Chapter 12
ignoring the govt and foreign sectors, equil real GDP is determined by
A) the intersection of the planned saving and planned investment schedules
if business executives become more optimistic about the future, we would expect that
A) the investment curve would shift outward to the right
according to the Keynesian theory, the most important determinant of saving and consumption is
A) the level of real disposable income
a higher level of real GDP will result if
A) total planned real expenditures exceed real GDP
the multiplier helps explain
A) why a rise in government expenditures cause real GDP to rise by more than the amount of the increase in government spending
when you purchase Nautica clothing and tickets to see the Eminem concert
A) you are buying consumption goods
suppose actual investment is greater than planned investment at the current level of output in 2010; given this info, we know that
B) firms' stock of inventories must have increased unexpectedly in 2010
ignoring the govt and foreign sectors, if planned investment spending is $500 billion, planned saving is $800 billion, and real GDP is $13 trillion, then unplanned inventories will
B) increase $300 billion
if the MPC is .75 and there is an increase in planned investment spending of $0.5 trillion, then saving will
B) increase by $0.5 trillion
suppose the econ is initially at equil, in which total planned real expenditures equals real GDP; which of the following will occur if there is an increase in autonomous investment?
B) inventories will decrease immediately and production of goods and services will increase until real GDP catches up with total planned real expenditures
thinking as an economist would, which is true of investment?
B) investment represents spending on capital goods
along the portion of the consumption function that lies above the 45-degree line, saving is
B) negative
your real disposable income is your real income after you have paid
B) net taxes
which one of the following statements is true?
B) over the years, real investment spending has been more volatile then real consumption spending
when the APS is .20, then this means
B) people are spending 80% of their disposable income
for a closed econ with no govt, we know that at every level of GDP actual investment equals
B) planned saving
if the MPS is .5 and net exports fall by $100 million, then
B) real GDP will fall by $200 million
at a level of real disposable income of 0, consumption is $4000. then
B) saving equals -$4000
in the Keynesian model, an increase in real autonomous spending results in a greater increase in real GDP if
B) the MPC is higher
what happens as interest rate falls?
B) the opportunity cost of using retained earnings to finance investment spending declines
when the SRAS curve slopes upward, the actual effect of an increase in real autonomous spending on equil real GDP is smaller than predicted by the multiplier because
B) the price level rises
which of the following would NOT be considered a consumption good?
B) tools used to cut metal on an auto production line
suppose that there is no govt and no international trade; when C+I is less than the level of real GDP,
B) unplanned inventories increase, and real GDP contracts
Keynes thought that the key to determining the broader economic effects of investment fluctuations
C) was to understand the relationship between how much people earn and their willingness to engage in personal consumption spending
suppose there is a $200 billion increase in govt spending; we know that his increase in govt spending will cause which of the following to occur?
C) an increase in equil real GDP and no change in the multiplier
which of the following is negative for the "typical" consumer at some level of real disposable income?
C) average propensity to save (APS)
the planned investment function will shift downward if
C) business expectations become more pessimistic
which of the following is a flow variable?
C) consumption
other things being constant, if the MPS is .1, and private investment spending falls by $100 million, then real GDP
C) decreases by $1 billion
suppose equil for an econ occurs when C+I+G+X=$14 trillion; if the real GDP is $13 trillion, then unplanned inventories are
C) decreasing, and real GDP will expand
expenditures by firms on new machines and buildings that are expected to yield a future stream of income is known as
C) fixed investment
if real disposable income increases, the APS will
C) increase
suppose govt spending decreases by $100 billion and the MPC is .8; given this info, this decrease in govt spending will cause a(n)
C) increase in equil real GDP equal to $500 billion
which of the following would be expected to shift the consumption function up?
C) increases in the nation's population
which of the following is a true statement relative to retained earnings and investment?
C) lower interest rates reduce the opportunity cost of retained earnings, stimulating the use of these funds in investment
the multiplier effect tends to
C) magnify small changes in spending into much larger changes in real GDP
suppose that AD increases along the upward sloping portion of the AS curve; what is the result?
C) nominal GDP increases more than real GDP increases
ignoring the govt and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion; from this info, we know that
C) planned investment is $200 billion more than planned saving
which of the following is NOT a simplifying assumption in the simple Keynesian model?
C) real disposable income equals government purchases of goods and services
based on historical data, which of the following tended to be most variable over time?
C) real investment spending
an increase in the price level causes
C) reduced investment spending, because interest rates increase and a decrease in net exports as the higher prices induce foreigners to buy fewer U.S. goods
at the break-even point for the consumption function
C) saving is zero
if disposable income=$200 billion and the APS=.9, then
C) saving=$180 billion
in the graph for the consumption function, the 45-degree line
C) shows various combos where planned consumption equals real disposable income
a higher price level causes
C) the C+I+G+X curve to shift down
the MPC is unchanged and autonomous consumption expenditures increase, then
C) the break-even disposable income increases
which one of the following is true in an open econ with a govt sector?
