Deck 17: The Determination of National Output and the Keynesian Multiplier

Question 1

If disposable income rises by $100 billion and personal consumption expenditure rises by $60 billion,what is the average propensity to consume?

A) 0.60
B) 0.40
C) -0.40
D) -1.00
E) impossible to calculate from these figures

Answer 1

E

Question 2

If a family's disposable income is $100,000 and the amount it saves is $35,000,its

A) average propensity to consume is 0.65.
B) marginal propensity to save is 0.53.
C) marginal propensity to consume is 0.65.
D) marginal plus average propensities to consume equal 1.
E) average propensity to consume is 1.53.

Answer 2

A

Question 3

The average propensity to consume is the

A) fraction of an extra dollar of GDP that becomes disposable income.
B) share of GDP spent by households and businesses.
C) proportion of an extra dollar of disposable income that is spent on consumption.
D) percentage of disposable income that is consumed.
E) reciprocal of the marginal propensity to consume.

Answer 3

D

Question 4

The saving function assumes that personal saving depends primarily on

A) interest rates.
B) the amount of investment.
C) the difference between the average and marginal propensities to consume.
D) disposable income.
E) the unemployment rate.

Question 5

The slope of the consumption function is equal to the

A) average propensity to consume.
B) marginal propensity to consume.
C) rate of interest.
D) saving function.
E) multiplier.

Question 6

If disposable income rises by $100 billion and personal consumption expenditure rises by $60 billion,what is the marginal propensity to consume?

A) 0.60
B) 0.40
C) 1.60
D) 1.66
E) 2.50

Question 7

The consumption function expresses the relationship between consumption spending and

A) investment spending.
B) aggregate supply.
C) disposable income.
D) savings.
E) the 45-degree line.

Question 8

If Carolyn's consumption rises by $5,000 as her income increases from $26,000 to $32,000 per year,her marginal propensity to consume is

A) 0.16.
B) 19.
C) 0.83.
D) 1.20.
E) impossible to determine from the data.

Question 9

The relationship between household spending and disposable income is known as the

A) investment function.
B) multiplier.
C) gross domestic product.
D) consumption function.
E) saving function.

Question 10

The additional amount a family spends on consumption from an additional dollar of disposable income is called the

A) saving function.
B) marginal propensity to save.
C) multiplier.
D) marginal propensity to consume.
E) average propensity to consume.

Question 11

If disposable income rises by $100 billion and personal consumption expenditure rises by $60 billion,what is the marginal propensity to save?

A) 0.60
B) 0.40
C) -0.40
D) -1.50
E) impossible to calculate from these figures

Question 12

The marginal propensity to consume is the

A) fraction of an extra dollar of GDP that becomes disposable income.
B) share of GDP spent by households and businesses.
C) proportion of an extra dollar of disposable income that is spent on consumption.
D) reciprocal of the average propensity to consume.
E) fraction of disposable income that is consumed.

Question 13

Which of the following best expresses the relationship between the marginal propensity to consume (MPC )and the average propensity to consume (APC )?

A) The APC equals 1 minus the MPC.
B) The APC equals the change in personal consumption divided by the change in disposable income; the MPC is the proportion of disposable income consumed.
C) The APC is the proportion of total income consumed; the MPC is the proportion of the additional income consumed.
D) The APC can never exceed the value 1; the MPC can exceed 1 at low income levels.
E) The MPC deals with the consumption behavior of a household; the APC deals with the consumption behavior of society.

Question 14

The following questions are based on the following information for a society:

If disposable income is $1,800 billion,the average propensity to consume is

A) 0.8.
B) 0.84.
C) 0.92.
D) 1.00.
E) 1.08.

Question 15

One minus the marginal propensity to consume equals

A) the average propensity to consume.
B) the multiplier.
C) the marginal propensity to save.
D) the expected rate of return.
E) disposable income.

Question 16

The average propensity to consume equals the

A) change in personal consumption expenditures divided by the current level of consumption expenditures.
B) amount spent on consumption divided by the amount of disposable income.
C) change in personal consumption expenditures divided by the change in disposable income.
D) personal consumption expenditures divided by personal saving.
E) sum of personal consumption expenditures and disposable income divided by 2.

Question 17

In national output determination theory,personal consumption expenditures depend primarily on

A) the amount of net investment.
B) the expected rate of return.
C) disposable income.
D) the difference between the average and marginal propensities to consume.
E) the aggregate demand curve.

Question 18

The following questions are based on the following information for a society:

If disposable income increases from $1,900 to $2,000 billion,the marginal propensity to consume is

A) 0.8.
B) 0.84.
C) 0.92.
D) 1.0.
E) 1.08.

