Question 1

The amount of consumption at each level of disposable personal income, all other determinants of consumption unchanged, is shown by the
A) aggregate demand curve.
B) consumption function.
C) price-consumption curve.
D) income curve.

Accepted Answer

The consumption function shows the relationship between disposable income and consumption, indicating how much households spend at each level of income. Therefore, the amount of consumption at each level of disposable personal income is shown by the consumption function.

Question 2

The bulk of aggregate demand in the United States consists of
A) consumption.
B) investment.
C) government spending.
D) net exports.

Accepted Answer

According to data from the Bureau of Economic Analysis, as of the third quarter of 2020, consumption (personal consumption expenditures) makes up approximately 68% of the U.S. gross domestic product (GDP), while investment, government spending, and net exports combined make up the remaining 32%.

Question 3

The marginal propensity to consume is given by
A) the change in consumption divided by the change in saving.
B) the change in consumption divided by the change in disposable personal income.
C) consumption divided by the change in disposable personal income.
D) consumption divided by disposable income.

Accepted Answer

The marginal propensity to consume (MPC) measures the fraction of a change in income that is spent on consumption. Option B is the correct choice as MPC is calculated as the change in consumption divided by the change in disposable personal income. Option A is incorrect as it mentions the change in saving instead of disposable personal income. Option C is incorrect as it mentions "change in disposable personal income" in the denominator which is not in line with the actual formula. Option D is incorrect as it mentions only disposable income in the denominator which can lead to incorrect calculations since the formula requires the change in disposable personal income.

Question 4

The marginal propensity to consume is the
A) slope of the saving function.
B) slope of the consumption function.
C) proportion of disposable personal income used for consumption.
D) change in consumption divided by the change in saving.

Accepted Answer

The answer of The marginal propensity to consume is the
A)...

Question 5

During an economic downturn, households respond to a decline in income by
A) reducing taxes.
B) reducing consumption.
C) increasing the quantity of labor supplied.
D) negotiating higher wages.

Accepted Answer

During an economic downturn, households may respond to a decline in income by reducing their consumption to balance their budget. Reducing taxes is not within their control and negotiating higher wages may not be possible during a downturn. While increasing the quantity of labor supplied may increase income, it is not always possible or feasible for households to do so.

Question 6

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $13,000. What is the marginal propensity to consume?
A) 0.2
B) 0.4
C) 0.6
D) 0.8

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. Here, the change in consumption is $13,000 - $9,000 = $4,000, and the change in income is $15,000 - $10,000 = $5,000. Therefore, MPC = $4,000 / $5,000 = 0.8.

Question 7

Disposable personal income is
A) the income households receive after paying personal taxes and personal debt.
B) the income households earn from supplying labor services for the production of aggregate output.
C) the income households receive after paying personal taxes.
D) the income households have leftover after paying personal taxes and purchasing necessities.

Accepted Answer

Disposable personal income is the income households receive after paying personal taxes. It does not take into account personal debt or the purchase of necessities.

Question 8

Personal saving equals
A) gross domestic income − consumption.
B) personal disposable income − consumption.
C) gross domestic product − consumption.
D) personal disposable income − taxes − consumption.

Accepted Answer

Personal saving is the difference between personal disposable income and consumption.

Question 9

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $13,000. What is the marginal propensity to save?
A) 0.2
B) 0.4
C) 0.6
D) 0.8

Accepted Answer

The marginal propensity to save (MPS) is calculated as the change in savings divided by the change in income. Here, the change in income is $5,000 ($15,000 - $10,000) and the change in consumption is $4,000 ($13,000 - $9,000). Therefore, the change in savings is $1,000 ($5,000 - $4,000). MPS = $1,000 / $5,000 = 0.2.

Question 10

Which of the following is true?
I. 1 − MPS = MPC where MPS = marginal propensity to save and MPC = marginal propensity to consume.
II. personal saving + consumption = gross income
III. ∆disposable income = ∆saving + ∆consumption where ∆ = change in
A) I, II, and III
B) I and II only
C) I and III only
D) II and III only

Accepted Answer

I. is true, as it is one of the basic equations in Keynesian economics. 
II. is not true, as gross income also includes taxes and transfers, which are not accounted for in this equation. 
III. is true, as it is another basic equation in Keynesian economics, showing that any change in disposable income will be split between changes in saving and consumption. Therefore, the correct option is C, as I and III are true, but II is not.

Question 11

The saving function expresses the relationship between
A) personal saving and consumption.
B) gross domestic income and saving.
C) disposable personal income and saving.
D) wage income and personal saving.

Accepted Answer

The saving function typically relates the level of disposable personal income (DPI) to the level of personal saving. This relationship indicates that, as DPI increases, so too does personal saving. However, the marginal propensity to save (MPS) may fall as DPI rises, indicating that households may save a smaller fraction of any additional income. Therefore, as income increases, personal consumption increases, but savings also tends to rise.

