Deck 9: Aggregate Demand.

Question 1

Linda earned an income of $3,000 per month which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is her disposable income after the increase?

A) $20,000
B) $3,500
C) $2,700
D) $3,150
E) $450

Answer 1

$3,500

Question 2

Table 9.1

Refer to Table 9.1, which shows the disposable income and consumption of a household. The level of saving at a disposable income of $1,200 is _____

A) $80
B) $240
C) $950
D) $1,200
E) $1,300

Answer 2

$240

Question 3

Linda earns an income of $3,000 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her consumption per month?

A) $3,500
B) $3,700
C) $2,700
D) $3,150
E) $450

Answer 3

$2,700

Question 4

If the marginal propensity to consume (MPC) is positive and less than one, an increase in disposable income will _____.

A) increase both consumption and saving
B) increase consumption and decrease saving
C) decrease both consumption and saving
D) decrease consumption but increase saving
E) increase saving, but we cannot predict what will happen to consumption

Question 5

Table 9.1

Refer to Table 9.1, which shows the disposable income and consumption of a household. Saving _____

A) decreases as disposable income increases.
B) decreases as disposable income decreases.
C) remains constant as disposable income increases.
D) is negative at a disposable income of $1,000.
E) is negative at a disposable income of $1,400.

Question 6

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her consumption per month before and after the increase in income?

A) $2,700; $3,000
B) $3,000; $3,000
C) $2,700; $3,150
D) $3,150; $3,500
E) $3,000; $3,500

Question 7

The consumption function assumes that _____

A) only disposable income affects consumption.
B) only the price level affects consumption.
C) many factors other than disposable income affect consumption, and each is allowed to vary along the consumption function.
D) factors other than disposable income affect consumption, but those are held constant along the consumption function.
E) only consumer expectations affect consumption.

Question 8

Which of the following is true of disposable income?

A) It excludes transfer payments.
B) It is the portion of income that is used solely for consumption.
C) It is the part of total earned income that is paid to the government in the form of taxes.
D) It is the difference between income and saving.
E) It equals consumption expenditures plus saving.

Question 9

Historically, consumption spending in the United States has _____

A) fluctuated greatly with changes in the level of income.
B) remained approximately constant as a percentage of income.
C) decreased as a percentage of income.
D) varied inversely with the inflation rate.
E) varied inversely with the interest rate.

Question 10

The relationship in the economy between consumption and income is called _____

A) disposable income.
B) the consumption function.
C) the marginal propensity to consume.
D) the marginal propensity to save.
E) net wealth.

Question 11

The marginal propensity to consume (MPC) is _____

A) the relationship between a change in consumption and a change in income.
B) the relationship between a change in consumption and a change in saving.
C) the relationship between changes in consumption and changes in net wealth.
D) the ratio of income to consumption at any given level of income.
E) the ratio of total consumption to total saving.

Question 12

The fraction of a change in income that is spent on consumption is known as _____

A) disposable income.
B) the consumption function.
C) the marginal propensity to consume.
D) the marginal propensity to save.
E) net wealth.

Question 13

Linda earned an income of $3,000 per month which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her consumption after the increase?

A) $20,000
B) $3,500
C) $2,700
D) $3,150
E) $450

Question 14

The most important determinant of a household's consumption spending is _____

A) its disposable income.
B) the in-kind transfers received by the household.
C) the level of education of the members of the household.
D) the interest rate.
E) the ratio of wage to non-wage income of the household.

Question 15

Consumption reflects _____

A) investment spending.
B) government expenditures.
C) income.
D) sales.
E) net exports.

Question 16

Which of the following is true of the relationship between disposable income and consumption?

A) Disposable income and consumption are both dependent variables.
B) Disposable income and consumption are both independent variables.
C) Disposable income is the dependent variable and consumption is the independent variable.
D) Consumption is the dependent variable and disposable income is the independent variable.
E) Disposable income and consumption are negatively related to each other.

