Deck 9: Consumption, investment, and the Multiplier

Question 1

According to Keynesian theory,the most important determinant of saving and consumption is

A)the level of real income.
B)the stock of liquid assets.
C)the stock of durable goods in the consumer's possession.
D)the level of consumer indebtedness.

Answer 1

the level of real income.

Question 2

According to Keynes,the primary determinant of a person's saving is not

A)the person's level of income,but is the desired real income of the person.
B)the person's level of savings,but is the expected interest rate in the near future.
C)the interest rate,but is the level of savings the person has.
D)the interest rate,but is the level of the person's real income.

Answer 2

the interest rate,but is the level of the person's real income.

Question 3

Which of the following statements is FALSE?

A)disposable income - saving = consumption
B)consumption + saving = disposable income
C)saving = disposable income - consumption
D)consumption = saving - disposable income

Answer 3

consumption = saving - disposable income

Question 4

Saving and savings differ in that

A)saving is a stock,and savings is a flow.
B)saving always exceeds savings.
C)savings is a stock,and saving is a flow.
D)savings can be negative,but saving cannot.

Question 5

The consumption function shows

A)a positive relationship between an individual's stock of wealth and his level of planned consumption.
B)a positive relationship between disposable income and planned consumption.
C)a negative relationship between planned consumption and aggregate saving.
D)a negative relationship between disposable income and planned consumption.

Question 6

Suppose when real disposable income is $5,000,planned real consumption is $4,000 and planned real saving is $1,000.When real disposable income increases to $6,000,planned real saving increases by $500.The new planned real consumption expenditures is

A)$5,000.
B)$4,500.
C)$6,000.
D)$3,500.

Question 7

If consumption spending exceeds income,we have

A)dissaving.
B)hoarding.
C)savings.
D)investment.

Question 8

Figure 9-1
In Figure 9-1,line ABC is called

A)the 45-degree line.
B)the consumption function.
C)the saving function.
D)aggregate supply.

Question 9

The relationship between households' planned consumption expenditures and households' level of real income is called

A)the consumption function.
B)the savings function.
C)the investment function.
D)the household aggregate demand function.

Question 10

Keynesian theory is based on the belief that

A)saving and consumption are influenced primarily by real current income.
B)saving is influenced primarily by the interest rate.
C)planned savings equal planned investment only at full employment.
D)full employment is automatically attained in any economy.

Question 11

Figure 9-1
In Figure 9-1,line EBD is called

A)the 45-degree line.
B)the consumption function.
C)the saving function.
D)aggregate demand.

Question 12

According to Keynes,an individual's level of saving is primarily determined by

A)the interest rate.
B)the individual's current level of real income.
C)the individual's assessment of the future direction of the stock market.
D)real GDP for the economy.

Question 13

Saving equals

A)disposable income minus taxes.
B)disposable income minus consumption spending.
C)disposable income minus savings.
D)consumption spending minus savings.

Question 14

Dissaving occurs when

A)income exceeds consumption.
B)planned savings is negative.
C)the consumption function is below the 45-degree line drawn from the origin.
D)planned savings is positive.

Question 15

At a level of real disposable income of 0,consumption is $5,000.Saving equals

A)0)
B)$2,500.
C)-$5,000.
D)an amount that cannot be determined with the information available.

Question 16

In the Keynesian model,consumption

A)is positively related to income and saving is negatively related to the stock market.
B)is positively related to income but saving is not systematically related to either income or interest rates.
C)and saving are positively related to the real interest rate.
D)and saving are positively related to income.

Question 17

According to Keynes,household planned consumption

A)decreases as disposable income increases.
B)is unstable and fluctuates widely with changes in disposable income.
C)is positively related to real disposable income.
D)is indirectly related to the interest rate.

Question 18

As real disposable income increases,consumption expenditures

A)stay constant.
B)decrease but by a smaller amount.
C)increase but by a smaller amount.
D)increase but by a larger amount.

Question 19

The 45-degree line

A)contains only a consumption component.
B)represents both planned consumption and planned investment.
C)shows various combinations where planned consumption equals real disposable income.
D)reflects a decreasing APC as real disposable income rises.

Question 20

An increase in autonomous consumption means that

A)the consumption function shifts down.
B)the consumption function shifts up.
C)the consumption function becomes steeper.
D)the consumption function becomes flatter.

