Deck 3: The Goods Market

Question 1

Which of the following occurs when disposable income is zero?

A)consumption must be zero
B)saving must be zero
C)saving must be positive
D)consumption is negative
E)none of the above

Answer 1

E

Question 2

Which of the following represents total saving for an economy?

A)the sum of private saving and fixed investment
B)the sum of private saving and consumption
C)the sum of taxes and government spending
D)the excess of taxes over government spending
E)none of the above

Answer 2

E

Question 3

Suppose the consumption equation is represented by the following: C = 250 + .75YD.The multiplier in this economy is

A).25.
B).75.
C)1.
D)4.
E)5.

Answer 3

D

Question 4

Which of the following would NOT be considered part of fixed investment spending (I)?

A)Toyota buys a new robot for its automobile assembly line.
B)Apple computer builds a new factory.
C)Exxon increases its inventories of unsold gasoline.
D)An accountant buys a newly built home for herself and her family.
E)all of the above

Question 5

Which of the following is true for a "closed economy"?

A)government spending equals taxes
B)there are no imports or exports
C)exports equal imports
D)there is no saving
E)there is no government spending or taxes

Question 6

Disposable income equals

A)income minus saving.
B)income minus both saving and taxes.
C)consumption minus taxes.
D)the sum of consumption and saving.
E)none of the above

Question 7

Suppose the consumption equation is represented by the following: C = 250 + .75YD.Given this information,the marginal propensity to save is

A).25.
B).7.
C)1.
D)4.
E)none of the above

Question 8

Suppose the consumption equation is represented by the following: C = 250 + .8YD.The multiplier for the above economy equals

A)2.
B)3.
C)4.
D)5.
E)none of the above

Question 9

Let the consumption function be represented by the following equation: C = c0 + c1YD.For this equation,we assume that c1 is

A)negative.
B)larger than c0.
C)different at different levels of income.
D)equal to one.
E)none of the above

Question 10

Suppose the consumption equation is represented by the following: C = 250 + .75YD.Now assume government spending increases by 100 for the above economy.Given the above information,we know that equilibrium output will increase by

A)200.
B)400.
C)800.
D)1000.
E)none of the above

Question 11

Equilibrium in the goods market requires that

A)production equals income.
B)production equals demand.
C)consumption equals saving.
D)consumption equals income.
E)government spending equals taxes minus transfers.

Question 12

For the U.S.economy,which of the following represents the largest component of GDP?

A)imports
B)investment
C)government spending
D)exports
E)none of the above

Question 13

An economy is in equilibrium when which of the following conditions is satisfied?

A)consumption equals saving
B)output equals consumption
C)total saving equals zero
D)total saving equals investment
E)all of the above

Question 14

The marginal propensity to consume represents

A)the level of consumption that occurs if disposable income is zero.
B)the ratio of total consumption to disposable income.
C)total income minus total taxes.
D)the change in output caused by a one-unit change in autonomous demand.
E)the change in consumption caused by a one-unit change in disposable income.

Question 15

Which of the following types of government spending is included when calculating GDP?

A)spending at the federal level
B)spending at the state level
C)spending at the municipal level
D)all of the above
E)only A and B

Question 16

Which of the following is an exogenous variable in our model of the goods market in Chapter 3?

A)consumption (C)
B)saving (S)
C)disposable income (YD)
D)government spending (G)
E)none of the above

Question 17

Which of the following would tend to make the multiplier smaller?

A)an increase in the marginal propensity to consume
B)an increase in the marginal propensity to save
C)a reduction in taxes
D)a reduction in government spending
E)none of the above

Question 18

Which of the following is an endogenous variable in our model of the goods market in Chapter 3?

A)consumption (C)
B)disposable income (YD)
C)saving (S)
D)total income (Y)
E)all of the above

Question 19

Which of the following is included in G?

A)medicare
B)social security payments
C)interest payments on the government debt
D)government purchases
E)all of the above

Question 20

Which of the following will NOT increase equilibrium output in the short run?

A)increases in R&D
B)increases in consumer confidence
C)increases in investment demand
D)increases in government spending
E)decreases in taxes

Question 21

Autonomous spending in a closed economy equals which of the following?