Question 17

The consumption function relates consumption spending to _____

A) the price level.
B) interest rates.
C) disposable income.
D) expectations about the price level.
E) household wealth.

Question 18

Linda earns an income of $3,000 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her disposable income per month?

A) $20,000
B) $3,000
C) $2,700
D) $3,150
E) $450

Question 19

The marginal propensity to consume _____

A) is the proportion of disposable income that is consumed.
B) is the ratio of disposable income to consumption.
C) is the change in consumption relative to a change in disposable income.
D) minus the marginal propensity to save must equal 1.
E) is greater than 1 at all levels of income.

Question 20

The difference between consumption spending and disposable income _____

A) decreases as income increases.
B) stays proportionally the same as income increases.
C) decreases if the interest rate increases.
D) equals the amount of taxes paid.
E) equals saving.

Question 21

An increase in net wealth will _____

A) increase consumption and increase saving.
B) increase saving and decrease consumption.
C) decrease consumption and decrease saving.
D) increase consumption and decrease saving.
E) have no effect on consumption.

Question 22

The fraction of an increase in income that is saved is referred to as the _____

A) marginal propensity to save.
B) average propensity to save.
C) marginal propensity to consume.
D) average propensity to consume.
E) saving-consumption ratio.

Question 23

If the marginal propensity to consume (MPC) is less than 1 and a household's disposable income increases by $2,000, the household's consumption will _____

A) increase by less than $2,000.
B) increase by $2,000.
C) decrease if the total income of the household is above $100,000.
D) remain the same unless the change in income significantly affects the household's wealth.
E) increase by more than $2,000.

Question 24

If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its _____

A) marginal propensity to consume is −0.67.
B) marginal propensity to consume is 0.88.
C) marginal propensity to consume is 0.20.
D) marginal propensity to save is 0.
E) marginal propensity to save is 0.12.

Question 25

The fraction of a change in income that is saved is known as _____

A) disposable income.
B) the consumption function.
C) the marginal propensity to consume.
D) the marginal propensity to save.
E) net wealth.

Question 26

If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion in an economy, then consumption spending will increase by _____

A) $6 billion.
B) $14 billion.
C) $20 billion.
D) $28 billion.
E) $67 billion.

Question 27

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is the change in her consumption per month after the increase in income?

A) $3,500
B) $3,000
C) $2,700
D) $3,150
E) $450

Question 28

Along the consumption function, an increase in disposable income will _____

A) cause autonomous consumption to rise.
B) shift the consumption function upward.
C) cause a corresponding downward shift of the saving function.
D) cause a movement along the given consumption function.
E) shift the consumption function downward.

Question 29

If a household's income falls from $26,000 to $24,000 and its savings fall from $1,000 to $500, then its _____

A) marginal propensity to consume is 0.98.
B) marginal propensity to consume is 1.33.
C) marginal propensity to consume is 0.25.
D) marginal propensity to save is 0.02.
E) marginal propensity to save is 0.25.

Question 30

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What are her savings per month before the increase income and after the increase in income?

A) $500; $450
B) $300; $350
C) $450; $500
D) $350; $300
E) $500; $350

Question 31

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is the change in her saving per month after the increase in income?

A) $500
B) $450
C) $350
D) $300
E) $50

Question 32

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging and other expenses. So far, she has managed to save $20,000. What is her marginal propensity to save (MPS)?

A) Her marginal propensity to save is 0.99.
B) Her marginal propensity to save is 0.90.
C) Her marginal propensity to save is 0.86.
D) Her marginal propensity to save is 0.10.
E) Her marginal propensity to save is 0.01.

Question 33

Net wealth is _____

A) the value of a household's assets plus liabilities.
B) the value of household's assets minus liabilities.
C) a household's income minus consumption.
D) a household's income minus savings.
E) a household's income plus consumption

Question 34

A decrease in net wealth will _____

A) increase consumption and increase saving.
B) increase saving and decrease consumption.
C) decrease consumption and decrease saving.
D) increase consumption and decrease saving.
E) have no effect on consumption.

