Deck 11: Expenditure Multipliers: the Keynesian Model

Question 1

According to the Keynesian theory, the typical firm

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

Answer 1

B

Question 2

The consumption function relates the consumption expenditure decisions of households to

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

Answer 2

C

Question 3

Disposable income is divided into

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

Answer 3

D

Question 4

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

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

Question 5

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

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

Question 6

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

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

Question 7

Disposable income is

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

Question 8

The consumption function relates consumption expenditure to

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

Question 9

The Keynesian model of aggregate expenditure describes the economy in

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

Question 10

A consumption function shows a

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

Question 11

Saving equals

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

Question 12

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

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

Question 13

Real GDP

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

Question 14

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

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

Question 15

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

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

Question 16

An increase in real GDP leads to

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

Question 17

Disposable income is equal to

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

Question 18

Which of the following statements is FALSE?

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

Question 19

The Keynesian model of aggregate expenditure assumes that

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

Question 20

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

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

Question 21

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

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

Question 22

In the above figure, at a disposable income level of $2 trillion, saving equals

A) consumption expenditures.
B) zero.
C) $4 trillion.
D) disposable income.

Question 23

An increase in expected future income .

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

Question 24

Autonomous consumption is equal to

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

Question 25

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

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

Question 26

The slope of the consumption function is

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

Question 27

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

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

Question 28

The slope of the consumption function is

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

Question 29

As disposable income increases, consumption expenditures

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

Question 30

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

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

Question 31

In the above figure, the line AB is called

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

Question 32

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

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

Question 33

___________consumption is consumption that will occur___________ the level of GDP and disposable income.

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

Question 34

If disposable income increases,

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

Question 35

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

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

Question 36

Autonomous consumption

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

Question 37

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

A) a disposable income level of $0.
B) any point along the consumption function.
C) a saving level of $1 trillion and disposable income level of $4 trillion.
D) a disposable income level of $2 trillion.

Question 38

The positive slope of the consumption function indicates that

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

Question 39

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

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

Question 40

The consumption function shows how much

A) real disposable income people will earn at each income tax bracket.
B) all households plan to consume at each possible real interest rate.
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 41

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

Question 42

ʺDissavingʺ occurs when

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

Question 43

Dissaving

A) is equal to taxation when disposable income is zero.
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) occurs when consumption is greater than disposable income.

Question 44

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

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

Question 45

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

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

Question 46

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

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

Question 47

As real disposable income increases, consumption expenditure and saving .

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

Question 48

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

Question 49

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

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

Question 50

In the above figure, autonomous consumption equals

A) $4 trillion.
B) -$4 trillion.
C) $12 trillion.
D) 0.

Question 51

Where the consumption function crosses the 45° line

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

Question 52

The saving function shows a relationship between .

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

Question 53

When disposable income equals consumption expenditure, then

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

Question 54

In the above figure, line ABC is called

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

Question 55

Induced consumption is equal to

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

Question 56

Planned saving equals

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

Question 57

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

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

Question 58

___________consumption expenditure is greater than disposable income.

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

Question 59

Consumption expenditures equal disposable income

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

Question 60

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

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

Question 61

The marginal propensity to consume is the

A) amount saving increases when consumption expenditure decreases.
B) fraction of a change in consumption expenditure that is not saved.
C) fraction of a change in disposable income spent on consumption expenditure.
D) fraction of a change in saving spent on consumption expenditure.

Question 62

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

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

Question 63

The marginal propensity to consume is

A) the percentage change in disposable income.
B) the percentage or fraction of income that is consumed.
C) never greater than 1.
D) the slope of the savings function.

Question 64

What is the marginal propensity to consume?

A) the percentage of disposable income that is consumed.
B) the percentage of total income that is consumed.
C) the change in consumption expenditure divided by the change in disposable income.
D) one minus the fraction of total disposable income that is saved.

Question 65

The marginal propensity to consume is found by

A) dividing the change in disposable income by the change in consumption expenditure.
B) dividing consumption expenditure by disposable income.
C) dividing the change in consumption expenditure by the change in disposable income.
D) dividing disposable income by consumption expenditure.

Question 66

A movement along the saving function occurs when

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

Question 67

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

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

Question 68

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

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

Question 69

The marginal propensity to consume measures

A) the fraction of a change in disposable income that is spent on consumption expenditure.
B) what percentage of disposable income goes to saving.
C) how much of a given level of disposable income is consumed.
D) how much consumption expenditure occurs at the equilibrium level of income.

Question 70

An increase in disposable income

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

Question 71

The marginal propensity to consume refers to

A) the additional consumption expenditure that occurs out of an additional dollar of disposable income.
B) total consumption expenditure divided by total disposable income.
C) the additional consumption expenditure that occurs out of an additional dollar of investment.
D) the additional saving that occurs out of an additional dollar of disposable income.

Question 72

If consumption expenditures for a household increase from $1000 to $1800 when disposable income rises from $1000 to $2000, the marginal propensity to consume is

A) 0.2.
B) 0.8.
C) 0.3.
D) 0.18.

Question 73

The value of the marginal propensity to consume is

A) between 0 and 1.
B) between 1 and 10.
C) between 1 percent and 10 percent.
D) between -1 and +1.

Question 74

The marginal propensity to consume is equal to

A) the desired amount of consumption expenditure as a proportion of disposable income.
B) the change in consumption expenditure from a change in disposable income.
C) what people spend out of total disposable income.
D) the average, after-tax consumption amount.

Question 75

The size of the marginal propensity to consume

A) exceeds 1.
B) is between 0 and 1.
C) equals 1.
D) is negative if dissaving is present.

Question 76

An increase in disposable income shifts

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

Question 77

The MPC is the fraction of

A) total disposable income that is consumed.
B) a change in disposable income that is consumed.
C) a change in disposable income that is saved.
D) total disposable income that is not consumed.

Question 78

The MPC is equal to

A) △C / △S.
B) △S / △C.
C) △S / △YD.
D) △C / △YD.

Question 79

The marginal propensity to consume is the .

A) fraction of GDP consumed
B) fraction of total disposable income consumed
C) total amount of disposable income consumed
D) fraction of a change in disposable income that is consumed.

Question 80

The marginal propensity to consume is

A) the change in consumption expenditure divided by total saving.
B) the change in consumption expenditure divided by total disposable income.
C) total consumption expenditure divided by the change in disposable income.
D) the change in consumption expenditure divided by the change in disposable income.