Deck 25: Consumption and Saving

Question 1

Which of the following scenarios represents consumption spending?

A)You get a haircut at the local salon.
B)The local Ford dealership brings in a stock of new car models.
C)Your town gets a new fire truck.
D)Your university upgrades all its computers.

Answer 1

A

Question 2

Which of the scenarios represents consumption spending?

A)A new hospital is constructed in your town.
B)You take out a bank loan.
C)You eat at a fancy restaurant for Valentine's Day.
D)Your parents pay their income taxes.

Answer 2

C

Question 3

Which of the scenarios represents consumption spending?

A)Your roommate borrows $50 from you.
B)You and your date go on a balloon ride.
C)Your mayor approves the construction of a new city hall building.
D)The local high school upgrades its classrooms.

Answer 3

B

Question 4

Consumption spending is:

A)purchases of stocks and bonds by consumers.
B)money that is saved by consumers.
C)household spending on final goods and services.
D)business spending on inputs for producing consumer goods.

Question 5

The consumption function is a plot of the:

A)level of consumption associated with each level of income.
B)average marginal propensity to consume over time.
C)level of government spending associated with each level of income.
D)price of consumer goods and services over time.

Question 6

The marginal propensity to consume is the:

A)initial level of consumption after income is earned.
B)average level of consumption over time.
C)fraction of each dollar of extra income that households save.
D)fraction of each dollar of extra income that households spend on consumption.

Question 7

Which statement correctly describes the relationship between consumption and income?

A)Consumption is always half of income.
B)Consumption and income are positively related.
C)Income is always less than consumption.
D)Total consumption is independent of income.

Question 8

The marginal propensity to consume is:

A)always 1.
B)positive.
C)negative.
D)zero.

Question 9

If the average marginal propensity to consume is 0.75, then a $1 million increase in total income will lead to a _____ in consumption.

A)$250,000 increase
B)$75,000 increase
C)$750,000 decrease
D)$750,000 increase

Question 10

If the average marginal propensity to consume is 0.8, then a $10 million increase in total income will lead to a _____ increase in consumption.

A)$80 million
B)$0.8 million
C)$8 million
D)$2 million

Question 11

If the average marginal propensity to consume is 0.68, then a $1 trillion increase in total income will lead to a _____ in consumption.

A)$3.2 trillion decrease
B)$3.2 trillion increase
C)$6.8 trillion increase
D)$0.68 trillion increase

Question 12

What is the marginal propensity to consume if a $10 million increase in total income leads to a $7.9 million increase in consumption?

A)0.79
B)7.9
C)0.079
D)0.21

Question 13

What is the marginal propensity to consume if a $100 million increase in total income leads to a $58 million increase in consumption?

A)4.2
B)5.8
C)0.58
D)0.42

Question 14

If a $100 million increase in total income leads to a $62 million increase in consumption, the slope of the consumption function is:

A)negative.
B)0.62.
C)zero.
D)0.38.

Question 15

Total consumption is $1,800 when income is $2,000, and total consumption increases to $2,600 when income is $3,000. What is the marginal propensity to consume?

A)0.8
B)0.5
C)0.2
D)1.25

Question 16

Total consumption is $1,400 when income is $1,600, and total consumption increases to $1,900 when income is at $2,400. What is the marginal propensity to consume?

A)0.83
B)1.6
C)0.37
D)0.63

Question 17

What is your permanent income marginal propensity to consume (MPC) if your income permanently changes by $20,000 and your consumption increases by $15,000?

A)0.75
B)0.25
C)0.2
D)1.33

Question 18

What is your permanent income marginal propensity to consume (MPC) if your income permanently changes by $50,000 and your consumption increases by $45,000?

A)0.1
B)1.11
C)0.9
D)1.25

Question 19

What is your permanent income marginal propensity to consume (MPC) if your income permanently changes by $5,000 and your consumption increases by $5,000?

