ECON chapter 8

If disposable income increases by $400 billion and consumption increases by $300 billion, the MPC equals

.75

If income in Austria decreases by 30 million euros and consumption decreases by 24 euros, then the MPC equals

.80

The nation's disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion. Therefore, the MPC equals

.80

If DI falls by $100 billion, and C falls by $90 billion, the slope of the consumption is

.90

The slope of the scatter diagram representing the relationship between consumption and disposable income in the United States is approximately

.90

Given the scatter diagram in Figure 8-1, what is the MPC (your best estimate)?

2/3

Based on the scatter diagram in Figure 8-1, approximately how much will consumption increase after a permanent tax cut of $400 billion? ______ billion

250

If the MPC is .80, then a change in disposable income of $60 billion will lead to an initial change in consumption of ____ billion

48

Based on the scatter diagram in Figure 8-1, if real disposable income is $800 billion, the consumption spending would be approximately _______ billion

540

Assume that consumption in the United States is $9,000 billion in 2009. If the MPC is 0.8 and disposable income increases by $1,000 billion in 2010, then the level of consumption in 2010 will be

9800 billion

Aggregate demand is the sum of

C + I + G + (X-IM)

If a U.S. citizen buys a car produced in Germany, this transaction will add to

German aggregate demand

Historical data representing consumption and disposable income reveals that during the 1930s, U.S. saving was at a high level. U.S. citizens increased saving during World War II. there is no systematic relationship between the two. consumption rises faster than disposable income during recessions.

U.S. citizens increased saving during world war II

Which of the following will most likely cause a shift in the consumption function? a change in consumer confidence a change in national output a change in real GDP a change in disposable income

a change in consumer confidence

Which of the following will most likely cause movement along the consumption function? a change in disposable income a change in interest rates a change in tastes a change in consumers' expectations

a change in disposable income

Pat Robertson, a TV evangelist and former Republican Party candidate for president, once said that "debt is an affront to God," so good Christians should not spend beyond their incomes. Indeed, Robertson wants Christians to save more. If more Americans, Christians as well as others, took his message seriously, how would we represent the result using a Keynesian macroeconomic model? a downward movement along the consumption function. an upward movement along the consumption function. a downward shift of the consumption function. an upward shift of the consumption function.

a downward shift of the consumption function

Which of the following is an example of wealth? a yearly salary of $40,000 a mutual fund balance of $1,000 rental payments of $3,000 per month stock dividends of $500 per quarter

a mutual fund balance of $1,000

Which of the following would be most likely to shift the consumption function downward? a stock market crash a price level decrease increased corporate profits a stock market boom

a stock market crash

Which of the following would lead you to predict an upward shift in the consumption function? a decrease in the value of real wealth a decrease in disposable income an increase in the value of real wealth an increase in the price level

an increase in the value of real wealth

The "investment" component of aggregate demand will include all of the following except (a. expenditures of business firms on new plants. b. expenditures of business firms on new equipment. c. resales of existing physical assets. d. household spending on new homes)

c (resales)

Given the scatter diagram in Figure 8-1, how much will consumption decrease if the price level rises by 5 percent? $50 billion $100 billion $200 billion cannot be determined

cannot be determined

The marginal propensity to consume (MPC) is calculated by which formula? MPC=

change in C divided by change in DI

A movement from one point to an another point on the same consumption function could be caused due to

changes in disposable income

Why does an increase in the price level tend to cause the consumption function to shift downward? An increase in price level ______

decreases the value of fixed money assets

A once-and-for-all jump in the price level would initially cause a(n)

downward shift in the consumption function

National income is

equal to the money value of national output

In economic analysis, which of the following is considered an injection? saving taxes imports exports

exports

The net export component of aggregate demand is defined as U.S.

exports minus U.S. imports

Historical data depicted on a scatter diagram show that consumer spending and disposable income

generally move together

If Kobe, an NBA star athlete, earns $10 million per year but has no money in the bank, he has a _____ income and _____ wealth

high/ low

In the circular flow model, which of the following is considered a leakage? investment spending business spending household saving total exports

household saving (because it decreases domestic purchases and goods)

If real disposable income is $300 billion and real consumer expenditures are $250 billion, it can be assumed that the government is spending the difference. the difference is being invested. households are saving the difference. transfer payments make up the difference.

households are saving the difference

Which of the following is the injection into the circular flow model? Money deposited in a savings account. Income earned through exports. Goods imported from abroad. Taxes paid by the individuals.

