Deck 11: Expenditure Multipliers: They Keynesian Model

Question 1

If firms set prices and then keep them fixed for a period of time, their fixed prices imply that

A) the aggregate price level is fixed and that aggregate demand determines the quantity of goods and services sold.
B) the aggregate price level adjusts continuously.
C) prices are set by aggregate demand and supply.
D) the aggregate price level is fixed and that aggregate supply determines the quantity of goods and services sold.

Answer 1

A

Question 2

Disposable income is $6 billion and planned saving is $2 billion. What is the value of planned consumption expenditure?

A) $8 billion
B) $4 billion
C) 0.33
D) 0.67

Answer 2

B

Question 3

The components of aggregate expenditure include
I) imports.
II) consumption.
III) government transfer payments.

A) I, II and III
B) I and II
C) II only
D) II and III

Answer 3

B

Question 4

Disposable income is divided into

A) consumption and taxes.
B) consumption, saving, and taxes.
C) saving and taxes.
D) consumption and saving.

Question 5

In the Keynesian model of aggregate expenditure, real GDP is determined by the

A) price level.
B) level of taxes.
C) level of aggregate supply.
D) level of aggregate demand.

Question 6

In the Keynesian model of aggregate expenditure, we assume that firms will

A) not change prices.
B) lower prices when inventory levels rise.
C) change prices only when inventory levels rise.
D) raise prices when inventory levels fall.

Question 7

The Keynesian model of aggregate expenditure describes the economy in

A) the short run.
B) the long run.
C) only a strong expansion.
D) both the short run and the long run.

Question 8

Disposable income is

A) income plus transfer payments minus consumption expenditure.
B) income minus taxes plus transfer payments.
C) total income divided by the price level.
D) income minus saving.

Question 9

Real GDP

A) is always greater then aggregate income.
B) is equal to aggregate income.
C) might be less than or more than aggregate income depending on consumption.
D) is always less than aggregate income.

Question 10

The Keynesian model of aggregate expenditure assumes that

A) individual firms' prices are fixed but the price level is flexible.
B) both individual firms' prices and the price level are fixed.
C) both individual firms' prices and the price level are flexible.
D) individual firms' prices are flexible but the price level is fixed.

Question 11

Saving equals

A) disposable income minus taxes.
B) disposable income plus consumption expenditure.
C) consumption expenditure minus disposable income.
D) disposable income minus consumption expenditure.

Question 12

Disposable income is equal to

A) aggregate income minus taxes plus government expenditures on goods and services.
B) consumption expenditure minus taxes plus transfer payments.
C) aggregate income minus taxes plus transfer payments.
D) aggregate income plus transfer payments.

Question 13

In the very short run, the components of aggregate planned expenditure that depend on the level of real GDP are

A) planned government expenditures on goods and services and planned imports.
B) planned investment and planned exports.
C) planned wealth and planned imports.
D) planned consumption expenditure and planned imports.

Question 14

The four components of aggregate planned expenditure are

A) the real interest rate, consumption expenditure, investment and government expenditures on goods and services.
B) the real interest rate, disposable income, wealth, and expected future income.
C) consumption expenditure, investment, government expenditures on goods and services, and net exports.
D) consumption expenditure, investment, government expenditures on goods and services, and wealth.

Question 15

An increase in real GDP leads to

A) an increase in aggregate planned expenditure.
B) a decrease aggregate planned expenditure.
C) no change in aggregate planned expenditure.
D) a change in aggregate planned expenditure but whether the change is an increase or a decrease depends on whether nominal GDP increases or decreases.

Question 16

In the very short term, planned investment _ when GDP changes and planned consumption expenditure _ when GDP changes.

A) does not change; changes
B) changes; changes.
C) changes; does not change
D) does not change; does not change

Question 17

A consumption function shows a

A) negative (inverse) relationship between consumption expenditure and saving.
B) positive (direct) relationship between consumption expenditure and price level.
C) positive (direct) relationship between consumption expenditure and disposable income.
D) negative (inverse) relationship between consumption expenditure and disposable income.

Question 18

According to the Keynesian theory, the typical firm

A) lowers its prices when inventories are decreasing.
B) lowers its prices if sales exceed production.
C) does not change its prices immediately when aggregate demand fluctuates.
D) changes its prices frequently in response to fluctuations in aggregate demand.

