Deck 12: Consumption, real GDP, and the Multiplier

Question 1

Which of the following is NOT a simplifying assumption in the simple Keynesian model?

A)Net investment and gross investment are equal.
B)All profits are distributed to the business owners.
C)Real disposable income equals government purchases of goods and services.
D)There is no foreign trade.

Answer 1

C

Question 2

Saving differs from savings in that

A)saving is a flow while savings is a stock.
B)saving is a stock while savings is a flow.
C)saving is both a flow and a stock while savings is a stock.
D)saving is a stock while savings is both a flow and a stock.

Answer 2

A

Question 3

At a level of real disposable income of $0,suppose consumption is $2,000.Given this information,we know with certainty that saving equals

A)$0.
B)$2,000.
C)-$2,000.
D)-$1,000.

Answer 3

C

Question 4

Saving is

A)the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.
B)the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.
C)the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.
D)the difference between disposable income and spending on goods and services while savings is the difference between real GDP and disposable income.

Question 5

Spending on new goods and services out of a household's current income is

A)consumption.
B)the capital consumption allowance.
C)savings.
D)investment.

Question 6

When you purchase Gap clothing and baseball tickets

A)you are buying consumption goods.
B)you are buying capital goods.
C)you are consuming intermediate goods.
D)you are buying physical capital.

Question 7

The terms "saving" and "savings" differ in that

A)saving is a stock,and savings are a flow.
B)saving always exceeds savings.
C)savings are a stock,and saving is a flow.
D)savings can be negative,but saving cannot.

Question 8

Which of the following represents the relationship between disposable income (DI),consumption (C),and saving (S)?

A)DI + C = S
B)DI = C + S
C)DI = C * S
D)DI = C - S

Question 9

The difference between "saving" and "savings" is that

A)saving is done by households and savings by businesses.
B)saving is undertaken as a precaution against unemployment and savings are undertaken to increase investment spending.
C)savings are the result of past and current saving.
D)saving is placed in financial institutions such as banks,while savings are kept at home by people.

Question 10

Which of the following is NOT a flow variable?

A)Consumption
B)Investment
C)Savings
D)Saving

Question 11

Thinking as an economist would,which is true of investment?

A)It is the portion of disposable income that is not used for consumption or saving.
B)Investment represents spending on capital goods.
C)Investment is putting money into stocks and bonds.
D)Investment is a stock concept.

Question 12

Consumption goods are

A)a form of investment.
B)goods purchased from savings.
C)a form of capital goods.
D)goods purchased by households to be used immediately.

Question 13

Which of the following is considered investment?

A)Maina purchases a new car for commuting to and from work.
B)Jane purchases a new car for commuting to and from school.
C)Johnny buys a new car for his wife as an anniversary gift.
D)James purchases a new car to replace an old car in his cab business.

Question 14

Keynes thought that the key to determining the broader economic effects of investment fluctuations

A)was to examine how businesses react to flexible prices and wages.
B)was to closely regulate the real interest rate.
C)was to understand the relationship between how much people earn and their willingness to engage in personal consumption spending.
D)was to understand how changes in the money supply influences consumption decisions.

Question 15

Which of the following is a simplifying assumption associated with the short-run Keynesian model of equilibrium real Gross Domestic Product (GDP)determination?

A)Gross private domestic investment exceeds net private domestic investment.
B)Most business profits are distributed to shareholders.
C)Businesses pay indirect taxes.
D)There is no depreciation.

Question 16

Consumption goods

A)include goods such as DVDs that firms hold in inventory.
B)are only the goods bought by households for immediate satisfaction.
C)include spending on machines and buildings so that goods can be produced in the future.
D)are goods that are used to make other goods.

Question 17

The income-expenditure model of real GDP determination is due to the work of

A)Adam Smith.
B)J.B.Say.
C)John Maynard Keynes.
D)Roger Miller.

Question 18

Which of the following statements is FALSE?

A)Disposable income - saving = consumption
B)Consumption + saving = disposable income
C)Saving = disposable income - consumption
D)Consumption = saving - disposable income

Question 19

Which of the following would NOT be considered a consumption good?

