2.) -$100

Look at the figure Aggregate Expenditures Curve I. The slope of the aggregate expenditures curve in this figure is: 1.) 45 degrees 2.) 0.5 3.) 0.25 4.) 1.0

2.) 0.5

If disposable income increase by $1,000 and consumer spending increases by $800, then the marginal propensity to consume is: 1.) 1 2.) 0.8 3.) 0.75 4.) 1.25

2.) 0.8

If the marginal propensity to consume is 0.8, the multiplier is: 1.) 1.25 2.) 5 3.) 0.2 4.) 0.8

2.) 5

Look at the table Income and Consumption. When disposable personal income is $400, the level of personal savings is: 1.) -$40 2.) -$20 3.) $20 4.) $0

3.) $20

Suppose that the aggregate consumption function is given by the equation C = 200 + 0.8 YD, where C represents consumption and YD represents disposable income. Look at the scenario Aggregate Consumption Equation. If disposable income increases from $500 to $800, autonomous consumption is: 1.) $440 2.) $240 3.) $200 4.) $0

3.) $200

Look at the table Aggregate Expenditures Curve III. Suppose that the consumption function shifts upward by $100. Equilibrium real GDP will rise by: 1.) $3,200 2.) $100 3.) $400 4.) $800

3.) $400

If the multiplier equals 4, then the marginal propensity to save must be equal to: 1.) 0.75 2.) the marginal propensity to consume 3.) 0.25 4.) 0.5

3.) 0.25

In an economy with no taxes and no imports, disposable income decreases from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the marginal propensity to save is: 1.) 1.125 2.) -0.25 3.) 0.25 4.) 0.75

3.) 0.25

In an economy with no taxes or imports, if the marginal propensity to consume is 0.7, the marginal propensity to save must be: 1.) 0.21 2.) 1.7 3.) 0.3 4.) 0.7

3.) 0.3

Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by C = 500 + 0.80Y, where Y is income. The marginal propensity to consume in Behr is: 1.) 500 2.) 1 3.) 0.80 4.) 0.75

3.) 0.80

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? 1.) C = 0.95 x YD 2.) C = 1.2 x YD 3.) C = $500 + 0.7 x YD 4.) C = $500 + $1,000 x YD

3.) C = $500 + 0.7 x YD

The marginal propensity to consume equals: 1.) income divided by consumption 2.) consumption divided by disposable income 3.) a change in consumption divided by a change in disposable income 4.) a change in income divided by a change in consumption

3.) a change in consumption divided by a change in disposable income

Real GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Look at the scenario Income-Expenditure Equilibrium. Given this income-expenditure equilibrium, firms will tend to: 1.) increase output 2.) hire more people 3.) decrease output 4.) raise prices

3.) decrease output

Look at the figure Consumption and Real GDP. The slope of the consumption function is called the: 1.) marginal consumption increment 2.) average propensity to consume 3.) marginal propensity to consume 4.) marginal propensity to save

3.) marginal propensity to consume

Look at the table Aggregate Expenditures Curve II. The slope of the aggregate expenditures curve is: 1.) 0.5 2.) 0.25 3.) 45 degrees 4.) 0.6

4.) 0.6

The marginal propensity to consumer in the aggregate consumption function is:; 1.) 0.9 2.) 0.5 3.) 0.7 4.) 0.8

4.) 0.8

The planned aggregate spending line has a slope: 1.) less than 0 2.) greater than 1 3.) equal to 1 4.) less than 1

4.) less than 1

If planned investment spending is $2 trillion and inventories decrease by $0.5 trillion, actual investment spending is: 1.) $1.5 trillion 2.) $2 trillion 3.) $2.5 trillion 4.) $1 trillion

1.) $1.5 trillion

If the interest rate rises: 1.) excess capacity will increase 2.) the opportunity cost of investment is greater 3.) more investment projects have a rate of return above that of the interest rate 4.) planned investment spending rises

2.) the opportunity cost of investment is greater

In the equation C = A + MPC x YD, _________ represents autonomous consumption. 1.) A 2.) MPC 3.) C 4.) YD

