Deck 8: Aggregate Expenditures

Question 1

Spending by federal, state, and local governments has grown from _____ of GDP in the 1930s to more than _____ today.

A) 5%; 50%.
B) 10%; 30%.
C) 30%; 70%
D) 5%; 10%.

Answer 1

B

Question 2

Which of the following equations is correct?

A) AE = C + I + G + (X + M)
B) AE = C + I + G + (X - M)
C) AE = C + I - G + (X - M)
D) AE = C - I + G - (X + M)

Answer 2

B

Question 3

In the following aggregate expenditures graph, to raise income from $4,400 to $4,800, government spending (G) must increase by _____; this corresponds with an MPC of _____.

A) $200; 0.5
B) $200; 0.75
C) $100; 0.4
D) $100; 0.75

Answer 3

D

Question 4

Which of the following marginal propensities to consume results in the flattest consumption line in an aggregate expenditures model?

A) 0.4
B) 0.5
C) 0.8
D) 1.0

Question 5

Generally, which group of people has the highest marginal propensity to consume?

A) the richest 1%
B) wealthy people
C) middle-class people
D) low-income people

Question 6

When consumer confidence falls in an economy, _____ increase in an economy and this amount is _____ by the multiplier.

A) injections; unaffected
B) injections; enhanced
C) withdrawals; unaffected
D) withdrawals; enhanced

Question 7

Which of the following did classical economists believe would happen if the economy experienced a downturn?

A) Prices would rise.
B) Interest rates would rise.
C) The economy would self-correct.
D) The government would fix the inefficiencies.

Question 8

In the Keynesian aggregate expenditure model, prices are assumed to be fixed because:

A) unemployment is low.
B) resources are underutilized.
C) consumption and disposable income are closely related.
D) the government heavily intervenes in the economy.

Question 9

What does the "paradox of thrift" say?

A) People who consume too much will go broke.
B) Businesses that are greedy will make the most profit.
C) An economy that saves too much can end up with lower total savings.
D) People who save too little are harming the economy.

Question 10

If the marginal propensity to save is 0.2 and income rises by $5,000, how much of this $5,000 will be consumed?

A) $625
B) $1,000
C) $4,000
D) $5,000

Question 11

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ exists, and will require a _____ in spending to bring the economy back to full employment.

A) recessionary gap; increase
B) recessionary gap; decrease
C) inflationary gap; increase
D) inflationary gap; decrease

Question 12

What is the main claim of the aggregate expenditures model?

A) The rich get richer and the poor get poorer.
B) Spending will generate income, which allows for more spending.
C) Lower taxes for businesses will "trickle-down" to consumers.
D) Spending is harmful while saving is helpful to an economy.

Question 13

If MPC = 0.6, what is the spending multiplier?

A) 6
B) 4
C) 2.5
D) 1.66

Question 14

What does the 45-degree line in the Aggregate Expenditures model represent?

A) all saving and no consumption
B) all consumption and no saving
C) no consumption and no saving
D) maximum consumption and maximum saving

Question 15

How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected?

A) An increase in government spending has a greater spending multiplier than an equivalent tax decrease.
B) An increase in government spending has a smaller spending multiplier than an equivalent tax decrease.
C) An increase in government spending has the same spending multiplier as an equivalent tax decrease.
D) Neither an increase in government spending nor a decrease in taxes generates any multiplier at all.

Question 16

What are the components of aggregate expenditures?

A) C + I
B) C + I + G
C) C + I + G + (X + M)
D) C + I + G + (X - M)

Question 17

In the Keynesian aggregate expenditure model, which variable is assumed to be fixed?

A) GDP
B) consumption
C) unemployment
D) the price level

Question 18

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?

A) Income will not change.
B) Income will increase by $8,000.
C) Income will increase by $10,000.
D) Income will increase by $50,000.

Question 19

If you spend $100 and the MPC is 0.9, how much spending will this $100 generate in the economy?

A) $1,000
B) $500
C) $250
D) $100

Question 20

Which of the following are considered withdrawals from an economy?