C) the equil level of real GDP occurs when total planned real expenditures equal real GDP
aging baby-boomers, predisposed to hearing loss because of years of listening to loud music, are now approaching the age range in which hearing loss starts to become apparent; what effect does this have on investment spending within the hearing aid industry?
C) the investment function of relating planning real investment spending to the interest rate can be expected to shift rightward
as real disposable income increases, we expect the APC
C) to decrease
when the investment is graphed as a function of real GDP
D) it graphs as a horizontal straight line at the level of investment
compared to consumption spending, investment historically has tended to be
D) more variable
consider a closed econ without a govt and without international trade; what will be true when this econ is in equil?
D) planned real consumption spending plus planned real investment spending equals real GDP
consumption expenditures include all of the following EXCEPT
D) purchasing a share of stock
where the consumption function intersects the 45-degree line,
D) saving will be zero
when a family's income is low and it's spending more on consumption than it's receiving in income,
D) some segment of the consumption function lies above the 45-degree line, indicating dissaving
which of the following will NOT lead to a shift in the investment function?
D) the cost of borrowing has just decreased
if the MPS is 1/3, a $100 increase in net exports will
D) increase real GDP by $300
autonomous consumption
D) is measured by the intercept of the consumption function and the Y-axis
suppose MPC is .7 and there is a $1,000 increase in autonomous consumption; given this info, real GDP will increase by
A) $3,333
if you real disposable income goes up by $1000 per week, and your real consumption spending goes up by $800 per week, you have an MPS of
A) .2
if the multiplier in the econ is 3, the MPS must be
A) .33
if the multiplier is 10, then the MPC is
A) .9
the slope of the consumption function is the
A) MPC
which formula is correct?
A) S=Ysubd-C
all of the following would cause the investment function relating investment to the interest rate to shift EXCEPT
A) a change in the real interest rate
the MPC explains how much of the next dollar of disposable income
A) a household will spend
a permanent reduction in net exports leads to
A) a more than proportional decrease in real GDP
according to the Keynesian model, an increase in autonomous investment leads to
A) a more than proportional decrease in real GDP
the following would cause an upward shift in the C+I+G+X curve EXCEPT
A) an increase in disposable income
which one of the following would shift your consumption function in an upward direction?
A) an increase in your wealth
technological progress should lead to
A) an outward (rightward) shift in the investment function
if the MPS increased from .2 to .25, this would cause the multiplier effect to
A) decrease
if the MPC is .75 and govt purchases increase by $200 billion, then
A) equil real GDP will increase by $800 billion
because a decrease in real autonomous spending results in a ______ in the price level, the ultimate effect on real GDP is ______ than predicted by the multiplier
A) fall; smaller
the consumption function shows how much
A) households plan to consume per year at each level of real disposable income
if the AS curve is upward sloping, then an increase in autonomous consumption leads to a(n)
A) increase in AD and a rise in the price level
spending by businesses on things such as machines and buildings which can be used to produce goods and services in the future is
A) investment
the relationship between real consumption spending and real disposable income
A) is direct
if saving equals $200 when real disposable income equals $1,000, the break-even income is
A) less than $1,000
if the APS is .60, then this means
A) people are saving 60% of their disposable income
which of the following is NOT included in the flow of investment spending that is part of total planned expenditures in the econ?
A) purchases of corporate stock
if autonomous investment increase by $200 billion and the MPC is .5, then
A) real GDP will rise by $400 billion
what effect would taxation have on real consumption spending when govt spending is autonomous?
A) taxation reduces real consumption spending
along a linear consumption function
A) the average propensity to consume falls with an increase in income
if an econ saves 20% of any increase in real GDP, then an increase in investment of $2 billion can produce an increase in real GDP of as much as
B) $10 billion
if the APC is 1.0, the MPC is .8, and real disposable income increases by $100, the additional saving is
B) $20
suppose the MPC is .8 and there is a $4,000 increase in planned investment; given this info, real GDP will increase by
B) $20,000
if the marginal propensity to save is .4 and disposable income increases from $1000 to $1500, saving will increase
B) $200
if the APC is initially 1.0, the MPC is .75, and real disposable income increases by $1000, the new value of saving is
B) $250
suppose when real disposable income is $5,000, planned real consumption is $4,000; when real disposable income increases to $6,000, planned real saving increases by $500; the new planned real consumption expenditures is
B) $4,500
if the APC is .8, then the APS is
B) .2
if consumption if $750 when real disposable income is $1000, the average propensity to consume is
B) .75
suppose that when disposable income decreases by $2,000, consumption spending increases by $1,500; given this info, we know that the MPC is
B) .75
suppose that when disposable income increases by $1,000, consumption spending increases by $750; given this info, we know that the marginal propensity to consume (MPC) is
B) .75
if your real disposable income goes up by $1000 per week, and your real consumption spending goes up by $800 per week, you have a MPC of
B) .8
assuming that Ysubd=$20,000 and C=$22,000, we would find that the APC would be equal to
B) 1.1
a permanent reduction in planned real investment spending leads to
B) a more than proportional decrease in real GDP
the planned investment function shows that
B) a negative relationship exists between the level of planned investment and the interest rate
the consumption function shows
B) a positive relationship between disposable income and planned consumption
a lump-sum tax, such as a $1000 tax that every family must pay one time, is
B) an autonomous tax
which of the following would increase the level of planned real investment?
