Deck 11: Income and Expenditure

Question 1

The decline in the Finnish economy of 2016 is primarily an example of how:

A) too much government regulation is harmful to the economy.
B) changes in consumer spending can be multiplied through the entire economy.
C) immigration affects local economies.
D) high tax rates can decrease economic activity in an area.

Answer 1

changes in consumer spending can be multiplied through the entire economy.

Question 2

The marginal propensity to consume equals the:

A) proportion of consumer spending as a function of aggregate disposable income.
B) change in savings divided by the change in aggregate disposable income.
C) ratio of the change in consumer spending to the change in aggregate disposable income.
D) change in savings divided by the change in consumer spending.

Answer 2

ratio of the change in consumer spending to the change in aggregate disposable income.

Question 3

If your disposable personal income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $13,000, your marginal propensity to consume is:

A) 0.2.
B) 0.4.
C) 0.6.
D) 0.8.

Answer 3

0.8.

Question 4

The main reasons that retail sales fell in Finland during 2016 were:

A) a decrease in imports and declining sales at Nokia, which led to reduced household incomes.
B) an increase in imports and declining sales at Nokia, which led to reduced household incomes.
C) an increase in exports and rising sales at Nokia, which led to reduced household incomes.
D) a decrease in exports and declining sales at Nokia, which led to reduced household incomes.

Question 5

Assuming no taxes and no trade, the multiplier equals:

A) MPC / MPS.
B) 1 / (1 - MPS).
C) MPC + MPS.
D) 1 / (1 - MPC).

Question 6

The economy of Finland experienced a setback in 2016 because:

A) of the advent of digital technology.
B) a drop in the price of oil.
C) of poor business practices at Nokia.
D) of climate change.

Question 7

The marginal propensity to consume is the change in _____ divided by the change in _____.

A) savings; disposable income
B) disposable income; consumption
C) disposable income; savings
D) consumption; disposable income

Question 8

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your marginal propensity to consume is:

A) 0.2.
B) 0.4.
C) 0.6.
D) 0.8.

Question 9

The marginal propensity to save plus the marginal propensity to consume must equal:

A) zero.
B) one.
C) income.
D) savings.

Question 10

The multiplier is:

A) 1 / (1 - MPC).
B) MPS / MPC.
C) 1 / (MPC).
D) 1(1 + MPC).

Question 11

Suppose that the marginal propensity to consume is 0.8 and investment spending increases by $100 billion. The increase in real GDP is:

A) $100 billion, the same amount as investment spending.
B) $125 billion, composed of $100 billion in investment spending and $25 billion in consumption.
C) $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion.
D) $500 billion, composed of $100 billion in investment spending and $400 billion in consumption.

Question 12

Suppose the marginal propensity to consume equals 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, real GDP will _____ by _____.

A) increase; $450 billion
B) increase; $90 billion
C) increase; $500 billion
D) decrease; $500 billion

Question 13

If the marginal propensity to save is 0.3, the size of the multiplier is:

A) 3.3.
B) 2.3.
C) 1.3.
D) 0.7.

Question 14

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.8. Assuming no taxes and no trade, real GDP will _____ by _____.

A) decrease; $500 billion
B) decrease; $200 billion
C) decrease; $800 billion
D) increase; $400 billion

Question 15

The marginal propensity to consume plus the marginal propensity to save must:

A) equal each other.
B) equal 1.
C) be less than 1.
D) be greater than 1.

Question 16

The changes in the economy of Finland in 2016 provide an example of:

A) the risk associated with an agricultural economy.
B) illustrating the way booms and busts happen for the economy as a whole.
C) how public assistance programs can stimulate the economy.
D) the benefits of government budget surpluses.

Question 17

The marginal propensity to consume (MPC) equals the change in _____ divided by the change in _____.

A) consumer spending; disposable income
B) consumer spending; investment spending
C) consumer spending; gross domestic product
D) disposable income; consumer spending

Question 18

If the multiplier equals 4, then the marginal propensity to save must be equal to:

A) 0.25.
B) 0.5.
C) 0.75.
D) the marginal propensity to consume.

Question 19

The marginal propensity to save is:

A) savings divided by aggregate income.
B) the fraction of an additional dollar of disposable income that is saved.
C) 1 + MPC.
D) savings divided by aggregate income, or 1 + MPC.

