Deck 7: The Spending Allocation Model

Question 1

Which of the following statements is the most accurate about the spending allocation model?

A) Interest rates influence spending.
B) Spending influences interest rates.
C) There is no relationship between interest rates and spending.
D) Interest rates both influence and are influenced by spending.
E) The relationship between spending and interest rates is too uncertain to be modeled.

Answer 1

Interest rates both influence and are influenced by spending.

Question 2

In 2010, the investment share of GDP was about

A) 27 percent.
B) 12 percent.
C) 7 percent.
D) 10 percent.
E) 33 percent.

Answer 2

12 percent.

Question 3

Between 2000 and 2010, the government purchases share of the GDP of the United States increased from about 17.5 to 20.5 percent, while the investment share decreased from 17.7 to 12.4 percent.

Answer 3

True

Question 4

The spending allocation model determines how consumers allocate their income between consumption and saving.

Question 5

Net exports for the United States have been negative in the past 25 years, with an increasingly larger difference between imports and exports.

Question 6

Since the late 1980s, the government purchases share has gone up, and the investment and consumption shares have gone down.

Question 7

Which of the four spending shares is the largest?

A) Consumption
B) Net exports
C) Government purchases
D) It varies from year to year.
E) Investment

Question 8

The spending allocation model applies more to the long run than to the short run.

Question 9

In a speech before the National Press Club in February of 2011, Federal Reserve Chairman Ben Bernanke expressed concern about which of the following U.S. economic trends?

A) That exports had grown too large compared to imports.
B) That inflation was getting dangerously large.
C) About the long-run path of the budget deficits.
D) About the long-run path of the value of the U.S. dollar.

Question 10

Which of the following statements is true?

A) Recently, the government purchases share of GDP has been close to 50 percent.
B) The net export share of GDP can be positive or negative.
C) Since World War II, the consumption and investment shares of GDP have moved erratically.
D) Recently, the investment share of GDP has been close to 50 percent.
E) All four spending shares must be positive and must add up to one.

Question 11

Which of the following is the correct ordering if we want to rank the four spending shares of U.S. GDP in 2010 in descending (from highest to lowest) order?

A) Consumption, government purchases, investment, net exports
B) Consumption, investment, government purchases, net exports
C) Government purchases, consumption, investment, net exports
D) Consumption, government purchases, net exports, investment
E) Consumption, investment, net exports, government purchases

Question 12

If GDP increases, then it is possible for all spending shares to increase simultaneously.

Question 13

The spending allocation model allows economists to determine how GDP is allocated among the major components of spending, which are

A) income, consumption, and savings.
B) consumption, savings, government purchases, and net exports.
C) consumption, investment, government purchases, and net exports.
D) consumption, savings, taxes, and net exports.
E) None of these

Question 14

The net export share has been negative for the last 25 years.

Question 15

The spending allocation model is designed to explain

A) short-run (monthly) movements in the economy.
B) movements in the CPI.
C) movements in the GDP deflator.
D) long-run (a period of years) movements in the economy.
E) why the production possibilities frontier is not a relevant concept in macroeconomics.

Question 16

The investment share of GDP is expressed as

A) I.
B) I*Y
C) I/Y.
D) I + G.
E) Y - I.

Question 17

Which of the following is true?

A) The government purchases share of GDP is currently less than what it was during World War II.
B) The government purchases share of GDP is currently greater than what it was during World War II.
C) The consumption share is currently at the same level it was at during World War II.
D) The net export share of GDP has been positive for the past 25 years.
E) The government purchases share has remained constant over the past 25 years.

Question 18

In 2010, the government share of GDP was about

A) 27 percent.
B) 20 percent.
C) 7 percent.
D) 12 percent.
E) 33 percent.

Question 19

Changes in the government spending share of GDP have no effect on the investment share of GDP.

Question 20

According to the 1994 Economic Report of the President, how would market forces enable a cut in government expenditures to lead to an increase in investment expenditures?

