Question 1

If the price level increases, we would expect consumers to

Accepted Answer

The answer of If the price level increases, we would...

Question 2

Which of the following would be most likely to shift the consumption function downward?

Accepted Answer

A stock market crash would likely decrease consumer wealth and confidence, leading to reduced consumption and a downward shift in the consumption function.

Question 3

Price level changes have their greatest effect on consumers'

Accepted Answer

Price level changes primarily affect consumers' wealth since it influences the purchasing power of their assets and liabilities. When the price level rises, consumers' money buys less, decreasing their purchasing power and reducing their real wealth. Conversely, when the price level falls, consumers' money buys more, increasing their purchasing power and boosting their real wealth. Changes in price level can also affect income, debt, and expectations indirectly but not as significantly as its effect on wealth.

Question 4

A sudden decrease in consumers' wealth-resulting, for example, from a stock market crash-would initially cause a(n)

Accepted Answer

A sudden decrease in consumers' wealth would cause a decrease in the level of consumption at all levels of income, resulting in a downward shift of the consumption function.

Question 5

Figure 8-2
 
-In Figure 8-2, which of the following moves can be explained by a tax cut?

Accepted Answer

The only move that can be explained by a tax cut is A to E, as the tax cut increases disposable income, leading to an increase in consumption and a shift to the right on the demand curve. The other moves are not necessarily related to tax cuts and could be explained by other factors, such as changes in production costs or changes in consumer preferences.

Question 6

After years of hard work in the field of macroeconomics, you win the Nobel Prize in economics (currently about $1.5 million).What is the most likely effect of this prize on your consumption function?

Accepted Answer

Winning the Nobel Prize is a permanent increase in wealth, which is likely to cause a permanent upward shift in the consumption function, as you will have more resources available for consumption over time.

Question 7

Which of the following would cause an upward shift in the consumption function?

Accepted Answer

A decrease in the price level would cause an upward shift in the consumption function. This is because when the price level decreases, the purchasing power of consumers increases, leading to an increase in their disposable income. As a result, consumers are likely to spend more on consumption goods and services, leading to an upward shift in the consumption function.

Question 8

Which of the following will most likely cause a shift in the consumption function?

Accepted Answer

A change in consumer confidence can directly affect the consumption function as it influences consumers' willingness to spend or save, thereby shifting the consumption function.

Question 9

Pat Robertson, a TV evangelist and former Republican Party candidate for president, once said that "debt is an affront to God," so good Christians should not spend beyond their incomes.Indeed, Robertson wants Christians to save more.If more Americans, Christians as well as others, took his message seriously, how would we represent the result using a Keynesian macroeconomic model?

Accepted Answer

According to Keynesian economics, if more individuals increase their savings and reduce their consumption, then the aggregate expenditure in the economy will decrease. This would lead to a downward shift of the consumption function, since at any given income level, people would be willing to consume a lower amount. This would then result in a decrease in equilibrium output and employment levels in the short run. Therefore, the best answer is "a downward shift of the consumption function."

Question 10

Which of the following will most likely have the greatest effect on an individual's consumption function?

Accepted Answer

An inheritance paying a modest annual dividend provides a consistent and ongoing increase in income, which is more likely to affect long-term consumption patterns compared to one-time or short-term income increases.

Question 11

Households can finance their consumer spending from current

Accepted Answer

Households can finance their consumer spending either from their current income or their current wealth. They may also use debt, but this is not necessarily current as it involves borrowing against future income or wealth. Therefore, the best choice is D, as it includes both income and current wealth.

Question 12

Which of the following will most likely cause movement along the consumption function?

Accepted Answer

The consumption function shows the relationship between consumption and disposable income. Therefore, changes in disposable income will directly affect consumption, causing movement along the consumption function. Changes in interest rates, tastes, or consumers' expectations may also affect consumption, but they would result in a shift of the consumption function rather than movement along it.

Question 13

Which of the following is an example of wealth?

Accepted Answer

Wealth refers to the total value of all assets owned, such as a mutual fund balance, rather than income or payments received periodically like salary, rent, or dividends.

Question 14

Consumption functions would shift downward if

Accepted Answer

The answer of Consumption functions would shift downward if
...

Question 15

Which of the following would lead you to predict an upward shift in the consumption function?

Accepted Answer

An increase in the value of real wealth will lead to a higher consumption function since people feel wealthier and are more likely to spend. Conversely, a decrease in the value of real wealth (choice A) would likely lead to a decrease in the consumption function. A decrease in disposable income (choice B) would also lead to a decrease in the consumption function since people have less money to spend. An increase in the price level (choice D) would lead to a decrease in the purchasing power of consumer's incomes, and thus a decrease in the consumption function.

Question 16

If the stock market falls by 25 percent next year and remains down, what is most likely to happen to the consumption function?

Accepted Answer

A fall in the stock market is likely to reduce households' wealth and income, leading to a decrease in their consumption spending. As a result, the consumption function is likely to shift downward. This shift shows a decrease in the marginal propensity to consume, or MPC, that may be attributed to lower expected income, declining wealth, or increased uncertainty. The shift might also be accompanied by a change in autonomous consumption, such as reduced government transfers or increased taxes. It is possible that, in the short run, people may continue to follow their previous consumption patterns by dipping into their savings or borrowing more, but over time, the consumption function is likely to adjust to reflect the new economic realities.

Question 17

A once-and-for-all jump in the price level would initially cause a(n)

Accepted Answer

A once-and-for-all jump in the price level would initially cause a downward shift in the consumption function. This is because with higher prices, consumers will have less disposable income, leading to a decrease in consumption at each level of income.

Question 18

Figure 8-2
 
-In Figure 8-2, which of the following moves can be explained by an increase in government transfer payments?

Accepted Answer

The answer of Figure 8-2
 
-In Figure 8-2, which of...

Question 19

A decrease in the price level will most likely have what effect on the consumption function?

Accepted Answer

A decrease in price level will increase the real income of consumers, making them more willing and able to spend, thereby shifting the consumption function upward.

Question 20

If Kobe, an NBA star athlete, earns $10 million per year but has no money in the bank, he has a

Accepted Answer

Income is the amount of money earned within a specific time frame (in this case, per year), while wealth refers to the accumulated assets minus liabilities (e.g., savings, property). Since Kobe earns a high income but has no money in the bank, it means he has a low net worth or wealth.

Quiz 25: Aggregate Demand and the Powerful Consumer