Deck 11: The Income-Expenditure Model

Question 1

An increase in the marginal propensity to import will cause the aggregate expenditure line to:

A) become steeper.
B) shift downwards.
C) become flatter.
D) shift upwards.

Answer 1

become flatter.

Question 2

The multiplier in an open economy will decrease if:

A) the marginal propensity to import increases.
B) the marginal propensity to consume increases.
C) either the marginal propensity to import or the marginal propensity to save decreases.
D) the marginal propensity to import decreases.

Answer 2

the marginal propensity to import increases.

Question 3

An increase in government spending will:

A) shift the aggregate expenditure line upwards and decrease equilibrium output.
B) shift the aggregate expenditure line downwards and decrease equilibrium output.
C) shift the aggregate expenditure line downwards. and increase equilibrium output.
D) shift the aggregate expenditure line upwards and increase equilibrium output.

Answer 3

shift the aggregate expenditure line upwards and increase equilibrium output.

Question 4

Refer to Table 11.3. If aggregate output equals _______, there will be a $50 million unplanned decrease in inventories.

A) $4,000 million
B) $2,000 million
C) $2,500 million
D) $3,500 million

Question 5

When the consumption function is expressed as C = Ca + b (1- t)y, income taxes act as an automatic stabilizer because:

A) when the economy experiences a large increase in GDP, the government's tax collection increases without the approval from Congress, increasing disposable income and consumption.
B) when the economy experiences a large increase in GDP, the government's tax collection decreases without government action, decreasing disposable income and consumption.
C) when the economy experiences a large increase in GDP, the government's tax collection increases without government action, decreasing disposable income and consumption.
D) when the economy experiences a large increase in GDP, the government's tax collection increases without government action, increasing disposable income and consumption.

Question 6

Suppose the economy is in equilibrium. Now, suppose there is an increase in investment. As the economy adjusts to this increase in investment, we know that:

A) the multiplier will increase.
B) consumption will fall.
C) saving will fall.
D) none of the above

Question 7

The fraction of additional income that is saved is called:

A) the marginal propensity of income.
B) the marginal propensity to consume.
C) the marginal propensity to save.
D) average consumption.

Question 8

Refer to Table 11.1. The equation for the aggregate consumption function is:

A) C = 80 + 0.65Y.
B) C = 80 + 0.85Y.
C) C = 80 + 0.75Y.
D) C = - 80 + 0.45Y.

Question 9

Assume that C = 150 + 0.9Y and I = 50. The balanced budget multiplier is:

A) 1.
B) 10.
C) - 9.
D) - 10.

Question 10

We define equilibrium as the point where:

A) planned spending equals depreciation.
B) planned spending equals output.
C) planned spending equals C+ I + G.
D) investment equals depreciation.

Question 11

The government spending multiplier is positive because _______ in government spending cause _______ in GDP.

A) decreases; increases
B) increases; decreases
C) increases; no change
D) decreases; decreases

Question 12

The tax multiplier is negative because an increase in taxes _______ disposable income, which then _______consumption and GDP.

A) increases; decreases
B) decreases; decreases
C) decreases; increases
D) increases; increases

Question 13

The Jackson Tool Company manufactures only tools. In 2010, Jackson Tools manufactured 20,000 tools, but sold 22,000 tools. In 2010, Jackson Tools' change in inventory was:

A) - 10,000 tools.
B) 18,000 tools.
C) - 2,000 tools.
D) 2,000 tools.

Question 14

If an economy's marginal propensity to consume is 0.9 and the marginal propensity to import is 0.1, then an increase in government spending of $2,000 will increase income by:

A) $20,000.
B) $4,000.
C) $10,000.
D) $2,222.

Question 15

With the equation M=my, where M is the level of imports and y is real GDP, "m":

A) is assumed as a constant.
B) increases when y increases.
C) increases when y decreases.
D) is assumed to be greater than unity.

Question 16

An increase in the marginal propensity to save will

A) cause the consumption function to be flatter.
B) cause the consumption function to be steeper.
C) shift the consumption function downwards.
D) shift the consumption function upwards.

Question 17

If Jack received a $1,000 bonus and his marginal propensity to save is 0.15, his consumption rises by _______ and his saving rises by _______ .

A) $1,000; $150
B) $150; $500
C) $850; $150
D) $150; $850

Question 18

If imports are expressed as M = my where M is the level of imports and y is the level of GDP, then the government spending multiplier equals:

A) b/(b- m).
B) m/(1- (b- m).
C) 1/(1- m).
D) 1/(1- (b- m).