A)0.1
B)1.11
C)1
D)0.5

Question 20

Consider the following data. What is the marginal propensity to consume?
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Consumption } \\\text { (trillions of \$) }\end{array} & \begin{array} { c } \text { Income } \\\text { (trillions of \$) }\end{array} \\\hline 1 & 1 \\\hline 1.7 & 2 \\\hline 2.4 & 3 \\\hline\end{array}$$

A)0.3
B)1
C)0.7
D)1.42

Question 21

Consider the following data. What is the marginal propensity to consume?
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Consumption } \\\text { (trillions of \$) }\end{array} & \begin{array} { c } \text { Income } \\\text { (trillions of \$) }\end{array} \\\hline 3.1 & 4 \\\hline 3.8 & 5 \\\hline 4.5 & 6 \\\hline\end{array}$$

A)0.7
B)1
C)0.3
D)0.45

Question 22

Consider the following data. What is the marginal propensity to consume?
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Consumption } \\( \$ )\end{array} & \begin{array} { c } \text { Income } \\( \$ )\end{array} \\\hline 184,000 & 200,000 \\\hline 274,000 & 300,000 \\\hline 334,000 & 400,000 \\\hline\end{array}$$

A)0.9
B)0.1
C)1.1
D)0.84

Question 23

Consider the following data. What is the marginal propensity to consume?
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Consumption } \\\text { (trillions of \$) }\end{array} & \begin{array} { c } \text { Income } \\\text { (trillions of \$) }\end{array} \\\hline 1.2 & 1 \\\hline 2 & 2 \\\hline 2.8 & 3 \\\hline\end{array}$$

A)1.25
B)0.8
C)0.2
D)2.8

Question 24

Consider the following data. What is the marginal propensity to consume?
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Consumption } \\\text { (trillions of \$) }\end{array} & \begin{array} { c } \text { Income } \\\text { (trillions of \$) }\end{array} \\\hline 1.7 & 2 \\\hline 2.3 & 3 \\\hline 2.9 & 4 \\\hline\end{array}$$

A)1.67
B)0.6
C)0.75
D)0.4

Question 25

Which of these statements is correct?

A)Savings plus consumption equals income.
B)Income plus consumption equals saving.
C)Dissaving equals consumption.
D)Dissaving plus saving plus consumption equals income.

Question 26

Mark earns $3,800 in the current period. His consumption in this same period is $4,100. Which of the following is true?

A)He has borrowed $3,800.
B)His income is $7,900.
C)His dissaving is $300.
D)He saves $300.

Question 27

Dissaving is:

A)excess income over and above consumption.
B)excess consumption over and above income.
C)saving plus interest earned.
D)consumption plus income.

Question 28

Dissaving is:

A)positive saving.
B)negative saving.
C)net wealth minus income.
D)saving plus interest earned.

Question 29

How can dissaving in the current period be funded?
(i) borrowing from friends
(ii) bank loans
(iii) previous savings
(iv) current income earned

A)(ii) and (iii)
B)(i), (ii), and (iii)
C)(ii), (iii), and (iv)
D)(i), (ii), (iii), and (iv)

Question 30

Net wealth is:

A)the amount by which income exceeds bills.
B)the real interest rate on saving.
C)equivalent to total consumption.
D)the amount by which assets exceed debts.

Question 31

When real interest rates rise, consumption will shift:

A)downward if income rises as well.
B)upward if the income effect outweighs the substitution effect.
C)upward if the substitution effect outweighs the income effect.
D)downward if there is saving.

Question 32

When real interest rates rise, consumption will shift:

A)only if income rises as well.
B)downward if the income effect outweighs the substitution effect.
C)downward if the substitution effect outweighs the income effect.
D)downward if there is saving.

Question 33

If Larry is a hand-to-mouth consumer and has just received a gift of $350, we can expect Larry to exhibit:

A)a large change in consumption.
B)a small change in consumption.
C)a large change in saving.
D)no change in MPC.

Question 34

If Frank is a hand-to-mouth consumer and he has just received a permanent 10% increase in salary, we can expect Frank to exhibit:

A)a large change in consumption.
B)a small change in consumption.
C)a large change in saving.
D)no change in MPC.