A) Through lower taxes
B) Through increased taxes
C) Through lower interest rates
D) Through government regulation
E) Through increased interest rates

Question 21

The consumption share line is

A) downward-sloping because an increase in the real interest rate will increase current consumption.
B) downward-sloping because a decrease in the real interest rate will raise the price of consuming today rather than tomorrow.
C) downward-sloping because a decrease in the real interest rate will reduce the price of consuming today rather than tomorrow.
D) upward-sloping because an increase in the real interest rate will increase saving and future consumption.
E) upward-sloping because an increase in the real interest rate will increase current consumption.

Question 22

The sum of all spending shares of GDP is always equal to one.

Question 23

All else being equal, if consumption declines as a share of GDP, then

A) people must be saving less.
B) people will consume less in the future.
C) there must have been an increase in GDP.
D) people will consume more in the future.
E) there must have been a decrease in GDP.

Question 24

To understand how the shares of GDP are allocated in a market economy, which of the following factors needs to be understood?

A) The rate of growth of potential GDP
B) The rate of growth of aggregate demand
C) The real rate of interest
D) The rate of growth of the labor force
E) The rate of inflation

Question 25

A higher real interest rate today makes current consumption

A) more expensive relative to future consumption because the return on savings is lowered.
B) more expensive relative to future consumption because the return on savings is increased.
C) less expensive relative to future consumption because the return on savings is increased.
D) less expensive relative to future consumption because the return on savings is lowered.
E) just as expensive as future consumption because the return on saving is uncertain.

Question 26

The real interest rate can never be negative.

Question 27

The real interest rate is the only factor that affects the consumption share of GDP.

Question 28

As the import share of GDP increases relative to the export share of GDP, the sum of the consumption, investment, and government shares of GDP will decline.

Question 29

The real interest rate is equal to the nominal interest rate

A) minus the rate of expected inflation.
B) plus the rate of expected inflation.
C) minus the unemployment rate.
D) plus the unemployment rate.

Question 30

The real interest rate is equal to the nominal interest rate minus an inflation premium.

Question 31

The real interest rate affects the incentive to save.

Question 32

Explain how it is possible for the sum of government, consumption, and investment expenditure shares of GDP to exceed one.

Question 33

If the government share of GDP increases by a certain percent, the sum of the other shares of GDP will fall by a greater amount.

Question 34

Saving by households can be thought of as

A) investment plus consumption.
B) future consumption.
C) income plus consumption.
D) investment plus future consumption.
E) GDP less investment.

Question 35

The consumption share of GDP must grow for the living standards of the average person to improve.

Question 36

The consumption share is negatively related to the real interest rate because a higher interest rate today

A) makes current consumption more expensive relative to future consumption.
B) lowers the price of current consumption relative to the future.
C) makes future consumption more expensive relative to current consumption.
D) reduces current savings.
E) increases the government share.

Question 37

An increase in taxes will not affect the relationship between consumption and real interest rates.

Question 38

Which of the following best explains what will happen if the government purchases share of GDP falls?

A) The net export share of GDP will fall with it.
B) The consumption share of GDP will fall with it.
C) The investment, consumption, and/or net export share of GDP will rise.
D) The investment share of GDP will fall with it.
E) It is not clear whether any of the other shares will change since we don't know what happens to GDP.

Question 39

An increase in the real interest rate leads to

A) an upward movement along the consumption share line.
B) a rightward shift in the consumption share line.
C) a downward movement along the consumption share line.
D) a leftward shift in the consumption share line.
E) an ambiguous effect on the consumption share line.

Question 40

Which of the following situations best explains a rightward shift in the consumption share line?

A) A decrease in real interest rates
B) A decrease in income taxes
C) A decrease in the consumer confidence index
D) An increase in real interest rates
E) An increase in income taxes

Question 41

If the real interest rate increases and the investment tax credit is abolished, the investment share will increase.

Question 42

A decrease in the United States interest rate relative to the Japanese interest rate will cause the exchange rate, measured in yen per dollar, to ____ as international investors ____ their demand for dollar-denominated assets.

A) rise; increase
B) fall; increase
C) rise; decrease
D) None of these are correct because only the government can change the exchange rate.
E) fall; decrease

Question 43

Which of the following statements is true?