Question 21

Figure 9-3
According to Figure 9-3,planned consumption and income are equal at an income level of

A)Y₂.
B)Y₃.
C)Y₁.
D)Y₀.

Question 22

When a family's income is low,and it is spending more on consumption than it is receiving in income,

A)the APC must be increasing.
B)the APC must be equal to the ratio of planned consumption expenditure to total saving.
C)the MPC must be zero.
D)some segment of the consumption function curve lies above the 45-degree line,indicating dissaving.

Question 23

Figure 9-3
According to Figure 9-3,at an income level of Y₁

A)the economy saves an amount equal to BD.
B)the marginal propensity to save is falling.
C)the average propensity to save is greater than one.
D)the economy dissaves an amount equal to BD.

Question 24

The consumption curve intersects the 45-degree reference line at $4 trillion.This indicates that

A)autonomous consumption spending is $4.1 trillion.
B)consumption spending is $4 trillion.
C)consumption spending is less than $4 trillion since taxes must be paid.
D)consumption spending is more than $4 trillion since taxes have been paid.

Question 25

If firms' unplanned inventories are increasing,then in a closed,private economy

A)the level of real national income will rise.
B)the level of real national income will not change in the foreseeable future.
C)actual consumption is greater than planned consumption.
D)consumers are saving more than businesses anticipated.

Question 26

Figure 9-2
In Figure 9-2,the marginal propensity to consume equals

A)0)8.
B)0)9.
C)0)75.
D)0)85.

Question 27

Figure 9-1
According to Figure 9-1,autonomous consumption equals

A)0)
B)$5,000.
C)$20,000.
D)-$5,000.

Question 28

Figure 9-2
In Figure 9-2,when disposable income is greater than 600,then

A)savings are negative.
B)the MPC is greater than 1.
C)savings are positive.
D)the MPS is negative.

Question 29

If the MPS = 0.1,then

A)the MPC = 0.9.
B)the APS = 0.1.
C)the APC = 0.9.
D)consumption equals $1,800 when income equals $2,000.

Question 30

If autonomous consumption expenditures increase,then

A)saving at every level of income increases.
B)the break-even point decreases.
C)the break-even point increases.
D)saving is unaffected.

Question 31

Where the consumption function crosses the 45-degree line,

A)savings will be negative.
B)consumption will equal only autonomous consumption.
C)the marginal propensity to consume is 0.5.
D)savings will be zero.

Question 32

The break-even point on the consumption function represents the point where

A)consumption equals spending.
B)income equals consumption plus spending.
C)consumption is zero.
D)consumption equals income.

Question 33

At the break-even point for the consumption function

A)saving is positive.
B)saving is negative.
C)saving is zero.
D)the marginal propensity to consume equals l.

Question 34

Figure 9-2
In Figure 9-2,when real disposable income is less than 600,then

A)consumption is less than disposable income.
B)consumption is more than disposable income.
C)consumption is the same as disposable income.
D)the MPC will fall.

Question 35

Autonomous consumption is

A)consumption spending that is earned rather than transferred from the government.
B)consumption spending that does not depend on the level of income.
C)the amount spent on consumption when saving equals zero.
D)consumption spending when the marginal propensity to consume is 1.

Question 36

Figure 9-2
In Figure 9-2,a change in autonomous consumption to 100 would cause the consumption function to

A)become steeper.
B)become flatter.
C)shift down.
D)shift up.

Question 37

Which of the following would be expected to shift the consumption function up?

A)decreases in wealth
B)expectations of harder times ahead
C)increases in the nation's population
D)changes in real disposable income

Question 38

If the consumption function is above the 45-degree line drawn from the origin,then the saving function will

A)be positive.
B)be negative.
C)equal zero.
D)intersect the consumption function.

Question 39

If saving equals $200 when real disposable income equals $1,000,the break-even income

A)is less than $1,000.
B)is greater than $1,000.
C)is equal to $1,000.
D)is equal to $1,200.

Question 40

Figure 9-2
In Figure 9-2,savings will equal zero when real disposable income equals

A)0)
B)60.
C)600.
D)500.

Question 41

The arithmetic value of 1 - MPC equals

A)APC.
B)MPS.
C)APS.
D)NNP.

