Question 1

As disposable income decreases,consumption:
A)increases.
B)decreases.
C)may either increase or decrease depending on the mpc.
D)may either increase or decrease depending on the wealth effect.

Accepted Answer

When disposable income decreases, consumers have less money available to spend. Therefore, consumption decreases. This is because households have less money to spend on goods and services, and may need to prioritize spending on necessities over discretionary spending.

Question 2

Suppose the stock market crashed,wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends,consumption spending might fall by as much as,but probably not more than,______.
A)$35 billion
B)$200 billion
C)$350 billion
D)$2 trillion

Accepted Answer

Based on historical trends, the marginal propensity to consume (MPC) is estimated to be around 0.7, meaning that for every dollar of wealth lost, households would reduce their consumption spending by 70 cents. Therefore, a $5 trillion loss in household wealth would result in a reduction in consumption spending of 0.7 x $5 trillion = $3.5 trillion. However, not all of this decrease in consumption would necessarily happen immediately, as households may try to maintain their levels of consumption by tapping into savings or borrowing. Therefore, it is likely that consumption spending would fall by less than $3.5 trillion, but still a significant amount, with estimates ranging from around $200 billion to $350 billion. Choice C - $350 billion - is the best choice.

Question 3

Planned aggregate expenditure (PAE)equals: A)C + I^p + G + NX. B)C^p + I + G + NX. C)C + I + G^p + NX. D)C + I + G + NX^p.

Accepted Answer

The answer of Planned aggregate expenditure (PAE)equals: A)C + I^p +...

Question 4

The consumption function is relationship between consumption and:
A)planned aggregate expenditure.
B)total spending.
C)investment.
D)its determinants,such as disposable income.

Accepted Answer

The consumption function shows the relationship between consumption and its determinants, such as disposable income, wealth, and expectations about the future. Planned aggregate expenditure, total spending, and investment may influence consumption, but they are not the primary determinant. Therefore, option D is the best choice.

Question 5

If consumption increases by $9 when after-tax disposable income increases by $10,the marginal propensity to consume (mpc)equals:
A)0.1.
B)0.9.
C)1.0.
D)9.0.

Accepted Answer

The formula to calculate MPC is:
MPC = change in consumption / change in income
From the information given in the question, when after-tax disposable income increases by $10, consumption increases by $9. Therefore, the change in consumption is 9 and the change in income is 10. 
MPC = 9/10 = 0.9
Therefore, the answer is B.

Question 6

The tendency of changes in asset prices to affect spending on consumption goods is called the ______ effect.
A)income
B)substitution
C)wealth
D)multiplier

Accepted Answer

The wealth effect refers to the tendency of changes in asset prices (such as stocks, housing, and other investments) to affect consumer spending. When the value of assets increases, consumers may feel wealthier and thus more willing to spend on consumption goods. On the other hand, if asset values decrease, consumers may feel poorer and reduce their spending. The income effect refers to the impact of changes in income on consumer spending, while the substitution effect refers to consumers switching to cheaper goods when prices increase. The multiplier effect refers to the impact of initial changes in spending on subsequent rounds of spending in the economy.

Question 7

C + I^p + G + NX equals: A)planned aggregate expenditure. B)potential GDP. C)the output gap. D)the income-expenditure multiplier.

Accepted Answer

C + I^p + G + NX represents the components of GDP (consumption, investment, government spending, and net exports), which together make up planned aggregate expenditure.

Question 8

The two parts of the Keynesian consumption function are consumption that depends on ______ and consumption that depends on _____.
A)disposable income;factors other than disposable income
B)planned spending;unplanned spending
C)real income;nominal income
D)money;wealth

Accepted Answer

The two parts of the Keynesian consumption function are consumption that depends on disposable income (which is the income remaining after taxes) and consumption that depends on factors other than disposable income such as wealth, expectations, and credit availability. Therefore, option A is the correct answer as it correctly identifies the two components of the Keynesian consumption function.

Question 9

In the Keynesian model,consumption depends on:
A)whether the government has a budget surplus or deficit.
B)potential output.
C)the natural rate of unemployment.
D)disposable income.

Accepted Answer

According to the Keynesian model, consumption is driven by disposable income, which is the income that households have available after paying taxes. The higher the disposable income, the higher the consumption, and vice versa. Factors such as government budget, potential output, and natural rate of unemployment have an indirect impact on consumption through their influence on the overall economy.

Question 10

The largest component of planned aggregate expenditure is:
A)consumption.
B)investment.
C)government purchases.
D)exports.

Accepted Answer

Consumption is typically the largest component of planned aggregate expenditure in most countries. This is because consumer spending makes up a significant portion of the economy, and tends to be more stable than other components like investment, which can be more cyclical and subject to fluctuations based on market conditions.

Question 11

The marginal propensity to consume (mpc)is the:
A)amount by which disposable income increases when consumption increases by $1.
B)amount by which consumption increases when disposable income increases by $1.
C)percentage by which consumption increases when disposable income increases by 1%.
D)percentage by which disposable income increases when consumption increases by 1%.

Accepted Answer

The marginal propensity to consume (mpc) measures the increase in consumption that results from a given increase in income. Therefore, it is the amount by which consumption increases when disposable income increases by $1.