A) A higher exchange rate means cheaper exports and cheaper imports.
B) A higher exchange rate means more expensive exports and more expensive imports.
C) A higher exchange rate means more expensive exports and cheaper imports.
D) A higher exchange rate means cheaper exports and more expensive imports.
E) A higher exchange rate has no effect on the price of exports and imports.

Question 44

The investment share line will become flatter if investment becomes more sensitive to changes in the real interest rate.

Question 45

An increase in optimism about the strength of the economy will

A) cause the investment share line to shift to the left.
B) cause a leftward movement along the investment share line.
C) have no effect on the investment share line.
D) cause the investment share line to shift to the right.
E) cause a rightward movement along the investment share line.

Question 46

If an increase in the mortgage rate causes a decline in new home purchases, the consumption share of GDP will fall.

Question 47

Which of the following events is most likely to cause the investment share line to shift to the right?

A) The release of a government report demonstrating that new computer equipment will lower future business costs
B) A decrease in the investment tax credit
C) A rise in real interest rates
D) An increase in pessimism
E) A decline in interest rates

Question 48

A decrease in real interest rates will cause

A) a rightward shift in the investment share line.
B) a downward movement along the investment share line.
C) a leftward shift in the investment share line.
D) an upward movement along the investment share line.
E) the investment share line to become steeper.

Question 49

Which of the following best describes the relationship between real interest rates and net exports?

A) The relationship is positive.
B) There is no relationship because both imports and exports are unaffected by real interest rates.
C) The relationship is negative.
D) It is not possible to determine the relationship between the two because exports are negatively related to interest rates and imports are positively related to real interest rates.
E) It is not possible to determine the relationship between the two because exports are positively related to real interest rates and imports are negatively related to real interest rates.

Question 50

Consumption is less sensitive than investment to changes in the real interest rate.

Question 51

If the exchange rate between the dollar and the euro is equal to €0.76 per $1.00, then what is the U.S. dollar cost of a German-made Porsche costing €39,000?

A) $29,640
B) $51,316
C) $39,000
D) $297
E) None of these

Question 52

When the real interest rate falls,

A) the investment share will not be affected.
B) people will choose to consume more and investment will fall.
C) businesses are likely to decrease their purchases of new equipment and production facilities.
D) businesses are likely to increase their purchases of new equipment and production facilities.
E) people will choose to consume less and investment will fall.

Question 53

Suppose the exchange rate in the year 2001 was 1 euro per dollar, and in 2010 the exchange rate increased to 2 euros per dollar. If the price of a German sweater was 50 euros in both years, the new dollar price in 2010 would be ____ and imports of German sweaters would ____.

A) $25; increase
B) $25; decrease
C) $100; increase
D) $100; decrease
E) $50; remain constant

Question 54

If the real interest rate increases and businesses expect that new equipment will significantly reduce their production costs in the future, then the investment share could increase, decrease, or stay the same.

Question 55

Ceteris paribus, a rise in U.S. interest rates

A) will cause international investors to decrease their demand for dollar-denominated assets.
B) has no effect on international investors.
C) will cause international investors to increase their demand for dollar-denominated assets
D) will have no effect on dollar-denominated assets but will cause an increase in the demand for yen-denominated assets.
E) will have an uncertain effect on dollar-denominated assets.

Question 56

If a firm expects equipment prices to decline in the future, it will invest more today.

Question 57

Which of the following statements is true?

A) The observed relationship between the investment share of GDP and the real interest rate is negative, as predicted by theory.
B) There is no steady relationship between the investment share of GDP and real interest rates, contrary to what is predicted by theory.
C) The observed relationship between the investment share of GDP and the real interest rate is positive, contrary to what is predicted by theory.
D) The observed relationship between the investment share of GDP and the real interest rate is positive, as predicted by theory.
E) The observed relationship between the investment share of GDP and the real interest rate is negative, contrary to what is predicted by theory.

Question 58

The consumption share line is very sensitive to changes in inflation.

Question 59

The consumption share will increase if there is a decrease in the real interest rate.

