Question 1

Based on historical data, which of the following tended to be most variable over time?

Accepted Answer

Real investment spending tends to be the most variable over time because it is heavily influenced by changes in the business cycle and economic conditions. Investment decisions are often based on expectations of future profitability, which can be affected by unpredictable factors such as technological advancements, changes in government policies, and shifts in consumer demand. On the other hand, real consumption spending and real savings tend to be more stable and predictable. The average propensity to consume, while related to consumption spending, is a measure of the proportion of income that is spent rather than saved, and is not directly subject to fluctuations in economic conditions.

Question 2

The relationship between planned real investment spending and the interest rate is

Accepted Answer

The relationship between planned real investment spending and interest rates is inverse. As interest rates increase, the cost of borrowing money to invest in capital goods increases, discouraging firms from investing. Conversely, as interest rates decrease, borrowing costs are lower, making investment more attractive. Therefore, investment spending tends to rise as interest rates fall and vice versa.

Question 3

Real planned investment spending is inversely related to

Accepted Answer

The interest rate affects the cost of financing investment projects; as the interest rate increases, the cost of borrowing money for investment increases, and as a result, real planned investment spending decreases. The other options (A, B, and D) are not necessarily inversely related to real planned investment spending.

Question 4

What would happen to the planned investment function if business taxes were increased?

Accepted Answer

Planned investment function refers to the amount of investment firms plan to make at each possible interest rate. If business taxes were increased, firms would have less profit available to invest, which would reduce their planned investment. Therefore, the planned investment function would shift to the left.

Question 5

Ignoring the government and foreign sectors, equilibrium real Gross Domestic Product (GDP)is determined by

Accepted Answer

Equilibrium real GDP is determined by the intersection of the planned saving and planned investment schedules because in a closed economy, national income (or GDP) must be either consumed or saved. Planned saving refers to the amount of income that households and firms intend to save, while planned investment refers to the amount of investment that businesses intend to make. At the equilibrium level of real GDP, planned saving must equal planned investment, as any excess saving would lead to a reduction in output (as firms reduce their production in response to lower demand) and any shortfall in saving would lead to an increase in output (as firms increase their production to meet higher demand). Therefore, the intersection of the planned saving and planned investment schedules determines the equilibrium level of real GDP.

Question 6

If we observe that interest rates rise but real investment spending still increases, what must have happened to the function relating investment to the interest rate?

Accepted Answer

When real investment spending increases despite a rise in interest rates, it indicates that the function relating investment to the interest rate has shifted to the right. This shift suggests that at any given interest rate, more investment is occurring than before, possibly due to increased optimism about future profitability, technological advancements, or other factors that enhance investment prospects.

Question 7

If businesses expect the economic activity to expand

Accepted Answer

If businesses expect the economic activity to expand, they will likely increase their planned investment, which would shift the planned investment function relating investment to the interest rate to the right. This is because at any given interest rate, businesses are willing to invest more due to the expected increase in demand for their goods and services.

Question 8

Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that

Accepted Answer

An unplanned decrease in inventories indicates that actual investment is less than planned investment, meaning planned investment exceeds planned saving by $200 billion.

Question 9

All of the following would cause the investment function relating investment to the interest rate to shift EXCEPT

Accepted Answer

A change in the real interest rate would cause movement along the investment function, rather than a shift of the entire function. The other three options would cause a shift in the investment function.

Question 10

Investment is

Accepted Answer

Investment is considered autonomous with respect to real GDP, meaning it does not directly depend on the current level of real GDP but is influenced by other factors such as expectations of future profitability, interest rates, and technological advances.

Question 11

Using real GDP on the horizontal axis instead of real disposable income implies that a marginal propensity to consume 0.75 generates for every additional $100 of real GDP

Accepted Answer

The answer of Using real GDP on the horizontal axis...

Question 12

A permanent increase in autonomous investment causes

Accepted Answer

Autonomous investment refers to investment undertaken without the influence of changes in income or output. When there is a permanent increase in autonomous investment, there will be a positive multiplier effect on the economy. This means that the initial increase in investment will lead to an increase in income, which in turn will lead to an increase in consumption, and so on. This process will continue until the final increase in income is greater than the initial increase in investment. Therefore, a permanent increase in autonomous investment will cause a more than proportional increase in real GDP.

Question 13

One of the primary determinants of planned real investment spending is the

Accepted Answer

Planned real investment spending depends heavily on the expectation of future profits. Firms are more likely to invest in new projects and expand their businesses if they anticipate higher future profits, indicating a positive outlook on the economy. Factors such as technological advancements, changes in government policies, and shifts in consumer preferences also influence the expectation of future profits and consequently impact planned investment spending. Real consumption spending, government spending, and saving rates are important economic indicators but have a weaker association with investment spending compared to future profit expectations.

Question 14

Ignoring the government and foreign sectors, if planned investment spending is $500 billion, planned saving is $800 billion, and real Gross Domestic Product (GDP)is $13 trillion, then unplanned inventories will

Accepted Answer

Unplanned inventories will increase by $300 billion because planned saving ($800 billion) exceeds planned investment spending ($500 billion) by $300 billion, indicating that not all output is being purchased, leading to an accumulation of inventories.

Question 15

The investment function intersects the saving schedule at an interest rate of 8 percent and a level of investment of $1.2 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then

Accepted Answer

At an interest rate of 8 percent, the investment level is $1.2 trillion a year, and the consumption level is $3 trillion. Therefore, total spending (C + I) is $4.2 trillion. This total spending intersects the 45-degree reference line, indicating that the equilibrium level of real GDP is $4.2 trillion. Therefore, choice D is the best answer.

Question 16

A decrease in interest rates will

Accepted Answer

A decrease in interest rates does not shift the investment function itself but results in a movement along the investment function. This is because the investment function relates planned investment to the interest rate, and a change in interest rates changes the quantity of investment demanded at the existing rates, not the relationship itself.

Question 17

If firms' unplanned inventories are increasing, then in a closed, private economy

Accepted Answer

When firms' unplanned inventories are increasing, it means that goods are not being sold as expected, indicating that consumers are spending less and saving more than businesses had anticipated. This does not directly imply a change in the level of real national income or that actual consumption is greater than planned.

Question 18

The 45-degree reference line indicates all points at which

Accepted Answer

The answer of The 45-degree reference line indicates all points...

Question 19

The investment function tells us, at any given interest rate

Accepted Answer

The investment function relates to the amount that businesses will spend on adding to their capital stock, which represents their investment in productive capacity, such as machinery, equipment, and buildings. This investment spending can have a significant impact on economic growth and employment, as it contributes to the expansion and improvement of production capabilities. The interest rate plays an important role in determining the level of investment, as it affects the cost of borrowing funds to finance the investment and the expected return on investment.

Question 20

Which would increase real planned investment demand?

Accepted Answer

A decrease in business taxes would increase the after-tax profits businesses can earn from their investments, which would increase their incentive to invest and thus increase real planned investment demand. A decrease in new technologies available (A) would likely decrease planned investment, as would a decline in profit expectations (B). An increase in nominal interest rates (D) would make borrowing more expensive for firms and decrease the incentive to invest.

Quiz 11: Consumption, Real GDP, and the Multiplier