Deck 21: The Simplest Short-Run Macro Model

Question 1

FIGURE 21-1
Refer to Figure 21-1.Desired consumption expenditures will equal disposable income at an income level of

A)zero.
B)Y₁.
C)Y₂.
D)Y₃.
E)more than Y₃.

Answer 1

Y₂.

Question 2

The consumption function is based on the assumption that as real disposable income rises,aggregate desired consumption

A)will fall and desired saving will rise.
B)will rise and desired saving will fall.
C)and desired saving will both rise.
D)remains constant and desired saving will rise.
E)remains constant and desired saving will fall.

Answer 2

and desired saving will both rise.

Question 3

FIGURE 21-1
Refer to Figure 21-1.If disposable income is equal to Y₃,desired consumption expenditure is equal to the vertical distance

A)Y₃E.
B)Y₃D.
C)Y₃F.
D)Y₃.
E)DE.

Answer 3

Y₃D.

Question 4

Consider the consumption function in a simple macro model with no taxes.At the level of national income where APC = 1,the nation's households are

A)consuming all of their disposable income.
B)allocating their income equally between saving and consumption.
C)saving a portion of their income,but saving is less than consumption.
D)spending more than their current income.
E)saving all of their disposable income.

Question 5

Consider the consumption function in our macro model.The key factors that influence desired consumption are assumed to be

A)expectations about the future.
B)wealth.
C)interest rates.
D)disposable income.
E)all of the above

Question 6

In the simple macroeconomic model,"autonomous expenditures" are

A)dependent on national income.
B)not dependent on national income.
C)induced expenditures.
D)those which are constant.
E)non-domestic expenditures.

Question 7

Consider the equation: AE = C + I + G + (X - IM).Which of the following statements correctly describes this sum?

A)This summation tells us total desired expenditures on domestically produced output.
B)It is a summation of actual expenditures and is equivalent to GDP.
C)This summation of planned expenditures is equal to actual nominal GDP.
D)It is a summation of planned expenditures and is always equal to real GDP.
E)It is a summation of the desired expenditures of domestic households,firms and government.

Question 8

With respect to consumption,investment,government purchases and net exports,the national-income and product accounts measure

A)desired expenditures in each of the categories.
B)both actual and desired expenditures,since actual expenditure must equal desired expenditure in each category.
C)the flow of saving at any income.
D)neither actual nor desired expenditures.
E)actual expenditures in each of the categories.

Question 9

In a simple macro model,an increase in households' wealth is generally assumed to

A)cause no change in desired consumption because consumption is a function of disposable income only.
B)cause no change in desired consumption because the increase is always expected.
C)cause a downward shift in the aggregate consumption function.
D)cause an upward shift in the aggregate consumption function.
E)affect only desired saving,not desired consumption.

Question 10

In each of the four expenditure categories,national income accounts measure ________ expenditures,while the theoretical model of the economy deals with ________ expenditures.

A)actual; autonomous
B)desired; actual
C)induced; exogenous
D)endogenous; exogenous
E)actual; desired

Question 11

FIGURE 21-1
Refer to Figure 21-1.The marginal propensity to consume is equal to

A)EF/Y₂Y₃.
B)EF/DF.
C)ED/CF.
D)DF/Y₂Y_3.
E)ED/Y₂Y_3.

Question 12

The percentage of disposable income that is saved by Canadian households has been changing over time.In 2014,it was estimated to be about ________ percent.

A)0
B)4
C)15
D)20
E)25

Question 13

In a simple macro model,a decrease in households' wealth is generally assumed to

A)cause no change in consumption because consumption is a function of disposable income only.
B)cause no change in consumption because the decline is always expected.
C)cause a downward shift in the consumption function.
D)cause an upward shift in the consumption function.
E)affect only saving,not consumption.

Question 14

Undesired or unplanned inventory decumulation is likely to occur when

A)consumption exceeds investment.
B)investment exceeds consumption.
C)autonomous expenditure exceeds induced expenditure.
D)desired aggregate expenditure exceeds actual aggregate expenditure.
E)actual aggregate expenditure exceeds desired aggregate expenditure.

Question 15

Undesired or unplanned inventory accumulation is likely to occur when

A)consumption exceeds investment.
B)investment exceeds consumption.
C)autonomous expenditure exceeds induced expenditure.
D)desired aggregate expenditure exceeds actual aggregate expenditure.
E)actual aggregate expenditure exceeds desired aggregate expenditure.

