Deck 3: Spending, Income, and Interest Rates

Question 1

The size of the multiplier depends in part on the

A) level of autonomous expenditures.
B) change in autonomous consumption.
C) level of consumption.
D) marginal propensity to consume.

Answer 1

marginal propensity to consume.

Question 2

What type of variables have their movements explained by theory?

A) endogenous
B) exogenous
C) autonomous
D) Both B and C

Answer 2

endogenous

Question 3

A fixed or rigid price level implies

A) that income is fixed.
B) real GDP is greater than nominal GDP.
C) nominal GDP is less than real GDP.
D) real GDP equals nominal GDP.

Answer 3

real GDP equals nominal GDP.

Question 4

As used in this text, "autonomous" variables are

A) spontaneous variables that are completely unpredictable.
B) completely independent of income, although they can be explained by movements in other variables.
C) determined only by income levels.
D) the same as endogenous variables.

Question 5

If disposable income increases by $100 and consumption increased by $85, ceteris paribus, we may conclude that

A) the marginal propensity to consume is 0.85.
B) the marginal propensity to consume is 0.15.
C) $15 is autonomous consumption.
D) a change in disposable income is induced by a change in consumption.

Question 6

If disposable income increases by $100 and saving increased by $25, ceteris paribus, we may conclude that

A) the marginal propensity to consume is 0.25.
B) the marginal propensity to save is 0.25.
C) $15 is autonomous consumption.
D) a change in disposable income is induced by a change in consumption.

Question 7

Assuming that there are NO income taxes, if both autonomous taxes, and government expenditures were to rise by $100 million, we would expect equilibrium GDP to

A) rise by $100 million.
B) rise, but by a multiple of $100 million.
C) rise by less than $100 million.
D) remain unaffected because leakages have changed by the same amount.

Question 8

In the simple Keynesian model of the determination of income, the price level is assumed to be

A) exogenous and to gradually change.
B) endogenous and to gradually change.
C) exogenous and to remain constant.
D) endogenous and to remain constant.

Question 9

An increase in autonomous taxes

A) increases autonomous planned spending by an equal amount.
B) decreases autonomous planned spending by an equal amount.
C) increases consumption by that amount times the marginal propensity to consume.
D) decreases saving by that amount times the marginal propensity to save.

Question 10

Figure 3-1
Employing Figure above, autonomous consumption expenditures are ________, and the marginal propensity to consume is ________.

A) 200; 0.75
B) 500; 1
C) 200; 0.60
D) 0; 1

Question 11

In the simplest Keynesian model of the determination of income, interest rates are assumed to be

A) exogenous and to gradually change.
B) endogenous and to gradually change.
C) exogenous and to remain constant.
D) endogenous and to remain constant.

Question 12

A fall in the government's budget deficit will lower

A) equilibrium GDP and consumption.
B) consumption and saving.
C) saving and GDP.
D) All of the above are correct.

Question 13

A rise in the income tax rate will

A) raise the multiplier and raise equilibrium income.
B) lower the multiplier and raise equilibrium income.
C) raise the multiplier and lower equilibrium income.
D) lower the multiplier and lower equilibrium income.

Question 14

If total planned spending (E(p)) exceeds GDP, we expect that

A) inventories will be falling.
B) inventories will be rising.
C) GDP will be falling.
D) government expenditures must be rising.

Question 15

Assume that all taxes are lump-sum, net exports = 0, and the marginal propensity to consume is 0.8. Then, if investment and taxes were each to fall by $100 million, the equilibrium level of income would

A) rise by $100 million.
B) fall by $100 million.
C) rise by $500 million.
D) fall by $500 million.

Question 16

In the simplest Keynesian model of the determination of income, interest rates are assumed

A) to be exogenous and to influence desired spending.
B) to be endogenous and not to influence desired spending.
C) to be endogenous and to influence desired spending.
D) to be exogenous and not to influence spending.

Question 17

The multiplier measures the

A) number of steps it takes to move from one equilibrium to another.
B) rise in saving resulting from a rise in income.
C) marginal propensity to invest.
D) rise in equilibrium GDP resulting from a one dollar rise in planned autonomous expenditures.

