Deck 9: Aaggregate Expenditure and Aggregate Demand

Question 1

If disposable income decreases,there is typically a decrease in consumption spending.

Answer 1

True

Question 2

Disposable income is

A)the major determinant of consumption spending
B)total salary and wage income minus taxes and transfer payments
C)the income households earn before taxes
D)aggregate income plus taxes minus transfer payments
E)a measure of income that is equivalent to GDP

Answer 2

A

Question 3

If disposable income increases,consumption spending increases and saving decreases.

Answer 3

False

Question 4

Saving in our simple model

A)varies inversely with income
B)is determined primarily by the interest rate
C)is positive when a person spends less than her income
D)can never be negative because it is a stock
E)can never be negative because it is a flow

Question 5

An increase in the interest rate would shift the consumption function upward.

Question 6

The primary determinant of saving is income.

Question 7

Historically,consumption spending in the United States has

A)increased as a percentage of income
B)remained approximately constant as a percentage of income
C)decreased as a percentage of income
D)remained constant over time
E)increased more than income

Question 8

Sarah moves from Upperland,which has no taxes or transfer payments,to Lowerland,where she is hit with taxes of $2,000 and receives transfer payments of $3,000.She earns the same wage in both countries,but in Lowerland her disposable income is

A)$1,000 higher
B)$1,000 lower
C)$5,000 higher
D)$2,000 lower
E)$3,000 higher

Question 9

If consumption is greater than income,saving must be negative.

Question 10

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

A)its disposable income
B)its total wealth
C)the number of persons in the household
D)its net wealth
E)the ratio of wage to nonwage income the household earns

Question 11

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 12

Disposable income is equal to consumption

A)plus investment
B)plus taxes
C)plus saving
D)minus taxes
E)minus saving

Question 13

Which must be true when consumption exceeds income?

A)the consumption function shifts upward
B)the consumption function shifts downward
C)aggregate expenditures equal real GDP
D)saving must be negative
E)aggregate expenditures will fall

Question 14

The primary determinant of saving is the interest rate.

Question 15

The primary determinant of consumption spending is the price level.

Question 16

Autonomous consumption expenditures are

A)identical to induced consumption
B)determined primarily by transfer payments
C)not influenced by disposable income
D)increasing at a decreasing rate
E)increasing at an increasing rate

Question 17

As disposable income increases,consumption spending

A)increases by the same amount
B)decreases by the same amount
C)increases by less than the increase in disposable income
D)decreases by less than the increase in disposable income
E)does not change at all

Question 18

As disposable income increases,saving decreases.

Question 19

Out of disposable income,households

A)consume and save
B)consume and invest
C)save and invest
D)consume,save,and pay taxes
E)consume,save,pay taxes,and make transfer payments

Question 20

Which is true of disposable income?

A)it excludes transfer payments
B)the portion of income is used solely for consumption
C)it is that part of aggregate income that is taken in taxes by government
D)all of disposable income contributes directly to aggregate expenditure
E)disposable income equals consumption expenditures plus saving

Question 21

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 zero
E)marginal propensity to save is 0.12

Question 22

Suppose that when disposable income rises from $3 trillion to $3.2 trillion,consumption rises from $2.5 trillion to $2.6 trillion.What is the marginal propensity to save?

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

Question 23

If a household's income falls from $26,000 to $24,000 and its consumption spending falls from $25,000 to $23,500,then its

A)marginal propensity to consume is 0.98
B)marginal propensity to consume is 1.33
C)marginal propensity to consume is 0.94
D)marginal propensity to save is 0.02
E)marginal propensity to save is 0.25

Question 24

A simple statement of the consumption behavior suggested in our model is that

A)all income earned from wages is spent
B)total income must be equal to wages plus profits
C)social values and customs are the primary determinants of consumption spending
D)spending increases by less than income
E)people spend more and save more as their disposable income increases

Question 25

As disposable income increases,

A)consumption and saving both increase
B)consumption increases and saving decreases
C)consumption and saving both decrease
D)consumption decreases but saving increases
E)saving increases,but we cannot predict what happens to consumption

Question 26

Induced saving

A)is that part of saving that is inversely related to the interest rate
B)plus autonomous saving equals disposable income
C)is that portion of saving that is directly related to income
D)is less than disposable income at every level of income
E)equals autonomous saving at every income level

Question 27

The MPC is a relationship between

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

Question 28

The marginal propensity to save is the fraction of a change in income that is saved.