A) imports; taxes; investment
B) imports; taxes; savings
C) exports; government spending; investment
D) exports; government spending; savings

Question 21

(Table: Consumption and Savings) Based on the table, the marginal propensity to consume is _____ and the average propensity to consume _____. $$\begin{array} { l c r } \text { Income } & \text { Consumption Spending } & \text { Saving } \\\$ 30,000 & \$ 30,000 & \$ 0 \\40,000 & 35,000 & 5,000 \\50,000 & 40,000 & 10,000\end{array}$$

A) 0.5; varies with the level of income
B) $5,000; is $5,000
C) $10,000; is $35,000
D) 2; varies with the level of income

Question 22

Aggregate expenditures are equal to:

A) the total of consumption plus investment plus government expenditures plus exports minus imports.
B) the total of consumption plus investment plus government expenditures.
C) the total of consumption plus investment plus government expenditures plus imports minus exports.
D) consumption alone in a simplified Keynesian model.

Question 23

If income is $50,000, consumption is $47,500, and saving is $2,500, then the average propensity to consume is:

A) 0.95.
B) 0.50.
C) 0.05.
D) There is not enough information to answer this question.

Question 24

If income is $50,000, consumption is $47,500, and saving is $2,500, then the marginal propensity to consume is:

A) 0.95.
B) 0.50.
C) 0.05.
D) There is not enough information to answer this question.

Question 25

If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume?

A) 0.4
B) 0.6
C) 1.2
D) 2.5

Question 26

The largest component of aggregate expenditures is:

A) investment spending.
B) saving.
C) government spending.
D) consumption spending.

Question 27

If disposable income is $250 and saving is $50, how much is the average propensity to consume?

A) 0.2
B) 0.25
C) 0.5
D) 0.8

Question 28

If there is no government and no foreign sector in the economy:

A) personal income and disposable personal income are unequal.
B) international trade is an important component of total spending.
C) gross domestic product equals consumption plus investment.
D) budget and trade deficits are important parts of the model of the economy.

Question 29

If disposable income increases from $250 to $300 and saving increases from $40 to $50, how much is the average propensity to save when disposable income is $300?

A) 0.133
B) 0.10
C) 0.167
D) 0.2

Question 30

Consumption spending is:

A) spending by households, businesses, and governments on all goods consumed within one year.
B) spending by individuals and households on only nondurable goods, since they are consumed quickly.
C) spending on goods and services by heads of households.
D) spending by individuals and households on both durable and nondurable goods.

Question 31

If disposable income is $3,000 and saving is $1,200, how much is consumption?

A) -$1,200
B) $1,800
C) $2,100
D) $4,200

Question 32

_____ is the change in saving associated with a change in income.

A) The average propensity to consume
B) The marginal propensity to consume
C) The average propensity to save
D) The marginal propensity to save

Question 33

A depression economy has considerable slack, therefore:

A) unemployment is high.
B) there is no excess plant capacity.
C) all resources are being used efficiently.
D) there is an increase in aggregate price levels.

Question 34

(Figure: Consumption Spending) At point A in the graph provided:

A) saving is $20.
B) consumption is zero.
C) saving is zero.
D) consumption exceeds income by $20.

Question 35

The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.

A) disposable income; saving
B) disposable income; consumption
C) saving; consumption
D) saving; investment

Question 36

In the Keynesian model, the principal determinant of saving is:

A) interest rates.
B) income.
C) tax rates.
D) investment.

Question 37

Which of the following is NOT true regarding the Keynesian model?

A) Aggregate expenditures can be expressed as C + I + G + (X - M).
B) GDP can be measured as the sum of all spending.
C) The four main types of spending are consumer, investment, government, and net exports.
D) Aggregate spending is always less than aggregate income.

Question 38

Approximately what share of U.S. GDP is consumption?

A) 60%
B) 70%
C) 80%
D) 90%

Question 39

_____ is the change in consumption associated with a change in income.

A) The average propensity to consume
B) The marginal propensity to consume
C) The average propensity to save
D) The marginal propensity to save

Question 40

In the simple Keynesian model of the private economy, which of the following is assumed?

A) The consumer price index can rise or fall.
B) Households and firms are savers.
C) The aggregate price level can change.
D) There is considerable slack in the economy.

Question 41

The marginal propensity to consumer plus the marginal propensity to save:

A) equals 1.
B) equals 0.75.
C) equals zero.
D) is always a negative number.

Question 42

As income increases, consumption _____.

