Deck 3: The Goods Market

Question 1

Which of the following will not increase equilibrium output in the short run?

A)increases in R&D
B)increases in consumer confidence
C)increases in investment demand
D)increases in government spending
E) decreases in taxes

Answer 1

increases in R&D

Question 2

Which of the following would tend to make the multiplier smaller?

A)an increase in the marginal propensity to consume
B)an increase in the marginal propensity to save
C)a reduction in taxes
D)a reduction in government spending
E) none of the above

Answer 2

an increase in the marginal propensity to save

Question 3

Which of the following is included in G?

A)medicare
B)social security payments
C)interest payments on the government debt
D)government purchases
E) all of the above

Answer 3

government purchases

Question 4

Which of the following would not be considered part of fixed investment spending (I)?

A)Toyota buys a new robot for its automobile assembly line.
B)Apple computer builds a new factory.
C)Exxon increases its inventories of unsold gasoline.
D)An accountant buys a newly built home for herself and her family.
E) all of the above

Question 5

Which of the following is an endogenous variable in our model of the goods market in Chapter 3?

A)consumption (C)
B)disposable income (YD)
C)saving (S)
D)total income (Y)
E) all of the above

Question 6

Which of the following occurs when disposable income is zero?

A)consumption must be zero
B)saving must be zero
C)saving must be positive
D)consumption is negative
E) none of the above

Question 7

Suppose the consumption equation is represented by the following: C = 250 + .75YD.Nₒw ₐssᵤmₑ government spending increases by 100 for the above economy.Given the above information,we know that equilibrium output will increase by

A)200.
B)400.
C)800.
D)1000.
E) none of the above

Question 8

For the U.S.economy,which of the following represents the largest component of GDP?

A)imports
B)investment
C)government spending
D)exports
E) none of the above

Question 9

The marginal propensity to consume represents

A)the level of consumption that occurs if disposable income is zero.
B)the ratio of total consumption to disposable income.
C)total income minus total taxes.
D)the change in output caused by a one-unit change in autonomous demand.
E) the change in consumption caused by a one-unit change in disposable income.

Question 10

Disposable income equals

A)income minus saving.
B)income minus both saving and taxes.
C)consumption minus taxes.
D)the sum of consumption and saving.
E) none of the above

Question 11

Let the consumption function be represented by the following equation: C = c₀ + c₁YD.For this equation,we assume that c₁ is

A)negative.
B)larger than c₀.
C)different at different levels of income.
D)equal to one.
E) none of the above

Question 12

Suppose the consumption equation is represented by the following: C = 250 + .75YD.The multiplier in this economy is

A) .25.
B) .75.
C) 1.
D) 4.
E) 5.

Question 13

Which of the following is an exogenous variable in our model of the goods market in Chapter 3?

A)consumption (C)
B)saving (S)
C)disposable income (YD)
D)government spending (G)
E) none of the above

Question 14

Suppose the consumption equation is represented by the following: C = 250 + .75YD.Given this information,the marginal propensity to save is

A) .25.
B) .7.
C) 1.
D) 4.
E) none of the above

Question 15

Which of the following represents total saving for an economy?

A)the sum of private saving and fixed investment
B)the sum of private saving and consumption
C)the sum of taxes and government spending
D)the excess of taxes over government spending
E) none of the above

Question 16

Suppose the consumption equation is represented by the following: C = 250 + .8YD.The multiplier for the above economy equals

A)2)
B)3)
C)4)
D)5)
E) none of the above

Question 17

An economy is in equilibrium when which of the following conditions is satisfied?

A)consumption equals saving
B)output equals consumption
C)total saving equals zero
D)total saving equals investment
E) all of the above

Question 18

Equilibrium in the goods market requires that

A)production equals income.
B)production equals demand.
C)consumption equals saving.
D)consumption equals income.
E) government spending equals taxes minus transfers.

Question 19

Which of the following is true for a "closed economy"?

A)government spending equals taxes
B)there are no imports or exports
C)exports equal imports
D)there is no saving
E) there is no government spending or taxes

Question 20

Which of the following types of government spending is included when calculating GDP?

A)spending at the federal level
B)spending at the state level
C)spending at the municipal level
D)all of the above
E) only A and B

Question 21

Autonomous spending in a closed economy equals which of the following?