Question 19

If the marginal propensity to consume is 0.8 and marginal propensity to import is 0.3, then the multiplier in an open economy is:

A) .9.
B) 2.
C) 5.
D) 3.3.

Question 20

Which of the following statements is true?

A) In an open economy, the smaller a nation's marginal propensity to import, the smaller the multiplier.
B) In an open economy, the larger a nation's marginal propensity to consume, the smaller the multiplier.
C) In an open economy, the larger a nation's marginal propensity to export, the smaller the multiplier.
D) In an open economy, the larger a nation's marginal propensity to import, the smaller the multiplier.

Question 21

The multiplier for government spending can be calculated using which formula?

A) (1- MPC)/MPC
B) 1/(1- MPC)
C) - MPC/(1- MPC)
D) 1/MPC

Question 22

Refer to Table 11.2. If aggregate output equals _______, there will be a $100 unplanned decrease in inventories.

A) $200
B) $400
C) $600
D) $800

Question 23

Figure 11.1
Refer to Figure 11.1. If the expenditures in the economy correspond to C + I, which of the following points correspond to an equilibrium?

A) a
B) b
C) c
D) a and d

Question 24

Refer to Table 11.3. At an aggregate output level of $4,000 million, the unplanned inventory change is:

A) 0.
B) $200 million.
C) - $200 million.
D) - $20 million.

Question 25

In a graph with output on the x- axis and expenditures on the y- axis, a 45- degree line starting from the origin represents the locus of:

A) negative inventory changes.
B) autonomous consumption levels.
C) equilibrium output levels.
D) positive inventory changes.

Question 26

The marginal propensity to consume is:

A) consumption divided by income.
B) the change in saving divided by the change in income.
C) the change in consumption divided by the change in saving.
D) the change in consumption divided by the change in income.

Question 27

The ratio of changes in the equilibrium level of output to a change in autonomous spending is the:

A) elasticity coefficient.
B) multiplier.
C) marginal propensity of the autonomous variable.
D) automatic stabilizer.

Question 28

The slope of the consumption function equals _______ while the slope of the 45 degree line equals _______.

A) one; zero
B) the MPC; zero
C) the MPC; one.
D) MPS; MPC

Question 29

Assuming there is no government or foreign sector, if the multiplier is 2.5, the marginal propensity to consume must be:

A) 0.6.
B) 0.8.
C) 0.25.
D) 2.5.

Question 30

Figure 11.4
Refer to Figure 11.4. Between expenditure lines C+I+G₀ and C+I+G₁, government purchases increased by:

A) $400.
B) $600.
C) $1400.
D) $200.

Question 31

If C = 100 + 0.6Y and I = 50, then the equilibrium level of income is:

A) 525.
B) 390.
C) 375.
D) 450.

Question 32

Refer to Table 11.5. If both G and T decrease by 100, equilibrium output will:

A) decrease by 200.
B) decrease by 100.
C) increase by 100.
D) stay the same.

Question 33

An increase in the price level will cause a:

A) shift in the aggregate demand curve downwards.
B) shift in the aggregate demand curve upwards.
C) movement along the aggregate demand curve upwards.
D) movement along the aggregate demand curve downwards.

Question 34

Refer to Table 11.3 At an aggregate output level of $2,000 million, what will change in order to bring the economy to equilibrium?

A) Consumption must decrease.
B) Output must increase.
C) Investment must decrease.
D) Inventories must increase.

Question 35

Figure 11.4
Refer to Figure 11.4. On Both expenditure lines C+I+G₀ and C+I+G₁, the mpc is:

A) 1/2.
B) 1/3.
C) 3/2.
D) 2/3.

Question 36

If the consumption function is C = 100 + 0.9Y, then the multiplier is:

A) 10.
B) 9.
C) 0.9.
D) 1/9.

Question 37

If an economy's marginal propensity to consume is 0.6 and the marginal propensity to import is 0.1, then an increase in government spending of $1,000 will increase income by:

A) $2,000.
B) $1,250.
C) $2,500.
D) $1,667.

Question 38

An increase in the marginal propensity to consume will tend to cause:

A) the demand line to become flatter and a given change in investment to have a smaller effect on output.
B) the demand line to become steeper and a given change in investment to have a greater effect on output.
C) the demand line to become steeper and a given change in investment to have a smaller effect on output.
D) none of the above

Question 39

When the consumption function is expressed as C = 200 + .75(1- t)y where t =0.2, then the adjusted MPC is

A) 0.75.
B) 0.15.
C) 0.6.
D) 0.8.

Question 40

When the consumption function is expressed as C = Ca + b (y- T), taxes are collected by the government as:

A) a constant proportion of income y.
B) a decreasing proportion of income y.
C) an increasing proportion of income y.
D) a lumpsum, and independent of y.

