Question 1

(Table) The table shows data on consumption at various levels of income. Assume there is no private investment. The value of the average propensity to consume at equilibrium is 
A) 0.875.
B) 0.917.
C) 1.00.
D) 1.25.

Accepted Answer

The answer of (Table) The table shows data on consumption...

Question 2

If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will
A) fall by $2 billion.
B) rise by $2 billion.
C) rise by $5 billion.
D) not change.

Accepted Answer

The answer of If the marginal propensity to consume is...

Question 3

If income is $22,150 and taxes are $11,000, then disposable income is $11,150.

Accepted Answer

Disposable income is calculated by subtracting taxes from income, therefore: 
$22,150 - $11,000 = $11,150

Question 4

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which statement is correct?
A) A small increase in spending will have a more powerful effect in starting a recovery in the United States than in Japan.
B) The Japanese economy is not in equilibrium.
C) The Japanese economy is more susceptible to a recession caused by a decrease in spending.
D) The U.S. economy tends to overheat from too much spending.

Accepted Answer

The higher marginal propensity to consume in the United States means that a small increase in spending will lead to a larger increase in overall demand and stimulate the economy more quickly. Japan, with a lower marginal propensity to consume, would require a larger increase in spending to achieve the same level of stimulation.

Question 5

If government spending falls and taxes rise, both will _____, but the effects of _____.
A) lower equilibrium income; government spending will be larger
B) lower equilibrium income; taxes will be larger
C) raise equilibrium income; government spending will be larger
D) raise equilibrium income; taxes will be larger

Accepted Answer

When government spending falls and taxes rise, both actions typically lower equilibrium income because government spending directly injects money into the economy, stimulating demand, while higher taxes reduce disposable income and consumption. The effect of a decrease in government spending is generally considered larger because it directly pulls money out of the economy, whereas the effect of a tax increase might be more distributed and can be partially saved or invested rather than spent.

Question 6

The average propensity to consume is calculated by dividing income by spending.

Accepted Answer

The average propensity to consume is calculated by dividing consumption spending by income, not the other way around.

Question 7

One implication of a straight-line aggregate expenditures curve is that the
A) marginal propensity to consume is constant.
B) average propensity to consume is constant.
C) average propensity to save is constant.
D) marginal propensity to save increases as income increases.

Accepted Answer

A straight-line aggregate expenditures curve indicates a constant marginal propensity to consume (MPC), meaning that for every additional dollar of income, the same proportion will be consumed.

Question 8

Taxes are added to total income to calculate disposable income.

Accepted Answer

Taxes are subtracted from total income to calculate disposable income.

Question 9

The balanced budget multiplier means that government spending, when financed by taxes, cannot affect the economy.

Accepted Answer

The balanced budget multiplier refers to the situation when an increase in government spending is financed by an equal decrease in taxes, so that the overall budget remains balanced. In this case, the multiplier effect of government spending on the economy would still occur, as it would increase aggregate demand and potentially lead to an increase in economic activity.

Question 10

In the simple Keynesian model, the only two things one can do with one's 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 away.

Accepted Answer

In the simple Keynesian model, individuals only have the choice to either spend their income or save it. While paying taxes and investing are important economic activities, they are not options that individuals can directly control with their income in the simple Keynesian model. The best choice would be to balance spending and saving, as excessive spending can lead to inflation while excessive saving can result in decreased demand and potential recession.

Question 11

Which statement(s) is/are TRUE about Keynes's simple model of the economy? I. The aggregate price level is fixed.
II) All savings are considered to be personal savings.
III) There is considerable slack in the economy.
A) I only
B) II only
C) III only
D) I, II, and III

Accepted Answer

Keynes's simple model of the economy assumes a fixed aggregate price level, treats all savings as personal savings, and posits that there is considerable slack in the economy, meaning resources, especially labor, are not fully utilized.

Question 12

The multiplier effect shows that a change in aggregate spending
A) causes output to move in the opposite direction.
B) causes output to change even more than the change in aggregate spending.
C) causes output to change by less than the change in aggregate spending.
D) leaves output unaffected.

Accepted Answer

The multiplier effect shows that a change in aggregate spending causes output to change even more than the change in aggregate spending. This is because an initial increase in spending leads to a series of subsequent rounds of spending as the recipients of the initial spending also spend their additional income. This process results in an exponential increase in output compared to the initial increase in spending.

Question 13

If disposable income increases from $250 to $300 and saving increases from $40 to $50, how much is the average propensity to save when disposable income is $300?
A) 0.10
B) 0.133
C) 0.167
D) 0.2

Accepted Answer

The answer of If disposable income increases from $250 to...