A)c₀ + I + G - c₁T
B)C + I + G
C)Z
D)c₀ + I + G + c₁T

Question 22

An increase in the marginal propensity to save from .3 to .4 will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c₀))to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a larger effect on output.

Question 23

Suppose an open economy is in equilibrium.Given this information,we know with certainty that

A)G = T.
B)X = IM.
C)S = I.
D)Y = Z.

Question 24

For a closed economy,which of the following conditions must be satisfied for equilibrium to be maintained?

A)G = T
B)X = IM = 0
C)C = S
D)none of the above

Question 25

An increase in taxes will cause

A)a reduction in investment.
B)an increase in investment.
C)no change in investment.
D)no change in autonomous spending.

Question 26

A tax cut will cause

A)a reduction in investment.
B)an increase in investment.
C)no change in investment.
D)no change in autonomous spending.

Question 27

Based on our understanding of the paradox of saving,we know that a reduction in the desire to save will cause

A)an increase in equilibrium GDP.
B)a reduction in GDP.
C)an increase in the desire to invest.
D)no change in equilibrium GDP.
E) a permanent reduction in the level of saving.

Question 28

When the economy is in equilibrium,we know with certainty that

A)public saving equals investment.
B)private saving equals investment.
C)G = T.
D)none of the above

Question 29

An increase in the marginal propensity to save from .1 to .2 will cause

A)an increase in the multiplier and a given change in autonomous consumption (c₀)to have a smaller effect on output.
B)an increase in the multiplier and a given change in autonomous consumption (c₀)to have a larger effect on output.
C)a reduction in the multiplier and a given change in autonomous consumption (c₀)to have a smaller effect on output.
D)a reduction in the multiplier and a given change in autonomous consumption (c₀)to have a larger effect on output.

Question 30

If C = 2000 + .9YD,what increase in government spending must occur for equilibrium output to increase by 1000?

A)100
B)200
C)250
D)500
E) 1000

Question 31

An increase in the desire to save by households will cause

A)a reduction in output.
B)a reduction in investment.
C)an increase in output.
D)no change in investment and no change in output.

Question 32

When a closed economy is in equilibrium,we know with certainty that

A)I = S + (T -G.)
B)I = S.
C)I = S + (G - T).
D) G = T and S = I.

Question 33

A reduction in the marginal propensity to save from .4 to .3 will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a larger effect on output.

Question 34

Suppose there is an increase in autonomous consumption.Specifically,suppose c₀ increases where C = c₀ + c₁YD. This increase in autonomous consumption will cause which of the following to increase?

A)equilibrium income
B)equilibrium disposable income
C)demand
D)all of the above
E) none of the above

Question 35

Which of the following events will cause a reduction in equilibrium output?

A)an increase in the marginal propensity to save
B)an increase in taxes
C)a reduction in the marginal propensity to consume
D)all of the above
E) none of the above

Question 36

Based on our understanding of the model presented in Chapter 3,we know that a reduction in c₁ (where C = c₀ + c₁YD)will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a larger effect on output.

Question 37

Based on our understanding of the model presented in Chapter 3,we know that an increase in c₁ (where C = c₀ + c₁YD)will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c₀)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c₀)to have a larger effect on output.

Question 38

Which of the following equals demand in a closed economy?

A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)none of the above

Question 39

Based on our understanding of consumption and saving,we know that the marginal propensity to consume and the marginal propensity to save must

A)be equal to each other.
B)sum to exactly one.
C)sum to less than one.
D)sum to more than one.
E) be equal to the multiplier.

Question 40

Which of the following equals demand in an open economy?

A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)C + I + G

Question 41

Explain what the multiplier represents.

Question 42

Suppose the marginal propensity to consume equals .8 (i.e.,c₁ = .8).Given this information,which of the following events will cause the largest increase in output?

A)G increases by 200
B)T decreases by 200
C)I increases by 150
D)both A and B

Question 43

For this question,assume that taxes are independent of income (i.e.,the income tax rate is zero).Now suppose that fiscal policy makers wish to decrease equilibrium output by $500 billion.Further suppose that policy makers can choose one of the following two options: (1)change in government spending; or (2)change in taxes.Compare and explain the relative size of the changes in government spending and taxes needed to obtain this desired change in output.

Question 44

Discuss what is meant by the paradox of saving.