Question 16

FIGURE 21-1
Refer to Figure 21-1.The marginal propensity to save can be expressed as

A)DE/Y₁Y_3.
B)DE/Y₂Y_3.
C)DF/Y₂Y_3.
D)FE/Y₁Y_3.
E)FE/Y₂Y_3.

Question 17

FIGURE 21-1
Refer to Figure 21-1.The APC will be equal to one (1.0)when disposable income is equal to

A)0.
B)Y₁.
C)Y₂.
D)Y₃.
E)desired saving.

Question 18

For firms or individual households,desired expenditure is

A)always greater than planned expenditure.
B)always greater than actual expenditure.
C)not relevant because human wants are unlimited.
D)what they plan on spending,given the resources at their command.
E)not a useful concept because it cannot be measured.

Question 19

In macroeconomics,the consumption function

A)and the aggregate expenditure function are the same.
B)describes the relationship between desired consumption expenditure and the factors that determine it,like national income.
C)refers to the relationship between consumption expenditure and relative prices.
D)refers to the relationship between an individual's consumption and his/her wealth.
E)is relatively unimportant in macroeconomics,because consumption is such a small component of aggregate expenditure.

Question 20

FIGURE 21-1
Refer to Figure 21-1.If disposable income is Y₃,the level of desired saving is

A)DE.
B)FD.
C)Y₃F.
D)Y₃D.
E)Y₂Y₃.

Question 21

Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired consumption rises from $350 billion to $380 billion.We can conclude that the marginal propensity to consume for this economy is

A)0.65.
B)0.75.
C)0.80.
D)0.90.
E)1.33.

Question 22

Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired saving rises from $50 billion to $60 billion.We can conclude that the marginal propensity to save for this economy is

A)0.10.
B)0.20.
C)0.25.
D)0.75.
E)1.0.

Question 23

FIGURE 21-2
Refer to Figure 21-2.Which of the following is the correct equation for the consumption function depicted in the figure?

A)C = 500 + (2/3)Y_D
B)C = (0.5)Y_D
C)C = 1000 + (2/3)Y_D
D)C = 500 + (0.5)Y_D
E)C = 2000 + (2/3)Y_D

Question 24

The table below shows disposable income and desired consumption for a closed economy with no government.
TABLE 21-2
Refer to Table 21-2.The marginal propensity to save is equal to

A)0.8.
B)0.67.
C)0.6.
D)0.4.
E)0.2.

Question 25

FIGURE 21-1
Refer to Figure 21-1.If disposable income is zero,then

A)autonomous desired consumption is 0A.
B)autonomous desired consumption is 0Y₁.
C)desired consumption must also be zero.
D)the level of desired saving will be 0A.
E)autonomous desired saving will be 0A.

Question 26

Consider a consumption function that is upward sloping but flatter than the 45-degree line.When real disposable income rises

A)desired consumption will fall and saving will rise.
B)desired consumption will rise and saving will fall.
C)desired consumption and saving will both rise.
D)desired consumption remains constant.
E)saving remains constant.

Question 27

Desired consumption divided by disposable income is called the

A)average propensity to consume.
B)average propensity to save.
C)average propensity to spend.
D)marginal propensity to save.
E)total propensity to save.

Question 28

FIGURE 21-2
Refer to Figure 21-2.What is the marginal propensity to consume associated with this consumption function?

A)0.5
B)0.67
C)1.0
D)-0.5
E)-1.0

Question 29

FIGURE 21-2
Refer to Figure 21-2.The slope of the consumption function in the figure is equal to

A)1.0.
B)0.67.
C)0.5.
D)-0.5.
E)-1.0.

Question 30

FIGURE 21-2
Refer to Figure 21-2.The slope of the consumption function in the figure is equal to

A)the marginal propensity to consume.
B)the average propensity to consume.
C)the marginal propensity to save.
D)the average propensity to save.
E)the slope of the 45-degree line.

Question 31

The table below shows disposable income and desired consumption for a closed economy with no government.
TABLE 21-1
Refer to Table 21-1.The marginal propensity to consume is equal to

A)0.8.
B)0.67.
C)0.6.
D)0.4.
E)0.2.

Question 32

The table below shows disposable income and desired consumption for a closed economy with no government.
TABLE 21-1
Refer to Table 21-1.The marginal propensity to save is equal to

A)0.2.
B)0.4.
C)0.6.
D)0.67.
E)0.8.

Question 33

Consider a consumption function of the following form: C = 50 + (0.6)Y_D.At what level of disposable income will desired savings be equal to zero?

A)31.25
B)50
C)83.33
D)125
E)208.33

Question 34

On a graph of a consumption function,what is the significance of the 45-degree line?