income earned through exports

Households can finance their consumer spending from current _____ and current ______

income/ wealth

In 1963, government economists assumed that the MPC for the United States was approximately 0.90. If taxes were cut by $9 billion, then consumer expenditures would initially be expected to

increase by 8.1 billion

In Macronesia, the MPC is approximately .80. If disposable income changes from 1,000 billion pukas to 1,500 billion pukas, then consumption will change by a(n) ____ of ____ billion pukas

increase/ 400

A movement upward along the consumption function can be caused only by a(n) increase/ decrease in DI/ price level

increase/ DI

For each $1 of a tax cut, economists expect consumption to _____ by ______

increase/ less than 1

A decrease in the price level will most likely have what effect on the consumption function?

it will shift upward

Which of the following is considered to be an investment in economists' point of view? (Serena buys bonds issued by Citibank. John purchases a new house. Venus invests hundred thousand dollars in Bear Stearns stock. Allen sells the old truck he used for transporting goods)

john purchases a new house

A decrease in disposable income will lead to an upward movement along the consumption function. lead to a downward movement along the consumption function. shift the consumption function upward. shift the consumption function downward.

lead to a downward movement along the consumption function

anything that decreases domestic purchases and goods

leakage

The numerical value of the MPC is typically ______ 1

less than

If the price level increases, we would expect consumers to raise their consumption functions. move downward along their consumption functions. lower their consumption functions. move upward along their consumption functions.

lower their consumption functions

If you fit a line through a scatter diagram of points that represent coordinates of consumer spending and disposable income, the slope of this line will equal the

marginal propensity to consume

To predict the effects of a tax cut on consumption spending, economists must have some estimate of the

marginal propensity to consume

Because of recent corporate downsizing, Chuck loses his job. The most likely effect on his consumption function is a(n) movement downward along the function. shift upward of the function. shift downward of the function. increase in consumption expenditures.

movement downward along the function

Melissa purchases shares in a government bond mutual fund. Is this included in the aggregate demand component "Investment"?

no (never included)

The federal government's principal tool in altering consumer spending is changing

personal income taxes

The difference between disposable income and consumption spending is

personal saving

"Men are disposed, as a rule, and on the average, to increase their consumption as their income increases, but not by as much as the increase in their incomes." Which of the following is consistent with this statement by J.M. Keynes? The slope of the consumption function is __________

positive and less than one

Consumption functions would shift downward if disposable incomes fall. disposable incomes rise. price levels fall. price levels rise.

price levels rise

When aggregate demand decreases rapidly, the economy is likely to experience

recession

Aggregate demand is a ____ rather than a ____.

schedule/ fixed number

If you produce a graph with consumption spending on the vertical axis and disposable income on the horizontal axis, the relation between consumption and income will be inverse. be transcendental. shift unpredictably. be direct.

shift unpredictably

If personal taxes are increased by $10 billion, we can expect that consumers will reduce

spending by less than 10 billion

The circular flow diagram is best described as a(n)model that clarifies the relationship between _______ and _______

spending/ income

Economists expect the relationship between consumption and disposable income to be

stable

The marginal propensity to consume is

the CHANGE in consumption divided by the CHANGE in disposable income

The difference between national income and disposable income is

the amount of taxes collected

If an economist wants to make a prediction about the effects of a change in disposable income on the change in consumption spending based on historical data, she must assume that (the future will closely resemble the past. consumption and disposable income will be negatively related. the consumption function will have a downward slope. as disposable income increases, consumer spending will remain constant)

the future will closely resemble the past

Which of the following would be counted as investment in the national income accounts? a. the purchase of a newly issued stock b. the purchase of a newly built apartment house c. the purchase of a newly minted coin d. the payment of tuition at a private college

the purchase of a newly built house

Why is it true that domestic product and national income must be equal?

the value of final product must equal the sum of resource income that produced it

Most older persons regularly spend more than their current disposable income. How is this possible? They receive government transfer payments. They work to supplement their retirement income. They borrow and increase their debt levels. They withdraw funds from accumulated wealth.

they withdraw funds from accumulated wealth

Consumer spending represents about what fraction of total spending in the economy?

two- thirds

One of the effects of a change in disposable income could not be a(n) movement up along the consumption function. movement down along the consumption function. change in the amount of consumption expenditures. upward shift of the consumption function.

upward shift

Price level changes have their greatest effect on consumers'

wealth

Do economists know the value of the MPC for most economies? Yes, with a high level of precision. Yes, with a certainty level of four decimal places. No, it is impossible to determine a national MPC. Yes, but with some level of uncertainty.