Question 45

Based on our understanding of the model presented in Chapter 3,we know with certainty that an equal and simultaneous reduction in G and T will cause

A)an increase in output.
B)no change in output.
C)a reduction in output.
D)an increase in investment.

Question 46

Explain what factors cause shifts and changes in the slope of the ZZ curve presented in chapter 3.

Question 47

Based on our understanding of the model presented in Chapter 3,a reduction in investment will cause

A)an increase in the multiplier.
B)a reduction in the multiplier.
C)a reduction in the marginal propensity to save.
D)a reduction in output.
E) both B and D

Question 48

Discuss and explain what effect a reduction in the marginal propensity to consume has on the size of the multiplier.

Question 49

Suppose the consumption equation is represented by the following: C = 250 + .75YD,thₑn pᵣᵢᵥₐtₑ sₐᵥᵢngs ᵢs

A)-250+0.25YD.
B)-250+0.75YD.
C)-1000+0.25YD.
D)-1000+0.75YD.

Question 50

Suppose that,at a given level of disposable income,consumers decide to save more.Explain what effect this decision will have on equilibrium income.Also,explain what effect this decision will have on the level of saving once the economy has reached the new equilibrium.

Question 51

Suppose business confidence decreases causing a reduction in investment.Based on our understanding of the model presented in Chapter 3,we know with certainty that a reduction in investment will cause

A)an increase in the multiplier.
B)a reduction in the multiplier.
C)a reduction in the marginal propensity to save.
D)a reduction in consumption as the economy adjusts to this decrease in investment.

Question 52

Which of the following about IS relation is not correct?

A)It is the the relation between interest rate and savings.
B)It is the equilibrium condition for the goods market.
C)It stands for "Investment equals saving."
D)It shows what firms want to invest must be equal to what people and the government want to save.

Question 53

Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y - T G = 2000
a.Given the above variables,calculate the equilibrium level of output.Hint: First specify (using the above numbers)the demand equation (Z)for this economy.Second,using the equilibrium condition,equate this expression with Y.Once you have done this,solve for the equilibrium level of output.Using the ZZ-Y graph (i.e.,a graph that includes the ZZ line and 45-degree line with Z on the vertical axis,and Y on the horizontal axis),illustrate the equilibrium level of output for this economy.
b.Now,assume that consumer confidence decreases causing a reduction in autonomous consumption (c₀)from 500 to 400.What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?
c.Graphically illustrate the effects of this change in autonomous consumption on the demand line (ZZ)and Y.Clearly indicate in your graph the initial and final equilibrium levels of output.
d.Briefly explain why this reduction in output is greater than (in absolute terms)the initial reduction in autonomous consumption.

Question 54

Which of the following is corrrect?

A)Governments can not achieve the level of output they want.
B)Changing government spending or taxes is easy.
C)Investment will remain constant.
D)Expectations do not matter for government to change spending or taxes.

Question 55

Inventory investment refers to

A)the difference between production and sales in a given year.
B)fixed investment.
C)nonresidential investment.
D)the purchase by firms of new machines.

Question 56

Based on our understanding of the model presented in Chapter 3,we know with certainty that an equal and simultaneous increase in G and T will cause

A)an increase in output.
B)no change in output.
C)a reduction in output.
D)an increase in investment.

Question 57

Why would consumer decrease consumption even if their disposable income has not changed?

Question 58

Use the ZZ-Y model presented in chapter 3 to illustrate the effects of a reduction in consumer confidence on the economy.Also,explain what effect this reduction in consumer confidence has on the economy.

Question 59

Explain the difference between endogenous and exogenous variables.

Question 60

If C = 2000 + .9YD,what decrease in taxes must occur for equilibrium output to increase by 1000?

A)111
B)100
C)1000
D)500

Question 61

Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y - T G = 2000
a.Given the above variables,calculate the equilibrium level of output.
b.Now,assume that taxes increase from 600 to 700.What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

Question 62

In the model discussed in Chapter 3,why do we assume G and T are exogenous?

Question 63

Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y - T G = 2000
a.Given the above variables,calculate the equilibrium level of output.
b.Now,assume that government spending decreases from 2000 to 1900.What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

Question 64

Graphically illustrate the effects of an increase in autonomous consumption on the demand line (ZZ)and Y.Clearly indicate in your graph the initial and final equilibrium levels of output.Briefly explain why this increase in output is greater than (in absolute terms)the initial change in autonomous consumption.