A)c0 + I + G - c1T
B)C + I + G
C)Z
D)c0 + I + G + c1T

Question 22

Based on our understanding of the model presented in Chapter 3,we know that a reduction in c1 (where C = c0 + c1YD)will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a larger effect on output.

Question 23

Based on our understanding of consumption and saving,we know that the marginal propensity to consume and the marginal propensity to save must

A)be equal to each other.
B)sum to exactly one.
C)sum to less than one.
D)sum to more than one.
E)be equal to the multiplier.

Question 24

Suppose an open economy is in equilibrium.Given this information,we know with certainty that

A)G = T.
B)X = IM.
C)S = I.
D)Y = Z.

Question 25

For a closed economy,which of the following conditions must be satisfied for equilibrium to be maintained?

A)G = T
B)X = IM = 0
C)C = S
D)none of the above

Question 26

If C = 2000 + .9YD,what increase in government spending must occur for equilibrium output to increase by 1000?

A)100
B)200
C)250
D)500
E)1000

Question 27

Which of the following equals demand in an open economy?

A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)C + I + G

Question 28

A reduction in the marginal propensity to save from .4 to .3 will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a larger effect on output.

Question 29

When the economy is in equilibrium,we know with certainty that

A)public saving equals investment.
B)private saving equals investment.
C)G = T.
D)none of the above

Question 30

Suppose there is an increase in autonomous consumption.Specifically,suppose c0 increases where C = c0 + c1YD.This increase in autonomous consumption will cause which of the following to increase?

A)equilibrium income
B)equilibrium disposable income
C)demand
D)all of the above
E)none of the above

Question 31

An increase in taxes will cause

A)a reduction in investment.
B)an increase in investment.
C)no change in investment.
D)no change in autonomous spending.

Question 32

An increase in the marginal propensity to save from .1 to .2 will cause

A)an increase in the multiplier and a given change in autonomous consumption (c0)to have a smaller effect on output.
B)an increase in the multiplier and a given change in autonomous consumption (c0)to have a larger effect on output.
C)a reduction in the multiplier and a given change in autonomous consumption (c0)to have a smaller effect on output.
D)a reduction in the multiplier and a given change in autonomous consumption (c0)to have a larger effect on output.

Question 33

An increase in the desire to save by households will cause

A)a reduction in output.
B)a reduction in investment.
C)an increase in output.
D)no change in investment and no change in output.

Question 34

A tax cut will cause

A)a reduction in investment.
B)an increase in investment.
C)no change in investment.
D)no change in autonomous spending.

Question 35

An increase in the marginal propensity to save from .3 to .4 will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c0))to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a larger effect on output.

Question 36

Which of the following equals demand in a closed economy?

A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)none of the above

Question 37

Based on our understanding of the model presented in Chapter 3,we know that an increase in c1 (where C = c0 + c1YD)will cause

A)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a smaller effect on output.
B)the ZZ line to become steeper and a given change in autonomous consumption (c0)to have a larger effect on output.
C)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a smaller effect on output.
D)the ZZ line to become flatter and a given change in autonomous consumption (c0)to have a larger effect on output.

Question 38

Based on our understanding of the paradox of saving,we know that a reduction in the desire to save will cause

A)an increase in equilibrium GDP.
B)a reduction in GDP.
C)an increase in the desire to invest.
D)no change in equilibrium GDP.
E)a permanent reduction in the level of saving.

Question 39

Which of the following events will cause a reduction in equilibrium output?

A)an increase in the marginal propensity to save
B)an increase in taxes
C)a reduction in the marginal propensity to consume
D)all of the above
E)none of the above

Question 40

When a closed economy is in equilibrium,we know with certainty that

A)I = S + (T-G).
B)I = S.
C)I = S + (G-T).
D)G = T and S = I.

Question 41

Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y - T G = 2000
a.Given the above variables,calculate the equilibrium level of output.Hint: First specify (using the above numbers)the demand equation (Z)for this economy.Second,using the equilibrium condition,equate this expression with Y.Once you have done this,solve for the equilibrium level of output.Using the ZZ-Y graph (i.e.,a graph that includes the ZZ line and 45-degree line with Z on the vertical axis,and Y on the horizontal axis),illustrate the equilibrium level of output for this economy.
b.Now,assume that consumer confidence decreases causing a reduction in autonomous consumption (c0)from 500 to 400.What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?
c.Graphically illustrate the effects of this change in autonomous consumption on the demand line (ZZ)and Y.Clearly indicate in your graph the initial and final equilibrium levels of output.
d.Briefly explain why this reduction in output is greater than (in absolute terms)the initial reduction in autonomous consumption.