Question 18

In the simple Keynesian model of the determination of income, planned investment is

A) an endogenous parameter.
B) autonomous and thus an exogenous parameter.
C) explained by the model of income determination.
D) None of the above.

Question 19

An exogenous rise in government expenditures will have the same effect on GDP as an equal rise in either autonomous ________ or autonomous ________.

A) consumption; investment
B) taxes; consumption
C) savings; investment
D) taxes; investment

Question 20

In equilibrium, with exports equal to imports it must be the case that

A) leakages equal injections.
B) saving plus taxes equal government expenditures plus investment.
C) total expenditures equal GDP.
D) All of these.

Question 21

Assume that the marginal propensity to consume equals 0.8, the income tax rate equals 0.3, and the marginal propensity to import equals 0.2. The marginal leakage rate is ________ and the size of the multiplier is ________.

A) 0.70; 3.33
B) 0.60; 2.5
C) 0.64; 1.56
D) 0.50; 2.0

Question 22

Figure 3-2
Employing the information in the figure above, when real disposable income is 1000, savings from households would be ________ and the marginal propensity to save would be ________.

A) 300; 0.1
B) 100; 0.2
C) 100; 0.1
D) 500; 0.2

Question 23

If Ep is 3500 and Y is 3000 then companies will

A) reduce orders and production by 500.
B) increase orders and production by 500.
C) wait for final sales to increase but continue to produce at existing level in the future.
D) wait for final sales to decrease but reduce the level of production in the future.

Question 24

When an economy is not in equilibrium

A) planned expenditures exceed production and income.
B) there is no savings nor investment.
C) government tax revenues equal planned government expenditures.
D) production and income equal planned expenditures.

Question 25

An increase in the marginal propensity to import will

A) raise imports and raise equilibrium income.
B) lower imports and raise equilibrium income.
C) lower the multiplier and reduce equilibrium income.
D) raise the multiplier and reduce equilibrium income.

Question 26

Suppose the only leakages are savings and taxes. The tax rate is 0.2 and the multiplier is 1.92. These values imply that the marginal propensity to consume is

A) 0.32.
B) 0.60.
C) 0.68.
D) 0.8.

Question 27

A 45 degree line on a graph with expenditures, E, on the vertical axis and production, Y, on the horizontal axis, represents

A) the line of disequilibrium levels of income.
B) all possible equilibrium levels of production and expenditures.
C) some of the equilibrium levels of production and expenditures.
D) None of the above.

Question 28

Assume that the level of autonomous consumption in an economy equals 400, the level of planned investment = 200, G = 0, T = 0, NX = 0, and the marginal propensity to consume is 0.6.
Refer to the information above. If the level of production in the economy equals 3000, the amount of saving equals ________ and the level of unintended inventory investment equals ________.

A) 200; 200
B) 200; -200
C) 1200; 600
D) 1200; -600

Question 29

If planned autonomous investment is 500, autonomous consumption 300, induced consumption 2500, savings 500, and government spending and taxes zero, then

A) Ep is 3300 and the economy is in equilibrium.
B) Ep is 3300 and the economy is out of equilibrium.
C) Ep is 3500 and the economy is in equilibrium.
D) Ep is 3500 and the economy is out of equilibrium.

Question 30

If Ep is 3500 and Y is 3000 then

A) planned inventory accumulation is 500.
B) planned inventory depletion is 500.
C) unplanned inventory accumulation is 500.
D) unplanned inventory depletion is 500.

Question 31

Let the marginal leakage rate be 0.5 while the marginal propensity to consume is 0.8. Then a $50 million reduction in autonomous taxes will cause autonomous consumption to ________ and equilibrium income to ________.

A) fall by $50 billion; fall by $100 billion
B) rise by $50 billion; rise by $100 billion
C) fall by $40 billion; fall by $200 billion
D) rise by $40 billion; rise by $80 billion

Question 32

Assume that the level of autonomous consumption in an economy equals 400, the level of planned investment = 200, G = 0, T = 0, NX = 0, and the marginal propensity to consume is 0.6.
Refer to the information above. What is the level of consumption when the level of income equals 2000?