Question 29

If a household's income rises from $20,000 to $22,000 and its consumption spending rises from $19,000 to $20,500,then its

A)marginal propensity to save is 0.70
B)marginal propensity to save is 0.02
C)marginal propensity to consume is 0.93
D)marginal propensity to consume is 0.95
E)marginal propensity to consume is 0.75

Question 30

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 31

Induced consumption spending

A)represents consumption that is independent of income
B)plus saving equals total consumption spending
C)is positively related to disposable income
D)is equal to autonomous consumption spending in equilibrium
E)is the difference between autonomous consumption spending and disposable income

Question 32

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 33

If the MPC < 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 family was wealthy before the income change
D)remain the same unless the change in income significantly affects the household's wealth
E)remain the same

Question 34

At the equilibrium level of real GDP,the MPC equals 1.

Question 35

Suppose that when disposable income rises from $3 trillion to $3.2 trillion,consumption rises from $2.5 trillion to $2.6 trillion.What is the marginal propensity to consume?

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

Question 36

If a household's income falls from $26,000 to $24,000 and its saving falls 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 0.75
D)marginal propensity to save is 0.02
E)marginal propensity to save is 0.4

Question 37

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 38

The marginal propensity to consume is the fraction of a change in income that is saved.

Question 39

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)Neither is dependent nor independent since they are related by the equation DI = C + S.

Question 40

Consumption spending depends mainly on the level of

A)national income
B)disposable income
C)personal income
D)personal income taxes
E)imports

Question 41

If every time disposable income increases by $5 billion,consumption increases by $4 billion and saving increases by $1 billion,the MPC and MPS are,respectively,

A)1/4,1/2
B)1/2,1/2
C)1,0
D)4/5,1/5
E)the answer is indeterminate from the information given

Question 42

The inverse of the slope of the consumption function equals the marginal propensity to save.

Question 43

Exhibit 9-2
$$\begin{array} { c c c c c c } \begin{array} { c } \text { Income } = \\\text { output } \\\text { (Y) }\end{array} & \mathrm { C } & \begin{array} { c } \text { Planned } \\\text { investment }\end{array} & \begin{array} { c } \text { Aggregate } \\\text { expenditure }\end{array} & \begin{array} { c } \text { Unintended } \\\text { inventory } \\\text { adjustment }\end{array} & \begin{array} { c } \text { Actual } \\\text { investment }\end{array} \\\hline \$ 1,200 & \$ 1,240 & \$ 200 & \$ 1,440 & - \$ 240 & - \$ 40 \\1,400 & 1,380 & 200 & 1,580 & - 180 & - 20 \\1,600 & 1,520 & 200 & 1,720 & - 120 & 80 \\1,800 & 1,660 & 200 & 1,860 & - 60 & 140 \\2,000 & 1,800 & 200 & 2,000 & 0 & 200 \\2,200 & 1,940 & 200 & 2,140 & 60 & 260 \\2,400 & 2,080 & 200 & 2,280 & 120 & 320\end{array}$$

-We can tell from the data in Exhibit 9-2 that planned investment is autonomous because

A)actual investment is constant at each level of income
B)it does not vary as consumption changes
C)it does not vary as income changes
D)it does not vary as the actual investment changes
E)it does not vary as the price level changes

Question 44

The marginal propensity to consume

A)is the proportion of disposable income consumed
B)is the reciprocal of the ratio of disposable income to saving
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 45

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 46

The slope of the consumption function equals the marginal propensity to consume.

Question 47

If autonomous net taxes increase by $10 trillion and the marginal propensity to consume is 0.8,consumption initially will

A)increase by $50 trillion
B)decrease by $10 trillion
C)decrease by $8 trillion
D)increase by $10 trillion
E)decrease by $50 trillion

Question 48

If income increases by $100 and $75 of the increase is spent (consumed),the MPS equals

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

Question 49

An increase in the MPC will cause the consumption function to become steeper (rotate upwards).

