Deck 11: The Income-Expenditure Model

Question 1

The consumption function describes the relationship between

A) prices and demand.
B) investment and interest rates.
C) consumers and firms.
D) consumer spending and income.

Answer 1

consumer spending and income.

Question 2

The income-expenditure model assumes that the aggregate supply curve is horizontal at a given price level.

Answer 2

True

Question 3

In the income-expenditure model, the 45-degree line

A) is the locus of all the points for which output equals expenditures.
B) marks all equilibrium output levels.
C) shows total expenditures at various price levels.
D) is also called the planned expenditures line.

Answer 3

is the locus of all the points for which output equals expenditures.

Question 4

The marginal propensity to consume (MPC)is the

A) ratio of consumption to savings.
B) fraction of additional income that is spent.
C) ratio of consumption to income.
D) fraction of additional consumption that is not based on the level of income.

Question 5

The total demand for goods and services at a given price level is also known as

A) the consumption function.
B) planned expenditures.
C) equilibrium output.
D) autonomous consumption.

Question 6

The income-expenditure model focuses on changes in

A) output levels.
B) price.
C) import restrictions.
D) operational lags.

Question 7

The income-expenditure model focuses on changes in price levels.

Question 8

Unlike Classical economists, Keynes believed that the economy could be trapped in a depression and not return to full employment without government intervention.

Question 9

If firms are producing an output greater than planned expenditures, these firms will cut back on production, which decreases GDP.

Question 10

If an economy is producing a level of output which is lower than the equilibrium level, planned expenditures ________ total output and ________ goods and services are being produced than are being demanded.

A) exceed; more
B) exceed; fewer
C) are less than; more
D) are less than; fewer

Question 11

John Maynard Keynes argued that the fundamental problem which led to the world depression was

A) negative net exports on goods and services.
B) a decreasing supply of goods and services.
C) insufficient demand for goods and services.
D) a shortage of goods and services.

Question 12

In the income-expenditure model, equilibrium output is the level of output at which the 45-degree line intersects the planned expenditures line. Explain why this output level is an equilibrium level. Illustrate your answer with a diagram of the income-expenditure model.

Question 13

When output exceeds planned expenditures, there is insufficient production in the economy.

Question 14

In the income-expenditure model, firms stand ready to provide all the output that is demanded.

Question 15

The marginal propensity to save (MPS)is the

A) fraction of income that is saved.
B) the ratio of additional savings to additional income.
C) the ratio of savings to consumption.
D) savings that is not based on the level of income.

Question 16

Suppose planned expenditures exceed output. Explain how equilibrium is restored in this economy.

Question 17

The income-expenditure model is best used for short-run analysis of economic fluctuations.

Question 18

The level of GDP at which planned expenditure equals the amount of output produced is the

A) potential output.
B) long-run output.
C) autonomous output.
D) equilibrium output.

Question 19

If an economy is producing a level of output which is higher than the equilibrium level, planned expenditures ________ total output and ________ goods and services are being produced than are being demanded.

A) exceed; more
B) exceed; fewer
C) are less than; more
D) are less than; fewer

Question 20

When prices do not change very much, the income-expenditure model can be used to understand economic fluctuation in the

A) long run.
B) short run.
C) fiscal year.
D) federal budget allocation.

Question 21

An increase in consumer confidence will

A) not change autonomous consumption and rotate the consumption function upward.
B) not change autonomous consumption and rotate the consumption function downward.
C) increase autonomous consumption and shift the consumption function upward.
D) decrease autonomous consumption and shift the consumption function downward.

Question 22

The marginal propensity to consume is always

A) less than one.
B) greater than one.
C) equal to one.
D) equal to zero.

Question 23

If the consumption function is C = 90 + 0.75y, then the marginal propensity to consume is

A) 0.2.5.
B) 0.75.
C) 67.5.
D) 90.

Question 24

An increase in consumer spending based on an increase in income is reflected by

A) an upward rotation of the consumption function.
B) an increase in the MPC.
C) a downward shift in the consumption function.
D) a movement up along the consumption function.

Question 25

If the consumption function is C = 25 + 0.9y and income increases by $100, then consumer spending will increase by

A) $10.
B) $25.
C) $90.
D) $115.

Question 26

If the consumption function is C = 25 + 0.9y and income increases by $100, then autonomous consumption spending will be

A) $10.
B) $25.
C) $90.
D) $115.

Question 27

A decrease in consumer wealth will

A) not change autonomous consumption and rotate the consumption function upward.
B) not change autonomous consumption and rotate the consumption function downward.
C) increase autonomous consumption and shift the consumption function upward.
D) decrease autonomous consumption and shift the consumption function downward.

Question 28

If the consumption function is C = 90 + 0.75y, then the level of autonomous consumption is

A) 0.25.
B) 0.75.
C) 67.5.
D) 90.

Question 29

If the consumption function is C = 90 + 0.75y, then the marginal propensity to save is

A) 0.25.
B) 0.75.
C) 67.5.
D) 90.

Question 30

The slope of the consumption function is equal to:

A) autonomous consumption.
B) the marginal propensity to consume.
C) the marginal propensity to save.
D) zero.