A)It connects all points where desired consumption equals desired expenditure.
B)It connects all points where desired consumption equals actual disposable income.
C)It shows the slope of the average consumption function,against which we measure other consumption functions.
D)It connects all points where desired consumption equals desired saving.
E)Desired consumption is zero at all points along the 45-degree line.

Question 35

FIGURE 21-2
Refer to Figure 21-2.The APC will be equal to one (1.0)when disposable income is

A)$0.
B)$1000.
C)$2000.
D)$3000.
E)Not enough information to determine.

Question 36

If the consumption function coincides with the 45-degree line,then we know that

A)desired consumption is constant at all levels of disposable income.
B)the marginal propensity to consume is less than one.
C)the marginal propensity to consume is greater than one.
D)desired consumption equals desired saving at all levels of disposable income.
E)desired saving is zero at all levels of disposable income.

Question 37

FIGURE 21-2
Refer to Figure 21-2.If disposable income is $3000,desired consumption expenditure is equal to

A)$0.
B)$500.
C)$1000.
D)$1500.
E)$2000.

Question 38

The table below shows disposable income and desired consumption for a closed economy with no government.
TABLE 21-2
Refer to Table 21-2.The marginal propensity to consume is equal to

A)0.2.
B)0.4.
C)0.6.
D)0.67.
E)0.8.

Question 39

If a family's annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000,it can be concluded that the family's

A)marginal propensity to consume is $800.
B)average propensity to consume is 0.8.
C)marginal propensity to consume is 0.8.
D)average propensity to save is 0.8.
E)marginal propensity to save is 0.8.

Question 40

FIGURE 21-2
Refer to Figure 21-2.The amount of desired consumption expenditure that is unrelated to the level of disposable income is

A)$0.
B)$500.
C)$1000.
D)$1500.
E)$2000.

Question 41

If the Jones family's disposable income increases from $1200 to $1700 and their desired saving increases from -$100 to +$100,then the family's

A)average propensity to consume is 0.60.
B)average propensity to consume is 0.40.
C)marginal propensity to consume is 0.40.
D)marginal propensity to consume is 0.60.
E)marginal propensity to save is 1.

Question 42

Jeff and Lori's disposable income rose from $80 000 per year to $84 000 and their desired consumption expenditure rose from $76 000 to $79 000.It can be concluded that their

A)average propensity to consume is constant.
B)average propensity to save is always 0.25.
C)marginal propensity to consume decreased.
D)marginal propensity to consume is 0.25.
E)marginal propensity to save is 0.25.

Question 43

Desired consumption divided by disposable income is called the

A)consumption function.
B)marginal propensity to consume.
C)average propensity to consume.
D)average propensity to save.
E)relative consumption ratio.

Question 44

In Canada,as in many other countries,the largest component of domestic investment expenditure is

A)plant and equipment.
B)residential housing.
C)inventories.
D)financial assets.
E)savings.

Question 45

Desired investment expenditure will generally fall as a result of which of the following changes?

A)a decrease in business confidence
B)a decrease in interest rates
C)an increase in government purchases
D)an increase in sales volume
E)an increase in business confidence

Question 46

Investment expenditure is the ________ volatile component of GDP,and changes in investment are ________ associated with business-cycle fluctuations.

A)most; strongly
B)most; weakly
C)least; strongly
D)least; weakly
E)least; not

Question 47

In the simple macro model,desired investment is assumed to be autonomous with respect to national income.Which of the following will cause a shift of the investment function?
1)a decrease in interest rates
2)an increase in firms' optimism about the economy
3)an expectation of a downturn in future economic activity

A)1 and 2
B)2 and 3
C)1 and 3
D)1,2,and 3
E)1 only

Question 48

In a simple model of the economy,without government or taxes,a shock that causes an upward shift of the aggregate consumption function also causes ________ shift of the saving function.

A)an equal upward
B)a less-than-equal upward
C)an equal downward
D)a less-than-equal downward
E)no

Question 49

Which of the following statements must be true in the simple macro model (with a closed economy and no government)?

A)APC increases as income rises.
B)APS decreases as income rises.
C)MPS and MPC are both negative.
D)MPC is negative below a certain level of income.
E)The sum of MPC and MPS is one.

Question 50

The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600.It can be concluded that their

A)average propensity to consume is 0.8.
B)average propensity to save is 0.8.
C)marginal propensity to consume is $800.
D)marginal propensity to consume is 0.8.
E)marginal propensity to save is 0.8.