1.) A

Look at the table Individual and Aggregate Consumption Functions. Which of the following represents Andy's individual consumption function? 1.) C = 150 + 0.8YD 2.) C = 0.95YD 3.) C = 150 + 0.5YD 4.) C = 0.15YD

1.) C = 150 + 0.8YD

Consider a simple economy: MPC=0.75, income=$400 billion, and aggregate consumption spending=$400 billion. Autonomous consumption is: 1.) $300 billion 2.) $100 billion 3.) $200 billion 4.) 0

2.) $100 billion

In an economy with no taxes or imports, if disposable income increases by $1,000 and consumption increases by $600, the marginal propensity to save is: 1.) 2.5 2.) $400 3.) $600 4.) 0.40

4.) 0.40

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your marginal propensity to consume is: 1.) 0.4 2.) 0.2 3.) 0.8 4.) 0.6

4.) 0.6

Income-expenditures equilibrium real GDP is the level of real GDP at which: 1.) autonomous consumption equals planned inventory investment 2.) there is no savings 3.) the unemployment rate is zero 4.) GDP equals planned aggregate spending

4.) GDP equals planned aggregate spending

Look at the table The Economy of Albernia. What is the income-expenditure equilibrium real GDP? 1.) $2,500 billion 2.) $1,000 billion 3.) $1,500 billion 4.) $2,000 billion

1.) $2,500 billion

Suppose that the aggregate consumption function is given by the equation C = 200 + 0.8 x YD, where C represent consumption and YD represents disposable income. Look at the scenario Aggregate Consumption Equation. If disposable income is $500, autonomous consumption is: 1.) $200 2.) $400 3.) $0 4.) $600

1.) $200

If planned aggregate spending rises by $10 billion and the marginal propensity to consume is 0.75, then equilibrium real GDP changes by: 1.) $40 billion 2.) $10 billion 3.) $7.5 billion 4.) $2.5 billion

1.) $40 billion

Suppose that the consumption function is C = $500 + 0.8 x YD, where YD is disposable income. Look at the scenario Consumption Spending. Autonomous consumption is: 1.) $500 2.) 0 3.) four-fifths of disposable income 4.) $1,300 if disposable income is $1,000

1.) $500

Look at the figure Consumption and Disposable Personal Income. When disposable personal income is $1,200 billion, consumption is ________ billion. 1.) $800 2.) $600 3.) $1,200 4.) $2,000

1.) $800

Suppose that the consumption function is C = $500 + 0.8 x YD, where YD is disposable income. Look at the scenario Consumption Spending. If disposable income is $1,000, savings is: 1.) -$300 2.) $1,300 3.) $300 4.) -$500

1.) -$300

Look at the table Individual Consumption Function for Bob. The marginal propensity to consume and autonomous consumption are __________ and __________, respectively, for Bob. 1.) 0.4; $9,000 2.) 0.6; $9,000 3.) 0.6; $10,000 4.) 0.4; $13,000

1.) 0.4; $9,000

If the multiplier is 4, the marginal propensity to consume is: 1.) 0.75 2.) 3 3.) 0.80 4.) 0.25

1.) 0.75

If MPC = 0.9, the multiplier is: 1.) 10 2.) 1 3.) 9 4.) 90

1.) 10

In an economy with no taxes or imports, if disposable income increases by $1,000 and consumption increases by $600, the multiplier is: 1.) 2.5 2.) $600 3.) 0.40 4.) 0.6

1.) 2.5

In an economy with no taxes and no imports, disposable income decreases from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the multiplier is: 1.) 4 2.) 0.25 3.) -4 4.) 1.125

1.) 4

If a store has 10,000 CDs at the start of the period and 15,000 CDs at the end, then its inventory investment during the period was ________ CDs: 1.) 5,000 2.) 1.5 3.) -5,000 4.) 0.67

1.) 5,000

Look at the table Income-Expenditure Equilibrium. If planned investment spending increases by $100, income-expenditure equilibrium occurs at real GDP of: 1.) $2,250 2.) $8,100 3.) $3,600 4.) $4,000

1.) $2,250

Real GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Look at the scenario Income-Expenditure Equilibrium. What is the consumption function? 1.) C = 500 + 0.8 x YD 2.) C = 8,000 + 0.8 x YD 3.) C = 1,700 + 0.2 x YD 4.) C = 8,700 + 0.2 x YD