A) 600
B) 1000
C) 1600
D) 2000

Question 33

Total planned expenditures are

A) C + Ip.
B) Ep + C.
C) Ep - Ip.
D) None of the above.

Question 34

Assume that all taxes in the economy are autonomous and the values for planned investment, government expenditures, and autonomous taxes are given: p = 100
G = 100 T = 50 he consumption function is: C = 50 + 0.5 YD
Assume that the economy is initially at its equilibrium level of GDP. What will happen to the equilibrium level of GDP if planned investment decreases by 20, government spending increases by 30, and taxes increase by 10?

A) GDP will decrease by 60
B) GDP will decrease by 10
C) there will be no change in GDP
D) GDP will increase by 10

Question 35

Assume that all taxes in the economy are autonomous and the values for planned investment, government expenditures, and autonomous taxes are given: p = 100
G = 100 T = 50 he consumption function is: C = 50 + 0.5 YD
Refer to the information above. What is the level of unintended inventory investment when income is 850?

A) -175
B) 175
C) -200
D) 200

Question 36

Assume that all taxes in the economy are autonomous and the values for planned investment, government expenditures, and autonomous taxes are given: p = 100
G = 100 T = 50 he consumption function is: C = 50 + 0.5 YD
Refer to the information above. What will be the equilibrium level of GDP if taxes are reduced by 10?

A) 460
B) 470
C) 510
D) 520

Question 37

Assume that all taxes in the economy are autonomous and the values for planned investment, government expenditures, and autonomous taxes are given: p = 100
G = 100 T = 50 he consumption function is: C = 50 + 0.5 YD
Refer to the information above. What is the level of consumption when the level of income is 850?

A) 375
B) 425
C) 450
D) 475

Question 38

When an economy is in equilibrium

A) planned expenditures exceed production and income.
B) there is no savings nor investment.
C) government tax revenues equal planned government expenditures.
D) production and income equal planned expenditures.

Question 39

Assume that all taxes in the economy are autonomous and the values for planned investment, government expenditures, and autonomous taxes are given: p = 100
G = 100 T = 50 he consumption function is: C = 50 + 0.5 YD
Refer to the information above. What is the equilibrium level of GDP?

A) 300
B) 400
C) 450
D) 525

Question 40

Assume that the level of autonomous consumption in an economy equals 400, the level of planned investment = 200, G = 0, T = 0, NX = 0, and the marginal propensity to consume is 0.6.
Refer to the information above. What is the equilibrium level of GDP?

A) 600
B) 1000
C) 1500
D) 1800

Question 41

If the gap between the actual level of output and the "natural real GDP" is 1000 and the marginal leakage rate is 0.5 then the simple Keynesian model suggests that the government could close the gap by

A) increasing autonomous expenditures by 1000.
B) increasing autonomous expenditures by 250.
C) increasing autonomous expenditures by 500.
D) decreasing taxes by 500.

Question 42

Since income tax revenues will rise (fall) as expenditures and output increase (decrease) the income tax results in

A) a reduction in the multiplier effect on GDP of autonomous expenditures.
B) autonomatic stabilization of GDP.
C) A and B.
D) None of the above.

Question 43

The "equilibrating mechanism," the reason the economy tends toward equilibrium in the simple Keynesian model, is primarily

A) autonomous but flexible prices.
B) production responses to unplanned inventory changes.
C) exogenous inventory changes.
D) endogenous price changes.

Question 44

If the MPS is 0.1 and the income tax rate is 0.33, and the fraction of income spent on imports is 0.25, then the multiplier is

A) 2.5.
B) 1.47.
C) 1.51.
D) 1.55.

Question 45

Which of these variables remains exogenous throughout Chapter 3?

