Deck 30: Basic Macroeconomic Relationships

Question 1

At the point where the consumption schedule intersects the 45-degree line,

A)the MPC is 1.00.
B)the APC is 1.00.
C)saving is equal to consumption.
D)the economy is in equilibrium.

Answer 1

the APC is 1.00.

Question 2

Suppose a family's consumption exceeds its disposable income.This means that its

A)MPC is greater than 1.
B)MPS is negative.
C)APC is greater than 1.
D)APS is positive.

Answer 2

APC is greater than 1.

Question 3

The size of the MPC is assumed to be

A)less than zero.
B)greater than one.
C)greater than zero but less than one.
D)two or more.

Answer 3

greater than zero but less than one.

Question 4

The most important determinant of consumption and saving is the

A)level of bank credit.
B)level of income.
C)interest rate.
D)price level.

Question 5

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to

A)save is three-fifths.
B)consume is one-half.
C)consume is three-fifths.
D)consume is two-fifths.

Question 6

A decline in disposable income

A)increases consumption by moving upward along a specific consumption schedule.
B)decreases consumption because it shifts the consumption schedule downward.
C)decreases consumption by moving downward along a specific consumption schedule.
D)increases consumption because it shifts the consumption schedule upward.

Question 7

The MPC can be defined as that fraction of a

A)change in income that is not spent.
B)change in income that is spent.
C)given total income that is not consumed.
D)given total income that is consumed.

Question 8

The 45-degree line on a graph relating consumption and income shows

A)all the points where the MPC is constant.
B)all the points at which saving and income are equal.
C)all the points at which consumption and income are equal.
D)the amounts households will plan to save at each possible level of income.

Question 9

Which one of the following will cause a movement down along an economy's consumption schedule?

A)an increase in stock prices
B)a decrease in stock prices
C)an increase in consumer indebtedness
D)a decrease in disposable income

Question 10

The relationship between consumption and disposable income is such that

A)an inverse and stable relationship exists between consumption and income.
B)a direct, but very volatile, relationship exists between consumption and income.
C)a direct and relatively stable relationship exists between consumption and income.
D)the two are usually equal.

Question 11

The APC is calculated as

A)change in consumption/change in income.
B)consumption/income.
C)change in income/change in consumption.
D)income/consumption.

Question 12

The most important determinant of consumer spending is

A)the level of household borrowing.
B)consumer expectations.
C)the stock of wealth.
D)the level of income.

Question 13

The consumption schedule shows

A)a direct relationship between aggregate consumption and accumulated wealth.
B)a direct relationship between aggregate consumption and aggregate income.
C)an inverse relationship between aggregate consumption and accumulated financial wealth.
D)an inverse relationship between aggregate consumption and the price level.

Question 14

The consumption schedule is such that

A)both the APC and the MPC increase as income rises.
B)the APC is constant and the MPC declines as income rises.
C)the MPC is constant and the APC declines as income rises.
D)the MPC and the APC must be equal at all levels of income.

Question 15

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income.At an $800 level of disposable income, the level of saving is

A)$180.
B)$740.
C)$60.
D)$18.

Question 16

The APC can be defined as the fraction of a

A)change in income that is not spent.
B)change in income that is spent.
C)specific level of total income that is not consumed.
D)specific level of total income that is consumed.

Question 17

In contrast to investment, consumption is

A)relatively unstable.
B)relatively stable.
C)measurable.
D)unmeasurable.

Question 18

The consumption schedule shows

A)that the MPC increases in proportion to GDP.
B)that households consume more when interest rates are low.
C)that consumption depends primarily on the level of business investment.
D)the amounts households intend to consume at various possible levels of aggregate income.

Question 19

(Advanced analysis) The equation C = 35 + 0.75Y, where C is consumption and Y is disposable income, shows that

A)households will consume three-fourths of whatever level of disposable income they receive.
B)households will consume $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.
C)there is an inverse relationship between disposable income and consumption.
D)households will save $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.

Question 20

The consumption schedule is drawn on the assumption that as income increases, consumption will

A)be unaffected.
B)increase absolutely but remain constant as a percentage of income.
C)increase absolutely but decline as a percentage of income.
D)increase both absolutely and as a percentage of income.

