Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

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. 
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. C

Question 3

Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $3.5 billion. The marginal propensity to spend in this economy is 0.6. What is the eventual total new expenditure in this economy due to the increase in investment?

Accepted Answer

A)  $2.1 billion. 
B)  $5.8 billion. 
C)  $3.5 billion. 
D)  $7.0 billion. 
E)  $8.75 billion. 
A)  $2.1 billion. 
B)  $5.8 billion. 
C)  $3.5 billion. 
D)  $7.0 billion. 
E)  $8.75 billion. E

Question 4

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

Accepted Answer

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. 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 5

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

Accepted Answer

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. 
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 6

FIGURE 21-3FIGURE 21-3
-Refer to Figure 21-3. All points along the 45-degree line represent

Accepted Answer

A)  combinations of desired aggregate expenditure and actual national income where consumption expenditure equals saving. 
B)  the equilibrium condition that desired aggregate expenditure equals actual national income. 
C)  levels of actual national income where desired AE is equal to the sum of desired consumption and desired investment. 
D)  levels of actual national income that occur when autonomous expenditure is increasing at a constant linear) rate. 
E)  levels of actual national income where desired saving is equal to zero. 
A)  combinations of desired aggregate expenditure and actual national income where consumption expenditure equals saving. 
B)  the equilibrium condition that desired aggregate expenditure equals actual national income. 
C)  levels of actual national income where desired AE is equal to the sum of desired consumption and desired investment. 
D)  levels of actual national income that occur when autonomous expenditure is increasing at a constant linear) rate. 
E)  levels of actual national income where desired saving is equal to zero.

Question 7

Total desired saving divided by total income is called the

Accepted Answer

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. 
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 8

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

Accepted Answer

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 
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 9

Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $30 million. The marginal propensity to spend in this economy is 0.9. What is the eventual total new expenditure in this economy due to the increase in investment?

Accepted Answer

A)  $3 million 
B)  $30 million 
C)  $27 million 
D)  $270 million 
E)  $300 million 
A)  $3 million 
B)  $30 million 
C)  $27 million 
D)  $270 million 
E)  $300 million

Question 10

Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be

Accepted Answer

A)  1/3. 
B)  1/2. 
C)  2/3. 
D)  4/5. 
E)  3. 
A)  1/3. 
B)  1/2. 
C)  2/3. 
D)  4/5. 
E)  3.

Question 11

Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to

Accepted Answer

A)  -0.6. 
B)  0.4. 
C)  0.6. 
D)  2.5. 
E)  -2.5. 
A)  -0.6. 
B)  0.4. 
C)  0.6. 
D)  2.5. 
E)  -2.5.

Question 12

If national income is demand-determined, the condition for national income to be in equilibrium can be stated as

Accepted Answer

A)  unemployment must equal the natural unemployment rate. 
B)  AE must be greater than Y. 
C)  desired saving equals actual investment. 
D)  actual saving equals actual investment. 
E)  desired aggregate expenditure equals the actual level of national income. 
A)  unemployment must equal the natural unemployment rate. 
B)  AE must be greater than Y. 
C)  desired saving equals actual investment. 
D)  actual saving equals actual investment. 
E)  desired aggregate expenditure equals the actual level of national income.

Question 13

Consider the following information describing an economy with demand -determined output. There is no government or foreign trade. All dollar figures are in billions.
1. equilibrium condition is Y = C + I
2. marginal propensity to save = 0.20
3. the autonomous part of C is $50
4. investment is autonomous and equals $25
TABLE 21-5
-Refer to Table 21-5. The equilibrium level of national income is

Accepted Answer

A)  $375. 
B)  $249. 
C)  $155. 
D)  $75. 
E)  $93.75. 
A)  $375. 
B)  $249. 
C)  $155. 
D)  $75. 
E)  $93.75.

Question 14

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

Accepted Answer

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. 
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 15

Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant.
1. Y = C + I
2. C = 100 + 0.6Y
3. I = 200
TABLE 21-6
-Refer to Table 21-6. This economyʹs equilibrium level of national income is

Accepted Answer

A)  500. 
B)  600. 
C)  750. 
D)  1000. 
E)  1500. 
A)  500. 
B)  600. 
C)  750. 
D)  1000. 
E)  1500.

Question 16

Suppose aggregate output is demand-determined. The simple multiplier will increase as a result of

Accepted Answer

A)  an increase in the marginal propensity to consume. 
B)  a decrease in the marginal propensity to consume. 
C)  a decrease in autonomous consumption. 
D)  an increase in autonomous consumption. 
E)  an increase in investment. 
A)  an increase in the marginal propensity to consume. 
B)  a decrease in the marginal propensity to consume. 
C)  a decrease in autonomous consumption. 
D)  an increase in autonomous consumption. 
E)  an increase in investment.

Question 17

In a simple macro model with the price level assumed to be constant, a change in firmsʹ level of desired investment is predicted to influence equilibrium national income by

Accepted Answer

A)  shifting the saving function. 
B)  shifting the consumption function. 
C)  shifting the aggregate expenditure function. 
D)  causing movement along the investment function. 
E)  shifting the 45-degree line. 
A)  shifting the saving function. 
B)  shifting the consumption function. 
C)  shifting the aggregate expenditure function. 
D)  causing movement along the investment function. 
E)  shifting the 45-degree line.

Question 18

Suppose aggregate output is demand-determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will and the marginal propensity to spend must equal .

Accepted Answer

A)  decrease by $40 billion; 0.75 
B)  decrease by $10 billion; 0.25 
C)  increase by $40 billion; 0.25 
D)  increase by $40 billion; 0.75 
E)  increase by $10 billion; 4.0 
A)  decrease by $40 billion; 0.75 
B)  decrease by $10 billion; 0.25 
C)  increase by $40 billion; 0.25 
D)  increase by $40 billion; 0.75 
E)  increase by $10 billion; 4.0

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer

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

Exam 21: The Simplest Short-Run Macro Model

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

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

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

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

FIGURE 21-3FIGURE 21-3 -Refer to Figure 21-3. All points along the 45-degree line represent

Total desired saving divided by total income is called the

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

Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be

Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to

If national income is demand-determined, the condition for national income to be in equilibrium can be stated as

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

Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant. 1. Y = C + I 2. C = 100 + 0.6Y 3. I = 200 TABLE 21-6 -Refer to Table 21-6. This economyʹs equilibrium level of national income is

Suppose aggregate output is demand-determined. The simple multiplier will increase as a result of

In a simple macro model with the price level assumed to be constant, a change in firmsʹ level of desired investment is predicted to influence equilibrium national income by

Suppose aggregate output is demand-determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will and the marginal propensity to spend must equal .

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

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

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