Question 20

The marginal propensity to consume is:

A) increasing if the marginal propensity to save is increasing.
B) the proportion of total disposable income that the average family saves.
C) the change in consumer spending divided by the change in aggregate disposable income.
D) the change in consumer spending minus the change in aggregate disposable income.

Question 21

The marginal propensity to consume is the increase in consumer spending when _____ increase(s) by $1.

A) investment spending
B) taxes
C) disposable income
D) savings

Question 22

In a simple, closed economy (no government or foreign sector), if the marginal propensity to save is 0.2, the marginal propensity to consume must be:

A) 0.2.
B) 0.8.
C) 1.2.
D) 0.16.

Question 23

If the multiplier is 4 and investment spending falls by $100 billion, the change in real GDP will be:

A) -$400 billion.
B) $400 billion.
C) $25 billion.
D) -$25 billion.

Question 24

In a simple, closed economy (no government or foreign sector), if disposable income increases by $100 and $30 is saved, _____ is consumed.

A) $30
B) $70
C) $100
D) $170

Question 25

A $50 million increase in investment spending will eventually cause equilibrium real GDP to:

A) decrease by $50 million.
B) increase by $50 million.
C) increase by more than $50 million.
D) increase by less than $50 million.

Question 26

In a simple, closed economy (no government or foreign sector), if the marginal propensity to consume increases, the marginal propensity to save will:

A) increase.
B) decrease.
C) remain constant.
D) fluctuate randomly.

Question 27

The marginal propensity to save is the increase in household savings when _____ increase(s) by $1.

A) investment spending
B) taxes
C) consumption
D) disposable income

Question 28

Which formula MOST accurately depicts the expenditure multiplier?

A) 1/(1- MPS)
B) 1/(MPC - 1)
C) 1/(1 - MPC)
D) 1/(1 + MPC)

Question 29

If the marginal propensity to save is small, it will:

A) make the multiplier smaller.
B) make the multiplier larger.
C) not affect the value of the multiplier.
D) increase the interest rate.

Question 30

A $70 million decrease in investment spending will cause real GDP to:

A) decrease by $70 million.
B) increase by $70 million.
C) decrease by less than $70 million.
D) decrease by more than $70 million.

Question 31

The _____ the _____, the _____ the multiplier.

A) smaller; level of wealth; bigger
B) bigger; marginal propensity to save; bigger
C) bigger; marginal propensity to consume; smaller
D) bigger; marginal propensity to consume; bigger

Question 32

In a simple, closed economy (no government or foreign sector), if the marginal propensity to consume is 0.7, the marginal propensity to save must be:

A) 1.7.
B) 0.7.
C) 0.3.
D) 0.21.

Question 33

Suppose that the U.S. economy is in a severe recession. Most households are trying to save more of their income than before. This increase in private savings will lead to:

A) an increase in real GDP, as more savings means more funds for business investment.
B) a fall in real GDP, as more savings means people will spend less.
C) no change in real GDP, because there is no savings multiplier.
D) an increase in real GDP, as an increase in savings will make people wealthier.

Question 34

In a simple, closed economy (no government or foreign sector), if disposable income increases by $100 and $70 is consumed, _____ is saved.

A) $30
B) $70
C) $100
D) $170

Question 35

Suppose that the government increases spending by $100 billion as a stimulus package. If the marginal propensity to consume is 0.6, then real GDP will:

A) decrease by $250 billion.
B) increase by $250 billion.
C) increase by $600 billion.
D) decrease by $400 billion.

Question 36

An increase in the marginal propensity to consume:

A) increases the multiplier.
B) shifts the autonomous investment line upward.
C) decreases the multiplier.
D) shifts the autonomous investment line downward.

Question 37

An initial change in the desired level of spending by firms, households, or government at a given level of real GDP is a(n):

A) autonomous change in aggregate spending.
B) multiplier-induced change in spending.
C) endogenous spending.
D) budget surplus.

Question 38

In a simple, closed economy (no government or foreign sector), if disposable income increases by $1,000 and consumption increases by $600, the marginal propensity to consume is:

A) $600.
B) $400.
C) 1.67.
D) 0.60.

Question 39

In a simple, closed economy (no government or foreign sector), if the marginal propensity to save decreases, the marginal propensity to consume will:

A) increase.
B) decrease.
C) remain constant.
D) fluctuate randomly.