1.) C = 500 + 0.8 x YD

Look at the table Income-Expenditure Equilibrium. If investment spending deceases in this economy, then the: 1.) aggregate expenditures curve will shift down, decreasing the income-expenditure equilibrium 2.) aggregate expenditures curve will shift up, increasing the income-expenditure equilibrium 3.) economy will move upward along the aggregate expenditures curve, increasing the income-expenditure equilibrium 4.) economy will move downward along the aggregate expenditures curve, decreasing the income-expenditure equilibrium

1.) aggregate expenditures curve will shift down, decreasing the income-expenditure equilibrium

An upward shift in the consumption function can be caused by: 1.) an increase in consumer wealth 2.) a drop in consumer wealth 3.) pessimistic expectations 4.) an increase in disposable personal income

1.) an increase in consumer wealth

An initial change in the desired level of spending by firms, households, or government at a given level of real GDP is a(n): 1.) autonomous change in aggregate spending 2.) endogenous spending 3.) multiplier-induced change in spending 4.) budget surplus

1.) autonomous change in aggregate spending

If other things are equal, expectations of lower disposable income would _________ and shift the consumption function __________. 1.) decrease autonomous consumption; down 2.) increase autonomous consumption; up 3.) increase the marginal propensity to consume; up 4.) decrease the marginal propensity to consume; down

1.) decrease autonomous consumption; down

Look at the table The Aggregate Consumption Function and Planned Aggregate Spending. If expected disposable income decreases in this economy, then the: 1.) economy will move downward along the aggregate expenditures curve 2.) aggregate expenditures curve will shift down 3.) economy will move upward along the aggregate expenditures curve 4.) aggregate expenditures curve will shift up

1.) economy will move downward along the aggregate expenditures curve

Look at the figure Consumption Functions. An economy's consumption function would shift from curve C to curve C' when there is a(n): 1.) increase in expected disposable income 2.) increase in the unemployment rate 3.) decrease in expected GDP growth estimates 4.) drop in wealth

1.) increase in expected disposable income

The marginal propensity to consumer equals the: 1.) ratio of the change in consumer spending to the change in aggregate disposable income 2.) proportion of consumer spending as a function of aggregate disposable income 3.) change in savings divided by the change in aggregate disposable income 4.) change in savings divided by the change in consumer spending

1.) ratio of the change in consumer spending to the change in aggregate disposable income

If the stock market crashes: 1.) the aggregate consumption function will shift down 2.) the aggregate consumption function will shift up 3.) unplanned inventory investment will be negative 4.) GDP will increase

1.) the aggregate consumption function will shift down

If the multiplier is 4 and autonomous government spending increases by $100 billion, real GDP will: 1.) decrease by $400 billion 2.) increase by $100 billion 3.) increase by $400 billion 4.) increase by $25 billion

3.) increase by $400 billion

If real GDP is $1,000 billion and the aggregate expenditure is $850 billion, then the change in inventories will be: 1.) $1,850 million 2.) $150 million 3.) -$1,850 million 4.) -$150 million

2.) $150 million

Suppose that the aggregate consumption function is given by the equation C = 200 + 0.8 YD, where C represents consumption and YD represents disposable income. Look at the scenario Aggregate Consumption Equation. If disposable income increases from $500 to $800, aggregate consumption will increase by: 1.) $200 2.) $240 3.) $0 4.) $440

2.) $240

Suppose that the marginal propensity to consume is 0.8 and investment spending increases by $100 billion. The increase in real GDP is: 1.) $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion 2.) $500 billion, composed of $100 billion in investment and $400 billion in consumption 3.) $100 billion, the same amount as investment spending 4.) $125 billion, composed of $100 billion in investment spending and $25 billion in consumption

2.) $500 billion, composed of $100 billion in investment and $400 billion in consumption

Real GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Look at the scenario Income-Expenditure Equilibrium. How much is planned aggregate spending? 1.) $8,000 2.) $7,100 3.) $700 4.) $6,400

2.) $7,100

In an economy with no taxes and no imports, disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 and $2,100, the multiplier is: 1.) 6 2.) 2.5 3.) 0.40 4.) 0.60