Question 41

If the consumption function is C = 100 + 0.8Y, then the Savings Function is

A) S = 100 + 0.8 Y.
B) S = - 100 + 0.8Y.
C) S = - 100 + 0.2Y.
D) S = 100 + 0.2Y.

Question 42

Refer to Table 11.2. At an aggregate output level of $200, what will change in order to bring the economy to equilibrium?

A) Inventories must increase.
B) Investment must decrease.
C) Consumption must decrease.
D) Output must increase.

Question 43

An unexpected increase in inventories has:

A) no effect on future production.
B) a negative effect on future production.
C) a positive effect on future production.
D) a negative effect on current production.

Question 44

If after adding investment (I) to the consumption (C) function, we find that the C+I line is parallel to the consumption function, then:

A) investment exceeds consumption.
B) investment is a constant.
C) investment equals consumption.
D) investment is less than consumption.

Question 45

Refer to Table 11.1. The marginal propensity to consume is:

A) 0.65.
B) 0.75.
C) 0.85.
D) 0.45.

Question 46

Assume that C = 150 + 0.9Y and I = 50. The tax multiplier is:

A) 10.
B) - 10.
C) - 9.
D) 0.9.

Question 47

If autonomous consumption increases, the size of the multiplier would:

A) decrease.
B) remain constant.
C) increase.
D) either increase or decrease depending on the size of the change in autonomous consumption.

Question 48

If the marginal propensity to consume is 0.9, the tax multiplier is:

A) - 10.
B) - 1.10.
C) 10.
D) - 9.

Question 49

Assume that the consumption function is C = 200 + 0.8Y. When Y equals $200, then C equals _______.

A) $160
B) $200
C) $360
D) $400

Question 50

An increase in government spending will result in a:

A) movement along the aggregate demand curve upwards.
B) movement along the aggregate demand curve downwards.
C) shift the aggregate expenditure line downwards.
D) shift the aggregate expenditure line upwards.

Question 51

Refer to Table 11.2. The equilibrium level of aggregate output equals:

A) $400.
B) $600.
C) $800.
D) $1,000.

Question 52

If a economy's planned expenditures turn out to be less than production, then inventories will be:

A) increasing, prompting firms to decrease production in the future.
B) decreasing, prompting firms to decrease production in the future.
C) decreasing, prompting firms to increase production in the future.
D) increasing, prompting firms to increase production in the future.

Question 53

If the marginal propensity to consume is 0.8 and marginal propensity to import is 0.3, then an increase in exports by 100 will cause equilibrium GDP to increase by

A) 200.
B) 500.
C) 90.
D) 330.

Question 54

A decrease in the price level will:

A) decrease consumption and increase output demand.
B) decrease consumption and decrease output demanded.
C) increase consumption and decrease output demanded.
D) increase consumption and increase output demanded.

Question 55

Firms react to unplanned inventory reductions by:

A) reducing output.
B) reducing planned investment.
C) increasing consumption.
D) increasing output.

Question 56

If both government spending and taxes increase by an equal amount at the same time, GDP will:

A) decrease.
B) remain the same.
C) increase.
D) none of the above are true, it is impossible to say.

Question 57

Assume that the consumption function is C = 200 + 0.8Y. The marginal propensity to save is:

A) 0.75.
B) 0.25.
C) 0.8.
D) 0.2.

Question 58

The Tiny Tots Toy Company manufactures only sleds. In 2010, Tiny Tots manufactured 11,000 sleds, but sold only 8,000 sleds. In 2010, Tiny Tots' change in inventory was:

A) 1,000 sleds.
B) 3,000 sleds.
C) - 3,000 sleds.
D) 8,000 sleds.

Question 59

The marginal propensity to import is the fraction of additional:

A) imports that is earned as income.
B) consumption that is imported.
C) imports that is consumed.
D) income that is spent on imports.

Question 60

Recall Application 4, "The Locomotive Effect: Why Do Foreign Demand Affects a Country's Output," to answer the
following questions:
According to the application, economic growth in the US will

A) increase other countries' exports.
B) decrease other countries' imports.
C) have no effect on other countries' exports or imports.
D) increase other countries' imports

Question 61

When the consumption function is expressed as C = 200 + .75(1- t)y where t =0.2, then an increase in income y by 100 will result in an increase in tax collection by:

A) 20.
B) 15.
C) 80.
D) 75.

Question 62

Assume there is no government or foreign sector. If the marginal propensity to save is 0.1, a $20 billion decrease in investment will cause equilibrium output to decrease by:

A) $20 billion.
B) $2 billion.
C) $1 billion.
D) $200 billion.