Question 60

An increase in the real interest rate will shift the consumption share line to the left because there will be an incentive to save more and consume less.

Question 61

All three nongovernment shares of GDP are negatively related to the interest rate.

Question 62

Explain how interest rates affect investment expenditures.

Question 63

Suppose, for reasons associated with political stability, international investors decide to increase their demand for dollars. Show what will happen to the net export share of GDP.

Question 64

A higher interest rate

A) causes the exchange rate to increase, which causes the share of net exports to rise.
B) causes the exchange rate to fall, which results in a decline in the share of net exports.
C) causes the exchange rate to fall, which causes the share of net exports to rise.
D) causes the exchange rate to increase, which results in a decline in the share of net exports.
E) has an uncertain effect on both exchange rates and the share of net exports.

Question 65

An increase in interest rates will cause the nongovernment share of GDP to decline.

Question 66

Which of the following is the best definition of the exchange rate?

A) The price at which the government translates the currency of another country
B) The price at which imports are traded for imports in the stock exchange
C) The price of one currency in terms of another in the foreign exchange market
D) None of these

Question 67

An increase in the real interest rate

A) causes the nongovernment share of GDP line to shift to the right.
B) causes the nongovernment share of GDP line to shift to the left.
C) causes a downward movement along the nongovernment share line.
D) causes an upward movement along the nongovernment share line.
E) has an indeterminate effect on nongovernment expenditures since some nongovernment expenditures are positively related to the interest rate while others exhibit a negative relationship.

Question 68

The exchange rate can be defined as the price of one currency in terms of another, and it is determined in the foreign exchange market.

Question 69

If the dollar is more expensive, this will reduce U.S. exports.

Question 70

If net exports become less sensitive to changes in the exchange rate, the net export share of GDP will get steeper.

Question 71

If the exchange rate becomes less sensitive to changes in interest rates, the net export share line will get steeper.

Question 72

The nongovernment share of GDP

A) is, for any real interest rate, the sum of the share of net exports, investment, and consumption expenditures.
B) is, for any interest rate, equal to 1 minus the government spending share of GDP.
C) is positively related to the real interest rate.
D) is, for any interest rate, the sum of investment and consumption shares.
E) is negatively related to the real interest rate.

Question 73

If the dollar gets stronger because international investors have more confidence in the U.S. economy, then the share of net exports line will shift to the right.

Question 74

As a result of changes in the tax laws in the late 1980s, interest payments on consumer loans were no longer deductible. How should this change in the tax law affect the consumption expenditure line, assuming everything else held equal?

Question 75

The generation of people who lived through the Great Depression is much more fiscally conservative than the baby boom generation. The baby boomers have tended to spend more freely, amass more debt, and save significantly less than those who lived through the Great Depression.
(A)As those who lived through the Great Depression pass away, they are leaving their accumulated wealth to their baby boom children. What effect will this have on the consumption share line? Please explain.
(B)As the baby boomers continue to spend freely, how might their spending affect consumption expenditures in the future?

Question 76

All else being equal, an increase in the rate of interest

A) causes a downward movement to the right along the nongovernment share line.
B) causes an upward movement to the left along the nongovernment share line.
C) shifts the nongovernment share line to the right.
D) shifts the nongovernment share line to the left.
E) has no effect on the nongovernment share of GDP.

Question 77

T or F. If the dollar appreciates against the Japanese yen (i.e., the exchange rate changes from ¥100 = $1 to ¥120 = $1), then imports from Japan to the United States will increase and American exports to Japan will decrease.

Question 78

The share of GDP available for nongovernment use

A) is, for any interest rate, the sum of the share of investment and consumption expenditures.
B) is the sum of the share of net exports, investment, and consumption expenditures at any given interest rate.
C) is equal to 1 minus the government share of GDP.
D) varies depending on the interest rate.
E) None of these

Question 79

Suppose businesses seriously believe that, within a year, a new generation of computers will be developed that will be more powerful than the current ones but cheaper to run. Assuming everything else held constant, how will the investment share of GDP be affected?

Question 80

If the exchange rate measured as yen per dollar increases, the dollar has become more expensive.