Question 21

Which of the following relations is not correct?

A)1 − MPC = MPS.
B)APS + APC = 1.
C)MPS = MPC + 1.
D)MPC + MPS = 1.

Question 22

Assume the economy's consumption and saving schedules simultaneously shift downward.This must be the result of

A)an increase in disposable income.
B)an increase in household wealth.
C)an increase in personal taxes.
D)the expectation of a recession.

Question 23

Dissaving occurs where

A)income exceeds consumption.
B)saving exceeds consumption.
C)consumption exceeds income.
D)saving exceeds income.

Question 24

At the point where the consumption schedule intersects the 45-degree line,

A)the MPC equals 1.
B)the APC is zero.
C)saving equals income.
D)saving is zero.

Question 25

The saving schedule is drawn on the assumption that as income increases,

A)saving will decline absolutely and as a percentage of income.
B)saving will increase absolutely but remain constant as a percentage of income.
C)saving will increase absolutely but decline as a percentage of income.
D)saving will increase absolutely and as a percentage of income.

Question 26

An upward shift of the saving schedule suggests

A)nothing with respect to changes in the APC and APS; only that the MPS has changed.
B)that the APC and APS have both decreased at each GDP level.
C)that the APC and APS have both increased at each GDP level.
D)that the APC has decreased and the APS has increased at each GDP level.

Question 27

Given the consumption schedule, it is possible to graph the relevant saving schedule by

A)subtracting the MPC from 1 at each level of income.
B)subtracting investment from consumption at each level of GDP.
C)plotting the horizontal differences between the consumption schedule and the 45-degree line.
D)plotting the vertical differences between the consumption schedule and the 45-degree line.

Question 28

The investment demand slopes downward and to the right because lower real interest rates

A)expand consumer borrowing, making investments more profitable.
B)boost expected rates of returns on investment.
C)enable more investment projects to be undertaken profitably.
D)create tax incentives to invest.

Question 29

Which of the following will not tend to shift the consumption schedule upward?

A)a currently small stock of durable goods in the possession of consumers
B)the expectation of a future decline in the consumer price index
C)a currently low level of household debt
D)the expectation of future shortages of essential consumer goods

Question 30

Other things equal, a decrease in the real interest rate will

A)shift the investment demand curve to the right.
B)shift the investment demand curve to the left.
C)move the economy upward along its existing investment demand curve.
D)move the economy downward along its existing investment demand curve.

Question 31

The saving schedule is such that as aggregate income increases by a certain amount, saving

A)increases by the same amount as the increase in income.
B)does not change.
C)increases, but by a smaller amount.
D)increases by an even larger amount.

Question 32

If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule

A)will not shift.
B)may shift either upward or downward.
C)will shift downward.
D)will also shift upward.

Question 33

Dissaving means

A)the same thing as disinvesting.
B)that households are spending more than their current incomes.
C)that saving and investment are equal.
D)that disposable income is less than zero.

Question 34

If for some reason households become increasingly thrifty, we could show this by

A)a downshift of the saving schedule.
B)an upward shift of the consumption schedule.
C)an upward shift of the saving schedule.
D)a movement down along a stable consumption function.

Question 35

Which one of the following will cause a movement up along an economy's saving schedule?

A)an increase in household borrowing
B)an increase in disposable income
C)an increase in stock prices
D)an increase in interest rates

Question 36

Which of the following will not cause the consumption schedule to shift?

A)a sharp increase in the amount of wealth held by households
B)a change in consumer incomes
C)the expectation of a recession
D)a growing expectation that consumer durables will be in short supply

Question 37

In the late 1990s, the U.S.stock market boomed, causing U.S.consumption to rise.Economists refer to this outcome as the

A)Keynes effect.
B)interest-rate effect.
C)wealth effect.
D)multiplier effect.

Question 38

(Advanced analysis) If the equation C = 20 + 0.6Y, where C is consumption and Y is disposable income, were graphed,

A)the vertical intercept would be +0.6 and the slope would be +20.
B)it would reveal an inverse relationship between consumption and disposable income.
C)the vertical intercept would be negative, but consumption would increase as disposable income rises.
D)the vertical intercept would be +20 and the slope would be +0.6.