Question 42

The average price of a share of stock on the Toronto Exchange falls by 30 percent.Other things constant,we would expect

A)an increase in the marginal propensity to consume.
B)a decrease in the marginal propensity to consume.
C)a shift up of the consumption function.
D)a shift down of the consumption function.

Question 43

An increase in the interest rate will cause

A)the quantity of investment spending to increase.
B)the quantity of investment spending to decrease.
C)the investment function to shift out.
D)the investment function to shift in.

Question 44

The fraction of a change in real disposable income that is spent is referred to as the

A)APC.
B)MPC.
C)MPS.
D)APS.

Question 45

The planned investment function shows that

A)real gross investment falls as real NNP increases.
B)a negative relationship exists between the level of planned investment and the interest rate.
C)a positive relationship exists between planned consumption and planned investment.
D)at higher levels of planned saving,planned investment increases.

Question 46

Which of the following would cause a leftward shift in the investment function?

A)technological progress
B)a reduction in the rate of interest
C)optimistic expectations about business conditions
D)an increase in business taxes

Question 47

The MPC can best be defined as

A)that fraction of real disposable income that is consumed.
B)that fraction of real disposable income that is not consumed.
C)that fraction of a change in real disposable income that is spent.
D)that fraction of a change in real disposable income that is saved.

Question 48

The consumption function will shift upward when

A)real income increases.
B)saving increases.
C)the real wealth of the average household increases.
D)population decreases.

Question 49

Suppose investment spending is $5 billion,real disposable income is $200 billion,and the marginal propensity to consume is 0.8.If real disposable income increases to $220 billion,investment spending will be

A)$5 billion.
B)$9 billion.
C)$21 billion.
D)$96 billion.

Question 50

The marginal propensity to consume is found by

A)dividing consumption by income.
B)dividing income by consumption.
C)dividing the change in income by the change in consumption.
D)dividing the change in consumption by the change in income.

Question 51

Planned expenditures equals real disposable income

A)at every point on the consumption function.
B)at every point on the saving function.
C)at every point on the 45-degree line.
D)when saving equals zero.

Question 52

Using real national income on the horizontal axis instead of real disposable income implies that a marginal propensity to consume 0.75 generates for every additional $100 of real national income

A)$75 of additional real disposable income.
B)$25 of additional saving.
C)$56.25 of additional consumption spending.
D)$25 of additional saving and taxes.

Question 53

Technological progress should lead to

A)an outward (rightward)shift in the investment function.
B)a downward movement of the investment function.
C)an unchanged investment function.
D)less savings.

Question 54

In the Keynesian model,planned investment is inversely related to

A)the interest rate.
B)the level of income.
C)the wage rate.
D)the tax rate.

Question 55

The planned investment function will shift downward if

A)real disposable income increases.
B)the interest rate falls.
C)expectations become more pessimistic.
D)the existing stock of capital decreases.

Question 56

The ratio of the change in consumption to the change in disposable income is the

A)marginal propensity to consume.
B)marginal propensity to save.
C)average propensity to consume.
D)average propensity to save.

Question 57

If business executives become more optimistic about the future,we would expect that

A)the investment curve would shift outward to the right.
B)the saving function would shift up.
C)the consumption curve would shift up.
D)investment spending would decrease.

Question 58

Compared to consumption spending,investment historically has tended to be

A)greater.
B)more stable.
C)stagnant.
D)more variable.

Question 59

The investment function would shift inward to the left if

A)real disposable income decreased.
B)interest rates increased.
C)there was an increase in business taxes.
D)there was a positive change in productive technology.

Question 60

The marginal propensity to consume

A)shows how much real disposable income changes when consumption falls.
B)is greater than 1 only if the marginal propensity to save is greater than 1.
C)shows how much of an extra dollar of real disposable income is spent.
D)shows the percentage of real disposable income consumed at each level of income.

Question 61

Equilibrium in the macro economy occurs when

A)total planned consumption expenditures equals real national income.
B)planned investment spending equals net exports of zero.
C)total planned expenditures equals real national income.
D)net exports equals inventory changes.

Question 62

In a closed economy,the equilibrium national income occurs where

A)the C + I + G line crosses the 45-degree line.
B)planned expenditures exceed national income.
C)savings will exceed planned investment.
D)all of these.