Question 35

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

A) 0.5.
B) the multiplier.
C) the slope of the consumption function.
D) 1.0.
E) the slope of the saving function.

Question 36

Suppose an increase in disposable income from $3 trillion to $3.2 trillion increases consumption from $2.5 trillion to $2.6 trillion. The marginal propensity to consume (MPC) is _____

A) 0.1.
B) 0.2.
C) 0.5.
D) 0.8.
E) 0.9.

Question 37

If income increases by $100 and saving increases by $25, the slope of the consumption function equals _____.

A) 1/4
B) 1/5
C) 1/2
D) 3/4
E) 3/5

Question 38

The slope of the consumption function shows how _____

A) consumption changes over time.
B) consumption changes as household size changes.
C) consumption changes as the price level changes.
D) income changes as the level of consumption changes.
E) consumption changes as the level of income changes.

Question 39

Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her marginal propensity to consume?

A) Her marginal propensity to consume is 0.99.
B) Her marginal propensity to consume is 0.90.
C) Her marginal propensity to consume is 0.86.
D) Her marginal propensity to consume is 0.10.
E) Her marginal propensity to consume is 0.01.

Question 40

If a household's income rises from $46,000 to $46,700, and its consumption spending rises from $35,800 to $36,400, then its _____

A) marginal propensity to consume is 0.86.
B) marginal propensity to consume is 0.99.
C) marginal propensity to consume is 0.98.
D) marginal propensity to save is 0.01.
E) marginal propensity to save is 0.86.

Question 41

How does an expected change in car prices affect consumption?

A) Higher car prices in the future prompts some to buy a new car now.
B) Higher car prices in the future prompts some to buy a new car in the future.
C) Lower car prices in the future prompts some to buy a new car now.
D) Lower car prices in the future prompts some to sell their car in the future.
E) Changes in car prices do not affect consumption.

Question 42

Expectations that the price level will increase in the future will _____

A) shift the current consumption function upward.
B) make the current consumption function steeper.
C) make the current consumption function flatter.
D) result in a downward movement along the current consumption function.
E) shift the current consumption function downward.

Question 43

Which of the following will shift the consumption function upward?

A) a decrease in stock prices
B) an increase in stock prices
C) a higher price level
D) a lower disposable income
E) a higher disposable income

Question 44

What was a result of China's "one-child policy"?

A) It increased the need to save.
B) It decreased the need to save.
C) It increased consumption spending.
D) It decreased consumption spending.
E) It increased disposable income.

Question 45

An upward shift of the consumption function might be caused by _____

A) an increase in disposable income.
B) a decrease in disposable income.
C) a decrease in the price level.
D) a decrease in household wealth.
E) an increase in the interest rate.

Question 46

A decrease in stock prices will _____ the net wealth of households and _____ consumption.

A) reduce; increase
B) reduce; decrease
C) reduce; not change
D) increase; increase
E) increase; decrease

Question 47

A decrease in net wealth will _____

A) shift the consumption function downward.
B) make the consumption function steeper.
C) cause an upward movement along the consumption function.
D) cause a downward movement along the consumption function.
E) make the consumption function flatter.

Question 48

A household that expects a decrease in disposable income in the future will _____

A) increase its current consumption spending.
B) decrease its current consumption spending.
C) maintain its current consumption spending.
D) first increase its current consumption spending and then decrease spending when income falls.
E) first decrease its current consumption spending and then increase spending when income falls.

Question 49

Which of the following will shift the consumption function upward?

A) a lower interest rate
B) an increase in the interest rate
C) an increase in disposable income
D) a decrease in disposable income
E) expectations of lower prices in the future

Question 50

Expectations that disposable income will increase in the future will _____

A) shift the current consumption function upward.
B) shift the current consumption function downward.
C) result in an upward movement along the current consumption function.
D) make the current consumption function flatter.
E) make the current consumption function steeper.

Question 51

_____ is the reward savers earn for deferring consumption.

A) A dividend
B) A wage
C) Rent
D) Profit
E) Interest

Question 52

Which of the following will shift the consumption function upward?