Question 19

In the very short term, in the Keynesian model, which of the following is fixed and does not change when GDP changes?

A) planned consumption
B) planned investment
C) planned imports
D) All of the above answers are correct

Question 20

Which of the following statements is FALSE?

A) Disposable income - saving = consumption expenditure.
B) Saving = disposable income - consumption expenditure.
C) Consumption expenditure + saving = disposable income.
D) Consumption expenditure = saving - disposable income.

Question 21

There is a movement along the consumption function if there is .

A) an increase in disposable income
B) a decrease in the real interest rate
C) an increase in autonomous consumption
D) an increase in the expected future income

Question 22

The slope of the consumption function is

A) greater than 1.
B) negative.
C) 1.
D) less than 1.

Question 23

If real disposable income increases by $1500, consumption expenditures will

A) decrease by less than $1500.
B) increase by more than $1500.
C) increase by less than $1500.
D) stay constant.

Question 24

The consumption function shows how much

A) all households plan to consume at each possible real interest rate.
B) real disposable income people will earn at each income tax bracket.
C) all households plan to consume at each level of savings.
D) all households plan to consume at each level of real disposable income.

Question 25

The relationship between consumption expenditure and disposable income is called the

A) consumption function.
B) household aggregate demand function.
C) investment function.
D) savings function.

Question 26

A movement along the consumption function is the result of changes in

A) the real interest rate.
B) expected future income.
C) disposable income.
D) All of the above answers are correct.

Question 27

An increase in expected future income .

A) shifts the consumption function upward
B) increases saving
C) shifts the saving function upward
D) decreases consumption expenditure

Question 28

The consumption function relates consumption expenditure to

A) saving.
B) the price level.
C) the interest rate.
D) disposable income.

Question 29

The consumption function shows a

A) positive relationship between disposable income and consumption expenditure.
B) positive relationship between an individual's wealth and his or her consumption expenditure.
C) negative relationship between disposable income and consumption expenditure.
D) negative relationship between consumption expenditure and aggregate saving.

Question 30

The consumption function relates the consumption expenditure decisions of households to

A) investment decisions of firms.
B) the level of disposable income.
C) saving decisions of households.
D) the nominal interest rate.

Question 31

If disposable income increases,

A) the consumption function shifts downward.
B) the consumption function shifts upward.
C) there is movement downward along the consumption function.
D) there is a movement upward along the consumption function.

Question 32

The slope of the consumption function is

A) equal to the slope of the 45- degree line.
B) less than the slope of the 45- degree line but not equal to zero.
C) equal to zero.
D) greater than the slope of the 45- degree line.

Question 33

The consumption function is the relationship between consumption expenditure and _, other things remaining the same.

A) disposable income
B) potential GDP
C) saving
D) the 45 degree line

Question 34

The positive slope of the consumption function indicates that

A) the amount of household wealth is subject to change.
B) when prices fall consumers spend more.
C) consumers increase their total consumption expenditure when disposable income increases.
D) consumers spend less out of each extra dollar of income.

Question 35

The graph of the consumption function has consumption expenditure on the vertical axis and

A) the Consumer Price Index on the horizontal axis.
B) the interest rate on the horizontal axis.
C) time on the horizontal axis.
D) disposable income on the horizontal axis.

Question 36

Which of the following will NOT shift the consumption function upward?

A) an increase in disposable income
B) an increase in wealth
C) a fall in the real interest rate
D) None of the above shift the consumption function upward.

Question 37

A movement along the consumption function to higher levels of consumption expenditure arises because

A) the level of disposable income increases.
B) household wealth rises.
C) the level of disposable income decreases.
D) the level of desired saving rises.

Question 38

Which of the following variables does NOT have a direct effect of changing consumption expenditure?

A) expected future income
B) expected future profits
C) wealth
D) disposable income

Question 39

As disposable income increases, consumption expenditures

A) increase by a smaller amount.
B) remain constant.
C) increase by a larger amount.
D) increase by the same amount.

Question 40

Autonomous consumption is that portion of consumption expenditure that is not influenced by

A) prices.
B) the legal authorities.
C) preferences.
D) income.