Question 63

Firms react to unplanned increases in inventories by:

A) increasing output.
B) reducing output.
C) increasing planned investment.
D) increasing consumption.

Question 64

Nobel laureate Franco Modigliani found that increases in wealth cause:

A) increases in the marginal propensity to consume.
B) decreases in the marginal propensity to consume.
C) increases in autonomous consumption.
D) decreases in autonomous consumption.

Question 65

Refer to Table 11.2. At an aggregate output level of $600, the unplanned inventory change is:

A) - $100.
B) - $50.
C) $0.
D) $50.

Question 66

A decrease in the government spending will cause a:

A) shift in the aggregate demand curve upward and to the right.
B) shift in the aggregate demand curve downward and to the left.
C) movement along the aggregate demand curve upwards.
D) movement along the aggregate demand curve downwards.

Question 67

Suppose that in the United States people begin to spend a smaller fraction of their income on imports. This would cause the multiplier to:

A) decrease.
B) increase.
C) remain unchanged.
D) either increase or decrease depending on the value of the MPC.

Question 68

An increase in the government expenditures will:

A) shift the aggregate expenditures line upwards and shift the aggregate demand curve to the right.
B) shift the aggregate expenditures line downwards and shift the aggregate demand curve to the left.
C) shift the aggregate expenditures line upwards and shift the aggregate demand curve to the left.
D) shift the aggregate expenditures line downwards and shift the aggregate demand curve to the right.

Question 69

If the government collects taxes using a constant income tax rate t, then the adjusted marginal propensity to consume (adjusted MPC) is:

A) t ( 1 - b).
B) b ( 1 - t ).
C) 1 (1- bt).
D) bt - t.

Question 70

With the equation M=my, where M is the level of imports and y is real GDP, "m" is the

A) marginal propensity to import.
B) marginal propensity to export.
C) net exports.
D) marginal propensity to consume.

Question 71

A $100 million increase in government spending causes:

A) a larger change in equilibrium output in a closed economy than in an open economy.
B) an equal amount of change in equilibrium output in an open and a closed economy.
C) a larger change in equilibrium output in a closed economy than in an open economy if the marginal propensity to import is zero.
D) a larger change in equilibrium output in an open economy than in a closed economy.

Question 72

Recall Application 1, "Falling Home Prices, the Wealth Effect, and Decreased Consumer Spending," to answer the following questions:
According to the application, from 1997- 2006, the nationwide increase in home values generated approximately _______ in consumer wealth.

A) a $1.5 trillion increase
B) a $6.5 trillion increase
C) a $26.5 trillion increase
D) a $9.5 trillion increase

Question 73

Assume that the consumption function is C = 200 + 0.8Y. The value of the point at which the consumption function intersects the C axis is:

A) 200.
B) 300.
C) 400.
D) 500.

Question 74

An increase in the price level will result in a:

A) shift the aggregate expenditure line upwards.
B) movement along the the aggregate demand curve downwards.
C) shift the aggregate expenditure line downwards.
D) movement along the the aggregate demand curve upwards.

Question 75

Recall Application 3, "John Maynard Keynes: A World Intellectual," to answer the following questions:
According to the application, Keynes argued in his book The General Theory of Employment, Interest and Money that

A) economies would be able to automatically recover from economic downturns.
B) economies would be able to automatically recover from economic booms.
C) economies would not be able to automatically recover from economic booms.
D) economies would not be able to automatically recover from economic downturns.

Question 76

Recall Application 2, "Using Long-Term Macro Data to Measure Multipliers," to answer the following questions:
According to the application, the multiplier for defense spending during wars was:

A) greater than one.
B) less than zero.
C) greater than 5.
D) less than one.

Question 77

If the tax multiplier is - 6 and taxes are reduced by $100 billion, output:

A) falls by $100 billion.
B) increases by $100 billion.
C) increases by $600 billion.
D) falls by $600 billion.

Question 78

Refer to Table 11.5. If both G and T increase by 100, equilibrium output will:

A) stay the same.
B) increase by 100.
C) decrease by 100.
D) increase by 200.

Question 79

If the marginal propensity to consume is 0.75 and marginal propensity to import is 0.15, then the multiplier in an open economy is:

A) 4.
B) 10.
C) 8.3.
D) 2.5.

Question 80

Recall Application 2, "Using Long-Term Macro Data to Measure Multipliers," to answer the following questions:
According to the application, the best time to measure the country's spending multipliers is:

A) during the buildups and the aftermaths of major wars.
B) before and after a presidential election.
C) during and after a stock market crash.
D) before and after the crash of the housing bubble.