Question 50

If income increases by $100 and consumption increases by $75,the slope of the consumption function equals

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

Question 51

The MPC plus the 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 52

If income increases by $100 and the MPC is 3/4 (0.75),then consumption increases by

A)$25
B)$66.66
C)$50
D)$33.33
E)$75

Question 53

Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion,consumption rises from $5.0 trillion to $5.6 trillion.What is the marginal propensity to consume?

A)0.25
B)0.33
C)0.75
D)0.67
E)0.07

Question 54

The marginal propensity to consume measures the change in consumption divided by the change in income.

Question 55

The slope of the consumption function equals the

A)MPC
B)MPS
C)APC
D)APS
E)ratio of the APC to the APS (i.e.,APC divided by APS)

Question 56

The marginal propensity to consume is defined as the

A)fraction of consumption that is spent on goods,both durable and nondurable
B)fraction of a change in income that is spent on consumption
C)fraction of a change in income that is spent on investment
D)average amount of consumption at different levels of income
E)average amount of consumption at a given level of income

Question 57

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 (i.e.,saving divided by consumption spending)

Question 58

If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion,then consumption spending will rise by

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

Question 59

If income increases by $100 and the MPS is 1/4,then the additional amount saved equals

A)$50
B)$75
C)$25
D)$100
E)$33.33

Question 60

Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion,consumption rises from $5.0 trillion to $5.6 trillion.What is the marginal propensity to save?

A)0.25
B)0.33
C)0.75
D)0.67
E)0.07

Question 61

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when the stock market crashes and the value of people's portfolios plummets.This would produce a movement from A to

A)B
B)D
C)E
D)F
E)H

Question 62

If income rises from $6.0 trillion to $6.4 trillion,consumption rises from $5.5 trillion to $5.8 trillion.What is the slope of the aggregate expenditure line? (Assume there is neither international trade nor any government.)

A)0.25
B)0.33
C)0.67
D)0.75
E)1.33

Question 63

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when the price level rises.This would produce a movement from A to

A)B
B)C
C)D
D)F
E)H

Question 64

A decrease in the price level decreases net wealth and increases consumption spending.

Question 65

Changes in the price level will not shift the consumption function.

Question 66

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when people's expectations about the future become increasingly optimistic.This would produce a movement from A to

A)B
B)D
C)F
D)H
E)I

Question 67

Exhibit 9-3
In Exhibit 9-3,the MPS is equal to

A)0.25
B)0.33
C)0.67
D)0.75
E)1.33

Question 68

Expectations that the price level will rise in the future cause consumption to rise today.

Question 69

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when interest rates go up.This would produce a movement from A to

A)B
B)D
C)E
D)F
E)H

Question 70

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when interest rates go down.This would produce a movement from A to

A)B
B)D
C)F
D)H
E)I

Question 71

Exhibit 9-3
In Exhibit 9-3,the slope of the consumption function is equal to

A).33
B).5
C).67
D).7
E).9

Question 72

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when interest rates go up.This would produce a movement from A to

A)B
B)C
C)D
D)F
E)H

Question 73

An increase in the interest rate will increase consumption spending.

Question 74

Exhibit 9-3
In Exhibit 9-3,when real disposable income is equal to $3 billion,saving is equal to

A)$-2 billion
B)$-1 billion
C)0
D)$1 billion
E)$2 billion

Question 75

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when there is an increase in real disposable income.This would produce a movement from A to

A)B
B)D
C)E
D)F
E)H

Question 76

Exhibit 9-3
In Exhibit 9-3,the MPC is equal to

A)0.25
B)0.33
C)0.67
D)0.75
E)1.33

Question 77

Along the aggregate consumption function,an increase in 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 movement along the given consumption function
E)shift the consumption function downward

Question 78

Exhibit 9-3
In Exhibit 9-3,when real disposable income is equal to $6 billion,saving is equal to

A)0
B)$1 billion
C)$2 billion
D)$3 billion
E)$4 billion

Question 79

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when there is a decrease in real disposable income.This would produce a movement from A to

A)B
B)D
C)E
D)F
E)H

Question 80

Exhibit 9-4
Consider an economy with a consumption function like C₁ in Exhibit 9-4.The economy is currently operating at A when the housing market takes off increasing housing values.This would produce a movement from A to

A)B
B)D
C)F
D)G
E)H