Question 35

If Derek is a consumption smoother and has just signed a contract for a new job that will increase his salary by 14%, we can expect Derek to exhibit:

A)a large change in consumption.
B)a small change in consumption.
C)zero change in saving.
D)no change in MPC.

Question 36

If Marios is a consumption smoother and has just won a prize of $12,000, we can expect Marios to exhibit:

A)a large change in consumption.
B)a small change in consumption.
C)zero change in saving.
D)no change in MPC.

Question 37

For consumption smoothers, the marginal propensity to consume out of anticipated changes in income is:

A)zero.
B)one.
C)negative.
D)always close to 1.

Question 38

Credit constraints limit the:

A)amount of saving that people can make.
B)interest rates that banks can charge.
C)amount of money that banks can accept as deposits.
D)amount of money that people can borrow.

Question 39

Hand-to-mouth consumers:

A)spend more on luxuries than on necessities.
B)have very high levels of consumption.
C)live paycheck to paycheck.
D)engage in a significant amount of spending.

Question 40

Hand-to-mouth consumers:
(i) spend more on necessities than on luxuries.
(ii) save very little or nothing at all.
(iii) purchase a large amount of luxury items.
(iv) live paycheck to paycheck.

A)(iv) only
B)(i), (ii), and (iv)
C)(iii) and (iv)
D)(i) and (ii)

Question 41

The opportunity cost of an extra dollar of consumption today is the:

A)same as the marginal benefit of consuming the dollar in the future.
B)marginal benefit of consumption today.
C)average benefit from consumption today and in the future.
D)marginal benefit of consuming a dollar-plus-interest in the future.

Question 42

The benefit of an extra dollar of consumption is called the:

A)marginal benefit of consumption.
B)average benefit of consumption.
C)average price of goods and services consumed.
D)real interest rate.

Question 43

The rational rule of consumption is to consume more today if the:

A)price of consumption today exceeds the dollar-plus-interest in the future.
B)marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.
C)marginal benefit of a dollar of consumption today is less than the marginal benefit of spending a dollar plus interest in the future.
D)real interest rate in the future is expected to be higher than the real interest rate today.

Question 44

When consumers receive more income, their spending:

A)increases.
B)increases.
C)decreases.
D)decreases.
E)stays the same, but their savings decreas
F)stays the same, but their savings decreas
G)and their savings both decrease.
H)and their savings both decrease.

Question 45

Which of the following graphs shows the correct effect on the consumption function when there is a decrease in income?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 46

Which of the following graphs shows the correct effect on the consumption function when there is an increase in real interest rates and the substitution effect is dominant?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 47

Which of the following graphs shows the correct effect on the consumption function when there is a decrease in real interest rates and the substitution effect is dominant?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 48

Why does a temporary change in income lead to only a small change in consumption for a consumption smoother?

A)The MPC always tends to be low.
B)The consumer prefers to focus on current consumption rather than future consumption.
C)Temporary increases in income are heavily taxed.
D)The consumer tends to spread a temporary spike in income over the lifetime of the consumer.

Question 49

Why does an anticipated change in income lead to no change in consumption for a consumption smoother?

A)The consumer is not aware of anticipated changes in future income.
B)Consumption is based on permanent income, which is already factored into anticipated future changes in income.
C)There are high tax rates on anticipated changes in future income.
D)There is a failure of the permanent income hypothesis.

Question 50

When does an anticipated change in future income lead to a change in consumption for consumption smoothers?

A)when the permanent income hypothesis fails
B)when the anticipated future income arrives in the paycheck
C)It never leads to a change in consumption.
D)when the consumption smoother first learns of the anticipated future change in income

Question 51

Which of the following graphs shows the correct effect on the consumption function when taxes decrease in the economy?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 52

Which of the following graphs shows the correct effect on the consumption function when taxes increase in the economy?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 53

Which of the following graphs shows the correct effect on the consumption function when consumers become optimistic about the state of the economy?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 54

Which of the following graphs shows the correct effect on the consumption function when consumers become pessimistic about the state of the economy?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 55

Which of the following graphs shows the correct effect on the consumption function when consumer wealth decreases?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 56