Question 40

Suppose that investment spending increases by $50 billion and as a result the equilibrium income increases by $200 billion. The value of the marginal propensity to consume is:

A) 0.8.
B) 0.4.
C) 0.75.
D) 4.

Question 41

Other things being equal, planned investment spending _____ as long as _____.

A) decreases; technological innovation develops faster than technological obsolescence
B) increases; sales exceed the existing production capacity
C) increases; the rate of growth of real GDP is lower than the marginal propensity to save
D) decreases; the rate of growth of physical capital is positive

Question 42

Positive unplanned inventory investment occurs when actual:

A) depreciation is less than expected.
B) sales are less than expected.
C) depreciation is more than expected.
D) sales are higher than expected.

Question 43

In a simple, closed economy (no government or foreign sector), disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the marginal propensity to save is:

A) $600.
B) $400.
C) 0.80.
D) 0.40.

Question 44

According to the accelerator principle, a _____ rate of growth in real GDP leads to _____.

A) lower; lower unplanned inventory investment
B) higher; higher inventory investment
C) higher; higher planned investment spending
D) lower; higher inventory investment

Question 45

In a simple, closed economy (no government or foreign sector), disposable income increases from $2,000 to $3,000. If consumption increases from $1,500 to $2,100, the marginal propensity to consume is:

A) $600.
B) 0.71.
C) 0.60.
D) 0.50.

Question 46

The level of productive capacity _____ planned investment spending.

A) has no effect on
B) is positively related to
C) is negatively related to
D) varies directly with

Question 47

According to the accelerator principle there is a _____ relationship between _____ and planned investment spending.

A) positive; expected growth
B) negative; expected growth
C) positive; unplanned inventory investment
D) positive; the interest rate

Question 48

The higher the production capacity of the economy:

A) the higher is planned investment spending.
B) the lower is planned investment spending.
C) the higher is actual production.
D) the lower is current production.

Question 49

Planned investment spending will decrease if:

A) the interest rate rises.
B) firms expect the growth of real GDP to increase.
C) firms are producing near full capacity.
D) consumer expectations about wealth grow more optimistic.

Question 50

Inventory investment can be:

A) negative only.
B) zero only.
C) positive only.
D) negative, zero, or positive.

Question 51

If planned investment spending is $2 trillion and inventories decrease by $0.5 trillion, actual investment spending is:

A) $2.5 trillion.
B) $1.5 trillion.
C) $2 trillion.
D) $1 trillion.

Question 52

Other things being equal, investment spending _____ when _____.

A) decreases; firms expect sales to fall
B) increases; firms have excessive production capacity
C) increases; the rate of growth of real GDP is low
D) decreases; the obsolete or worn out physical capital increases

Question 53

Actual investment equals planned investment:

A) plus unplanned investment.
B) minus unplanned investment.
C) plus unplanned investment plus inventory investment.
D) times unplanned investment minus inventory investment.

Question 54

Inventory investment is:

A) a part of planned investment spending and is always positive.
B) a part of unplanned investment spending and may either be positive or negative.
C) not a part of investment spending, as it can't be properly planned.
D) a part of consumption spending, as these are unsold goods.

Question 55

According to the _____, there is a positive relationship between planned investment spending and the expected growth rate of real GDP.

A) paradox of thrift
B) life-cycle hypothesis
C) multiplier effect
D) accelerator principle

Question 56

According to the accelerator principle:

A) a higher growth rate of real GDP leads to higher planned investment spending.
B) a higher growth rate of real GDP increases immigration.
C) higher budget deficits lead to even larger deficits.
D) the more money people make, the faster they spend it.

Question 57

In a simple, closed economy (no government or foreign sector), if disposable income increases by $1,000 and consumption increases by $600, the marginal propensity to save is:

A) $600.
B) $400.
C) 2.5.
D) 0.40.

Question 58

If a store has 10,000 CDs at the start of the period and 15,000 CDs at the end, then its inventory investment during the period was _____ CDs.

A) -5,000
B) 0.67
C) 1.5
D) 5,000

Question 59

In a simple, closed economy (no government or foreign sector), if disposable income increases by $1,000 and consumption increases by $600, the multiplier is:

A) $600.
B) 0.6.
C) 2.5.
D) 0.40.