A)A new sweater
B)Tools used to cut metal on an auto production line
C)A jar of Skippy peanut butter
D)A bottle of Scotch whiskey

Question 20

Consumption expenditures include all of the following EXCEPT

A)buying a pizza.
B)going to a concert.
C)having your house cleaned by Klean Maids.
D)purchasing a share of stock.

Question 21

Investment is

A)the purchasing of stocks and mutual funds.
B)goods bought by households.
C)spending by businesses on things which can be used to produce goods and services in the future.
D)the production of goods for immediate satisfaction.

Question 22

Savings are an example of

A)a flow concept.
B)a stock concept.
C)a depreciation concept.
D)an investment concept.

Question 23

Investment includes spending on

A)capital goods,buildings,and consumer durable goods.
B)capital goods,buildings,and changes in business inventories.
C)capital goods,consumer durable goods,and changes in business inventories.
D)capital goods,buildings,and changes in business savings.

Question 24

Which of the following is a flow variable?

A)Savings
B)Wealth
C)Consumption
D)Population

Question 25

Investment is

A)a flow concept and is made up of fixed investment and inventory investment.
B)a flow concept and is made up of fixed investment.
C)a stock concept and is made up of fixed investment and inventory investment.
D)a stock concept and is made up of fixed investment.

Question 26

Fixed investment is

A)when a firm adds to its inventories of goods.
B)when a firm accumulates profits.
C)dissavings.
D)an expenditure by firms on new machines that are expected to produce income in the future.

Question 27

The difference between savings and saving

A)is nonexistent.
B)is that savings occurs when consumption does not and saving is used to purchase consumption goods.
C)is that savings is a stock concept and saving is a flow concept.
D)is that savings is measured in real terms while saving is measured in nominal terms.

Question 28

Saving is an example of

A)a flow concept.
B)a stock concept.
C)a depreciation concept.
D)an investment concept.

Question 29

The difference between a stock and a flow is

A)a stock is something measured at one point in time while a flow is something that is expressed per unit of time.
B)a stock is something measured at one point in time while a flow is something that is fixed.
C)a stock is expressed per unit of time while a flow is measured at one point in time.
D)a stock refers to the solid inventory firms have on hand while a flow refers to the liquid inventory firms have on hand.

Question 30

Which of the following statements is true?

A)investment = disposable income + consumption
B)saving = personal income - consumption
C)saving = disposable income - consumption
D)saving = personal income + consumption

Question 31

Which formula is correct?

A)S = - C
B) + S = C
C)2( )- S = C
D) + C = S

Question 32

By definition,disposable income is equal to

A)consumption plus saving.
B)consumption plus investment.
C)investment plus saving.
D)consumption minus saving.

Question 33

Nonconsumable goods that firms use to make other goods are

A)consumption goods.
B)capital goods.
C)dissaving.
D)the MPC.

Question 34

All of the following are flow variables EXCEPT

A)consumption.
B)saving.
C)investment.
D)capital goods.

Question 35

Changes in business inventories are known as

A)consumer durable.
B)consumption goods.
C)fixed investment.
D)inventory investment.

Question 36

Expenditures by firms on new machines and buildings that are expected to yield a future stream of income is known as

A)consumer durable.
B)consumption goods.
C)fixed investment.
D)inventory investment.

Question 37

Which of the following statements is true?

A)consumption + saving = disposable income
B)consumption + saving = personal income
C)consumption - investment = disposable income
D)consumption - saving = personal income

Question 38

Spending by businesses on things such as machines and buildings which can be used to produce goods and services in the future is

A)investment.
B)consumption.
C)consumption goods.
D)savings.

Question 39

How is investment defined as an economic concept?

A)Investment is primarily the market value of all shares of stock held by the public.
B)Investment is primarily the market value of all equipment,buildings,and inventories held by corporations,partnerships,and proprietorships.
C)Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income.
D)Investment is primarily the portion of your savings held in an interest-earning account.

Question 40

Your real disposable income is your real income after you have paid

A)rent and food expenses.
B)net taxes.
C)medical expenses.
D)consumption expenses.

