Deck 8: Aggregate Demand and the Powerful Consumer

Question 1

The MPC can be used to predict the effect of a tax increase.

Answer 1

True

Question 2

Both President Bush and President Obama wanted tax cuts to stimulate consumer spending during the 2007-2009 recession.

Answer 2

True

Question 3

Government spending is a leakage out of the circular flow of income and spending.

Answer 3

False

Question 4

Taxes add to and transfers subtract from the flow of income and spending.

Question 5

Aggregate demand is the total demand for the final goods and services produced in an economy.

Question 6

The consumption function shows an indirect relationship between consumer spending and disposable income.

Question 7

If consumers receive an increase in income of $1,000,their spending will increase by a smaller amount.

Question 8

The marginal propensity to consume is calculated by dividing the change in consumer spending by the change in disposable income.

Question 9

A change in the value of consumer's stock market holdings will cause a shift in the consumption function.

Question 10

Consumer spending is an injection in the circular flow of income and spending.

Question 11

The relationship between consumption and disposable income is very unreliable and unpredictable.

Question 12

The slope of the consumption function is equal to the marginal propensity to save.

Question 13

The typical value for the MPC is less than 1.0.

Question 14

Scatter diagrams are a useful way to depict the relationship between two variables.

Question 15

A decrease in disposable income causes a shift in the consumption function.

Question 16

If U.S.consumers become more optimistic about their future income and wealth,the consumption function will shift upward.

Question 17

Aggregate demand is the sum of total domestic spending by the private sector.

Question 18

The tax cuts of 2008 and 2009 reduced the disposable income of U.S.consumers.

Question 19

A scatter diagram could help a policy maker decide on the size of a tax cut necessary to increase consumer expenditures by a certain amount.

Question 20

Tax reductions should also reduce the amount of consumer expenditures.

Question 21

The purchase of a new house is included in government spending.

Question 22

An example of investment is the purchase of machinery by a manufacturing company.

Question 23

U.S.imports rise when income in the United States increases.

Question 24

If inflation rises more quickly in the United States than in France,U.S.exports to France should rise.

Question 25

A $500 government bond is a money-fixed asset.

Question 26

When the price level falls,consumers may feel wealthier and the consumption function will shift upward.

Question 27

Changes in the price level affect household wealth more than household income.

Question 28

Government transfer payments are income earned by individuals who work for the federal government.

Question 29

A savings account is an example of consumer income.

Question 30

Capital goods are counted the same as consumer goods in the national product accounts.

Question 31

Bank accounts and bonds are examples of money-fixed assets.

Question 32

An economic boom in one country usually causes a recession in other countries.

Question 33

The value of both exports and imports are added to the value of national product.

Question 34

Consumers increased consumption by a relatively small amount in 2008 and 2009 because they believed the tax cuts were temporary.

Question 35

National income minus personal taxes net of transfer payments equals disposable income.

Question 36

If households decrease the amount of bank account withdrawals,the consumption function may shift upward.

Question 37

To economists,investment means buying stocks and bonds.

Question 38

Government purchases are included in national product.

Question 39

The tax cuts of 2008 and 2009 were effective because consumers believed that they were temporary.

Question 40

Financial investments,such as mutual fund purchases,are included in the national income component.

Question 41

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

A) one-fifth
B) two-thirds
C) one-third
D) two-fifths
E) three-fourths

Question 42

Aggregate demand is a ____ rather than a ____.

A) fixed number, concept
B) schedule, fixed number
C) set number, concept
D) government aggregate, private aggregate

Question 43

Which of the following is considered to be an investment in economists' point of view?

A) Serena buys bonds issued by Citibank.
B) John purchases a new house.
C) Venus invests hundred thousand dollars in Bear Stearns stock.
D) Allen sells the old truck he used for transporting goods.

Question 44

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

A) inflation.
B) an economic boom.
C) economic growth.
D) recession.

Question 45

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

A) government spending.
B) exports.
C) taxes.
D) transfer payments.

Question 46

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

Question 47

Aggregate demand is the sum of

A) C + I + G + (X − IM).
B) C + I + X.
C) C + I + X − IM.
D) C + I + G.

Question 48

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

A) imports minus U.S. exports.
B) imports plus U.S. exports.
C) exports minus U.S. imports.
D) exports minus taxes and customs duties.

Question 49

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

A) Yes, if it is a domestic mutual fund.
B) Yes, if the purchase is made out of current income.
C) No, unless the funds are deposited in a domestic financial institution.
D) No, it would never be included.

Question 50

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

A) U.S. aggregate demand.
B) U.S. aggregate supply.
C) German aggregate demand.
D) German imports.

