Question 1

Higher marginal propensities to consume and invest will make the slope of the aggregate expenditure function steeper.

Accepted Answer

Marginal propensity to consume (MPC) indicates the fraction of each additional unit of income that is spent on consumption. Similarly, marginal propensity to invest (MPI) indicates the fraction of each additional unit of income that is invested. Higher MPC and MPI mean that a larger fraction of income is spent and invested, respectively. This leads to a steeper slope of the aggregate expenditure function, as a given increase in income will result in a larger increase in both consumption and investment.

Question 2

A closer relationship exists between GDP and nonresidential investment than between business profits and investment spending.

Accepted Answer

Nonresidential investment is a component of GDP and is directly related to economic growth. Business profits, on the other hand, can be influenced by a variety of factors and may not necessarily lead to increased investment spending. Therefore, the relationship between GDP and nonresidential investment is generally stronger than the relationship between business profits and investment spending.

Question 3

The marginal propensity to consume plus the marginal propensity to invest equal one.

Accepted Answer

The marginal propensity to consume plus the marginal propensity to save equals one, not the marginal propensity to invest.

Question 4

The role of the costs of capital is influenced by the degree to which firms can substitute capital for other inputs of production known as relative prices.

Accepted Answer

The statement is true. The costs of capital are influenced by the degree of substitution between capital and other inputs of production, which is determined by relative prices.

Question 5

A firm's investment expenditures are positively related to market interest rates.

Accepted Answer

The relationship between a firm's investment expenditures and market interest rates is not clear-cut, and can vary depending on the specific circumstances and economic environment. In some cases, higher interest rates may discourage firms from undertaking investment projects due to increased borrowing costs, while in other cases they may incentivize firms to invest by providing higher returns on their investments. Therefore, the statement cannot be conclusively true or false.

Question 6

Business investment is usually more volatile than overall economic growth.

Accepted Answer

Business investment is often driven by market conditions, industry trends, and investor sentiment, which can be more affected by fluctuations and uncertainties in the economy than overall growth. Therefore, it tends to be more volatile than the broader economic environment.

Question 7

The slope of the linear consumption function represents induced consumption expenditures.

Accepted Answer

The slope of the linear consumption function represents the marginal propensity to consume, which is the fraction of each additional dollar of income that is spent on consumption. Induced consumption expenditures are the minimum level of consumption that occurs even when income levels are zero, which is represented by the y-intercept of the consumption function.

Question 8

Temporary tax cuts will have a greater influence on consumption expenditures than temporary tax cuts.

Accepted Answer

This statement is actually backwards. Permanent tax cuts are more likely to have a greater influence on consumption expenditures than temporary tax cuts. Temporary tax cuts may encourage some additional spending, but consumers are more likely to save their extra money or use it to pay down debt, knowing that the tax cut is only temporary. In contrast, a permanent tax cut would result in a more significant increase in disposable income and would likely lead to more sustained increases in consumption expenditures.

Question 9

U.S. export spending is not affected by U.S. real income but is influenced by the economic activity of its major trading partners and the exchange rate, hence export spending is taken as autonomous.

Accepted Answer

The answer of U.S. export spending is not affected by...

Question 10

The real interest rate, business taxes, expected profits and business confidence, and capacity utilization are embedded in the slope of the investment function.

Accepted Answer

The answer of The real interest rate, business taxes, expected...

Question 11

U.S. import spending is not affected by U.S. real income but is influenced by the economic activity of its major trading partners and the exchange rate, hence import spending is taken as autonomous.

Accepted Answer

U.S. import spending is actually affected by U.S. real income, as higher income can lead to higher spending on imports.

Question 12

Increased profits provide more internal funds to finance capital investments and a major factor in lenders' and investors' decisions to provide external funds to the firm.

Accepted Answer

This statement is true. When a company has higher profits, it means they have more money available to reinvest in the business, whether it be through new equipment, expanding operations, or other capital investments. This can also make the company more attractive to potential lenders and investors, as they see the company as financially stable and capable of generating returns on their investment.

Question 13

The slope of the linear consumption function represents autonomous consumption expenditures.

Accepted Answer

The slope of the linear consumption function represents the marginal propensity to consume (MPC), which reflects the change in consumption expenditures in response to a change in income. Autonomous consumption expenditures are represented by the vertical intercept of the consumption function.

Question 14

A larger marginal propensity to import will make the slope of the aggregate expenditure function flatter.

Accepted Answer

A larger marginal propensity to import means that more of each additional dollar of income will be spent on imports rather than domestic goods and services, reducing the multiplier effect on aggregate expenditure. As a result, the slope of the aggregate expenditure function will be flatter.

Question 15

The Federal Reserve looks at the threshold of capital utilization rates as an indicator of inflationary pressures.

Accepted Answer

The Federal Reserve considers the capacity utilization rate as a leading indicator of inflationary pressures, as it reflects the extent to which resources in the economy are utilized. A high utilization rate may indicate increased inflationary pressures.

Question 16

The currency exchange rate is the rate at which one nation's currency can be exchanged for another.

Accepted Answer

The statement is true. Currency exchange rate refers to the value or price of one currency in relation to another currency. It is the rate at which one currency can be exchanged for another currency.

Question 17

In the consumption function, the real interest rate, consumer confidence, wealth, available consumer credit, and consumer debt are captured in the autonomous consumption term of the consumption function.

Accepted Answer

The autonomous consumption term includes factors that influence consumption regardless of income, including real interest rate, consumer confidence, wealth, available consumer credit, and consumer debt.

Question 18

Government expenditure does not include transfer payments.

Accepted Answer

Transfer payments are payments made by the government to individuals, but they are not made for any goods or services received. They are usually in the form of benefits or subsidies and are not included in government expenditure.

Question 19

Consumer confidence is measured by two indices: the Consumer Sentiment Index and the Consumer Confidence Index.

Accepted Answer

Consumer confidence is indeed measured by two indices - the Consumer Sentiment Index and the Consumer Confidence Index.

Question 20

In a open economy, aggregate expenditures are the sum of personal consumption, investment, government, and net export expenditures.

Accepted Answer

This statement is true. Aggregate expenditures in an open economy include personal consumption, investment, government, and net export expenditures.

Quiz 12: Spending by Individuals, Firms, and Governments on Real Goods and Services