Question 41

Dissaving occurs when

A)disposable income exceeds consumption.
B)disposable income is less than consumption.
C)the marginal propensity to save is less than .5.
D)the marginal propensity to consume is less than .5.

Question 42

The Keynesian model is based on the idea that

A)saving depends only on the interest rate.
B)both consumption and saving are directly related to disposable income.
C)consumption is unrelated to the level of real Gross Domestic Product (GDP).
D)both consumption and saving are unrelated to the level of real Gross Domestic Product (GDP).

Question 43

According to the permanent income hypothesis,a temporary increase in income that does not affect average lifetime income would

A)cause a large increase in consumption.
B)cause no change in consumption.
C)cause an increase in consumption and saving by the same amount.
D)cause a decrease in consumption and saving by the same amount.

Question 44

Along a linear consumption function,

A)the average propensity to consume falls with an increase in income.
B)the marginal propensity to consume rises with an increase in income.
C)the average propensity to consume rises with income,but the marginal propensity to consume falls with an increase in income.
D)both the average propensity to consume and the marginal propensity to consume rise with an increase in income.

Question 45

Saving equals

A)disposable income minus taxes.
B)disposable income minus consumption spending.
C)disposable income minus savings.
D)consumption spending minus savings.

Question 46

Suppose that when disposable income decreases by $2,000,consumption spending increases by $1500.Given this information,we know that the marginal propensity to consume (MPC)is

A).25.
B).75.
C)$1,000/$750 = 1.33.
D)1/.25 = 4.

Question 47

The relationship between households' planned consumption expenditures and households' level of disposable real income is called

A)the consumption function.
B)the savings function.
C)the investment function.
D)the household aggregate demand function.

Question 48

According to Keynes,planned consumption

A)decreases as disposable income increases.
B)is unstable and fluctuates widely with changes in disposable income.
C)is positively related to real disposable income.
D)is indirectly related to the interest rate.

Question 49

According to Keynes,the primary determinant of a person's saving is NOT

A)the person's level of income but the desired real income of the person.
B)the person's level of savings but the expected interest rate in the near future.
C)the interest rate but the level of savings the person has.
D)the interest rate but the level of the person's real disposable income.

Question 50

Which of the following is true?

A)MPC - MPS = 1
B)MPC + MPS = 1
C)MPC * MPS = 1
D)MPC / MPS = 1

Question 51

Suppose that when disposable income increases by $1,000,consumption spending increases by $750.Given this information,we know that the marginal propensity to consume (MPC)is

A).25.
B).75.
C)$1,000/$750 = 1.33.
D)1/.25 = 4.

Question 52

The consumption function shows the relationship

A)between households' disposable income and their consumption spending.
B)between investment and rate of return.
C)between consumption spending and capital gains.
D)between government spending and tax collection.

Question 53

The consumption function shows

A)a positive relationship between an individual's stock of wealth and his level of planned consumption.
B)a positive relationship between disposable income and planned consumption.
C)a negative relationship between planned consumption and aggregate saving.
D)a negative relationship between disposable income and planned consumption.

Question 54

According to the permanet income hypothesis,a person's consumption increases only when

A)the person's average lifetime income increases.
B)the person saves more.
C)the person's income increases unexpectedly.
D)the person's current income increases.

Question 55

According to Keynes,an individual's level of saving is primarily determined by

A)the interest rate.
B)the individual's current level of disposable real income.
C)the individual's assessment of the future direction of the stock market.
D)real Gross Domestic Product (GDP)for the economy.

Question 56

Distinguish between saving and savings.How does investment relate to this distinction,if at all?

Question 57

Keynesian theory is based on the hypothesis that

A)saving and consumption are influenced primarily by real current disposable income.
B)saving is influenced primarily by the interest rate.
C)planned savings equal planned investment only at full employment.
D)full employment is automatically attained in any economy.

Question 58

Which of the following theories predicts that current consumption increases when a person expects an increase in future income?

A)The life-cycle theory of consumption
B)The permanent income hypothesis
C)The Keynesian theory of consumption
D)All of the above

Question 59

When an individual spends more than her/his disposable income,this person is

A)saving.
B)investing.
C)dissaving.
D)unemployed.