Question 19

Another name for the income expenditure model is the

A) classical model.
B) consumption propensities model.
C) paradox of thrift.
D) production possibilities model.
E) Keynesian model.

Question 20

The following questions are based on the following information for a society:

If disposable income is $1,900 billion,saving is ________ billion.

A) $16
B) $20
C) $144
D) $160
E) $180

Question 21

The following questions are based on the following rates-of-return table for five independent investment projects:

A 3-percentage-point increase in the interest rate might result in canceling the decision to undertake project

A) A.
B) B.
C) C.
D) D.
E) E.

Question 22

When GDP is at its equilibrium value

A) firms' inventories will neither increase nor decrease unexpectedly.
B) employment and GDP are identical.
C) the multiplier is zero.
D) intended investment equals the 45-degree line.
E) consumption equals disposable income.

Question 23

GDP is at the equilibrium level when

A) total intended household spending equals business spending.
B) it is at full-employment level.
C) the rate of inflation equals the rate of unemployment.
D) any further increases in intended spending increase the price level.
E) it equals the amount of intended spending.

Question 24

The interest rate

A) equals the expected rate of return minus depreciation.
B) expresses the relationship between saving and disposable income.
C) has no effect on the volume of investment in the economy.
D) is another name for profit.
E) is the annual amount a borrower must pay for the use of a dollar.

Question 25

If total intended spending precisely equals GDP

A) inflation soars.
B) consumer spending begins to decline.
C) expected rates of return exceed interest rates.
D) unemployment rises.
E) GDP tends to remain unchanged.

Question 26

If output determines income and income determines spending

A) an equilibrium is impossible in the economy.
B) intended spending and actual spending are always equal.
C) the C + I line is the same as the 45-degree line.
D) the levels of both national output and prices rise indefinitely.
E) the level of GDP changes unless intended spending equals GDP.

Question 27

The following questions are based on the following information:

If actual GDP equals $1,980 billion

A) intended saving equals intended investment.
B) the economy is operating below its equilibrium level.
C) business inventories will increase by $60 billion.
D) producers will plan to increase production further still.
E) the C + I line lies above the 45-degree line.

Question 28

The following questions are based on the following information:

If intended spending exceeds the total value of final goods and services produced

A) GDP falls.
B) firms cut back on their production rates.
C) inventories will be depleted faster than firms desire.
D) the aggregate supply curve must be vertical.
E) depreciation exceeds investment.

Question 29

The following questions are based on the following information:

When the total amount spent on final goods and services falls short of the total value of final goods and services produced

A) expected rates of return on investment must rise.
B) the economy is in equilibrium.
C) households must not be saving.
D) firms accumulate unwanted inventories.
E) intended investment is negative.

Question 30

A marginal propensity to save of 0.32 implies that the marginal propensity to consume is

A) 1.32.
B) 0.74.
C) 0.68.
D) 0.36.
E) impossible to calculate unless the change in income is specified.

Question 31

The determinants of investment are

A) the marginal propensity to invest and the savings rate.
B) the level of gross domestic product and the marginal propensity to spend.
C) the profit rate and the equilibrium rate.
D) business expectations and the Dow Jones Industrial Average.
E) the interest rate and the expected rate of return from capital.

Question 32

The following questions are based on the following diagram:

Given the consumption and investment spending shown on the graph,the equilibrium GDP is ________ billion.

A) $1,500
B) $1,700
C) $1,800
D) $1,900
E) $2,100

Question 33

If total intended spending is greater than GDP

A) firms cut production and avoid expansion.
B) inventories fall below desired levels.
C) interest rates decline sharply.
D) business investment will lag.
E) GDP tends to remain unchanged.

Question 34

The following questions are based on the following rates-of-return table for five independent investment projects:

If the interest rate is 7 percent,the number of projects undertaken would be

A) 1.
B) 2.
C) 3.
D) 4.
E) 5.

Question 35

The following questions are based on the following information:

If intended spending falls short of the total value of final goods and services produced

A) GDP will rise.
B) firms will cut back on their production rates.
C) inventories will be depleted faster than firms desire.
D) the aggregate supply curve must be vertical.
E) depreciation exceeds investment.

Question 36

The slope of the saving function equals the

A) marginal propensity to save.
B) average propensity to save.
C) marginal efficiency of saving.
D) expected rate of return.
E) rate of interest.

Question 37

Investment in a project will take place if the

A) marginal propensity to save exceeds the marginal propensity to consume.
B) expected rate of return exceeds the interest rate.
C) interest rate exceeds the marginal propensity to save.
D) net investment in the economy exceeds gross investment.
E) multiplier exceeds the expected rate of return.