yes but with some level of uncertainty

The Marginal Propensity to Consume (MPC) is defined as the change in

consumption over the change in disposable income

If the MPC increases in value, what will happen to the slope of the consumption function? The slope will_____ and the consumption function will become ______

increase/ steeper

Government spending is an injection in the sense that it

increases the amount of total spending

According to the relationship represented by the consumption function, governments can indirectly decrease consumption spending by

increasing taxes

In the circular flow model, which of the following is an injection? investment spending government taxes total exports imports

investment spending

When saving leaks out of the circular flow of income and spending, total income necessarily falls. it leaks out of the financial system. it flows to borrowers. it increases the size of the spending flow.

it flows to borrowers

If the stock market falls by 25 percent next year and remains down, what is most likely to happen to the consumption function? It will shift upward. It will shift downward. It will not shift, but people will move downward along the consumption function. It will not shift, but people will move upward along the consumption function.

it will shift downward

After years of hard work in the field of macroeconomics, you win the Nobel Prize in economics (currently about $1.5 million). What is the most likely effect of this prize on your consumption function? It will shift downward temporarily. It will shift upward temporarily. It will shift downward permanently. It will shift upward permanently. none of the above

it will shift upward permanently

On a graph with consumption on the vertical axis and disposable income on the horizontal axis, the slope of the line is

less than one

Disposable income can be defined as national product

minus taxes plus transfers

In which of the following years was a tax cut ineffective in stimulating aggregate demand?

1975

In Figure 8-2, which of the following moves can be explained by a decrease in the prices of stock on the NASDAQ?

A to C (price level shifts the graph, not movement along)

In Figure 8-2, which of the following moves can be explained by a decrease in the price level?

A to D (lower price level--> more spending)

In Figure 8-2, which of the following moves can be explained by an increase in government transfer payments?

A to E (gov. payments= more DI= more consumption= movement ALONG graph)

In Figure 8-2, which of the following moves can be explained by a tax cut?

A to E (tax cut mean more spending, which moves ALONG graph)

In Figure 8-2, which of the following moves can be explained by a decrease in disposable income?

E to B

The relationship between consumer spending and disposable income is called the ______ function

consumption

Which of the following should be subtracted while calculating aggregate demand of the U.S.? Pakistan's purchase of F-16s from the U.S. Computers imported by China from the U.S. Memorabilia purchases in the U.S. by a foreign tourist. A U.S. firm's purchase of German machinery.

a u.s. firm's purchase of german machinery

Which of the following will most likely have the greatest effect on an individual's consumption function? winning a small amount in the lottery a one-time tuition grant a week of high overtime pay an inheritance paying a modest annual dividend

a week of high overtime pay

Aggregate demand is defined as the total spending a. of all consumers, business firms, government agencies, and foreigners on final goods and services produced in the United States. b. by all consumers, business firms, government agencies, and foreigners in the United States. c. consumers, businesses, government agencies, and foreigners wish to make in one year. d. of consumers, businesses, and government agencies on final output.

a.

To get a complete measure of the total spending on U.S.-produced final goods and services, one must adjust aggregate demand by adding imports and subtracting exports. adding imports that are purchased by U.S. consumers. adding exports and subtracting imports. subtracting exports sold to foreigners.

adding exports and subtracting imports

The total amount spent on final goods and services in the U.S. in 2009 was approximately ten trillion dollars. This total spending is referred to as

aggregate demand

Aggregate demand is the total demand for

all final goods and services

Governments can affect the level of aggregate demand in a direct way by changing

government spending

Suppose the stock market rises, causing a rapid increase in consumers' wealth. This would lead to

an upward shift of the consumption function

Which of the following would be added to U.S. national income? a. an American consumer buying French wine b. an American business selling aircraft to British Airways c. a Swedish firm selling mobile phones to Americans d. a French firm buying a Swedish cellular phone

b.

Which of the following is a transfer payment? a. Work-study students receive wages transferred from the university budget. b. A company pays the moving expenses for a transferred employee. c. A student transfers to another college and receives a tuition rebate. d. A student receives a tuition grant from the federal government.

c.

The largest component of aggregate demand is

consumer spending

Imports are a leakage in the sense that the international financial system is unstable. consumers buy foreign output of goods and services. foreigners earn less than U.S. workers. a trade deficit increases aggregate demand.

consumers buy foreign output of goods and services

Saving is a leakage in the sense that

consumers spend less than their total income

The relationship between consumption and disposable income is such that as consumption rises, disposable income falls. disposable income rises, consumption rises. disposable income rises, consumption falls. disposable income rises, saving falls.

disposable income rises, consumption rises

A sudden decrease in consumers' wealth-resulting, for example, from a stock market crash-would initially cause a(n)

downward shift of the consumption function