B) an expectation of higher future profits
government purchases
B) are determined by the political process
suppose the econ is at an equil when C+I+G+X=$12 trillion; if the econ is currently at a real national income level of $14 trillion, then total planned real expenditures
B) are less than real GDP, and real GDP will decline
consumption goods
B) are only the goods bought by households for immediate satisfaction
the Keynesian model is based on the idea that
B) both consumption and saving are directly related to disposable income
nonconsumable goods that firms use to make other goods are
B) capital goods
suppose real disposable income increases by $1,000; given this info, we know that
B) consumption will generally increase by less than $1,000
if the multiplier is 10 and income increases by $100, then saving will increase by
C) $10
suppose the MPC is .9 and there is a $3,000 increase in planned investment; given this info, real GDP will increase by
C) $30,000
a decrease in autonomous investment of $100 that occurs when the MPS equals .25 will lead to a decrease in real GDP of
C) $400
suppose that the MPC is .75 and there is an increase in investment spending of $100,000; as a result, equil real GDP would increase by
C) $400,000
suppose the MPC equals .8, an increase in autonomous investment of $100 will lead to an increase in real GDP by
C) $500
at a level of real disposable income of $0, suppose consumption is $2,000; given this info, we know with certainty that saving equals
C) -$2,000
assuming that Ysubd=$20,000 and C=$22,000, we would find that the APS would be equal to
C) -.1
if the multiplier is 4, the MPC must be
C) .75
if the MPC is .9, then the multiplier for a change in autonomous spending will be
C) 10
if an increase of $5 billion in investment is associated with an increase of $25 billion in real GDP, the multiplier is
C) 5
if the level of consumption is $100 billion and disposable income is $125 billion, then the
C) APC=.8 and saving is positive
in equil, real GDP is equal to
C) C+I+G+X
the slope of the saving function is the
C) MPS
an increase in the interest rate results in
C) a greater opportunity cost of investment and so planned investment spending decreases
consumption goods are
D) goods purchased by households to be used immediately
suppose the MPC is .8 and there is a $2,000 increase in autonomous consumption; given this info, real GDP will increase by
D) $10,000
using real GDP on the horizontal axis instead of real disposable income implies that a MPC .75 generates for every additional $100 of real GDP
D) $25 of additional saving and taxes
if the MPC=.8, and planned autonomous investment increases by $80 billion, then equil real GDP will increase by
D) $400 billion
if initial equil real GDP is $400 billion, MPC=.9 and autonomous investment increases $40 billion, equil real GDP will be
D) $800 billion
if the multiplier has a value of 10, then the value of the MPS is
D) .1
if the MPS is .1, then the multiplier will be
D) 10
if the MPC is .8, the multiplier will be
D) 5
if the MPC is .8, the spending multiplier will be
D) 5
suppose that the MPS equals .2; the value of the multiplier would be
D) 5
the average price of a share of stock on the New York Stock Exchange fall by 30%; other things being equal, we would expect
D) a shift down of the consumption function
an increase in planned real investment spending causes
D) a shift of the C+I+G+X curve that causes the AD curve to shift
with reference to the consumption function, the 45-degree line represents
D) all points at which real disposable income is equal to real consumption spending
if society wants AD to increase without changes in the price level, then there must be
D) an increase in autonomous spending and a horizontal SRAS
which of the following would cause a leftward shift in the investment function?
D) an increase in business taxes
if the MPC is .8 and there is a desire to increase real GDP by $500 billion, then
D) an increase in real autonomous spending of $100 billion will generate this change
if firms' unplanned inventories are increasing, then in a closed, private economy,
D) consumers are saving more than businesses anticipated
the break-even point on the consumption function represents the point where
D) consumption equals income
when a household's disposable income falls to zero, what do we expect to happen?
D) consumption will fall to the level of autonomous consumption
if real disposable income increases the APC will
D) decreases
if the MPC equals .75, then
D) for every $100 increase in real GDP, saving increases by $25
the investment function intersects the saving schedule at an interest rate of 8% and a level of investment of $1.2 trillion a year; if the consumption curve intersects the 45-degree reference line at $3 trillion, then
D) the equil level of real GDP is $4.2 trillion
according to Keynes, the primary determinant of a person's saving is NOT
D) the interest rate but the level of the person's real disposable income
a firm will invest in a project if
D) the rate of return of the project is greater than the opportunity cost of the investment
which of the following is a simplifying assumption associated with the short-run Keynesian model of equil real GDP determination?
D) there is no depreciation
if, at some level of output, total planned real expenditures are less than real GDP,
D) unplanned inventories will increase and real GDP will fall