Question 38

The following questions are based on the following information:

If intended spending is greater than GDP

A) firms will experience unexpected increases in their planned inventory levels.
B) consumption expenditures must be greater than disposable income.
C) firms will attempt to increase production.
D) GDP will fall.
E) the economy is in declining equilibrium.

Question 39

The following questions are based on the following information:

The equilibrium value of GDP is ________ billion.

A) $1,740
B) $1,800
C) $1,860
D) $1,920
E) $1,980

Question 40

Increases in the rate of interest

A) make it more profitable for firms to invest in new projects.
B) raise the expected rates of return on existing projects.
C) cause net investment to exceed gross investment.
D) raise the equilibrium levels of GDP.
E) tend to reduce the amount of investment.

Question 41

An MPC of zero means the value of the multiplier is

A) 0.
B) 1.
C) 2.
D) 2.5.
E) 3.

Question 42

The expression 1/MPS is called

A) the marginal propensity to consume.
B) the saving function.
C) induced saving.
D) the multiplier.
E) the paradox of thrift.

Question 43

An autonomous investment change of $2 billion in the first stage,with a multiplier of 2,leads to extra income in the third stage of ________ billion.

A) $4
B) $1
C) $0.5
D) $0.25
E) $0

Question 44

In the Keynesian model,supply adjusts passively to demand in the short run because

A) of Say's law.
B) the equilibrium level of output automatically adjusts to the full-employment level.
C) actual saving equals actual investment at all times.
D) both consumption and investment respond to changes in interest rates when the aggregate supply curve is vertical.
E) high levels of unemployment keep wages and prices stable.

Question 45

If an economy is operating at a point on the C + I line that lies below the 45-degree line

A) the economy is in equilibrium.
B) the C + I line shifts down.
C) GDP will rise.
D) unwanted inventories will accumulate.
E) intended saving equals intended investment.

Question 46

An increase in autonomous investment spending initially produces an equal

A) increase in household consumption.
B) decrease in household saving.
C) increase in income for workers and suppliers.
D) decrease in induced investment spending.
E) increase in depreciation.

Question 47

The reciprocal of the marginal propensity to save is called the

A) multiplier.
B) propensity to consume.
C) saving function.
D) 45-degree line.
E) interest rate.

Question 48

If an economy is operating at a point on the C + I line that lies above the 45-degree line

A) the economy is in equilibrium.
B) the C + I line shifts down.
C) GDP will rise.
D) unwanted inventories will accumulate.
E) intended saving equals intended investment.

Question 49

The value of the multiplier is

A) negative at low income levels.
B) the reciprocal of the marginal propensity to consume.
C) increased as autonomous investment spending declines.
D) never less than 1.
E) difficult to calculate unless you know the change in equilibrium GDP.

Question 50

A change in investment spending NOT caused by a change in income or GDP is a(n)________ change.

A) induced
B) obscure
C) identical
D) autonomous
E) hypothetical

Question 51

The income expenditure model is most relevant when

A) the economy is operating in the horizontal range of the aggregate supply curve.
B) aggregate supply equals aggregate demand.
C) the price level is changing.
D) the equilibrium level of GDP is less than the level of intended spending.
E) actual saving equals actual investment.

Question 52

The following questions are based on the following diagram:

The marginal propensity to consume is

A) 1.
B) 19/21.
C) 5/7.
D) 2/3.
E) impossible to tell from the graph.

Question 53

The 45-degree line represents points of equality between

A) saving and investment.
B) intended spending and GDP.
C) consumption and saving.
D) unemployment and inflation.
E) price levels and intended spending.

Question 54

One reason for the volatility of investment is that

A) investment decisions can be postponed because of the durability of capital goods.
B) motives for saving and investment are the same for businesses and households.
C) firms maintain a constant rate of capacity utilization from year to year.
D) wages and prices are flexible.
E) consumer spending is erratic and unpredictable.

Question 55

The irregularity of the innovation rate

A) primarily affects the levels of household spending and saving.
B) helps explain why gross investment expenditure tends to be unstable.
C) causes average real wages to tend toward subsistence levels.
D) is a major reason behind the classical economists' belief that interest rates are inflexible.
E) is increased when the value of the multiplier is less than 1.

Question 56

According to John Maynard Keynes and his followers,GDP is dependent mainly on

A) the level of intended spending.
B) current tax rates.
C) the influence of labor unions.
D) current trends in interest payments.
E) the price level.

Question 57

Autonomous changes in intended investment

A) are due to changes in GDP.
B) lead to changes in GDP.
C) are inversely related to changes in induced investment.
D) are rarely, if ever, negative.
E) offset changes in the propensity to consume.

Question 58

The following questions are based on the following diagram:

At equilibrium the amount of investment spending would be ________ billion.