Question 51

A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size,and therefore ________ desired investment expenditure.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; leaves unaffected
E)decreases; decreases

Question 52

The consumption function is based on a number of assumptions.Given these assumptions,which of the following statements is true?

A)Below a certain level of income,APC > 1 and MPC < 0.
B)The MPC and APC are always less than unity.
C)As income rises,the MPC falls and the APC rises.
D)The MPC is greater than zero and less than one,and the APC falls as income rises.
E)The APC is greater than zero and less than one,and the MPC falls as income rises.

Question 53

The "marginal propensity to consume" refers to the additional

A)desired saving that occurs out of an additional dollar of disposable income.
B)desired consumption that occurs out of an additional dollar of disposable income.
C)desired consumption that occurs out of an additional dollar of investment.
D)desired consumption caused by a change in tastes.
E)desired consumption that occurs over time.

Question 54

Total desired saving divided by total income is called the

A)average propensity to consume.
B)average propensity to save.
C)average propensity to spend.
D)marginal propensity to save.
E)total propensity to save.

Question 55

The change in desired consumption divided by the change in disposable income that brought it about is called the

A)average propensity to consume.
B)average propensity not to consume.
C)consumption function.
D)marginal propensity to consume.
E)marginal propensity not to spend.

Question 56

If the marginal propensity to consume (MPC)is equal to 0.9,an increase in household income causes desired consumption expenditure to

A)rise by more than the increase in income.
B)rise by the full increase in income.
C)rise by less than the full increase in income.
D)fall,as an increase in income will increase saving.
E)remain constant,because the MPC is also constant.

Question 57

The marginal propensity to consume is defined to be

A)the change in desired consumption divided by the change in saving.
B)the change in desired consumption divided by total disposable income.
C)the change in desired consumption divided by the change in disposable income.
D)total desired consumption divided by total disposable income.
E)total desired consumption divided by the change in disposable income.

Question 58

When desired consumption exceeds disposable income,desired saving is ________; when desired consumption is less than the disposable income,desired saving is ________.

A)negative; negative
B)positive; negative
C)negative; positive
D)positive; positive
E)zero; positive

Question 59

The Smith family's disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600.It can be concluded that their

A)average propensity to consume decreased from 0.950 to 0.943.
B)average propensity to save decreased from 0.950 to 0.943.
C)marginal propensity to consume is 0.050.
D)marginal propensity to consume increased from 0.050 to 0.058.
E)marginal propensity to save is 0.80.

Question 60

The marginal propensity to save refers to the

A)additional saving that occurs out of an additional dollar of income.
B)additional saving that occurs out of an additional dollar of investment.
C)total saving divided by a change in income.
D)change in saving divided by total income.
E)additional saving that occurs over time.

Question 61

FIGURE 21-3
Refer to Figure 21-3.If national income is Y₁ and the aggregate expenditure function is AE₁,

A)the economy is in equilibrium.
B)there is unintended inventory accumulation and income will rise.
C)there is unintended inventory accumulation and income will fall.
D)there is unintended inventory decumulation and income will rise.
E)there is unintended inventory decumulation and income will fall.

Question 62

In general,the marginal propensity to spend is the change in total desired expenditure induced by a change in ________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________.In the case of the simplest macro model with no government and no international trade,however,the marginal propensity to spend is ________ the marginal propensity to consume.

A)national income; disposable income; greater than
B)national income; disposable income; equal to
C)disposable income; national income; equal to
D)disposable income; national income; greater than
E)national income; disposable income; smaller than

Question 63

Consider the following news headline: "Increase in consumer confidence leads to increase in spending".Which of the following correctly describes the likely effect in our simple macro model?

A)the consumption function shifts downward
B)the consumption function gets flatter
C)the AE function shifts upward
D)the consumption function shifts upward
E)both C and D are correct

Question 64

Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y.Assuming that we have no government,no international trade and desired investment is autonomous and is equal to $56 billion,then which of the following is the correct statement of the consumption function?

A)C = $356 billion + (0.87)Y
B)C = $356 billion + (0.13)Y
C)C = $244 billion + (0.87)Y
D)C = $244 billion + (0.13)Y
E)C = $300 billion + (0.13)Y

Question 65

FIGURE 21-3
Refer to Figure 21-3.Assuming AE₀ is the prevailing aggregate expenditure function,at a level of national income equal to Y₃ we can state that

A)consumption is greater than desired aggregate expenditure.
B)consumption is less than desired aggregate expenditure.
C)desired aggregate expenditure is greater than output.
D)desired aggregate expenditure is less than output.
E)desired saving is less than zero.