Question 31

Which of the following shifts the entire consumption function upwards?

A) an increase in income
B) a decrease in the value of consumer durables
C) a decrease in consumer confidence
D) an increase in consumer wealth

Question 32

If the consumption function is C = 25 + 0.9y and income increases by $100, then savings will increase by

A) $10.
B) $25.
C) $90.
D) $115.

Question 33

The marginal propensity to consume (MPC)is equal to

A) MPS + 1.
B) MPS - 1.
C) 1 - MPS.
D) 1 + MPS.

Question 34

Let "C = Ca + by" define the consumption function. The term "b" is known as

A) autonomous consumption.
B) induced consumption.
C) the marginal propensity to consume.
D) the marginal propensity to save.

Question 35

Autonomous consumption is

A) the sum of consumption that depends on the level of income and consumption that does not depend on income.
B) the part of consumption that depends on the level of income.
C) the part of consumption that does not depend on income.
D) the relationship between consumption spending and the level of income.

Question 36

The marginal propensity to save (MPS)is equal to

A) 1 - MPC.
B) MPC - 1.
C) MPC + 1.
D) 1 + MPC.

Question 37

The sum of the marginal propensity to consume (MPC)and the marginal propensity to save (MPS)is

A) equal to one.
B) greater than one.
C) less than one.
D) negative.

Question 38

At a fixed income level, an increase in consumption which is accompanied by a decrease in savings is reflected by

A) an upward rotation of the consumption function.
B) a downward rotation of the consumption function.
C) an upward shift of the consumption function.
D) a movement up along the consumption function.

Question 39

Let "C = Ca+ by" define the consumption function. The term "by" is

A) autonomous consumption.
B) current income.
C) the marginal propensity to consume.
D) consumption that depends on income.

Question 40

Let "C =Ca + by" define the consumption function. The term "
Ca " is known as

A) autonomous consumption.
B) induced consumption.
C) the marginal propensity to consume.
D) the marginal propensity to save.

Question 41

Recall the Application about the impact that home equity values have on consumer spending and wealth to answer the following question(s). From 1997 to mid-2006, housing prices rose nationally by approximately 90 percent and consumer wealth increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall. Home equity is the single largest component of net wealth for most families in the United States, and changes in the value of home equity affect consumer spending.
According to this Application, home equity is the single largest component of net wealth for most families in the United States. As home equity falls

A) autonomous consumption will decrease, shifting the consumption function downward.
B) autonomous consumption will decrease, shifting the consumption function upward.
C) the MPC will decrease, increasing the slope of the consumption function.
D) the MPC will decrease, decreasing the slope of the consumption function.

Question 42

Recall the Application about the impact that home equity values have on consumer spending and wealth to answer the following question(s). From 1997 to mid-2006, housing prices rose nationally by approximately 90 percent and consumer wealth increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall. Home equity is the single largest component of net wealth for most families in the United States, and changes in the value of home equity affect consumer spending.
According to this Application, studies estimated that a decrease of consumer wealth of $1 would ________ consumption spending by somewhere between ________.

A) lower; $0.02 and $0.07
B) raise; $0.21 and $0.72
C) lower; $0.21 and $0.72
D) raise; $0.10 and $0.50

Question 43

In Figure 11.1, an increase in the marginal propensity to consume is represented by a change in the consumption function from

Question 44

Recall the Application about the impact that home equity values have on consumer spending and wealth to answer the following question(s). From 1997 to mid-2006, housing prices rose nationally by approximately 90 percent and consumer wealth increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall. Home equity is the single largest component of net wealth for most families in the United States, and changes in the value of home equity affect consumer spending.
According to this Application, the decrease in consumer wealth due to decreases in the value of home equity has

A) decreased consumer spending.
B) increased consumer saving.
C) decreased the marginal propensity to save.
D) increased short-run aggregate supply.

Question 45

In Figure 11.1, an increase in consumer wealth is represented by a change in the consumption function from

A)
B)
C)
D)

Question 46

Which of the following causes the consumption function to rotate downwards?

A) a decrease in consumer tax rates
B) a decrease in autonomous consumption
C) a decrease in the marginal propensity to save (MPS)
D) a decrease in the marginal propensity to consume (MPC)

Question 47

In Figure 11.1, a decrease in the marginal propensity to save is represented by a change in the consumption function from

A)
B)
C)
D)

Question 48

The marginal propensity to consume (MPC)is the fraction of additional income that is spent.

Question 49

The consumption function shows the relationship between consumer spending and price level.

Question 50

Autonomous consumption is consumer spending which is based on income levels.

Question 51

Increases in consumer wealth will cause an increase in autonomous consumption.

Question 52

The slope of the consumption function is equal to the level of autonomous consumption.

Question 53

In Figure 11.1, an increase in the marginal propensity to save is represented by a change in the consumption function from

A)
B)
C)
D)

Question 54

A movement along the consumption function is the result of a change in

A) autonomous consumption.
B) income.
C) consumer wealth.
D) expected wealth.

