Question 1

An rise in stock prices will __________ net wealth and __________ consumption.
A)reduce; increase
B)reduce; decrease
C)reduce; not change
D)increase; increase
E)increase; decrease

Accepted Answer

An increase in stock prices will increase net wealth (the value of financial assets owned by individuals increases) and increase consumption (because people feel richer and want to spend more).

Question 2

Which of the following would not shift the consumption function downward?
A)a decline in business profits
B)a decline in wealth
C)an increase in the price level
D)an increase in the interest rate
E)a more pessimistic outlook about the future

Accepted Answer

A decline in business profits primarily affects investment rather than consumption directly, so it would not shift the consumption function downward.

Question 3

A grocery store manager must decide whether to buy four rug cleaners to rent to customers.The manager estimates that the first would yield $200 a year,the second $150,the third $75,and the fourth $20.If the interest rate is 12 percent and each rug cleaner costs $500,how many should the manager buy?
A)none
B)one
C)two
D)three
E)four

Accepted Answer

The answer of A grocery store manager must decide whether...

Question 4

Dennis spends $400 on a snowblower,expecting to earn $80 per year for each of the next five years clearing out his neighbors' driveways.The rate of return he expects on this investment is
A)500 percent per year
B)100 percent per year
C)80 percent per year
D)25 percent per year
E)20 percent per year

Accepted Answer

Dennis has spent $400 on a snowblower and expects to earn $80 per year for the next five years, so his total earnings will be: 
$80/year x 5 years = $400

Therefore, his total return on investment (ROI) is $400/$400 = 1 or 100%. Since this is spread out over five years, his annual rate of return is 100%/5 = 20%.

Therefore, the correct answer is E) 20 percent per year.

Question 5

A grocery store manager must decide whether to buy a rug cleaner to rent to customers.The cleaner costs $800.It is expected to yield $200 in income per year.What is the expected annual rate of return from the cleaner?
A)$600
B)$200
C)400 percent
D)75 percent
E)25 percent

Accepted Answer

The expected annual rate of return is calculated by dividing the annual income by the cost of the investment. Here, $200 (annual income) divided by $800 (cost) equals 0.25, or 25 percent.

Question 6

The opportunity cost of investing in capital is the interest rate.

Accepted Answer

The opportunity cost is the foregone alternative, in this case, the interest that could have been earned if the money invested in capital had instead been put in a savings account or other investment option. Therefore, the opportunity cost of investing in capital is the interest rate.

Question 7

Which of the following will not shift the consumption function upward?
A)a drop in the price level
B)an increase in net wealth
C)a drop in the interest rate
D)expectations of lower future income
E)expectations of higher prices in the future

Accepted Answer

Expectations of lower future income would likely decrease consumption, not increase it, thus not shifting the consumption function upward.

Question 8

Purchases of existing commodities,such as gold and precious gems,are considered investment spending by economists.

Accepted Answer

The answer of Purchases of existing commodities,such as gold and...

Question 9

Which of the following is not investment spending?
A)an increase in business inventories
B)the extensive renovation of an old factory building
C)the purchase of stock in Potomac Electric Company
D)the construction of a new apartment building
E)the purchase of a new silo for a farm

Accepted Answer

The purchase of stock in Potomac Electric Company is not investment spending, as it involves buying an already-existing asset rather than creating a new one. The other choices involve spending on physical capital, such as buildings or equipment, which is considered investment spending.

Question 10

The non-income determinants of consumption include all of the following except one.Which is the exception?
A)net wealth
B)the profitability of new investment
C)the price level
D)expectations
E)the interest rate

Accepted Answer

The profitability of new investment is an income determinant, as it directly affects the amount of disposable income available for consumption. The other options, net wealth, the price level, expectations, and the interest rate, are all non-income determinants that can impact consumption decisions.

Question 11

The partners in the Wonderwords word processing firm spend $12,000 on computers,hoping to earn an additional $1,000 per year with them.If the partners could earn 7 percent interest on a bank deposit they should
A)put the $12,000 in the bank
B)put $6,000 in the bank and spend only $6,000 on computers
C)buy the computers because the rate of return on the computers is positive
D)buy the computers only if they do not have to borrow the funds to buy the computers
E)buy the computers because the rate of return on the computers exceeds 7 percent

Accepted Answer

The answer of The partners in the Wonderwords word processing...

Question 12

The owners of the Morning Glory Coffee Shop are considering spending $3,000 on a new cappuccino machine.They expect to increase revenues by $200 per year if they do.The current interest rate is 8 percent.Which of the following is true?
A)The rate of return on their investment is $200.
B)The rate of return on their investment is 5 percent.
C)The owners should not buy the machine.
D)The owners should buy the cappuccino machine if they have the $3,000 in cash,but not if they have to borrow the money.
E)The owners should buy the cappuccino machine regardless of whether they have the $3,000 in cash or not.

Accepted Answer

The expected increase in revenue ($200 per year) is less than the cost of capital (8% of $3,000 = $240 per year), making the investment not financially viable.