Question 12

If the marginal propensity to consume equals 0.75,then a $100 increase in after-tax disposable income leads to a ______ increase in consumption.
A)$13.33
B)$25
C)$75
D)$133

Accepted Answer

The marginal propensity to consume (MPC) refers to the fraction of each additional dollar of income that is spent on consumption. In this case, an MPC of 0.75 means that for every additional dollar of income, 75 cents will be spent on consumption. Therefore, a $100 increase in after-tax disposable income will lead to a 0.75 x $100 = $75 increase in consumption. So, the correct answer is option C.

Question 13

Historically speaking,a one dollar decrease in household wealth will cause consumer spending to fall by:
A)$0.03 to $0.07.
B)$0.30 to $0.70.
C)$3.00 to $7.00.
D)$30.00 to $70.00.

Accepted Answer

Historically, the wealth effect has been a fall of three to seven percent, or $0.03 to $0.07 for every one-dollar decrease in household wealth.

Question 14

The slope of the consumption function:
A)is vertical.
B)is horizontal.
C)equals 1.
D)equals the mpc.

Accepted Answer

The slope of the consumption function is equal to the marginal propensity to consume (mpc), which measures the change in consumption for a given change in income. Therefore, the correct choice is D - "equals the mpc".

Question 15

When housing prices decrease,household wealth _____,and consumption _____.
A)increases;increases
B)increases;decreases
C)decreases;decreases
D)decreases;increases

Accepted Answer

When housing prices decrease, household wealth decreases because the value of people's homes, which is often their largest asset, decreases. As a result, people tend to spend less on consumption because they have less wealth to draw on. This is known as the wealth effect, where changes in household wealth impact consumption and overall economic activity.

Question 16

Changes in autonomous consumption could be the result of:
A)changes in disposable income.
B)changes in inflation.
C)changes in the mpc.
D)changes in housing prices.

Accepted Answer

Changes in autonomous consumption shift the consumption function up or down. These shifts are typically caused by changes in wealth and much household wealth is held in housing.

Question 17

As disposable income increases,consumption:
A)increases.
B)decreases.
C)may either increase or decrease depending on the wealth effect.
D)may either increase or decrease depending on the mpc.

Accepted Answer

Disposable income refers to the income left after deducting taxes and other mandatory expenses. As disposable income increases, the consumer has more money to spend on goods and services. This leads to an increase in consumption as they are able to afford more goods and services. Therefore, option A is the correct answer.

Question 18

The vertical intercept of the consumption function equals ______ and the slope equals _____.
A)the mpc;autonomous consumption
B)autonomous consumption;the mpc
C)the unplanned component of consumption;the planned component of consumption
D)the planned component of consumption;the unplanned component of consumption

Accepted Answer

The vertical intercept of the consumption function represents autonomous consumption, which is the level of consumption that would still occur if income were zero. The slope of the consumption function represents the marginal propensity to consume (MPC), which is the fraction of additional income that is spent on consumption. Therefore, the correct option is B, where the vertical intercept represents autonomous consumption and the slope represents the MPC.

Question 19

A decrease in stock prices alters the consumption function by:
A)increasing the mpc.
B)decreasing the mpc.
C)increasing the constant term.
D)decreasing the constant term.

Accepted Answer

A decrease in stock prices can lead to a decrease in consumer wealth, which can result in a decrease in consumption. This would be reflected in the constant term of the consumption function, which represents the level of consumption that would occur even in the absence of income. Therefore, decreasing the constant term would make the consumption function represent a decrease in overall consumption levels due to the decrease in stock prices.

Question 20

Data on after-tax income and consumption spending for the Adam Smith family are given below: $\begin{array}{cc}
\underline { \text { After-tax Income }} & \underline { \text { Consumption Spending }} \
\$ 9,000 & \$ 18,100 \
\$ 14,000 & \$ 22,600 \
\$ 19,000 & \$ 27,100 \
\$ 24,000 & \$ 31,600
\end{array}$
Based on these data,the Adam Smith family has a marginal propensity to consume of:
A)0.9.
B)0.8.
C)0.75.
D)0.6.

Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption spending divided by the change in after-tax income. In this case, the MPC is calculated as follows:MPC = (Change in consumption spending) / (Change in after-tax income)= (22,600 - 18,100) / (14,000 - 9,000)= 4,500 / 5,000= 0.9Therefore, the Adam Smith family has a marginal propensity to consume of 0.9.

Quiz 22: Spending, Output, and Fiscal Policy

As disposable income decreases,consumption:

Suppose the stock market crashed,wiping out $5 trillion of household wealth.Consistent with economic models based on historical trends,consumption spending might fall by as much as,but probably not more than,______.

Planned aggregate expenditure (PAE) equals:

The consumption function is relationship between consumption and:

If consumption increases by $9 when after-tax disposable income increases by $10,the marginal propensity to consume (mpc) equals:

The tendency of changes in asset prices to affect spending on consumption goods is called the ______ effect.

C + I^p + G + NX equals:

The two parts of the Keynesian consumption function are consumption that depends on __ and consumption that depends on _.

In the Keynesian model,consumption depends on:

The largest component of planned aggregate expenditure is:

The marginal propensity to consume (mpc) is the:

If the marginal propensity to consume equals 0.75,then a $100 increase in after-tax disposable income leads to a ______ increase in consumption.

Historically speaking,a one dollar decrease in household wealth will cause consumer spending to fall by:

The slope of the consumption function:

When housing prices decrease,household wealth _,and consumption _.

Changes in autonomous consumption could be the result of:

As disposable income increases,consumption:

The vertical intercept of the consumption function equals __ and the slope equals _.

A decrease in stock prices alters the consumption function by: