Deck 8: Aggregate Expenditures

Question 1

Which of the following is FALSE regarding the Keynesian model?

A) Aggregate expenditures can be expressed as C + I + G + (X - M).
B) GDP can be measured as the sum of all spending.
C) The four main types of spending are consumer,investment,government,and net exports.
D) Aggregate spending is always less than aggregate income.

Answer 1

Aggregate spending is always less than aggregate income.

Question 2

Approximately what share of U.S.GDP is consumption?

A) 60%
B) 70%
C) 80%
D) 90%

Answer 2

70%

Question 3

If disposable income is $3,000 and saving is $1,200,how much is the average propensity to consume?

A) 0.4
B) 0.6
C) 1.2
D) 2.5

Answer 3

0.6

Question 4

In the Keynesian model,the principal determinant of saving is:

A) interest rates.
B) income.
C) tax rates.
D) investment.

Question 5

A depression economy has considerable slack,so:

A) unemployment is high.
B) there is no excess plant capacity.
C) all resources are being used efficiently.
D) there is an increase in aggregate price levels.

Question 6

If disposable income is $3,000 and saving is $1,200,how much is consumption?

A) −$1,200
B) $1,800
C) $2,100
D) $4,200

Question 7

In the simple Keynesian model of the private economy,which of the following is assumed?

A) The consumer price index can rise or fall.
B) Households and firms are savers.
C) The aggregate price level can change.
D) There is considerable slack in the economy.

Question 8

If there is no government and no foreign sector in the economy:

A) personal income and disposable personal income are unequal.
B) international trade is an important part of total spending.
C) GDP = C + I.
D) budget and trade deficits are important parts of the model of the economy.

Question 9

(Figure: Consumption Spending) At point A:

A) saving is $20.
B) consumption is zero.
C) saving is zero.
D) consumption exceeds income by $20.

Question 10

If disposable income is $250 and saving is $50,how much is the average propensity to consume?

A) 0.2
B) 0.25
C) 0.5
D) 0.8

Question 11

Consumption spending is:

A) spending by households,businesses,and government on all goods used up within one year.
B) spending by individuals and households on only nondurable goods,since they are used up quickly.
C) spending on goods and services by heads of households.
D) spending by individuals and households on both durable and nondurable goods.

Question 12

Which of the following equations is correct?

A) AE = C - I + G + (X + M)
B) AE = C + I + G + (X - M)
C) AE = C + I - G + (X - M)
D) AE = C - I + G - (X + M)

Question 13

(Table)In the table,the marginal propensity to consume is ________ and the average propensity to consume ________. Income
Consumption Spending
Saving
$30,000
$30,000
$0
40,000
35,000
5,000
50,000
40,000
10,000

A) 0.5;varies with the level of income
B) $5,000;is $5,000
C) $10,000;is $35,000
D) 2;varies with the level of income

Question 14

Aggregate expenditures are equal to:

A) the total of consumption plus investment plus government expenditures plus exports minus imports.
B) the total of consumption plus investment plus government expenditures.
C) the total of consumption plus investment plus government expenditures plus imports minus exports.
D) consumption alone in a simplified Keynesian model.

Question 15

If disposable income increases from $250 to $300 and saving increases from $40 to $50,how much is the average propensity to save?

A) 0.133
B) 0.16
C) 0.167
D) 0.2

Question 16

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

A) disposable income;saving
B) disposable income;consumption
C) saving;consumption
D) saving;investment

Question 17

In the Keynesian aggregate expenditure model,prices are assumed to be fixed because:

A) unemployment is low.
B) resources are idle (underutilized).
C) consumption and disposable income are closely related.
D) the government heavily intervenes in the economy.

Question 18

Spending by federal,state,and local government has grown from ___ of GDP in the 1930s to more than _____ today.

A) 5%;50%.
B) 10%;30%.
C) 30%;70%
D) 5%;10%.

Question 19

Which of the following did classical economists believe would happen if the product markets accrued surpluses?

A) Prices would rise.
B) Interest rates would rise.
C) Wage rates would fall.
D) The government would fix things.

Question 20

In the Keynesian aggregate expenditure model,which variable is assumed to be fixed?

A) GDP
B) consumption
C) unemployment
D) the price level

Question 21

The factors that would shift the savings and consumption schedule include all of the following EXCEPT:

A) household debt.
B) tastes and preferences from durable goods to nondurable goods.
C) wealth.
D) taxes.

Question 22

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000,by how much does consumption increase?

A) $11,000
B) $1,000
C) $900
D) $100

Question 23

Along the 45-degree line in the graph of consumption and disposable income:

A) consumption is equal to disposable income.
B) consumption is equal to total saving.
C) consumption is equal to marginal saving.
D) the interest rate is zero.

Question 24

The marginal propensity to consume:

A) increases when income increases.
B) is the change in consumption associated with a change in income.
C) is equal to consumption divided by income.
D) decreases when income increases.

Question 25

As income increases,consumption ______

A) increases at a slower rate
B) increases faster
C) decreases at a slower rate
D) decreases faster

Question 26

Classical economists claim that ______ is the primary determinant of saving,and Keynes claimed that ______ is the primary determinant of saving.

A) the interest rate;income
B) income;the interest rate
C) taxes;government spending
D) GDP;disposable income

Question 27

The largest component of aggregate expenditures is:

A) investment spending.
B) saving.
C) government spending.
D) consumption spending.

Question 28

If your income is $35,000 and the average propensity to save is 0.46,what is consumption?

A) $16,100
B) $18,900
C) $15,500
D) $19,500

Question 29

If income is $50,000,consumption is $47,500,and saving is $2,500,then the average propensity to consume is:

A) 0.95.
B) 0.50.
C) 0.05.
D) There is not enough information to answer this question.

Question 30

The average propensity to consume is:

A) always stable.
B) equal to consumption divided by income.
C) equal to income divided by consumption.
D) the increase in consumption derived from an increase in income.

Question 31

Saving is equal to:

A) disposable income minus consumption.
B) consumption minus disposable income.
C) investment minus government taxes.
D) government taxes minus investment.

Question 32

_____ is the change in consumption associated with a change in income.

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

Question 33

If you spend $35,000 and your income is $60,000,what is your average propensity to save?

A) 0.7
B) 0.3
C) 0.58
D) 0.42

Question 34

Personal consumption expenditures:

A) constitute 30% of GDP.
B) can be found by subtracting saving from disposable income.
C) primarily depend on interest rates,according to Keynes.
D) are very unstable as a percentage of GDP over time.

Question 35

If income is $50,000,consumption is $47,500,and saving is $2,500,then the marginal propensity to consume is:

A) 0.95.
B) 0.50.
C) 0.05.
D) There is not enough information to answer this question.

Question 36

_____ is the change in saving associated with a change in income.

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

Question 37

According to the simple Keynesian model,which of the following statements is NOT correct?

A) MPC + MPS = 1
B) APC + MPS = 1
C) APC + APS = 1
D) Y = C + S

Question 38

Which of the following will NOT cause an increase in the consumption schedule?

A) James's family wealth increases.
B) The price of gas is expected to increase in two days.
C) James's family debt increases.
D) James's personal taxes decrease.

Question 39

If the marginal propensity to save is 0.25 and income increases by $7,540,what is the increase in consumption?

A) $5,655
B) $1,885
C) $10,053
D) $30,160

Question 40

Keynes believed that saving is a function of:

A) the interest rate.
B) income.
C) GDP.
D) the price of money.

Question 41

Which one of the following helps determine consumption and saving in the Keynesian model?

A) wealth
B) imports
C) technology
D) government regulations

Question 42

If income grows from $3,000 per month to $3,500 per month and consumption rises from $2,800 per month to $3,200 per month,what is the marginal propensity to consume?

A) 1.25
B) 0.8
C) 1.09
D) 0.91

Question 43

If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8,then equilibrium income will:

A) fall by $25 billion.
B) fall by $125 billion.
C) rise by $25 billion.
D) rise by $125 billion.

Question 44

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion,the marginal propensity to save is:

A) 0.2.
B) 0.25.
C) 0.75.
D) There is not enough information to answer this question.

Question 45

If the stock market collapses,consumption will:

A) not be affected.
B) increase because stocks can now be purchased cheaply.
C) decrease because people feel less wealthy.
D) mildly increase.

Question 46

When the consumption schedule lies below the 45-degree reference line,saving:

A) must be negative.
B) is zero.
C) is positive.
D) is negatively sloped.

Question 47

One implication of a straight line aggregate expenditure curve is that:

A) the marginal propensity to consume is constant.
B) the average propensity to consume is constant.
C) the average propensity to save is constant.
D) All of the answers are correct.

Question 48

If income grows from $3,000 per month to $3,500 per month and savings rise from $200 per month to $400 per month,what is the marginal propensity to save?

A) 1.25
B) 0.8
C) 2.5
D) 0.4

Question 49

If income is $5,000 per month and consumption spending is $4,500 per month,what is the average propensity to consume?

A) 0.9
B) 1.11
C) 500
D) −500

Question 50

The reason business investment is sensitive to interest rates is that:

A) interest rates are a lagging indicator,so they signal to firms the state of the economy.
B) most funds used for investment are borrowed,so firms incur an interest charge.
C) interest rates indicate how aggressive government policy is about fighting recessions.
D) firms charge interest on any investment they make.

Question 51

A luxury car manufacturer is contemplating investing in its assembly plants.It learns that the probability of a recession in the next few years has increased dramatically because of adverse international events.Its investment demand will:

A) remain unchanged because auto manufacturing is well insulated from global events.
B) decrease because lower investment returns are expected.
C) increase because lower returns to the investment are expected.
D) increase to compensate for the lower expected sales.

Question 52

Investment spending:

A) tends to be volatile.
B) is the largest component of total spending.
C) is not sensitive to interest rates.
D) is limited to the stock and bond markets.

Question 53

Which of the following is NOT a determinant of investment?

A) business expectations
B) past stock and bond prices
C) technological innovations
D) the amount of existing capital goods

Question 54

When the consumption schedule lies above the 45-degree reference line,consumption spending is ________ than income and saving is ___________.

A) greater;positive
B) less;positive
C) greater;negative
D) less;negative

Question 55

If income rises from $10,000 to $20,000 and consumption increases from $9,000 to $16,000,then the marginal propensity to consume is:

A) 0.10.
B) 0.30.
C) 0.70.
D) 0.80.

Question 56

MPC + MPS:

A) equals 1.
B) equals 0.75.
C) equals zero.
D) is always a negative number.

Question 57

When household debt levels rise:

A) the ability to get more credit rises.
B) families are less able to spend in the current period.
C) investment levels rise.
D) tax payments will be higher.

Question 58

If income rises from $10,000 to $20,000 and savings increases from $9,000 to $16,000,then the marginal propensity to save is:

A) 0.10.
B) 0.30.
C) 0.70.
D) 0.80.

Question 59

In 2008-2009,the falling stock market reduced wealth of U.S.households,causing the United States:

A) to move down along its consumption schedule.
B) to shift its consumption schedule downward.
C) to move up along its consumption schedule.
D) to shift its consumption schedule upward.

Question 60

The slope of the saving schedule is:

A) the marginal propensity to consume.
B) 1 minus the marginal propensity to consume.
C) the average propensity to consume.
D) the average propensity to save.

Question 61

If AE = $7,600 and Y = $8,000,businesses will produce:

A) more,raising both employment and income.
B) less,lowering both employment and income.
C) more,raising employment and lowering income.
D) less,lowering employment and raising income.

Question 62

If AE = $6,200 and Y = $5,800,businesses will produce:

A) more,raising both employment and income.
B) less,lowering both employment and income.
C) more,raising employment and lowering income.
D) less,lowering employment and raising income.

Question 63

Which of the following statements is CORRECT?

A) Keynesian economics is unrelated to the events of the Great Depression.
B) Classical economics approaches the economy as three separate but interrelated sectors,while Keynesian economics looks at the economy as a whole.
C) Keynesian economics was developed by the Scholastic School at Salamanca in the late medieval period.
D) The classical school of economics was developed during the classical age of Greece.

Question 64

At equilibrium in the simple Keynesian model,income is $6 million and consumption spending is $5 million.Which of the following is correct?

A) Investment is $1 million.
B) There is no saving in this economy.
C) The economy will go into disequilibrium because consumption is not equal to income.
D) The information provided is insufficient to determine the level of investment spending.

Question 65

After the acceptance of Keynesian analysis,government:

A) played a role in setting the interest rate only.
B) actions toward macroeconomic policy grew significantly.
C) reduced its role in the operation of the economy.
D) turned to communism as the only solution to the Great Depression.

Question 66

If the marginal propensity to save is 0.2,how much is the spending multiplier?

A) 0.8
B) 1.25
C) 5
D) 8

Question 67

Investment levels depend mainly on:

A) high levels of consumption in the economy.
B) strong government demand.
C) the rate of return on capital.
D) tax incentives.

Question 68

Which group of economists believed that economic downturns were self-correcting,that is the forces of supply and demand would naturally bring the economy back to equilibrium?

A) Keynesians
B) classical economists
C) interventionists
D) Marxists

Question 69

With respect to income,the investment schedule in the short run is:

A) perfectly elastic.
B) perfectly inelastic.
C) relatively elastic.
D) relatively inelastic.

Question 70

If the marginal propensity to consume is 0.8,by how much will total income increase after an initial $200 is spent?

A) $40
B) $160
C) $200
D) $1,000

Question 71

In the simple Keynesian model,the only two things you can do with your income are:

A) pay taxes and spend it.
B) spend it and save it.
C) spend it and invest it.
D) save it and give it.

Question 72

In the simple Keynesian model,equilibrium exists when:

A) investment spending equals saving.
B) quantity supplied equals quantity demanded.
C) consumption equals investment.
D) price accepted by demanders equals price offered by suppliers.

Question 73

If the interest rate increases,investment will:

A) decrease.
B) increase.
C) not be affected.
D) fall to zero.

Question 74

In the simple Keynesian model,the economy will be in equilibrium when:

A) savings is greater than investment.
B) savings is greater than income.
C) savings is equal to investment.
D) investment is equal to income.

Question 75

John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment,output,and income.

A) aggregate spending
B) investment
C) the interest rate
D) property rights

Question 76

If the marginal propensity to consume is 0.85,how much is the spending multiplier?

A) 0.15
B) 1.17
C) 5.1
D) 6.67

Question 77

The 45-degree line in the Keynesian model represents:

A) AE = C.
B) AE = G.
C) AE = I.
D) AE = Y.

Question 78

Investment is defined as spending by:

A) investors in the stock market.
B) investors in the bond market.
C) business that adds to the productive capacity of the economy.
D) households on home maintenance.

Question 79

In Keynesian macroeconomic equilibrium:

A) AE = I and C = S.
B) AE = S and C = I.
C) AE = Y and C = S.
D) AE = Y and S = I.

Question 80

Firms decide how much to invest by comparing the rate of return on their projects with:

A) their total profit.
B) the productivity of the workers assigned to the projects.
C) the interest rate.
D) before-tax rate of return.