Question 12

The consumption function shows
A) the amount of consumption at each level of aggregate demand, holding all other determinants constant.
B) the amount of consumption at each price level, holding all other determinants constant.
C) the amount of consumption at each level of disposable income, holding all other determinants constant.
D) the amount of consumption at each wage rate holding all other determinants constant.

Accepted Answer

The consumption function shows the amount of consumption spending at each level of disposable income, holding all other determinants constant. Other determinants that can affect consumption include interest rates, wealth, expectations, and government policies.

Question 13

The saving function shows
A) the amount of saving at each level of aggregate demand, holding all other determinants of saving constant.
B) the amount of saving on at each level of disposable income, holding all other determinants of saving constant.
C) the amount of saving at each price level, holding all other determinants of saving constant.
D) the amount of saving at each wage rate, holding all other determinants of saving constant.

Accepted Answer

The saving function shows the amount of saving at each level of disposable income, holding all other determinants of saving constant. This is because disposable income is the primary determinant of saving, and as it increases, people tend to save more. Holding other factors (such as interest rates and wealth) constant, the saving function reflects this relationship between disposable income and saving.

Question 14

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to save?
A) 0.2
B) 0.4
C) 0.6
D) 0.8

Accepted Answer

The change in income is $5,000 ($15,000-$10,000) and the change in consumption is $3,000 ($12,000-$9,000).

Marginal propensity to save = Change in saving/Change in income

Change in saving = Change in income - Change in consumption 
= $5,000 - $3,000 
= $2,000

Marginal propensity to save = $2,000/$5,000 
= 0.4

Therefore, the answer is B.

Question 15

Disposable personal income is
A) the income households receive after paying personal taxes and personal debt.
B) the income households receive after paying personal taxes and saving.
C) the income households receive after paying personal taxes and purchasing necessities.
D) the income households receive that is available for consumption and saving.

Accepted Answer

Disposable personal income is the income households receive that is available for consumption and saving, after paying personal taxes and other obligatory payments. This includes both direct and indirect taxes, as well as social security contributions that are deducted from gross income. It also takes into account transfer payments like social security benefits or unemployment benefits received by households.

Question 16

An increase in aggregate demand causes an increase in
A) income, which in turn induces an increase in consumption.
B) investment, which in turn induces an increase in consumption.
C) government, which in turn induces an increase in net exports.
D) consumption, which in turn induces an increase in price.

Accepted Answer

An increase in aggregate demand will lead to an increase in income, which in turn induces an increase in consumption. This is because higher aggregate demand creates more job opportunities and leads to higher wages, resulting in increased disposable income for individuals to spend on consumption.

Question 17

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to consume?
A) 0.2
B) 0.4
C) 0.6
D) 0.8

Accepted Answer

The answer of Suppose when disposable personal income increases from...

Question 18

The consumption function expresses the
A) purposes of consumption.
B) relationship between consumption and prices.
C) relationship between consumption and saving.
D) relationship between consumption and disposable personal income.

Accepted Answer

The consumption function expresses the relationship between consumption and disposable personal income. It shows how much of an increase in income leads to an increase in consumption.

Question 19

The income households receive less the personal income taxes they pay is
A) net savings.
B) disposable personal income.
C) gross private domestic investment.
D) gersonal consumption.

Accepted Answer

Disposable personal income is the income households have available to spend or save after paying personal income taxes. It is calculated by subtracting personal income taxes from personal income.

Question 20

The marginal propensity to consume is the
A) slope of the saving function.
B) slope of the consumption-saving curve.
C) slope of the saving-investment curve.
D) change in consumption divided by the change in disposable personal income.

Accepted Answer

The marginal propensity to consume (MPC) measures the change in consumption that results from a change in disposable personal income. It is calculated as the change in consumption divided by the change in disposable personal income. Therefore, choice D is the correct answer. The other choices are not accurate in their definitions of MPC.

Quiz 13: Consumption and the Aggregate Expenditures Model

The amount of consumption at each level of disposable personal income, all other determinants of consumption unchanged, is shown by the

The bulk of aggregate demand in the United States consists of

The marginal propensity to consume is given by

The marginal propensity to consume is the

During an economic downturn, households respond to a decline in income by

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $13,000. What is the marginal propensity to consume?

Disposable personal income is

Personal saving equals

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $13,000. What is the marginal propensity to save?

Which of the following is true? I. 1 − MPS = MPC where MPS = marginal propensity to save and MPC = marginal propensity to consume. II. personal saving + consumption = gross income III. ∆disposable income = ∆saving + ∆consumption where ∆ = change in

The saving function expresses the relationship between

The consumption function shows

The saving function shows

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to save?

Disposable personal income is

An increase in aggregate demand causes an increase in

Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to consume?

The consumption function expresses the

The income households receive less the personal income taxes they pay is

The marginal propensity to consume is the