Question 1

The MPC can be used to predict the effect of a tax increase.

Accepted Answer

The MPC (Marginal Propensity to Consume) can be used to predict the effect of a tax increase on consumer spending and overall economic activity. As the MPC represents the proportion of an increase in income that is spent rather than saved, it can be used to estimate how much of a tax increase will be absorbed by reduced consumer spending and how much will be saved or invested.

Question 2

Both President Bush and President Obama wanted tax cuts to stimulate consumer spending during the 2007-2009 recession.

Accepted Answer

This statement is true. Both President Bush and President Obama supported tax cuts as a way to encourage consumer spending during the recession. Bush implemented tax cuts in 2008, while Obama signed into law the American Recovery and Reinvestment Act of 2009, which included tax cuts for individuals and businesses.

Question 3

Government spending is a leakage out of the circular flow of income and spending.

Accepted Answer

Government spending is an injection into the circular flow of income and spending, as it represents additional demand for goods and services in the economy.

Question 4

Taxes add to and transfers subtract from the flow of income and spending.

Accepted Answer

The answer of Taxes add to and transfers subtract from...

Question 5

Aggregate demand is the total demand for the final goods and services produced in an economy.

Accepted Answer

Aggregate demand refers to the total demand for all goods and services produced in an economy, including consumer goods, investment goods, government spending, and exports minus imports.

Question 6

The consumption function shows an indirect relationship between consumer spending and disposable income.

Accepted Answer

The consumption function shows a direct relationship between consumer spending and disposable income, meaning as disposable income increases, consumer spending typically increases as well.

Question 7

If consumers receive an increase in income of $1,000,their spending will increase by a smaller amount.

Accepted Answer

This is because of the income elasticity of demand. As income increases, the percentage increase in spending decreases as people allocate more of their income towards savings or goods with lower income elasticity of demand.

Question 8

The marginal propensity to consume is calculated by dividing the change in consumer spending by the change in disposable income.

Accepted Answer

This is the correct formula for calculating the marginal propensity to consume.

Question 9

A change in the value of consumer's stock market holdings will cause a shift in the consumption function.

Accepted Answer

When the value of a consumer's stock market holdings changes, it will affect their wealth and therefore their disposable income. This, in turn, will cause a shift in their consumption function. If their stock market holdings increase in value, their consumption may increase, while a decrease in the value may cause a decrease in consumption.

Question 10

Consumer spending is an injection in the circular flow of income and spending.

Accepted Answer

Consumer spending is a component of aggregate demand, which contributes to the injection of income into the circular flow by stimulating production and generating income for businesses and workers. This income is then used for further spending and investment, creating a continuous cycle of income and spending.

Question 11

The relationship between consumption and disposable income is very unreliable and unpredictable.

Accepted Answer

The relationship between consumption and disposable income is generally considered to be positive and predictable, as disposable income is a key determinant of how much people are able to spend on goods and services.

Question 12

The slope of the consumption function is equal to the marginal propensity to save.

Accepted Answer

The slope of the consumption function is equal to the marginal propensity to consume, not the marginal propensity to save. The marginal propensity to save is equal to 1 minus the marginal propensity to consume.

Question 13

The typical value for the MPC is less than 1.0.

Accepted Answer

The MPC, or marginal propensity to consume, is the change in consumer spending resulting from a change in disposable income. As disposable income increases, consumers tend to spend a portion of that increase, and the MPC measures that portion. The value of the MPC is typically between 0 and 1, with a value of 1 indicating that consumers spend all of the additional disposable income, and a value of 0 indicating that consumers spend none of it. Therefore, the statement that the typical value for the MPC is less than 1.0 is true.

Question 14

Scatter diagrams are a useful way to depict the relationship between two variables.

Accepted Answer

Scatter diagrams help show the relationship between two variables by plotting them on a graph. This helps illustrate any patterns or correlations between the two variables.

Question 15

A decrease in disposable income causes a shift in the consumption function.

Accepted Answer

The answer of A decrease in disposable income causes a...

Question 16

If U.S.consumers become more optimistic about their future income and wealth,the consumption function will shift upward.

Accepted Answer

When consumers become more optimistic about their future income and wealth, they are likely to increase their consumption. This leads to an upward shift of the consumption function.

Question 17

Aggregate demand is the sum of total domestic spending by the private sector.

Accepted Answer

Aggregate demand is the sum of total domestic spending by all sectors of the economy, including the private sector, government, and foreign sector.

Question 18

The tax cuts of 2008 and 2009 reduced the disposable income of U.S.consumers.

Accepted Answer

The tax cuts of 2008 and 2009 actually increased the disposable income of U.S. consumers. These tax cuts, known as the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009, were intended to stimulate consumer spending and boost the economy during the Great Recession.

Question 19

A scatter diagram could help a policy maker decide on the size of a tax cut necessary to increase consumer expenditures by a certain amount.

Accepted Answer

A scatter diagram can be used to examine the relationship between two variables, such as consumer expenditures and the size of a tax cut. By plotting these variables on a graph, a policy maker can identify patterns or trends in the data and determine the level of tax cut needed to achieve the desired increase in consumer expenditures.

Question 20

Tax reductions should also reduce the amount of consumer expenditures.

Accepted Answer

Tax reductions typically result in an increase in disposable income for consumers, which may then lead to an increase in consumer spending.

Quiz 8: Aggregate Demand and the Powerful Consumer