A) $200
B) $300
C) $1,700
D) $1,900
E) $2,100

Question 59

The sensitivity of GDP to changes in intended investment increases as the

A) marginal propensity to save declines.
B) multiplier declines.
C) slope of the consumption function declines.
D) change in equilibrium declines.
E) spending chain declines.

Question 60

Keynes disagreed with the classical model because he felt that

A) a modern economy has adequate levels of competition to ensure the flexibility of wages and prices.
B) supply creates its own demand.
C) in the long run, capitalism will be replaced by socialism.
D) one cannot be certain that changes in interest rates equate saving to investment.
E) the automatic mechanism in a capitalist society produces accelerating rates of inflation.

Question 61

Which of the following could cause equilibrium GDP to fall?

A) an increase in autonomous investment
B) a downward shift in the saving function
C) an increase in amounts saved along an existing saving function
D) a downward shift in the consumption function
E) an increase in the nation's population

Question 62

John Maynard Keynes shocked the economic world with his theory that the Great Depression could continue in a never-ending downward spiral unless government intervened.According to Keynes,the reason the economy could NOT pull itself out of the Depression was that

A) the government continued to insist on high tax rates.
B) price controls precluded business expansion.
C) we no longer had a balanced budget.
D) the lack of income had reduced aggregate demand.
E) wages and prices were much too flexible.

Question 63

If the marginal propensity to save is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.

A) $0.4
B) $0.6
C) $1.2
D) $1.67
E) $2

Question 64

Which of the following was the most important force in bringing an end to the Great Depression?

A) the natural resilience of the economy
B) Roosevelt's New Deal policies
C) U.S. involvement in World War II
D) a delayed impact from increased business investment in the early 1930s
E) falling wages and prices

Question 65

The following questions are based on the following consumption function for a hypothetical economy. Assume autonomous intended investment is $200 billion and there are no government expenditures, exports, or imports.

If intended investment increases from 200 to 250,GDP will rise by ________ billion.

A) $30
B) $50
C) $83
D) $125
E) $250

Question 66

If disposable income is held constant,aggregate consumption expenditure will increase in all but which of the following cases?

A) The public's wealth holdings increase.
B) The rate of interest increases.
C) The public anticipates price increases in the future.
D) The public currently has an abnormally low stock of durable goods.
E) The population increases.

Question 67

If the marginal propensity to consume is 0.6,a $1.2 billion increase in intended investment will increase equilibrium GDP by ________ billion.

A) $0.4
B) $0.6
C) $1.2
D) $2.5
E) $3

Question 68

The following questions are based on the following consumption function for a hypothetical economy. Assume autonomous intended investment is $200 billion and there are no government expenditures, exports, or imports.

The current equilibrium level of GDP is ________ billion.

A) $2,000
B) $2,100
C) $2,200
D) $2,300
E) $2,400

Question 69

If the morning paper reports that Americans,for the sixth month in a row,tend to spend more money and save less,these events would be depicted in an income expenditures model as

A) causing the 45-degree line to slope upward.
B) a downward shift in the supply function.
C) an upward shift in the consumption function.
D) an upward shift in the investment function.
E) a right to left movement along the consumption function.

Question 70

An upward shift in the consumption function must

A) reduce equilibrium GDP.
B) be accompanied by a downward shift in the saving function.
C) reduce the value of the multiplier.
D) increase the volatility of the investment process.
E) reduce the amount of consumption at equilibrium.

Question 71

An upward shift in the saving function

A) will cause GDP to rise.
B) will have the same effect on GDP as an upward movement along the saving function.
C) means that, at any given level of income, people want to save less.
D) will cause GDP to fall by an amount equal to the shift divided by the marginal propensity to save.
E) means that the marginal propensity to save must have fallen.

Question 72

If interest rates on consumer loans rise,the

A) consumption function will shift downward.
B) saving function will shift downward.
C) consumption and saving functions will not change, but the amounts consumed and saved will decline.
D) marginal propensity to consume will rise.
E) marginal propensity to save will rise.

Question 73

A reduction in personal consumption expenditures induced by a fall in disposable income

A) will shift the consumption function downward.
B) will shift the saving function downward.
C) will produce an increase in intended investment.
D) will be offset by an increase in the amount saved.
E) represents a movement along a given consumption function.

Question 74

A marginal propensity to consume of 0.8 means the value of the multiplier is

A) 1.
B) 2.
C) 3.
D) 4.
E) 5.

Question 75

An upward shift in the consumption function

A) results if people decide they want to save more.
B) has the same kind of multiplier effect as an increase in investment.
C) occurs if people's incomes rise.
D) raises the average propensity to save.
E) raises the marginal propensity to consume.