2.) 2.5

If the marginal propensity to save is 0.2, the multiplier is: 1.) 0.2 2.) 5 3.) 0.8 4.) 1.25

2.) 5

Planned investment spending depends on all of the following EXCEPT: 1.) the expected level of real GDP 2.) real GDP 3.) the productive capacity of the economy 4.) the rate of interest

2.) real GDP

The higher the production capacity of the economy: 1.) the higher is actual production 2.) the lower is planned investment spending 3.) the lower is current production 4.) the higher is planned investment spending

2.) the lower is planned investment spending

If the marginal propensity to save decreases from 0.6 to 0.5: 1.) the vertical axis intercept of the consumption function changes from 0.6 to 0.5 2.) the slope of the consumption function increases from 0.4 to 0.5 3.) the horizontal axis intercept of the consumption function changes from 0.4 to 0.5 4.) the slope of the consumption function decreases from 0.6 to 0.5

2.) the slope of the consumption function increases from 0.4 to 0.5

People are likely to save the most __________ according to the life-cycle hypothesis. 1.) in their old age 2.) the older they get 3.) in their peak earnings in years 4.) as they get closer to retirement

3.) in their peak earnings in years

A fall in the market interest rate makes any investment project: 1.) more profitable only if the funds were borrowed 2.) less profitable whether the funds were borrowed or came from retained earnings 3.) more profitable whether the funds were borrowed or came from retained earnings 4.) less profitable if the funds were borrowed and more profitable if it came from retained earnings

3.) more profitable whether the funds were borrowed or came from retained earnings

Look at the figure Aggregate Expenditures Curve I. Suppose that the consumption function in this economy rises by $100. The result would be a shift in the aggregate expenditures curve: 1.) downward by $200 2.) upward by $100 times the multiplier 3.) upward by $100 4.) upward by $200

3.) upward by $100

In a simple economy with no taxes, government spending, exports, or imports, if disposable income increases by $100 and $70 is consumed, _________ is saved. 1.) $170 2.) $100 3.) $70 4.) $30

4.) $30

Look at the table Aggregate Spending. Suppose the economy has no government spending and no foreign trade. With no taxes of transfers, real GDP equals disposable income (YD). If real GDP is $2,500, what is the level of unplanned inventory investment? 1.) $0 2.) $2,700 3.) $200 4.) -$250

4.) -$250

If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume equals: 1.) 9 2.) 1.25 3.) 20 4.) 0.8

4.) 0.8

Suppose that the U.S. economy is in a severe recession. Most households are trying to save more of their income than before. This increase in private savings will lead to: 1.) no change in real GDP, because there is no savings multiplier 2.) an increase in real GDP, as an increase in savings will make people wealthier 3.) an increase in real GDP, as more savings means more funds for business investment 4.) a fall in real GDP, as more savings means people will spend less

4.) a fall in real GDP, as more savings means people will spend less

Rising inventories usually indicate an: 1.) unexpected spurt in sales 2.) economy that grows unexpectedly 3.) inflationary cycle 4.) economy that slows unexpectedly

4.) economy that slows unexpectedly

In the consumption function, an individual household's consumer spending: 1.) is determined by the accelerator principle 2.) is negatively related to its autonomous consumption and its marginal propensity to consumer 3.) is positively related to the interest rate 4.) is positively related to its current disposable income

4.) is positively related to its current disposable income

The changes in the economy of Ft. Meyers, Florida, between 2003 and 2010 provide an example of: 1.) the benefits of government budget surpluses 2.) the risk associated with an agricultural economy 3.) how public assistance programs can stimulate the economy 4.) positive and negative multiplier effects

4.) positive and negative multiplier effects

Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function? 1.) autonomous consumption will increase 2.) the slope will get steeper and autonomous consumption will increase 3.) the function will shift downward 4.) the slop will get steeper

4.) the slop will get steeper

Which of the following will shift the aggregate consumption function UPWARD? 1.) disposable income falls 2.) disposable income rises 3.) consumer expectations turn more pessimistic 4.) the stock market is strong and wealth is rising

4.) the stock market is strong and wealth is rising