Chapter 8

the value of consumption at each level of disposable income, all other determinants of consumption unchanged, is shown by the

consumption function

At the point where the consumption function crosses the 45-degree line:

consumption is equal to disposable income, and therefore, savings is zero

Real investment spending is ________________ real personal consumption.

highly volatile compared to

the consumption function will shift upward if real asset and money holdings:

increase, if people expect prices to increase, if interest rates increase, and if taxes increase

If a major technological breakthrough occurs, then the:

investment demand curve will shift upward.

which of the following will shift the consumption function downward ?

legislation making credit herder to obtain

The aggregate expenditures function (AE) is the total spending in an economy at a given:

level of disposable income.

prior to the great depression, classical economist believed that a recessionary downturn would be reversed by:

lower wages and prices

The fraction of each added dollar of disposable income that is used for consumption is called the:

marginal propensity to consume (MPC).

A decrease in the rate of interest, other things being equal, will cause a:

movement downward along the investment demand curve.

An increase in the rate of interest, other things being equal, will cause a(n):

movement upward along the investment demand curve.

Mathematically, the marginal propensity to consume is:

mpc= (change in C)/(change in Yd)

The investment demand curve as a function of various possible interest rates for the entire economy is assumed to be:

negatively sloped.

if people expect prices to fall in the future,

they will increase their current levels of consumption by moving up along their consumption functions

When one observes consumption and investment patterns over time, one finds that:

unlike consumption, which is fairly stable over time, investment is subject to erratic

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) always equals:

1

The relationship between MPC and MPS is:

1-MPC = MPS.

The marginal propensity to save is:

1-MPC.

The Keynesian view stresses that:

All of these: demand creates its own demand there is direct relationship between consumer spending and disposable income when aggregate expenditures (demand) can be forever less that full-employment output therefore prolonged unemployment

Which of the following would cause the investment demand curve to shift?

All of these: Animal spirits (expectations). Technological change. Change in business taxes.

Which of the following would shift the investment demand curve leftward?

An increase in business taxes.

which of the following events would produce an upward shift in the consumption function, other things being equal?

An increase in consumer wealth

which of the following statements is true concerning the consumption function?

E) All of these it slopes upward it slope equals to the MPC It represents the direct (positive relationship between consumption spending and the level of real disposable income if the consumption function lie above the 45-degree line then savings is positive

Which of the following will shift the consumption function upward?

Expectations of inflation

The relationship between aggregate expenditures and disposable income is shown by the:

aggregate expenditures curve.

The sum of consumption and investment is:

aggregate expenditures.

In the Keynesian aggregate expenditure model, the 45-degree line indicates

all income levels at which the planned spending of decision makers equals total output

in the Keynesian consumption-income graph, the vertical distance between the consumption function and the 45-degree line shows the:

amount of savings (or dissavings) at the level of disposable income

The consumption function is drawn on a graph with disposable income on the horizontal axis without including investment. Assume investment is autonomous and is added to the consumption function. The effect is:

an upward adjustment in the vertical intercept.

An increase in the wealth of households, other things remaining the same, can result in _____________________ the consumption function.

an upward shift in

the consumption function has a slope less that one because:

as disposable income increases, consumption expenditures increase by an amount less that the increase in income

The vertical intercept of the consumption function that represents the portion of consumption expenditure not associated with a level of disposable income is known as:

autonomous consumption.

In the short-run Keynesian model, investment is:

autonomous in relation to real GDP.

A shift in the consumption function:

can be caused by a change in the price level.

The marginal propensity to consume measures the ratio of the:

change in consumer spending to a change in disposable income.

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment in the run is :

classical economics

A downward movement along the investment demand curve would be caused by a(n):

decrease in the rate of interest.

in the view of school unemployment:

disappears when everyone who is willing to work at the equilibrium wage finds employment

If the interest rate rises, then firms' investment spending:

falls.

According to economists, which of the following would make prolonged employment impossible?

flexible prices, wages and interest rates

Keynesians:

focus on increasing aggregate demand in order to stimulate the economy

Classical economic theory predicted that in the run the economy would experience:

full employment

the consumption function shows the relationship between:

planned consumption expenditures and disposable income

Classical economists believed that

price flexibility automatically directs market economies to full employment

According to Say's law, there cannot be over production of goods and services because

prices and wages are "sticky" or inflexible in the downward direction

The investment demand curve shows the amount businesses spend for investment good at different possible:

rates of interest.

a movement along the consumption function is caused by change in

real disposable income

consider the Keynesian consumption function. If disposable income is greater than the break-even level of disposable income, then households will be:

saving

economists refer to the simple relationship between consumption and disposable income as:

the consumption function