Question 41

Planned saving equals

A) zero when disposable income is less than planned consumption expenditure.
B) planned consumption expenditure minus disposable income.
C) disposable income minus planned consumption expenditure.
D) planned consumption expenditure plus disposable income.

Question 42

In a diagram with the consumption function, the 45- degree line indicates all points where

A) consumption expenditures and saving are equal.
B) saving and investment are equal.
C) saving and disposable income are equal.
D) consumption expenditures and disposable income are equal.

Question 43

Consumption expenditures equal disposable income

A) when saving equals disposable income.
B) at every point on the consumption function.
C) at every point on the saving function.
D) at every point on the 45- degree line.

Question 44

"Dissaving" occurs when

A) saving is positive.
B) the consumption function is below the 45- degree line drawn from the origin.
C) income exceeds consumption expenditure.
D) saving is negative.

Question 45

In a diagram with the consumption function, the 45- degree line

A) reflects a decreasing MPC as disposable income rises.
B) shows where consumption expenditure equals disposable income.
C) contains only a consumption component.
D) represents both consumption expenditure and investment.

Question 46

When disposable income equals $800 billion, planned consumption expenditure equals $600 billion, and when disposable income equals $1,000 billion, planned consumption expenditure equals $640 billion. What is planned saving when disposable income is $800 billion?

A) $360 billion
B) $200 billion
C) $560 billion
D) $1,400 billion

Question 47

In the above figure, line ABC is called

A) the 45- degree line.
B) the saving function.
C) aggregate supply.
D) the consumption function.

Question 48

Autonomous consumption is equal to

A) consumption when disposable income is zero.
B) consumption caused by an increase in disposable income.
C) dissaving when disposable income is greater than zero.
D) saving when consumption equals disposable income.

Question 49

In a diagram with the consumption function, the shows all points where disposable income equals consumption expenditures.

A) consumption function
B) saving function
C) 45- degree line
D) aggregate demand curve

Question 50

In the above figure, consumption and disposable income are equal at

A) a disposable income level of $200 billion.
B) a disposable income level of $0.
C) a saving level of $100 billion and disposable income level of $400 billion.
D) any point along the consumption function.

Question 51

Dissaving

A) occurs when consumption is greater than disposable income.
B) is equal to the amount of saving when consumption is less than disposable income.
C) is equal to consumption expenditure when disposable income is greater than zero.
D) is equal to taxation when disposable income is zero.

Question 52

Autonomous consumption is

A) consumption expenditure that does not depend on the level of GDP or disposable income.
B) consumption expenditure that is earned rather than transferred from the government.
C) the amount spent on consumption when saving equals zero.
D) consumption expenditure when the marginal propensity to consume is 1.

Question 53

As real disposable income increases, consumption expenditure and saving .

A) increases; increases
B) decreases; decreases
C) decreases; increases
D) increases; decreases

Question 54

In the above figure, autonomous consumption equals

A) 0.
B) $6 trillion.
C) $2 trillion.
D) - $2 trillion.

Question 55

In the above figure, the line AB is called

A) the consumption function.
B) the saving function.
C) the 45- degree line.
D) the expenditure function.

Question 56

Induced consumption is equal to

A) consumption caused by an increase in disposable income.
B) consumption when disposable income is zero.
C) dissaving when disposable income is greater than zero.
D) saving when consumption equals disposable income.

Question 57

consumption is consumption that will occur _ the level of GDP and disposable income.

A) Autonomous; depending on
B) Autonomous; independent of
C) Induced; independent of
D) None of the above answers is correct.

Question 58

Autonomous consumption

A) increases with income.
B) is independent of income and must be equal to zero.
C) is independent of income.
D) decreases with income.

Question 59

With consumption expenditure on the vertical axis and disposable income on the horizontal axis, the consumption function intersects the 45- degree line at $8 trillion. This result indicates that

A) autonomous consumption spending is $8 trillion.
B) consumption spending is less than $8 trillion because taxes must be paid.
C) consumption spending is more than $8 trillion because taxes have been paid.
D) consumption spending is $8 trillion when disposable income is $8 trillion.