Which of the following graphs shows the correct effect on the consumption function when consumer wealth increases?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 57

Suppose the federal minimum wage decreases in the United States. Which of the following graphs shows the correct effect on the consumption function?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 58

Suppose the London stock market experiences a significant boom. Which of the following graphs shows the correct effect on the consumption function in the United Kingdom?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 59

Suppose the Canadian job markets report is very strong and consumers begin to expect more economic growth and rising incomes. Which of the following graphs shows the correct effect on the consumption function in Canada?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 60

What effect does a booming real estate market in China have on the consumption function in China?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 61

If the real estate market in Kyiv, Ukraine, experiences a slump, what effect does this have on the consumption function in Ukraine?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 62

Suppose falling interest rates in Australia discourage saving. What effect does this have on the consumption function in Australia?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 63

What is the permanent income hypothesis?

A)the idea that the marginal propensity to consume does not change over time
B)the idea that consumption is based on permanent income rather than current income
C)the idea that temporary changes in income lead to the largest changes in total consumption
D)the idea that consumption is based on current income rather than permanent income

Question 64

What is the permanent income hypothesis?

A)the idea that the marginal propensity to consume does not change over time
B)the idea that people choose how much to consume based on their long-term average income
C)the idea that temporary changes in income lead to the largest changes in total consumption
D)the idea that people choose how much to consume based on their current income

Question 65

The permanent income hypothesis implies that young consumers with no savings and low income will fund permanent consumption by:

A)borrowing.
B)dissaving.
C)saving.
D)not paying taxes.

Question 66

The permanent income hypothesis implies that retired consumers with savings but no income will fund excess permanent consumption by:

A)borrowing.
B)dissaving.
C)saving.
D)not paying taxes.

Question 67

The permanent income hypothesis implies that consumers whose incomes exceed their permanent consumption will engage in:

A)borrowing.
B)dissaving.
C)saving.
D)not paying taxes.

Question 68

If policy makers announce tax cuts, it is reasonable to expect that hand-to-mouth consumers will:

A)increase spending.
B)increase saving.
C)not pay taxes.
D)have less disposable income.

Question 69

If there is a temporary rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

A)a small increase; a large increase
B)a large increase; a large increase
C)no change; a large increase
D)a large increase; no change

Question 70

If there is a permanent rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

A)a small increase; a large increase
B)a large increase; a large increase
C)no change; a large increase
D)a large increase; no change

Question 71

If there is an anticipated rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

A)a small increase; a large increase
B)a large increase; a large increase
C)no change; a large increase
D)a large increase; no change

Question 72

If there is news of a future rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

A)a small increase; a large increase
B)a large increase; a large increase
C)no change; a large increase
D)a large increase; no change

Question 73

If there is _____ rise in income, a hand-to-mouth consumer will exhibit no change in consumption.

A)a temporary
B)an announcement about a future
C)a permanent
D)an anticipated

Question 74

If there is _____ rise in income, a consumption smoother will exhibit no change in consumption.

A)a temporary
B)an announced
C)a permanent
D)an anticipated

Question 75

If a short-lived recession is expected, a consumption smoother will exhibit _____ in consumption.

A)a large increase
B)no change
C)a rising rate of increase
D)a large decrease

Question 76

If there is _____ rise in income, a consumption smoother will exhibit a small change in consumption.

A)a temporary
B)an announced
C)a permanent
D)an anticipated

Question 77

Total consumption in the economy is composed of:

A)only permanent changes in consumption.
B)consumption by consumption smoothers only.
C)consumption by hand-to-mouth consumers only.
D)consumption by hand-to-mouth consumers and consumption by consumption smoothers.

Question 78

If there is _____ rise in income, there will be an intermediate increase in total consumption in the economy.

A)a permanent
B)zero
C)a temporary
D)no news of a

Question 79

If there is _____ rise in income, there will be a large increase in total consumption in the economy.

A)a temporary
B)an announced
C)a permanent
D)an anticipated

Question 80

If there is _____ rise in income, there will be an intermediate increase in total consumption in the economy.

A)no news of a
B)an announcement of a future
C)an anticipated
D)zero