Question 39

The investment demand curve portrays an inverse (negative) relationship between

A)investment and real GDP.
B)the real interest rate and investment.
C)the nominal interest rate and investment.
D)the price level and investment.

Question 40

One can determine the amount of any level of total income that is consumed by

A)multiplying total income by the slope of the consumption schedule.
B)multiplying total income by the APC.
C)subtracting the MPS from total income.
D)multiplying total income by the MPC.

Question 41

A decline in the real interest rate will

A)increase the amount of investment spending.
B)shift the investment schedule downward.
C)shift the investment demand curve to the right.
D)shift the investment demand curve to the left.

Question 42

Assume a machine that has a useful life of only one year costs $2,000.Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300.The expected rate of return on this machine is

A)7.5 percent.
B)10 percent.
C)15 percent.
D)20 percent.

Question 43

The relationship between the real interest rate and investment is shown by the

A)investment demand schedule.
B)consumption of fixed capital schedule.
C)saving schedule.
D)aggregate supply curve.

Question 44

A rightward shift of the investment demand curve might be caused by

A)an increase in the price level.
B)a decline in the real interest rate.
C)businesses planning to increase their stock of inventories.
D)an increase in business taxes.

Question 45

Given the expected rate of return on all possible investment opportunities in the economy,

A)an increase in the real rate of interest will reduce the level of investment.
B)a decrease in the real rate of interest will reduce the level of investment.
C)a change in the real interest rate will have no impact on the level of investment.
D)an increase in the real interest rate will increase the level of investment.

Question 46

The investment demand curve will shift to the right as a result of

A)an increase in the excess production capacity available in industry.
B)an increase in business taxes.
C)technological progress.
D)an increase in the acquisition and maintenance cost of capital goods.

Question 47

The investment demand curve will shift to the left as a result of

A)an increase in the excess production capacity available in industry.
B)a decrease in business taxes.
C)increased business optimism with respect to future economic conditions.
D)a decrease in labor costs.

Question 48

The investment demand curve suggests that

A)changes in the real interest rate will not affect the amount invested.
B)there is an inverse relationship between the real rate of interest and the level of investment spending.
C)an increase in business taxes will tend to stimulate investment spending.
D)there is a direct relationship between the real rate of interest and the level of investment spending.

Question 49

The investment demand curve will shift to the right as the result of

A)the availability of excess production capacity.
B)an increase in business taxes.
C)businesses becoming more optimistic about future business conditions.
D)an increase in the real interest rate.

Question 50

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on.If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be

A)$25 billion.
B)$20 billion.
C)$15 billion.
D)$10 billion.

Question 51

Other things equal, a 10 percent decrease in corporate income taxes will

A)decrease the market price of real capital goods.
B)have no effect on the location of the investment demand curve.
C)shift the investment demand curve to the right.
D)shift the investment demand curve to the left.

Question 52

If business taxes are reduced and the real interest rate increases,

A)consumption and saving will necessarily increase.
B)the level of investment spending might either increase or decrease.
C)the level of investment spending will necessarily increase.
D)the level of investment spending will necessarily decrease.

Question 53

Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on.The investment demand curve for this economy is shown in which table?

A)
B)
C)
D)

Question 54

When we draw an investment demand curve, we hold constant all of the following except

A)the expected rate of return on the investment.
B)business taxes.
C)the interest rate.
D)the present stock of capital goods.

Question 55

Suppose that a new machine tool having a useful life of only one year costs $80,000.Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000.The expected rate of return on this tool is

A)80 percent.
B)8 percent.
C)2 percent.
D)20 percent.

Question 56

Other things equal, if the real interest rate falls and business taxes rise,

A)investment will rise until it is equal to saving.
B)we will be uncertain as to the resulting change in investment.
C)we can be certain that investment will rise.
D)we can be certain that investment will fall.

Question 57

The real interest rate is

A)the percentage increase in money that the lender receives on a loan.
B)the percentage increase in purchasing power that the lender receives on a loan.
C)also called the after-tax interest rate.
D)usually higher than the nominal interest rate.

