Deck 25: Aggregate Demand and the Powerful Consumer

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

Tax reductions should also reduce the amount of consumer expenditures.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

The typical value for the MPC is less than 1.0.

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

To economists, investment means buying stocks and bonds.

Question 25

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

Question 26

A savings account is an example of consumer income.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

Government purchases are included in national product.

Question 40

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

Question 41

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 42

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

A)1964 
B)1975 
C)1981 
D)1999

Question 43

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 44

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 45

In 1975, Congress passed a tax rebate to spur consumer spending.Consumers:

A)spent the entire amount of the tax savings, boosting the economy, as planned 
B)did not spend any of the amount of the tax savings 
C)saved a substantial share of the tax savings and spent the rest 
D)saved a small portion of the tax savings, and spent the rest

Question 46

National income and domestic product must be equal.

Question 47

For those in the lowest tax bracket, each dollar tax cut
increases disposable income by about $1.33.

Question 48

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 49

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 50

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 51

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 52

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

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

Question 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

Consumers most likely decide on their current consumption spending by looking at their short-run income prospects.

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

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 63

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 64

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 65

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 66

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 67

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 68

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

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

Question 69

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.

Question 70

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 71

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 72

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 73

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 74

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 75

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

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

Question 76

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 77

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 78

Why is it true 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 79

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 80

The largest component of aggregate demand is

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