Question 13

Which of the following would not increase the Gallego family's real net wealth?
A)an increase in the value of their home
B)an increase in the value of Mrs.Gallego's pension fund
C)an increase in the amount that the Gallegos have saved in the bank
D)a rise in the price level
E)a decrease in the size of the mortgage payments on the Gallego's home

Accepted Answer

A rise in the price level is associated with inflation, which reduces the purchasing power of money. Therefore, it decreases the real value of the Gallego family's net wealth. The other options (A, B, C, and E) all increase the Gallego family's real net wealth.

Question 14

A drop in stock prices will __________ net wealth and __________ consumption.
A)reduce; increase
B)reduce; decrease
C)reduce; not change
D)increase; increase
E)increase; decrease

Accepted Answer

A drop in stock prices will reduce net wealth because the value of the stocks owned by individuals will decrease. This reduction in net wealth will result in a decrease in consumption because people will have less disposable income to spend.

Question 15

A grocery store manager has $600 in cash with which to buy a rug cleaner.Rental income from the cleaner would be about $75 per year.The interest rate is 11 percent.Should the manager buy the machine?
A)Yes,since the rate of return is greater than the rate of interest.
B)Yes,since the manager does not have to borrow the money the interest rate is irrelevant.
C)No,since the yield of $75 is less than the interest cost of 11 percent.
D)No,since the rate of return is less than the interest rate.
E)Yes,since the return of $75 is greater than 11 percent.

Accepted Answer

The rate of return from the rental income of $75 per year is higher than the interest rate of 11 percent. Therefore, the investment in the rug cleaner would be profitable and the manager should buy the machine.

Question 16

A household that expects a decrease in disposable income in the future will
A)increase its current consumption spending
B)decrease its current consumption spending
C)maintain its current consumption spending
D)increase its current consumption spending,then increase spending when income falls
E)decrease its current consumption spending,then increase spending when income falls

Accepted Answer

A household that expects a decrease in disposable income in the future will likely decrease its current consumption spending to prepare for the expected decrease in income. This is known as precautionary saving.

Question 17

Which of the following would shift the consumption function downward?
A)a decrease in stock prices
B)a lower interest rate
C)a lower price level
D)lower disposable income
E)expectations of higher future prices

Accepted Answer

The answer of Which of the following would shift the...

Question 18

Which of the following would not shift the consumption function upwards?
A)an increase in wealth
B)an increase in disposable income
C)a decrease in the price level
D)a decline in the interest rate
E)a more optimistic outlook about the future

Accepted Answer

An increase in disposable income does not shift the consumption function; it causes movement along the curve.

Question 19

Economists assume that the fundamental motive of investors is
A)to maximize profit
B)to maximize income
C)to maximize the firm's growth
D)to promote economic growth for the economy as a whole
E)the desire to save

Accepted Answer

The concept of profit maximization is a key assumption in economic theory and is related to the idea that investors and firms seek to maximize their financial returns from their investments. This can be achieved by increasing revenues, reducing costs, or improving efficiency, among other strategies.

Question 20

If a new pizza oven costs $50,000 and is expected to generate $10,000 in revenue next year,its expected rate of return is 20 percent.

Accepted Answer

The expected rate of return is calculated by dividing the expected revenue ($10,000) by the cost of the investment ($50,000), which equals 0.20 or 20%.

Quiz 9: Aaggregate Expenditure and Aggregate Demand

An rise in stock prices will net wealth and consumption.

Which of the following would not shift the consumption function downward?

A grocery store manager must decide whether to buy four rug cleaners to rent to customers.The manager estimates that the first would yield $200 a year,the second $150,the third $75,and the fourth $20.If the interest rate is 12 percent and each rug cleaner costs $500,how many should the manager buy?

Dennis spends $400 on a snowblower,expecting to earn $80 per year for each of the next five years clearing out his neighbors' driveways.The rate of return he expects on this investment is

A grocery store manager must decide whether to buy a rug cleaner to rent to customers.The cleaner costs $800.It is expected to yield $200 in income per year.What is the expected annual rate of return from the cleaner?

The opportunity cost of investing in capital is the interest rate.

Which of the following will not shift the consumption function upward?

Purchases of existing commodities,such as gold and precious gems,are considered investment spending by economists.

Which of the following is not investment spending?

The non-income determinants of consumption include all of the following except one.Which is the exception?

The partners in the Wonderwords word processing firm spend $12,000 on computers,hoping to earn an additional $1,000 per year with them.If the partners could earn 7 percent interest on a bank deposit they should

The owners of the Morning Glory Coffee Shop are considering spending $3,000 on a new cappuccino machine.They expect to increase revenues by $200 per year if they do.The current interest rate is 8 percent.Which of the following is true?

Which of the following would not increase the Gallego family's real net wealth?

A drop in stock prices will net wealth and consumption.

A grocery store manager has $600 in cash with which to buy a rug cleaner.Rental income from the cleaner would be about $75 per year.The interest rate is 11 percent.Should the manager buy the machine?

A household that expects a decrease in disposable income in the future will

Which of the following would shift the consumption function downward?

Which of the following would not shift the consumption function upwards?

Economists assume that the fundamental motive of investors is

If a new pizza oven costs $50,000 and is expected to generate $10,000 in revenue next year,its expected rate of return is 20 percent.