A) the interest rate
B) investment
C) price level
D) all of the above

Question 46

In an economy described by the assumptions of the simple Keynesian Model, the impact of fluctuations in autonomous investment on consumption spending could be

A) caused by government tax and spending policies.
B) explained by changes in output, Y.
C) endogenous.
D) offset by government tax and spending policies.

Question 47

Fluctuations in total output are the reverse image of fluctuations in

A) the inflation rate.
B) the unemployment rate.
C) gross domestic product.
D) the GDP deflator.

Question 48

Economic model building begins with the construction of greatly oversimplified "benchmark" models, which are brought closer to reality by gradually removing the simplifying assumptions. In this process, more and more ________ variables become ________.

A) short-run, long-run
B) exogenous, endogenous
C) long-run, short-run
D) endogenous, exogenous
E) nominal, real

Question 49

If the MPS is 0.1 and the income tax rate is 0.33 the multiplier, k, is approximately

A) 2.5.
B) 2.0.
C) 10.
D) 3.

Question 50

In economic models, variables taken as given and not explained by the model are called ________ variables.

A) exogenous
B) endogenous.
C) short-run.
D) long-run.
E) nominal.

Question 51

If the MPS is 0.1 and the income tax rate is 0.33 the marginal leakage rate for a closed economy is

A) 0.033.
B) 0.23.
C) 0.43.
D) 0.397.

Question 52

One way to view equilibrium in the simple Keynesian model without government spending and taxes is that:

A) saving equals planned investment.
B) saving equals planned expenditures.
C) saving equals planned autonomous spending.
D) None of the above.

Question 53

In a country without foreign trade and income taxes, if the government decreases autonomous spending and autonomous taxes by 50 then total expenditures and output will

A) increase by 50 if the MPC is 1.
B) decrease by 50 for any value of the MPS greater than zero.
C) decrease by 100 if the MPS is 0.5.
D) increase by 200 if the MPS is 0.25.

Question 54

A $1 increase in autonomous spending has a multiplier effect greater than one on total expenditures and output because

A) each expenditure is respent in the same amount continuously.
B) overtime expenditures tend to increase.
C) total expenditures include autonomous expenditures.
D) each time an expenditure occurs the recipient respends a proportion of the funds.

Question 55

If Ep is 2500 and Y is 3000 then companies will

A) reduce orders and production by 500.
B) increase orders and production by 500.
C) wait for final sales to increase.
D) wait for final sales to decrease.

Question 56

The establishment of an income tax, ceteris paribus, will result in

A) a lower expenditure multiplier.
B) a higher expenditure multiplier.
C) no change in the size of the multiplier.
D) None of the above.

Question 57

Assuming a simple Keynesian multiplier, and given an increase in planned investment of $100 billion, the effect on total output will be greater than $100 billion only if the

A) MPS is greater than zero.
B) MPC is zero.
C) MPS is less than zero.
D) MPC is greater than one.

Question 58

If both autonomous imports and autonomous taxes decrease by $100B we expect that equilibrium income will

A) increase by more than $200B.
B) decrease by more than $200B.
C) increase by $200B.
D) remain unchanged.

Question 59

If Ep is 2500 and Y is 3000 then

A) planned inventory accumulation is 500.
B) planned inventory depletion is 500.
C) unplanned inventory accumulation is 500.
D) unplanned inventory decumulation is 500.

Question 60

In a country without foreign trade and no income taxes, if the government increases autonomous taxes by 1000 and the MPS is 0.1, then the initial or first round change in expenditures by all tax payers will be

A) a reduction equal to 1000.
B) an increase equal to 1000.
C) a reduction equal to 900.
D) an increase equal to 900.

Question 61

Income on the horizontal axis at which the vertical distance to the 45-degree line is greater than the vertical distance to the Ep line gives rise to ________-than-equal planned expenditures, and so we must be ________ the equilibrium level of income.

A) less, below
B) less, above
C) greater, below
D) greater, above

Question 62

Where the planned expenditure and the 45-degree lines intersect, the economy is ________ equilibrium, with unplanned inventory investment equal to ________.