A) increases at a slower rate
B) increases faster
C) decreases at a slower rate
D) decreases faster

Question 43

Classical economists claim that _____ is the primary determinant of saving, and Keynes claimed that _____ is the primary determinant of saving.

A) the interest rate; income
B) income; the interest rate
C) taxes; government spending
D) GDP; disposable income

Question 44

The marginal propensity to consume:

A) increases when income increases.
B) is the change in consumption associated with a change in income.
C) is equal to consumption divided by income.
D) decreases when income increases.

Question 45

(Table) When disposable income increases from $1,000 to $1,200, what is the value of the marginal propensity to save? $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Disposable } \\\text { Income }\end{array} & \text { Consumption } \\\hline \$ 1,000 & \$ 1,200 \\\hline \$ 1,200 & \$ 1,300 \\\hline \$ 1,400 & \$ 1,400 \\\hline \$ 1,600 & \$ 1,500 \\\hline \$ 1,800 & \$ 1,600 \\\hline\end{array}$$

A) 0.5
B) -0.5
C) 1.5
D) -1.5

Question 46

Which of the following will NOT cause an increase in the consumption schedule?

A) There is an increase in the wealth of a family.
B) There is an increase in the price of gas.
C) There is an increase in the debt of a family.
D) There is a decrease in one's personal taxes.

Question 47

Saving is equal to:

A) disposable income minus consumption.
B) consumption minus disposable income.
C) investment minus government taxes.
D) government taxes minus investment.

Question 48

The factors that would shift the savings and consumption schedule include all of the following EXCEPT:

A) household debt.
B) tastes and preferences from durable goods and nondurable goods.
C) wealth.
D) taxes.

Question 49

Keynes believed that saving is a function of:

A) the interest rate.
B) income.
C) GDP.
D) the price of money.

Question 50

When the consumption schedule lies above the 45-degree reference line, consumption spending is _____ than income and saving is _____.

A) greater; positive
B) less; positive
C) greater; negative
D) less; negative

Question 51

If your income is $35,000 and the average propensity to save is 0.46, what is consumption?

A) $16,100
B) $18,900
C) $15,500
D) $19,500

Question 52

The average propensity to consume is:

A) always stable.
B) equal to consumption divided by income.
C) equal to income divided by consumption.
D) the increase in consumption derived from an increase in income.

Question 53

Along the 45-degree line in the graph of consumption and disposable income:

A) consumption is equal to disposable income.
B) consumption is equal to total saving.
C) consumption is equal to marginal saving.
D) the interest rate is zero.

Question 54

If the marginal propensity to save is 0.25 and income increases by $7,540, what is the increase in consumption?

A) $5,655
B) $1,885
C) $10,053
D) $30,160

Question 55

According to the simple Keynesian model, which of the following statements is NOT correct?

A) MPC + MPS = 1
B) APC + MPS = 1
C) APC + APS = 1
D) Y = C + S

Question 56

Personal consumption expenditures:

A) constitute 30% of GDP.
B) can be found by subtracting saving from disposable income.
C) primarily depend on interest rates, according to Keynes.
D) are very unstable as a percentage of GDP over time.

Question 57

The slope of the saving schedule is:

A) the marginal propensity to consume.
B) 1 minus the marginal propensity to consume.
C) the average propensity to consume.
D) the average propensity to save.

Question 58

(Table) When disposable income is $1,200, what is the value of the average propensity to save? $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Disposable } \\\text { Income }\end{array} & \text { Consumption } \\\hline \$ 1,000 & \$ 1,200 \\\hline \$ 1,200 & \$ 1,300 \\\hline \$ 1,400 & \$ 1,400 \\\hline \$ 1,600 & \$ 1,500 \\\hline \$ 1,800 & \$ 1,600 \\\hline\end{array}$$

A) -0.5
B) -1.5
C) -1.083
D) -0.083

Question 59

If you spend $35,000 and your income is $60,000, what is your average propensity to save?

A) 0.7
B) 0.3
C) 0.58
D) 0.42

Question 60

If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?

