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

Question 1

The nominal interest rate is 7 percent and the expected inflation rate is 4 percent. The real interest rate is:

A) 10 percent.
B) -2 percent.
C) 3 percent.
D) 4 percent.

Answer 1

C

Question 2

You are given the following consumption function C = 50 + .80Y_D. _{What is the amount of autonomous} consumption expenditures?

A) 75
B) 100
C) 5
D) 50

Answer 2

D

Question 3

Short-run macroeconomic policies concentrate on:

A) minimizing fluctuations around potential GDP.
B) maximizing fluctuations around potential GDP.
C) incentives for increasing productivity and the potential output of the economy.
D) none of the above.

Answer 3

A

Question 4

For the U.S. economy, the largest expenditure category is:

A) government expenditures.
B) net export expenditures.
C) personal consumption expenditures.
D) investment expenditures.

Question 5

The marginal propensity to consume is defined as:

A) $\Delta$ C/ $\Delta$ Y_d.
B) $\Delta$ S/ $\Delta$ Y_d.
C) $\Delta$ Y_d/ $\Delta$ C.
D) $\Delta$ Y_d/ $\Delta$ S.

Question 6

If marginal propensity to save equals 0.50, then the marginal propensity to consume is:

A) 1.25.
B) 0.50.
C) 0.70.
D) 1.00.

Question 7

Potential GDP focuses on the:

A) long-run supply side of the economy.
B) long-run demand side of the economy.
C) short-run supply side of the economy.
D) short-run demand side of the economy.

Question 8

The vital link between the real and monetary sectors of the economy is the:

A) price level.
B) interest rate.
C) balance of payments.
D) budget deficit.

Question 9

Long-run macroeconomic policies concentrate on:

A) minimizing fluctuations around potential GDP.
B) maximizing fluctuations around potential GDP.
C) incentives for increasing productivity and the potential output of the economy.
D) none of the above.

Question 10

Measuring expenditures and income with the price level held constant, so that any changes in these values represent changes in the actual amount of goods, services, and income is denoted in__________ terms.

A) nominal
B) real
C) constant dollar
D) all of the above

Question 11

Measuring expenditures and income with the price level allowed to vary, so that changes in these values represent changes in either the actual amount of goods, services, and income or changes in the price level or a combination of both factors is denoted in __________ terms.

A) nominal
B) real
C) constant dollar
D) all of the above

Question 12

The marginal propensity to save is defined as:

A) $\Delta$ C/ $\Delta$ Y_d.
B) $\Delta$ S/ $\Delta$ Y_d.
C) $\Delta$ Y_d/ $\Delta$ C.
D) $\Delta$ Y_d/ $\Delta$ S.

Question 13

The sum of personal consumption expenditure, investment expenditure, government expenditure, and net export expenditure on the total amount of real output in the economy in a given period of time is called:

A) potential GDP.
B) aggregate expenditure.
C) real money balances.
D) none of the above.

Question 14

Potential GDP is:

A) minimum amount of output that can be produced given the labor force, capital stock, and technology.
B) maximum amount of output that can be produced given the labor force, capital stock, and technology.
C) varies over the business cycle.
D) none of the above.

Question 15

An index, based on a telephone survey of 500 households conducted by the University of Michigan, that measures households' attitudes regarding expected business conditions, personal financial conditions, an consumer confidence about purchasing furniture and major household appliances is called the:

A) Consumer Sentiment Index.
B) Consumer Confidence Index.
C) Consumer Satisfaction Index.
D) Consumer Consumption Index.

Question 16

Greater consumer confidence, wealth, available consumer credit, and disposable income__________ personal consumption expenditures.

A) increase
B) decrease
C) have no effect on
D) none of the above

Question 17

Household consumption primarily depends on:

A) disposable income.
B) the interest rate.
C) marginal propensity to import.
D) credit card debt.