A) in, zero
B) out of, zero
C) in, planned inventory investment
D) in, autonomous planned expenditure
E) out of, autonomous planned expenditure

Question 63

In the consumption function C = a + c(Y - T), "autonomous consumption" appears as

A) a.
B) c.
C) cY.
D) -cT.
E) c(Y - T).

Question 64

On a diagram of the planned expenditure function Ep and the 45-degree line, we find autonomous planned spending

A) where the 45-degree line hits the vertical axis.
B) at each level of output by the vertical distance between the Ep and 45-degree lines.
C) where Ep intersects the vertical axis.
D) at each level of income by the vertical distance from the horizontal axis up to Ep.

Question 65

In the consumption function, suppose a = 60, c = 0.75, Y = 3000, and T = 800. Consumption expenditure is

A) 2910.
B) 2245.
C) 1710.
D) 1590.
E) 1510.

Question 66

Suppose that in producing a GDP of 3000, goods worth 200 go unsold and are unintentionally added to business inventories. These goods

A) are not counted in total expenditure.
B) are part of the investment component of expenditure.
C) are nonetheless part of the consumption component of expenditure.
D) are classified as net exports and are subtracted from total expenditures.

Question 67

During the worst of the Great Depression, in 1932 and 1933, disposable income was so low that it actually ________ aggregate consumption, so that aggregate saving became ________.

A) rose above, positive
B) rose above, negative
C) fell below, positive
D) fell below, negative

Question 68

Figure 3-3
In the figure above, autonomous planned spending is

A) 400.
B) 400 + 0.6Y.
C) 0.8Y.
D) 400 - 0.6Y.
E) 0.

Question 69

In the consumption function C = a + c(Y - T), the "marginal propensity to consume" appears as

A) a.
B) c.
C) cY.
D) -cT.
E) c(Y - T).

Question 70

In our consumption function, when disposable income is zero, consumption is

A) a.
B) -cT.
C) cT.
D) -a.

Question 71

When stock prices fall significantly, people may feel less wealthy and thus decide to consume less of their current flow of disposable income. In our consumption function, this can be represented by a

A) fall in (Y - T).
B) rise in T.
C) rise in c.
D) fall in a.

Question 72

Total income is always equal to ________ expenditures; but only in equilibrium is it equal to ________ expenditures, producing in equilibrium ________ on income to change.

A) actual, planned, pressure
B) actual, planned, no pressure
C) planned, actual, pressure
D) planned, actual, no pressure

Question 73

On a diagram of the consumption function and the 45-degree line, saving at each level of disposable income is the vertical distance

A) from the horizontal axis to the intersection point of the consumption line and the 45-degree line.
B) from the horizontal axis to the 45-degree line.
C) between the consumption and the 45-degree lines.
D) from the horizontal axis to where the consumption line intersects the vertical axis.

Question 74

Income on the horizontal axis at which the vertical distance to the 45-degree line is less than the vertical distance to the Ep line gives rise to ________-than-equal planned expenditures, and so we must be ________ the equilibrium level of income.

A) less, below
B) less, above
C) greater, below
D) greater, above

Question 75

Which element of total planned expenditure is not included in "autonomous planned spending?"

A) cY
B) -cT
C) NX
D) Ip
E) a

Question 76

The one type of expenditure that we assume can differ from what spenders have planned is

A) consumption.
B) investment.
C) government expenditure.
D) net exports.

Question 77

Figure 3-3
In the figure above, equilibrium income is

A) 400.
B) 640.
C) 666.67.
D) 1,000.
E) 2,400.

Question 78

Saving is positive for all levels of disposable income

A) above zero.
B) above where the consumption line intersects the 45-degree line.
C) below where the consumption line intersects the 45-degree line.
D) above where the consumption function intersects the vertical axis.
E) above autonomous consumption.

Question 79

The slope of the planned expenditure line is

A) autonomous consumption.
B) the marginal propensity to save.
C) autonomous planned spending.
D) the marginal propensity to consume.

Question 80

Suppose a = 50, c = 0.8, and T = 410. How much is saved out of a total income of 1230?

A) 706
B) 606
C) 278
D) 196
E) 114