Question 14

If the marginal propensity to consume is 0.8, full-employment output is $14 trillion, and current output is $13.5 trillion, then investment spending must _____ to reach full-employment output.
A) decrease by $0.5 trillion
B) increase by $0.1 trillion
C) increase by $0.4 trillion
D) increase by $0.5 trillion

Accepted Answer

The marginal propensity to consume (MPC) is 0.8, meaning for every additional dollar earned, 80 cents is spent on consumption. The output gap is $0.5 trillion ($14 trillion - $13.5 trillion). To close this gap with an MPC of 0.8, the multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, an increase in investment spending of $0.1 trillion, multiplied by the multiplier of 5, would increase total output by $0.5 trillion, closing the gap and reaching full-employment output.

Question 15

The paradox of thrift suggests that when households intend to save more, they will _____ consumption, which will ultimately lead to _____ actual aggregate saving.
A) reduce; lower
B) reduce; higher
C) increase; lower
D) increase; higher

Accepted Answer

The paradox of thrift suggests that when households intend to save more, they will reduce consumption. This is because if households are spending less, it means that there is less demand for goods and services, which then leads to reduced production, less income for workers, and therefore less saving overall. As a result, actual aggregate saving may ultimately be lower, even though households are intent on saving more.

Question 16

From year to year, consumption fluctuates more than gross private domestic investment.

Accepted Answer

Gross private domestic investment typically fluctuates more than consumption from year to year because investment is more sensitive to interest rates, business expectations, and economic conditions, leading to greater volatility compared to the relatively stable consumption patterns driven by household spending.

Question 17

The difference between disposable income and consumption is savings.

Accepted Answer

Disposable income minus consumption equals savings, as savings represent the portion of disposable income not spent on consumption.

Question 18

A horizontal investment schedule assumes that investment spending is not related to current income.

Accepted Answer

A horizontal investment schedule shows a constant level of investment spending, regardless of changes in current income or other economic conditions. This assumes that investment decisions are based on factors such as interest rates, technological advancements, and business expectations, rather than current income.

Question 19

Which of these did classical economists believe would happen if the economy experienced a downturn?
A) Prices would rise.
B) Interest rates would rise.
C) The economy would self-correct.
D) The government would fix any inefficiencies.

Accepted Answer

Classical economists believed in the idea of a self-correcting economy. They argued that market forces would ultimately lead to full employment and economic growth, even in the face of downturns. This idea is based on the assumption that prices and wages are flexible, so that any imbalance in supply and demand will lead to corresponding changes in prices and wages, eventually restoring equilibrium in the economy. Therefore, classical economists did not rely on government intervention to fix any inefficiencies in the economy, as they believed that such intervention would only lead to further distortions.

Question 20

If the marginal propensity to save is 0.2, the value of the spending multiplier will be
A) 0.8.
B) 1.25.
C) 5.
D) 8.

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC). If the marginal propensity to save (MPS) is 0.2, then the marginal propensity to consume (MPC) is 1 - 0.2 = 0.8. Therefore, the spending multiplier is 1/(1-0.8) = 1/0.2 = 5.

Quiz 8: Aggregate Expenditures

(Table) The table shows data on consumption at various levels of income. Assume there is no private investment. The value of the average propensity to consume at equilibrium is

If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will

If income is $22,150 and taxes are $11,000, then disposable income is $11,150.

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which statement is correct?

If government spending falls and taxes rise, both will _, but the effects of _.

The average propensity to consume is calculated by dividing income by spending.

One implication of a straight-line aggregate expenditures curve is that the

Taxes are added to total income to calculate disposable income.

The balanced budget multiplier means that government spending, when financed by taxes, cannot affect the economy.

In the simple Keynesian model, the only two things one can do with one's income are

Which statement(s) is/are TRUE about Keynes's simple model of the economy? I. The aggregate price level is fixed. II) All savings are considered to be personal savings. III) There is considerable slack in the economy.

The multiplier effect shows that a change in aggregate spending

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

If the marginal propensity to consume is 0.8, full-employment output is $14 trillion, and current output is $13.5 trillion, then investment spending must _____ to reach full-employment output.

The paradox of thrift suggests that when households intend to save more, they will _ consumption, which will ultimately lead to _ actual aggregate saving.

From year to year, consumption fluctuates more than gross private domestic investment.

The difference between disposable income and consumption is savings.

A horizontal investment schedule assumes that investment spending is not related to current income.

Which of these did classical economists believe would happen if the economy experienced a downturn?

If the marginal propensity to save is 0.2, the value of the spending multiplier will be