Question 18

An index based on a mail survey of 5,000 households by the Conference Board that measures households' perceptions of general business conditions, available jobs in the households' local area, and expected personal family income in the coming six months is called the:

A) Consumer Sentiment Index.
B) Consumer Confidence Index.
C) Consumer Satisfaction Index.
D) Consumer Consumption Index.

Question 19

Comparing the situation of a nominal interest rate of 10 percent and an inflation rate of 9 percent with a nominal interest rate of 6 percent and inflation rate of 2 percent, consumers would borrow more in which situation?

A) Nominal interest rate of 10 percent since real interest rate is 1 percent.
B) Nominal interest rate of 6 percent since the real interest rate is 4 percent.
C) Nominal interest rate of 10 percent since the real interest rate is 9 percent.
D) Nominal interest rate of 6 percent since the real interest rate is 2 percent.

Question 20

A lower real interest rate, amount of consumer debt, and personal taxes________ personal consumption expenditures.

A) increase
B) decrease
C) have no effect on
D) none of the above

Question 21

Appreciation of the U.S. dollar will ________ exports and ________imports, other things equal.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 22

Consumer debt increases. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 23

Within the Keynesian cross, the adjustment towards equilibrium occurs through:

A) inflation.
B) inventories.
C) interest rates.
D) none of the above.

Question 24

The capacity utilization rate is the ratio of ________ to ________

A) production; capacity
B) capacity; production
C) capacity; potential GDP
D) none of the above

Question 25

In an open economy, injections and leakages are related as:

A) I + G = S + T.
B) I + G + X = S + T + M.
C) X + G = T + M.
D) none of the above

Question 26

The change in import spending due to a change in domestic real income is called:

A) marginal propensity to save.
B) marginal propensity to consume.
C) marginal propensity to import.
D) none of the above.

Question 27

If desired spending is less than output, then firms:

A) accumulate their inventories and cut production.
B) deplete their inventories and cut production.
C) deplete their inventories and increase production.
D) accumulate their inventories and increase production.

Question 28

The slope of the aggregate expenditure function is the sum of the:

A) marginal propensity to consume and marginal propensity to save.
B) marginal propensity to consume and marginal propensity to invest.
C) marginal propensity to consume, marginal propensity to save, and marginal propensity to import.
D) marginal propensity to consume, marginal propensity to invest, and marginal propensity to import.

Question 29

The intercept term of the linear investment function measures:

A) induced investment expenditures.
B) autonomous investment expenditures.
C) income.
D) none of the above.

Question 30

The opportunity costs of the firm using its own funds are measured by the:

A) market interest rate.
B) inflation rate.
C) price level.
D) menu costs.

Question 31

Government expenditures are considered autonomous in the model meaning that changes are the result of:

A) changes in real income.
B) changes in inflation.
C) changes in unemployment.
D) changes in policy decisions.

Question 32

The extent to which investment spending changes with changes to income is called the:

A) marginal propensity to consume.
B) marginal propensity to save.
C) marginal propensity to import.
D) marginal propensity to invest.

Question 33

The role of the currency exchange rate is embedded in the import expenditure equation as:

A) autonomous import spending.
B) marginal propensity to import.
C) autonomous export spending.
D) none of the above.

Question 34

The aggregate expenditure in an open economy is defined as:

A) E = C + I + G.
B) E = C + I + G + X.
C) E = C × I × G × X - M.
D) E = C + I + G + X - M.

Question 35

The total amount of spending on nonresidential structures, equipment, software, residential structures, and business inventories in a given period of time is called:

A) net exports.
B) government consumption and investment.
C) gross private domestic investment.
D) personal consumption.

Question 36

________ investment is more volatile than other forms of investment spending because this type of investment can be changed relatively quickly.

A) Business fixed
B) Inventory
C) Residential
D) Capital

Question 37

Higher expected profits and business confidence ________ investment spending

A) decrease
B) increase
C) do not affect
D) none of the above.