Question 60

In the above figure, at a disposable income level of $200 billion, saving equals

A) consumption expenditures.
B) $40 billion.
C) zero.
D) disposable income.

Question 61

consumption expenditure is greater than disposable income.

A) Saving is positive whenever
B) Dissaving occurs whenever
C) It is always the case that
D) None of the above answers is correct because it is impossible for consumption expenditure to be greater than disposable income.

Question 62

At a level of disposable income of $0, consumption expenditure is $5000. Saving equals

A) $2500.
B) 0.
C) - $5000.
D) an amount that cannot be determined with the information available.

Question 63

If the consumption function is below the 45- degree line, then at these levels of disposable income

A) saving is negative.
B) saving is positive.
C) saving is zero.
D) dissaving is positive.

Question 64

When disposable income is 0, consumption is $2000. Then

A) saving = $2000.
B) saving = $0.
C) the MPC = 0.2.
D) saving = - $2000.

Question 65

At the level of disposable income where the consumption function crosses the 45- degree line,

A) saving is zero.
B) saving is negative.
C) the marginal propensity to consume is 0.50.
D) consumption expenditure equals only autonomous consumption expenditure.

Question 66

Suppose that saving equals $0 when disposable income equals $1 trillion. Along the saving function, occurs to the left of $1 trillion and occurs to the right of $1 trillion.

A) saving; saving
B) saving; dissaving
C) dissaving; dissaving
D) dissaving; saving

Question 67

An increase in disposable income

A) shifts the saving function upward.
B) shifts the saving function downward.
C) results in a movement upward along the saving function.
D) results in a movement downward along the saving function.

Question 68

The saving function shows a _ relationship between .

A) negative; real GDP and saving
B) negative; disposable income and consumption expenditure
C) positive; disposable income and saving
D) positive; disposable income and dissaving

Question 69

A movement along the saving function occurs when

A) wealth increases.
B) the real interest rate rises.
C) disposable income decreases.
D) None of the above answers is correct.

Question 70

At a level of disposable income of $0, consumption expenditure is $3500. Then

A) the MPC = zero.
B) saving equals $3500.
C) saving equals - $3500.
D) saving equals 0.

Question 71

The vertical distance between the 45- degree line and the consumption line represents

A) saving or dissaving.
B) the difference between consumption expenditure and investment.
C) total consumption expenditure.
D) investment.

Question 72

Dissaving occurs when a household

A) spends less than it receives in disposable income.
B) consumes more than it receives in disposable income.
C) spends more than it saves.
D) saves more than it spends.

Question 73

When the consumption function lies above the 45- degree line, households

A) save all of any increase in income.
B) spend on consumption an increasing percentage of any increase in income.
C) spend on consumption a decreasing percentage of any increase in income.
D) are dissaving.

Question 74

What is the marginal propensity to consume?

A) one minus the fraction of total disposable income that is saved.
B) the percentage of income that is not saved.
C) the percentage of income that is consumed.
D) the ratio of the change in consumption expenditure to the change in disposable income.

Question 75

Saving rather than dissaving occurs at any level of disposable income at which

A) the consumption function is above the 45- degree line.
B) the consumption function is below the 45- degree line.
C) the consumption function intersects the saving/income curve.
D) autonomous consumption is positive.

Question 76

When disposable income equals consumption expenditure, then

A) the MPC = zero.
B) the MPS = zero.
C) saving is zero.
D) None of the above is correct.

Question 77

Where the consumption function crosses the 45° line

A) saving is positive.
B) saving is negative.
C) consumption expenditure equals disposable income.
D) consumption expenditure equals saving.

Question 78

An increase in disposable income shifts

A) both the consumption and savings functions downward.
B) both the consumption and savings functions upward.
C) neither the consumption function or the savings function because it leads to a movement along both the consumption and savings function.
D) the consumption function upward and leads to a movement along the savings function.

Question 79

As disposable income increases, there is a _ the saving function.

A) rightward shift of
B) change in the slope of
C) leftward shift of the
D) movement along

Question 80

If the consumption function lies below the 45- degree line, then saving at these levels of disposable income will

A) equal zero.
B) be positive.
C) be negative.
D) be some amount that cannot be determined without additional information.