Question 60

The accelerator principle states that planned investment spending by firms is:

A) positively related to the expected growth of real GDP.
B) negatively related to the expected growth of real GDP.
C) negatively related to the current level of real GDP.
D) positively related to the current level of real GDP.

Question 61

In 2005, Airbus Co. purchased raw materials worth $400 million to manufacture airplanes for a total value of $900 million. In that year, Airbus Co. sold airplanes for a total value of $800 million. During 2005, Airbus Co. registered inventory investment of:

A) $900 million.
B) $500 million.
C) $400 million.
D) $100 million.

Question 62

Rising inventories usually indicate an:

A) economy that grows unexpectedly.
B) economy that slows unexpectedly.
C) unexpected spurt in sales.
D) inflationary cycle.

Question 63

In an economy with no international trade, no government expenditure, no transfers, and no taxes, disposable income equals GDP. Therefore, it follows that:

A) as GDP increases, planned aggregate spending decreases.
B) consumption equals investment spending.
C) as GDP decreases, planned aggregate spending decreases.
D) investment spending equals disposable income.

Question 64

If overall inventories rise in a month because of unplanned inventory investment, MOST likely:

A) the economy is slowing down.
B) sales were above forecasts.
C) inventory investment is negative.
D) the accelerator principle was contradicted.

Question 65

The initial impact of a sudden decrease in the expected growth rate of GDP will MOST likely be a change in _____ investment spending.

A) planned
B) unplanned
C) both planned and unplanned
D) neither planned nor unplanned

Question 66

Negative inventory investment occurs when companies _____ their inventories _____.

A) add to; because sales fall
B) add to; by increasing production
C) reduce; by decreasing production
D) reduce; because sales increase.

Question 67

Actual investment equals:

A) planned investment plus unplanned investment.
B) planned investment minus unplanned investment.
C) unplanned investment minus planned investment.
D) planned investment in a free market economy.

Question 68

Planned investment spending is _____ related to the interest rate and _____.

A) positively; existing productive capacity
B) negatively; existing productive capacity
C) positively; expected GDP
D) negatively; expected GDP

Question 69

When planned investment is less than actual investment, there must be:

A) unplanned inventory investment.
B) unplanned inventory disinvestments.
C) unplanned depreciation.
D) unplanned technological progress.

Question 70

The initial impact of a sudden decrease in the expected growth rate of GDP will MOST likely be a(n) _____ in _____ investment spending.

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

Question 71

Falling inventories indicate _____ unplanned inventory investment and a _____ economy.

A) positive; growing
B) positive; slowing
C) negative; slowing
D) negative; growing

Question 72

Which factor will cause a decrease in unplanned inventory investment?

A) an increase in interest rates
B) an unexpected increase in consumer spending
C) an increase in the growth rate of real GDP
D) a sudden decrease in consumer wealth

Question 73

An increase in interest rates on business loans will _____ investment spending.

A) decrease planned
B) decrease unplanned
C) increase planned
D) increase unplanned

Question 74

In an economy with no international trade, no government expenditure, no transfers, and no taxes, planned aggregate spending equals _____ plus planned investment spending.

A) GDP minus disposable income
B) consumption
C) disposable income
D) GDP minus consumption

Question 75

An increase in interest rates on business loans will change _____ investment spending.

A) planned
B) unplanned
C) both planned and unplanned
D) neither planned nor unplanned

Question 76

The initial impact of an unexpected decrease in consumer spending will be a(n) _____ investment spending.

A) decrease in planned
B) decrease in unplanned
C) increase in planned
D) increase in unplanned

Question 77

Actual investment spending equals:

A) planned investment plus unplanned investment.
B) planned investment minus unplanned investment.
C) unplanned investment, even if there is a positive amount of planned investment.
D) unplanned investment minus planned investment.

Question 78

Actual investment spending equals:

A) the difference between unplanned investment spending and planned investment spending.
B) the difference between planned investment spending and unplanned investment spending.
C) the sum of planned investment spending and unplanned investment spending.
D) the ratio of planned investment spending to unplanned investment spending.

Question 79

Rising inventories typically indicate _____ unplanned inventory investment and a _____ economy.

A) positive; slowing
B) negative; slowing
C) positive; expanding
D) negative; expanding

Question 80

The initial impact of an unexpected decrease in consumer spending will be a change in:

A) planned investment spending.
B) unplanned investment spending.
C) both planned and unplanned investment spending.
D) neither planned nor unplanned investment spending.