Question 38

The difference between export spending on domestically produced goods and services by individuals in other countries and import spending on foreign produced goods and services by domestic residents is called:

A) net export expenditure.
B) personal consumption expenditure.
C) government expenditure.
D) investment expenditure.

Question 39

If desired spending exceeds output, then firms:

A) accumulate their inventories and cut production.
B) deplete their inventories and cut production.
C) deplete their inventories and increase production.
D) accumulate their inventories and increase production.

Question 40

Taxes levied on a firm's earnings ________the effective cost of funds.

A) lower
B) raise
C) have no effect
D) none of the above

Question 41

The function that shows the inverse relationship between planned consumption and investment spending and the real interest rate, all else constant, is called the:

A) interest-related expenditure function.
B) aggregate expenditure function.
C) consumption function.
D) investment function.

Question 42

When measuring the actual output produced in an economy, one should focus on GDP measured in nominal terms.

Question 43

Personal income taxes are reduced as part of an expansionary fiscal policy. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 44

Decreases in autonomous spending have a contractionary effect and make ________ levels of real income consistent with a given interest rate.

A) lower
B) higher
C) constant
D) none of the above.

Question 45

The U.S. dollar appreciates against the euro. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 46

Stock market wealth decreases. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 47

Increase in business taxes will ________ the expenditure curve:

A) decrease.
B) increase.
C) not change.
D) none of the above.

Question 48

The open economy multiplier is calculated as follows:

A) 1/[1-marginal propensity to consume + marginal propensity to invest)]
B) 1/[1-marginal propensity to consume + marginal propensity to import)]
C) 1/[1-marginal propensity to consume + marginal propensity to invest + marginal propensity to import)]
D) 1/[1-marginal propensity to consume + marginal propensity to invest - marginal propensity to import)]

Question 49

Decrease in personal income taxes will ________ the expenditure curve:

A) decrease.
B) increase.
C) not change.
D) none of the above.

Question 50

Business taxes increase. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 51

The U.S. dollar depreciates against the Japanese yen. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 52

In a closed economy the marginal propensity to consume is 0.60 and the marginal propensity to invest is 0.10. What is the size of the multiplier?

A) 1.33
B) 2.33
C) 3.33
D) 0.70

Question 53

Decrease in stock market wealth will ________ the expenditure curve:

A) decrease.
B) increase.
C) not change.
D) none of the above.

Question 54

Stabilization of business cycle fluctuations focuses on the long run.

Question 55

Capacity utilization increases. What is the impact on aggregate expenditures and income?

A) Both increase.
B) Both decrease.
C) Aggregate expenditure increases and income decreases.
D) Aggregate expenditure decreases and income increases.

Question 56

Potential GDP measures the capacity of the economy in terms of the actual goods and services to be produced.

Question 57

The marginal propensity to consume is 0.75, marginal propensity to invest is 0.3, and the marginal propensity to import is 0.2. What is the size of the multiplier?

A) 6.67
B) 5.67
C) 4.67
D) 1.67

Question 58

Decrease in government spending will________ the expenditure curve:

A) decrease.
B) increase.
C) not change.
D) none of the above.

Question 59

The marginal propensity to consume is 0.50, marginal propensity to invest is 0.20, and the marginal propensity to import is 0.05. What is the size of the multiplier?

A) 1.00
B) 2.86
C) 3.00
D) 0.50

Question 60

Increases in autonomous spending have an expansionary effect and make ________ levels of real income consistent with a given interest rate.

A) lower
B) higher
C) constant
D) none of the above.

Question 61

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

Question 62

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

Question 63

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

Question 64

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.

Question 65

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

Question 66

Business investment is usually more volatile than overall economic growth.

Question 67

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

Question 68

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

Question 69

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.

Question 70

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

Question 71

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.

Question 72

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.

Question 73

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

Question 74

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

Question 75

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

Question 76

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

Question 77

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.

Question 78

Government expenditure does not include transfer payments.

Question 79

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

Question 80

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