Question 63

A permanent increase in autonomous investment causes

A)a more than proportional increase in real national income.
B)a proportional increase in real national income.
C)a less than proportional increase in real national income.
D)an offsetting change in saving that leaves real national income at the same level.

Question 64

The multiplier effect tends to

A)generate instability.
B)promote stability of the general price level.
C)magnify small changes in spending into much larger changes in output and income.
D)increase the MPC.

Question 65

Figure 9-4
At an income level of Y₃ and planned expenditures of (C + I)1 in Figure 9-4,

A)planned saving exceeds planned investment.
B)the economy is in equilibrium.
C)the quantity of aggregate demand exceeds the real output produced.
D)there is full employment.

Question 66

If GDP is at an equilibrium level in a closed economy,

A)C + I + G = GDP or National Income.
B)savings will be less than planned investment.
C)unplanned inventory accumulation will equal planned inventory accumulation.
D)C + T - G = GDP or National Income.

Question 67

In Keynesian analysis,if investment remains constant when income increases or decreases,it is described as being

A)planned.
B)autonomous.
C)unplanned.
D)discretionary.

Question 68

Total planned expenditures in a closed economy are equal to

A)consumption + investment + government.
B)consumption + savings + transfers + investment.
C)savings + investment + government.
D)investment + savings + transfers.

Question 69

A lump-sum tax,such as a $1,000 tax that every family must pay one time,is

A)a type of income tax.
B)an autonomous tax.
C)negatively related to real national income.
D)a regressive tax.

Question 70

Suppose the economy is at an equilibrium when C + I + G + X - M = $1,200.If the economy is currently at a real national income level of $1,400,then planned expenditures

A)exceed real national income,and output will increase.
B)are less than real national income,and output will decline.
C)are equal to real national income,and there will be no change in output.
D)are less than real national income,and output will increase.

Question 71

A higher level of real national income will result if

A)total expenditures exceed real national income.
B)aggregate supply exceeds aggregate demand.
C)aggregate demand exceeds aggregate supply.
D)leakage exceeds injections.

Question 72

If an economy saves 20 percent of any increase in income,then an increase in investment of $2 billion can produce an increase in income of as much as

A)$2 billion.
B)$10 billion.
C)$0.4 billion.
D)$1.6 billion.

Question 73

For an investment to be considered autonomous,it must

A)be negatively related to the interest rate.
B)increase as the level of income increases.
C)include fixed components.
D)be independent of the level of real disposable income.

Question 74

If,at some level of output,total planned expenditures are less than the level of real national income,

A)output and income will rise.
B)output and income remain unchanged.
C)output and income will either fall or remain unchanged,depending on the MPC.
D)unplanned inventories will increase and income will fall.

Question 75

An increase in the price level causes

A)reduced investment spending because interest rates increase,but an increase in net exports as Canadians buy fewer imports.The change in investment is usually greater than the change in net exports.
B)a reduction in net exports as higher priced Canadian goods induce foreigners to buy fewer Canadian products,and an increase in investment spending as the higher prices make businesses more profitable.
C)reduced investment spending because interest rates increase and a decrease in net exports as the higher prices induce foreigners to buy fewer Canadian goods.
D)increased government spending which crowds out investment spending so that the net effect on aggregate demand is nil.

Question 76

Figure 9-5
According to Figure 9-5,the equilibrium level of real national income is

A)$3 billion.
B)$3.5 billion.
C)$6 billion.
D)$10 billion.

Question 77

When real national income exceeds total expenditures,

A)there will be unplanned decreases in inventories.
B)the circular flow will increase.
C)a lower level of equilibrium income will result.
D)a higher level of equilibrium income will prevail.

Question 78

Figure 9-4
In Figure 9-4,at an income level of Y₁ and planned expenditures of (C + I)1,the level of autonomous investment is

A)ED.
B)EF.
C)JK.
D)GK.

Question 79

Suppose the equilibrium level for an economy occurs when C + I + G + X - M = $600.If the real national income is $500,then unplanned inventories are

A)increasing,and output will expand.
B)increasing,and output will contract.
C)decreasing,and output will expand.
D)decreasing,and output will contract.

Question 80

In the Keynesian model,government spending is considered

A)a positive function of real national income.
B)a negative function of real national income.
C)to be a negative function of the real interest rate.
D)to be autonomous.