Question 42

Suppose business confidence decreases causing a reduction in investment.Based on our understanding of the model presented in Chapter 3,we know with certainty that a reduction in investment will cause

A)an increase in the multiplier.
B)a reduction in the multiplier.
C)a reduction in the marginal propensity to save.
D)a reduction in consumption as the economy adjusts to this decrease in investment.

Question 43

If C = 2000 + .9YD,what decrease in taxes must occur for equilibrium output to increase by 1000?

A)111
B)100
C)1000
D)500

Question 44

Suppose that,at a given level of disposable income,consumers decide to save more.Explain what effect this decision will have on equilibrium income.Also,explain what effect this decision will have on the level of saving once the economy has reached the new equilibrium.

Question 45

Based on our understanding of the model presented in Chapter 3,we know with certainty that an equal and simultaneous reduction in G and T will cause

A)an increase in output.
B)no change in output.
C)a reduction in output.
D)an increase in investment.

Question 46

For this question,assume that taxes are independent of income change in taxes.Compare and explain the relative size of the changes in government spending and taxes needed to obtain this desired change in output.

Question 47

Explain the difference between endogenous and exogenous variables.

Question 48

Why would consumer decrease consumption even if their disposable income has not changed?

Question 49

Discuss and explain what effect a reduction in the marginal propensity to consume has on the size of the multiplier.

Question 50

Which of the following about IS relation is NOT correct?

A)It is the the relation between interest rate and savings.
B)It is the equilibrium condition for the goods market.
C)It stands for "Investment equals saving."
D)It shows what firms want to invest must be equal to what people and the government want to save.

Question 51

Suppose the marginal propensity to consume equals .8 .Given this information,which of the following events will cause the largest increase in output?

A)G increases by 200
B)T decreases by 200
C)I increases by 150
D)both A and B

Question 52

Suppose the consumption equation is represented by the following: C = 250 + .75YD,then private savings is

A)-250+0.25YD.
B)-250+0.75YD.
C)-1000+0.25YD.
D)-1000+0.75YD.

Question 53

Use the ZZ-Y model presented in chapter 3 to illustrate the effects of a reduction in consumer confidence on the economy.Also,explain what effect this reduction in consumer confidence has on the economy.

Question 54

Based on our understanding of the model presented in Chapter 3,a reduction in investment will cause

A)an increase in the multiplier.
B)a reduction in the multiplier.
C)a reduction in the marginal propensity to save.
D)a reduction in output.
E)both B and D

Question 55

Discuss the two components of fixed investment.

Question 56

Based on our understanding of the model presented in Chapter 3,we know with certainty that an equal and simultaneous increase in G and T will cause

A)an increase in output.
B)no change in output.
C)a reduction in output.
D)an increase in investment.

Question 57

Explain what factors cause shifts and changes in the slope of the ZZ curve presented in chapter 3.

Question 58

Discuss what is meant by the paradox of saving.

Question 59

Explain what the multiplier represents.

Question 60

Inventory investment refers to

A)the difference between production and sales in a given year.
B)fixed investment.
C)nonresidential investment.
D)the purchase by firms of new machines.

Question 61

Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y - T G = 2000
a.Given the above variables,calculate the equilibrium level of output.
b.Now,assume that taxes increase from 600 to 700.What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

Question 62

In the model discussed in Chapter 3,why do we assume G and T are exogenous?

Question 63

Graphically illustrate the effects of an increase in autonomous consumption on the demand line (ZZ)and Y.Clearly indicate in your graph the initial and final equilibrium levels of output.Briefly explain why this increase in output is greater than (in absolute terms)the initial change in autonomous consumption.

Question 64

Suppose the United States economy is represented by the following equations:
Z = C + I + G C = 500 + .5YD T = 600 I = 300
YD = Y - T G = 2000
a.Given the above variables,calculate the equilibrium level of output.
b.Now,assume that government spending decreases from 2000 to 1900.What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?