Question 66

Consider the following news headline: "Canadian business leaders fear reduced world demand for commodities".Which of the following correctly describes the likely effect in our simple macro model?

A)the investment function shifts downward
B)the AE function shifts downward
C)the investment function shifts upward
D)the savings function shifts downward
E)both A and B are correct

Question 67

In the simplest macroeconomic model,with a closed economy and no government,the aggregate expenditure (AE)function is the sum of

A)saving and desired investment.
B)consumption and disposable income.
C)desired consumption and desired investment.
D)consumption and saving.
E)actual consumption and actual investment.

Question 68

The aggregate expenditure (AE)function is an upward-sloping curve that describes

A)the amount spent on an economy's output at each national income.
B)what firms and households would like to spend at each level of national income.
C)what an economy would like to spend,in the absence of income constraints,at each level of output.
D)what is actually spent on an economy's output at each level of output.
E)what is actually spent at each level of national income.

Question 69

Suppose there is an increase in the marginal propensity to spend out of national income.The result will be

A)a movement to the right along the AE curve.
B)a movement to the left along the AE curve.
C)an increase in the slope of the AE curve.
D)a decrease in the slope of the AE curve.
E)a parallel upward shift in the AE curve.

Question 70

Other things being equal,higher real interest rates tend to

A)increase every component of desired investment expenditure.
B)reduce every component of desired investment expenditure.
C)reduce every component of desired investment expenditure except residential housing.
D)reduce every component of desired investment expenditure except inventories.
E)reduce every component of desired investment expenditure except plant and equipment.

Question 71

The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the

A)average propensity to consume.
B)average propensity to save.
C)marginal propensity to spend.
D)marginal propensity to save.
E)marginal propensity to consume.

Question 72

A decrease in the marginal propensity to spend out of national income will cause

A)a movement to the right along the AE curve.
B)a movement to the left along the AE curve.
C)an increase in the slope of the AE curve,which rotates it upward.
D)a decrease in the slope of the AE curve,which rotates it downward.
E)a parallel downward shift in the AE curve.

Question 73

Which of the following correctly describes the meaning of the aggregate expenditure (AE)function?

A)The AE function relates the level of desired aggregate expenditure to the level of actual national income.
B)The AE function relates the level of desired consumption expenditure to desired aggregate expenditure.
C)The AE function relates the level of desired investment expenditure to desired aggregate expenditure.
D)The AE function relates the level of nominal GDP to the level of real GDP.
E)The AE function relates the level of aggregate demand to the price level.

Question 74

FIGURE 21-3
Refer to Figure 21-3.If national income is Y₃ and the aggregate expenditure function is AE₁,

A)the economy is in equilibrium.
B)there is unintended inventory accumulation and income will rise.
C)there is unintended inventory accumulation and income will fall.
D)there is unintended inventory decumulation and income will rise.
E)there is unintended inventory decumulation and income will fall.

Question 75

FIGURE 21-3
Refer to Figure 21-3.Assuming AE₀ is the prevailing aggregate expenditure function,the distance 0A is a measure of

A)aggregate expenditure at equilibrium national income.
B)autonomous desired expenditures.
C)induced expenditures.
D)desired saving.
E)desired investment.

Question 76

FIGURE 21-3
Refer to Figure 21-3.In this demand-determined model of the macro economy,the price level is

A)measured by Y_2/0B.
B)measured by Y₁Y_2/AB.
C)increasing as the economy moves from E₀ to E₁.
D)assumed to be constant.
E)derived from the slope of the AE function.

Question 77

FIGURE 21-3
Refer to Figure 21-3.If national income is Y₁ and the aggregate expenditure function is AE₁,then desired aggregate expenditure

A)exceeds income and income will rise.
B)exceeds income and income will fall.
C)is less than income and income will rise.
D)is equal to income and income will not change.
E)is less than income and income will fall.

Question 78

The slope of the aggregate expenditure (AE)function is always equal to the marginal propensity to

A)save.
B)invest.
C)import.
D)spend.
E)tax.

Question 79

Consider the simplest macroeconomic model,with a closed economy and no government.If we assume that desired investment is autonomous with respect to national income,then the investment function (which graphs desired investment against actual national income)will be

A)negatively sloped.
B)positively sloped and relatively steep.
C)positively sloped and relatively flat.
D)vertical.
E)horizontal.

Question 80

The schedule that relates the level of desired total expenditures to the level of actual national income is called the

A)consumption function.
B)desired aggregate demand function.
C)aggregate expenditure function.
D)dissaving function.
E)equilibrium function.