Chapter 28 Economics

6. The size of the MPC is assumed to be: A. less than zero. B. greater than one. C. greater than zero but less than one. D. two or more.

greater than zero but less than one.

4. The consumption schedule 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.

increase absolutely but decline as a percentage of income.

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

APC + APS = 1.

15. 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.

and saving both increase.

14. Refer to the figure. The consumption schedule indicates that: A. consumers will maximize their satisfaction where the consumption schedule and 45 line intersect. B. up to a point consumption exceeds income but then falls below income. C. the MPC falls as income increases. D. households consume as much as they earn.

up to a point consumption exceeds income but then falls below income.

19. 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.

.1.

13. With a marginal propensity to save of .4, the marginal propensity to consume will be: A. 1.0 minus .4. B. .4 minus 1.0. C. the reciprocal of the MPS. D. .4.

1.0 minus .4.

12. The multiplier is: A. 1/MPC. B. 1/(1 + MPC). C. 1/MPS. D. 1/(1 - MPS).

1/MPS.

30. If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is: A. 4. B. 5. C. 3.33. D. 2.5.

5.

20. 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.

An increase in disposable income.

16. Refer to the given diagram, which shows consumption schedules for economies A and B. We can say that the: A. MPC is greater in B than in A. B. APC at any given income level is greater in B than in A. C. MPS is smaller in B than in A. D. MPC is greater in A than in B.

MPC is greater in A than in B.

2. The 45-degree line on a graph relating consumption and income shows: A. all the points where the MPC is constant. B. all the points at which saving and income are equal. C. all the points at which consumption and income are equal. D. the amounts households will plan to save at each possible level of income.

all the points at which consumption and income are equal.

23. 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.

an increase in personal taxes.

22. 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.

an upward shift of the saving schedule.

1. 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.

change in income that is spent.

28. If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase: A. GDP by $120 billion. B. GDP by $20 billion. C. saving by $25 billion. D. consumption by $80 billion.

consumption by $80 billion.

3. 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.

consumption/income.

25. Refer to the diagram. Consumption equals disposable income when: A. disposable income is B. B. disposable income is D. C. CD equals A. D. B equals CD.

disposable income is B.

24. Refer to the given data. At the $200 level of disposable income: A. the marginal propensity to save is 21⁄2 percent. B. dissaving is $5. C. the average propensity to save is .20. D. the average propensity to consume is .80.

dissaving is $5.

18. 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.

saving is zero.

17. 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.

spend eight-tenths of any increase in his disposable income.

8. 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.

that households are spending more than their current incomes.

11. 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.

the percentage increase in purchasing power that the lender receives on a loan.

7. 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.

the slope of the consumption schedule or line.

21. 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.

A change in consumer incomes.

26. 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.

an increase in the real rate of interest will reduce the level of investment.

10. 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.

expected rate of return on capital goods and the real interest rate.

29. The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because: A. the real-world MPS is larger than the MPS in the examples. B. in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes. C. the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts. D. the MPC in the United States is greater than 1.

in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.

9. 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.

investment demand schedule.

27. 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.

r is greater than i.