A) a decrease in disposable income
B) an increase in disposable income
C) an increase in the interest rate
D) expectations of lower future prices
E) an increase in net wealth

Question 53

A higher interest rate will _____

A) shift the consumption function upward.
B) shift the consumption function downward.
C) make the consumption function steeper.
D) make the consumption function flatter.
E) cause an upward movement along the consumption function.

Question 54

Expectations that the price level will decrease in the future will _____

A) make the current consumption function flatter.
B) shift the current consumption function downward.
C) result in an upward movement along the current consumption function.
D) result in a downward movement along the current consumption function.
E) make the current consumption function steeper.

Question 55

Which of the following is least likely to cause a shift of the consumption function?

A) a change in the level of saving
B) a change in consumer expectations about future prices
C) a change in household wealth
D) a change in investment spending
E) a change in the interest rate

Question 56

A decrease in disposable income will _____

A) shift the consumption function upward.
B) shift the consumption function downward.
C) cause an upward movement along the consumption function.
D) cause a downward movement along the consumption function.
E) make the consumption function flatter.

Question 57

An increase in the price level will _____

A) make the consumption function flatter.
B) make the consumption function steeper.
C) increase consumption because wages will increase.
D) decrease consumption because falling interest rates make it cheaper to borrow.
E) decrease consumption because the value of net wealth will decrease.

Question 58

A decrease in the price level will _____

A) shift the consumption function upward.
B) make the consumption function steeper.
C) result in an upward movement along the consumption function.
D) result in a downward movement along the consumption function.
E) shift the consumption function downward.

Question 59

In 2005, what was the average saving rate as a percentage of income among urban households in China?

A) 0 percent
B) 5 percent
C) 10 percent
D) 25 percent
E) 30 percent

Question 60

Which of the following will not shift the consumption function?

A) a change in household wealth
B) a change in the price level
C) a change in household disposable income
D) a change in the level of unemployment
E) a change in the rate of interest

Question 61

A decrease in the market interest rate will _____

A) increase investment for individual firms, so total investment in the economy increases.
B) increase investment for individual firms, so total investment in the economy decreases.
C) decrease investment for individual firms, so total investment in the economy increases.
D) decrease investment for individual firms, so total investment in the economy is decreases.
E) not change investment for individual firms, so total investment in the economy is unchanged.

Question 62

A technological change that positively affects business expectations will _____

A) cause a rightward shift of the investment demand curve.
B) cause a leftward shift of the investment demand curve.
C) cause an upward movement along the investment demand curve.
D) cause a downward movement along the investment demand curve.
E) make the investment demand curve slope upward.

Question 63

If the market interest rate decreases, then there will _____

A) be an upward movement along the investment demand curve.
B) be a downward movement along the investment demand curve.
C) be a rightward shift of the investment demand curve.
D) be a leftward shift of the investment demand curve.
E) be neither a movement along nor a shift of the investment demand curve.

Question 64

Data on annual percentage changes in real GDP, consumption, and investment in the United States shows that fluctuations in investment _____

A) are noticeably smaller during expansions than during recessions.
B) are roughly similar to fluctuations in consumption.
C) are roughly similar to fluctuations in GDP.
D) are closely followed by economic forecasters because those fluctuations often signal that a recession will occur.
E) account for most of the variability in GDP.

Question 65

The market interest rate is important to the investment decisions of firms _____

A) only when funds are borrowed from financial intermediaries.
B) only when firms have the money to invest in capital.
C) regardless of whether funds must be borrowed or firms have the funds on hand.
D) only when firms have funds on hand and are ready to lend them.
E) only when firms purchase new equipment rather than a new building.

Question 66

In aggregate spending, investment does not include _____

A) buying stocks and bonds.
B) a new housing development.
C) net increases to inventories.
D) purchases of equipment.
E) building a new factory.

Question 67

Identify the correct statement.