Question 60

According to Keynesian theory,the most important determinant of saving and consumption is

A)the level of real disposable income.
B)the stock of liquid assets.
C)the stock of durable goods in the consumer's possession.
D)the level of consumer indebtedness.

Question 61

Suppose when real disposable income is $5000,planned real consumption is $4000.When real disposable income increases to $6000,planned real saving increases by $500.The new planned real consumption expenditures is

A)$5,000.
B)$4,500.
C)$6,000.
D)$3,500.

Question 62

In the above figure,a change in autonomous consumption to 100 would cause the consumption function to

A)become steeper.
B)become flatter.
C)shift down.
D)shift up.

Question 63

According to the above figure,at an income level of Y1,

A)the economy saves an amount equal to BD.
B)the marginal propensity to save is falling.
C)the average propensity to save is greater than one.
D)the economy dissaves an amount equal to BD.

Question 64

When a family's income is low and it is spending more on consumption than it is receiving in income,

A)the APC must be increasing.
B)the APC must be equal to the ratio of planned consumption expenditure to total saving.
C)the MPC must be zero.
D)some segment of the consumption function curve lies above the 45-degree line,indicating dissaving.

Question 65

At the break-even point for the consumption function

A)saving is positive.
B)saving is negative.
C)saving is zero.
D)the marginal propensity to consume equals l.

Question 66

According to the above figure,the average propensity to save (APS)is zero at point

A)D.
B)F.
C)I.
D)J.

Question 67

According to the above table,if real Gross Domestic Product (GDP)is $30,000,planned saving equals

A)$2,000.
B)$3,000.
C)$4,000.
D)$5,000.

Question 68

According to the above table,the marginal propensity to consume is

A)0.6.
B)0.5.
C)0.75.
D)0.8.

Question 69

According to Keynes,

A)consumption is positively related to the interest rate.
B)consumption is directly related to income but saving is inversely related to income.
C)both consumption and saving are positively related to real disposable income.
D)consumption is directly related to income but saving has no relationship with income.

Question 70

If saving equals $200 when real disposable income equals $1,000,the break-even income is

A)less than $1,000.
B)greater than $1,000.
C)equal to $1,000.
D)equal to $1,200.

Question 71

According to the above table,if real Gross Domestic Product (GDP)equals $30,000,what is the average propensity to consume?

A)0.67
B)0.75
C)0.8
D)0.87

Question 72

The life-cycle theory of consumption predicts that when a person anticipates a higher income in the future,then that person will

A)consume more and save less in the current period.
B)consume less and save more in the current period.
C)consume less and save less in the current period.
D)not change the amount of consumption or saving in the current period.

Question 73

In the graph for the consumption function,the 45-degree line

A)contains only a consumption component.
B)represents both planned consumption and planned investment.
C)shows various combinations where planned consumption equals real disposable income.
D)reflects a decreasing APC as real disposable income rises.

Question 74

Suppose real disposable income increases by $1,000.Given this information,we know that

A)consumption will generally increase by exactly $1,000.
B)consumption will generally increase by less than $1,000.
C)consumption will generally increase by more than $1,000.
D)saving will generally increase by exactly $1,000.

Question 75

In the above figure,when disposable income is greater than 600,

A)saving is negative.
B)the MPC is greater than 1.
C)saving is positive.
D)the MPS is negative.

Question 76

In the above figure,the marginal propensity to consume (MPC)equals

A)0.8.
B)0.9.
C)0.75.
D)0.85.

Question 77

The break-even point on the consumption function represents the point where

A)consumption equals spending.
B)income equals consumption plus spending.
C)consumption is zero.
D)consumption equals income.

Question 78

The consumption function shows how much

A)households plan to consume per year at each level of real disposable income.
B)households plan to consume per year at each possible interest rate.
C)real disposable income people will earn at each income tax bracket.
D)households plan to consume per year at each level of savings.

Question 79

According to the above figure,planned consumption and income are equal at an income level of

A)Y2.
B)Y3.
C)Y1.
D)Y0.

Question 80

When consumption spending is greater than disposable income,we know with certainty that we have

A)dissaving.
B)excess thrift.
C)positive savings.
D)negative net investment.