Question 55

Recall the Application about the impact that home equity values have on consumer spending and wealth to answer the following question(s). From 1997 to mid-2006, housing prices rose nationally by approximately 90 percent and consumer wealth increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall. Home equity is the single largest component of net wealth for most families in the United States, and changes in the value of home equity affect consumer spending.
According to this Application, what is home equity?

A) the value of homes less the value of the property on which the homes are sitting
B) the value of homes plus the value of the content in the homes
C) the average retail value of homes listed for sale
D) the difference between the value of homes and the amount of mortgage debt on the property

Question 56

In Figure 11.1, a decrease in consumer wealth is represented by a change in the consumption function from

A)
B)
C)
D)

Question 57

Which of the following increases the slope of the consumption function?

A) an increase in the marginal propensity to consume
B) a decrease in the value of consumer durables
C) an increase in consumer confidence
D) an increase in consumer wealth

Question 58

In Figure 11.1, a decrease in the marginal propensity to consume is represented by a change in the consumption function from

A)
B)
C)
D)

Question 59

Which of the following causes autonomous consumption to decrease?

A) a decrease in consumer income
B) consumers becoming more thrifty
C) consumers becoming more optimistic about future decreases in the price level
D) an increase in average family size

Question 60

Recall the Application about the impact that home equity values have on consumer spending and wealth to answer the following question(s). From 1997 to mid-2006, housing prices rose nationally by approximately 90 percent and consumer wealth increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall. Home equity is the single largest component of net wealth for most families in the United States, and changes in the value of home equity affect consumer spending.
According to this Application, falling home equity values have decreased consumer wealth, which is a measure of a consumer's

A) total net worth.
B) annual income.
C) annual income minus annual expenses.
D) annual income minus total expenses.

Question 61

Let S =y - (150 + 0.6y). Assume no government or foreign sectors. What is the consumption function?

A) C = -150 + 0.4y
B) C = 150 + 0.4y
C) C = 150 + 0.6y
D) C = -150 - 0.6y

Question 62

Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. The slope of the consumption function is

A) 0.1.
B) 0.2.
C) 0.8.
D) 0.9.

Question 63

Let C = 120 + 0.8y. Assume no government or foreign sectors. At the equilibrium level of income, y* = 200, the level of saving is

A) -80.
B) -30.
C) 96.
D) 160.

Question 64

Let S =y - (100 + 0.5y). Assume no government or foreign sectors. At the equilibrium level of income, y* = 800, the level of saving is

A) 0.
B) 50.
C) 100.
D) 300.

Question 65

Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. Equilibrium income is

A) 40.
B) 50.
C) 250.
D) 400.

Question 66

In the savings function S = -725 + 0.25y, 0.25 is the

A) MPC.
B) MPS.
C) slope of the consumption function.
D) vertical intercept of the savings function.

Question 67

Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. What is the value of consumption in equilibrium?

A) 32
B) 80
C) 240
D) 320

Question 68

Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. The value of autonomous consumption is

A) 10.
B) 40.
C) 50.
D) 80.

Question 69

Let C = 150 + 0.5y and I = 45. At the equilibrium level of income, y*, the level of saving is

A) 45.
B) 75.
C) 105.
D) 150.

Question 70

At the equilibrium level of income, the value of consumption is equal to

A) (consumption - savings).
B) (income - investment).
C) (income + investment).
D) (savings + investment).

Question 71

In the simple Keynesian cross model with no government or foreign sectors, at the equilibrium level of output

A) saving is equal to zero.
B) saving is less than investment.
C) saving is equal to investment.
D) saving is greater than investment.

Question 72

Let C = 40 + 0.8y and I = 10. Autonomous consumption is

A) 10.
B) 32.
C) 40.
D) 50.

Question 73

Suppose autonomous consumption increases. Explain how this event will lead to a rise in equilibrium output, and illustrate using a graph of the income-expenditure model.

Question 74

Let S =y - (100 + 0.75y). Assume no government or foreign sectors. At the equilibrium level of income, y* = 400, the level of investment is

A) 0.
B) 75.
C) 300.
D) 400.

Question 75

Let C = 800 + 0.6y and I = 100. Assume no government or foreign sectors. If investment decreases by 40, the equilibrium output decreases by a total of

A) 800.
B) 480.
C) 100.
D) 25.

Question 76

What is the difference between income and wealth?

Question 77

Let C = 550 + 0.8y and I = 75. Assume no government or foreign sectors. If investment increases by 100, the equilibrium output increases by a total of

A) 60.
B) 175.
C) 500.
D) 800.

Question 78

Let C = 300 + 0.75y and I = 200. Assume no government or foreign sectors. Investment needs to decrease by ________ to decrease equilibrium output by a total of $750.

A) $75
B) $100
C) $150
D) $187.50

Question 79

Let C = 70 + 0.75y and I = 40. Assume no government or foreign sectors. Investment needs to increase by ________ to increase equilibrium output by a total of $600.

A) $30
B) $150
C) $560
D) $600

Question 80

In the simple Keynesian cross model with no government or foreign sectors, the value of the multiplier is defined as

A) 1/MPC.
B) 1/(1-MPC).
C) 1/(MPC-1).
D) 1/(MPC+1).