Question 58

Assume a machine that has a useful life of only one year costs $2,000.Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300.If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should

A)not purchase the machine, because the expected rate of return exceeds the interest rate.
B)not purchase the machine, because the interest rate exceeds the expected rate of return.
C)purchase the machine because the expected rate of return exceeds the interest rate.
D)purchase the machine because the interest rate exceeds the expected rate of return.

Question 59

The immediate determinants of investment spending are the

A)expected rate of return on capital goods and the real interest rate.
B)level of saving and the real interest rate.
C)marginal propensity to consume and the real interest rate.
D)interest rate and the expected price level.

Question 60

If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when

A)r falls.
B)i is greater than r.
C)r is greater than i.
D)i rises.

Question 61

In annual percentage terms, investment spending in the United States is

A)less variable than real GDP.
B)less variable than consumption spending.
C)less variable than the price level.
D)more variable than real GDP.Topic: The Interest-Rate-Investment Relationship

Question 62

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is

A)18 percent.
B)24 percent.
C)12 percent.
D)6 percent.

Question 63

If 100 percent of any change in income is spent, the multiplier will be

A)equal to the MPC.
B)1.
C)zero.
D)infinitely large.

Question 64

A high rate of inflation is likely to cause a

A)high nominal interest rate.
B)low nominal interest rate.
C)low rate of growth of nominal GDP.
D)decrease in nominal wages.

Question 65

Investment spending in the United States tends to be unstable because

A)expected profits are highly variable.
B)capital goods are durable.
C)innovation occurs at an irregular pace.
D)all of the factors mentioned in other answers contribute to the instability.

Question 66

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

A)investment will take place until i and r are equal.
B)investment will take place until r exceeds i by the greatest amount.
C)r will rise as more investment is undertaken.
D)i will fall as more investment is undertaken.

Question 67

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.If the real interest rate is 15 percent, what amount of investment will be undertaken?

A)$15
B)$30
C)$45
D)$60

Question 68

The multiplier can be calculated as

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

Question 69

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.The expected rate of return curve

A)shows a direct relationship between the interest rate and investment.
B)is also the investment demand curve.
C)is indeterminate.
D)implies a direct (positive) relationship between the interest rate and the level of GDP.

Question 70

The multiplier is useful in determining the

A)full-employment unemployment rate.
B)level of business inventories.
C)change in the rate of inflation from a change in the interest rate.
D)change in GDP resulting from a change in spending.

Question 71

If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is

A)2 percent.
B)zero percent.
C)10 percent.
D)22 percent.

Question 72

The multiplier is

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

Question 73

The size of the multiplier is equal to the

A)slope of the consumption schedule.
B)reciprocal of the slope of the consumption schedule.
C)slope of the saving schedule.
D)reciprocal of the slope of the saving schedule.

Question 74

If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then, other things equal,

A)more investment will be forthcoming when i exceeds r.
B)less investment will be forthcoming when r rises.
C)r will fall as more investment is undertaken.
D)r will exceed i at all possible levels of investment.

Question 75

If the MPS is only half as large as the MPC, the multiplier is

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

Question 76

The purchase of capital goods, like consumer goods, can be postponed; it tends to contribute to in investment spending.

A)nondurable; instability
B)nondurable; stability
C)durable; instability
D)durable; stability

Question 77

The multiplier is defined as

A)1 − MPS.
B)change in GDP × initial change in spending.
C)change in GDP/initial change in spending.
D)change in GDP − initial change in spending.

Question 78

Investment spending in the United States tends to be unstable because

A)profits are highly variable.
B)the price level fluctuates rapidly.
C)investment spending is affected by interest rates.
D)capital wears out quickly and must be replaced often.

Question 79

The multiplier effect means that

A)consumption is typically several times as large as saving.
B)a change in consumption can cause a larger increase in investment.
C)an increase in investment can cause GDP to change by a larger amount.
D)a decline in the MPC can cause GDP to rise by several times that amount.

Question 80

Assume that for the entire business sector of a private closed economy, there are $0 worth of investment projects that will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent, another $15 with an expected rate of return of 15-20 percent, and an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.If the real interest rate is 5 percent, what amount of investment will be undertaken?

A)$15
B)$30
C)$45
D)$60