A) During a recession, investment decreases while consumption increases.
B) During a recession, investment increases while consumption decreases.
C) During a recession, investment is constant while consumption increases.
D) Annual variations in investment are larger than annual variations in consumption.
E) Annual variations in investment are smaller than annual variations in consumption.

Question 68

When do firms buy capital goods?

A) when firms have sufficient funds and can afford the capital goods
B) when firms have to borrow funds to buy the capital goods
C) when firms expect the investment to yield a higher return than other possible uses of their funds
D) when firms grow more optimistic about current profit prospects
E) when the capital good has a long productive life

Question 69

Which of the following is most likely to cause a rightward shift of the investment demand curve?

A) an increase in income
B) a decrease in the market interest rate
C) an improvement in business expectations
D) an increase in the market rate of interest
E) a decrease in income

Question 70

During the most recent decade consumption averaged _____ of GDP and investment only _____ of GDP.

A) 10 percent; 23 percent
B) 50 percent; 23 percent
C) 54 percent; 16 percent
D) 68 percent; 16 percent
E) 75 percent; 25 percent

Question 71

Which of the following will shift the investment demand curve rightward?

A) higher interest rates
B) gloomy sales expectations
C) a cut in corporate taxes that raises after-tax profits
D) a decrease in the marginal propensity to consume
E) an increase in aggregate income

Question 72

On a graph showing investment along the vertical axis and income along the horizontal axis, _____

A) the investment line will be downward sloping.
B) the investment line will be upward sloping.
C) the investment line will be horizontal.
D) the investment line will be vertical.
E) the investment line will be U-shaped.

Question 73

A firm's level of investment depends on the market interest rate _____

A) only when the firm has to borrow funds to invest in new equipment.
B) only when the firm has to borrow funds to buy stocks and bonds.
C) only when the firm already has sufficient funds and could lend them.
D) because the interest rate represents the opportunity cost of investing in capital.
E) because investments are always made with borrowed funds.

Question 74

The life-cycle model of consumption and saving indicates that _____

A) young people pay off debt.
B) middle-agers draw down their saving.
C) older people dissave.
D) net savings over a lifetime are usually little or nothing.
E) net savings over a lifetime are usually substantial.

Question 75

An increase in the market interest rate, other things equal, will _____

A) have no effect on investment.
B) increase the amount invested since the rate of return will be lower.
C) increase the amount invested because income will increase.
D) reduce the amount invested because the opportunity costs of investing will be higher.
E) increase the amount invested because the rate of return will be higher.

Question 76

If the market interest rate equals 8 percent, the opportunity cost of the last new investment project undertaken would approximately be equal to _____

A) zero percent.
B) 4 percent.
C) infinity.
D) 8 percent.
E) 16 percent.

Question 77

What happens to the fraction of disposable income saved in an economy as the economy changes?

A) The fraction of disposable income saved increases as the economy grows.
B) The fraction of disposable income saved increases as the economy shrinks.
C) The fraction of disposable income saved decreases as the economy grows.
D) The fraction of disposable income saved decreases as the economy shrinks.
E) The fraction of disposable income saved is unchanged as the economy grows.

Question 78

Fewer of an economy's resources will be channeled into building new factories and equipment when _____

A) interest rates are high.
B) households decide to spend more of their income.
C) firms are optimistic about their future profits.
D) aggregate income increases.
E) an economy has a trade deficit.

Question 79

Fluctuations in investment _____

A) account for almost all of the variability in gross domestic product (GDP) only during expansions.
B) account for little of the variability in gross domestic product (GDP).
C) account for almost all of the variability in gross domestic product (GDP) only during recessions.
D) are larger during expansions than during recessions.
E) account for more of the variability in gross domestic product (GDP) than consumption.

Question 80

An increase in the market interest rate will _____

A) increase investment for individual firms, so total investment in the economy increases.
B) increase investment for individual firms, so total investment in the economy decreases.
C) decrease investment for individual firms, so total investment in the economy increases.
D) decrease investment for individual firms, so total investment in the economy decreases.
E) not change investment for individual firms, so total investment in the economy is unchanged.