Question 51

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.

Question 52

Aggregate demand is the total demand for

A) all intermediate and final goods.
B) all monetary investments.
C) real and financial investments.
D) all final goods and services.

Question 53

The largest component of aggregate demand is

A) investment spending.
B) consumer spending.
C) government spending.
D) total imports.

Question 54

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.

Question 55

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

Question 56

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

A) 1964
B) 1975
C) 1981
D) 1999

Question 57

National income is

A) the sum of all wages and salaries, interest, rent, and profits in the economy.
B) equal to the money value of national output.
C) the before-tax income of all individuals in the economy.
D) All of the above are correct.

Question 58

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

A) investment demand.
B) aggregate demand.
C) market demand.
D) consumption demand.

Question 59

Which of the following should be subtracted while calculating aggregate demand of the U.S.?

A) Pakistan's purchase of F-16s from the U.S.
B) Computers imported by China from the U.S.
C) Memorabilia purchases in the U.S. by a foreign tourist.
D) A U.S. firm's purchase of German machinery.

Question 60

The difference between national income and disposable income is

A) residential investment.
B) federal deficits.
C) net exports.
D) financial investment.
E) the amount of taxes collected.

Question 61

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.

Question 62

When saving leaks out of the circular flow of income and spending,

A) total income necessarily falls.
B) it leaks out of the financial system.
C) it flows to borrowers.
D) it increases the size of the spending flow.

Question 63

Saving is a leakage in the sense that

A) saving is lost to the economy and ultimately leads to stagnation.
B) the financial system often makes negative profits.
C) it often accompanies a trade deficit.
D) consumers spend less than their total income.

Question 64

In the circular flow model,which of the following is considered a leakage?

A) investment spending
B) business spending
C) household saving
D) total exports

Question 65

Historical data representing consumption and disposable income reveals that

A) during the 1930s, U.S. saving was at a high level.
B) U.S. citizens increased saving during World War II.
C) there is no systematic relationship between the two.
D) consumption rises faster than disposable income during recessions.

Question 66

Government spending is an injection in the sense that it

A) increases the amount of total spending.
B) increases the size of the federal deficit.
C) decreases the amount of household saving.
D) decreases the amount of taxes paid.

Question 67

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

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

Question 68

The circular flow diagram is best described as a(n)

A) abstraction of little value in macroeconomics.
B) exact representation of the cause and effect relationship between spending and employment.
C) model that clarifies the relationship between spending and income.
D) model to explain the relationship between the federal deficit and tax revenues.

Question 69

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

A) corporate income taxes.
B) federal sales taxes.
C) unemployment insurance benefits.
D) personal income tax rates.

Question 70

Imports are a leakage in the sense that

A) the international financial system is unstable.
B) consumers buy foreign output of goods and services.
C) foreigners earn less than U.S. workers.
D) a trade deficit increases aggregate demand.

Question 71

The difference between disposable income and consumption spending is

A) transfer payments.
B) personal taxes.
C) net exports.
D) personal investment.
E) personal saving.

Question 72

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

A) converge as income grows.
B) generally move together.
C) diverge as income grows.
D) show no clear relationship.

Question 73

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

A) be inverse.
B) be transcendental.
C) shift unpredictably.
D) be direct.

Question 74

The relationship between consumption and disposable income is such that as

A) consumption rises, disposable income falls.
B) disposable income rises, consumption rises.
C) disposable income rises, consumption falls.
D) disposable income rises, saving falls.

Question 75

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

A) The IRS national accounting system assures that taxes equal total income.
B) The total amount of spending must equal total national sales.
C) The value of final product must equal the sum of resource income that produced it.
D) The total amount of income earned is eventually spent.

Question 76

Disposable income can be defined as national product

A) minus federal and state taxes.
B) minus taxes plus transfers.
C) minus indirect taxes.
D) plus taxes plus transfers.

Question 77

In the circular flow model,which of the following is an injection?

A) investment spending
B) government taxes
C) total exports
D) imports

Question 78

In economic analysis,which of the following is considered an injection?

A) saving
B) taxes
C) imports
D) exports

Question 79

To get a complete measure of the total spending on U.S.-produced final goods and services,one must adjust aggregate demand by

A) adding imports and subtracting exports.
B) adding imports that are purchased by U.S. consumers.
C) adding exports and subtracting imports.
D) subtracting exports sold to foreigners.

Question 80

Which of the following is the injection into the circular flow model?

A) Money deposited in a savings account.
B) Income earned through exports.
C) Goods imported from abroad.
D) Taxes paid by the individuals.