A) $11,000
B) $1,000
C) $900
D) $100

Question 61

(Table) The table shows data on consumption at various levels of income. The value of the marginal propensity to consume is: $$\begin{array} { | c | c | } \hline \text { Income } & \text { Consumption } \\\hline \$ 0 & \$ 250 \\\hline \$ 500 & \$ 700 \\\hline \$ 1,000 & \$ 1,150 \\\hline \$ 1,500 & \$ 1,600 \\\hline \$ 2,000 & \$ 2,050 \\\hline \$ 2,500 & \$ 2,500 \\\hline\end{array}$$

A) 0.25.
B) 0.75.
C) 0.8.
D) 0.9.

Question 62

If income rises from $10,000 to $20,000 and savings increases from $9,000 to $16,000, then the marginal propensity to save is:

A) 0.10.
B) 0.30.
C) 0.70.
D) 0.80.

Question 63

When the consumption schedule lies below the 45-degree reference line, saving:

A) must be negative.
B) is zero.
C) is positive.
D) is negatively sloped.

Question 64

If income increases from $3,000 per month to $3,500 per month and savings rise from $200 per month to $400 per month, what is the marginal propensity to save?

A) 1.25
B) 0.8
C) 2.5
D) 0.4

Question 65

The reason business investment is sensitive to interest rates is that:

A) interest rates are a lagging indicator, so they signal to firms the state of the economy.
B) most funds used for investment are borrowed, so firms incur an interest charge.
C) interest rates indicate how aggressive government policy is about fighting recessions.
D) firms charge interest on any investment they make.

Question 66

A luxury car manufacturer is contemplating investing in its assembly plants. It learns that the probability of a recession in the next few years has increased dramatically because of adverse international events. Its investment demand will:

A) remain unchanged because auto manufacturing is well insulated from global events.
B) decrease because lower investment returns are expected.
C) increase because lower returns to the investment are expected.
D) increase to compensate for the lower expected sales.

Question 67

If income increases from $3,000 per month to $3,500 per month and consumption rises from $2,800 per month to $3,200 per month, what is the marginal propensity to consume?

A) 1.25
B) 0.8
C) 1.09
D) 0.91

Question 68

From 2008 to2009, the falling stock market reduced the wealth of U.S. households, causing the United States:

A) to move down along its consumption schedule.
B) to shift its consumption schedule downward.
C) to move up along its consumption schedule.
D) to shift its consumption schedule upward.

Question 69

Which of the following is NOT a determinant of investment?

A) business expectations
B) past stock and bond prices
C) technological innovations
D) the amount of existing capital goods

Question 70

(Table) The table shows data on consumption at various levels of income. The value of the marginal propensity to save is: $$\begin{array} { | c | c | } \hline \text { Income } & \text { Consumption } \\\hline \$ 0 & \$ 250 \\\hline \$ 500 & \$ 700 \\\hline \$ 1,000 & \$ 1,150 \\\hline \$ 1,500 & \$ 1,600 \\\hline \$ 2,000 & \$ 2,050 \\\hline \$ 2,500 & \$ 2,500 \\\hline\end{array}$$

A) 0.1.
B) 0.25.
C) 0.75.
D) 0.9.

Question 71

If income rises from $10,000 to $20,000 and consumption increases from $9,000 to $16,000, then the marginal propensity to consume is:

A) 0.10.
B) 0.30.
C) 0.70.
D) 0.80.

Question 72

If income is $5,000 per month and consumption spending is $4,500 per month, what is the average propensity to consume?

A) 0.9
B) 1.11
C) 500
D) -500

Question 73

When household debt levels rise:

A) the ability to earn more credit rises.
B) families are less able to spend in the current period.
C) investment levels rise.
D) tax payments will be higher.

Question 74

If consumption increases from $500 billion to $575 billion and income increases from $600 billion to $700 billion, the marginal propensity to save is:

A) 0.2.
B) 0.25.
C) 0.75.
D) There is not enough information to answer this question.

Question 75

Which one of the following helps determine consumption and saving in the Keynesian model?

A) wealth
B) imports
C) technology
D) government regulations

Question 76

If the stock market collapses, consumption will:

A) not be affected.
B) increase because stocks can now be purchased cheaply.
C) decrease because people feel less wealthy.
D) increase by a small amount.

Question 77

Investment spending:

A) tends to be volatile.
B) is the largest component of total spending.
C) is not sensitive to interest rates.
D) is limited to the stock and bond markets.

Question 78

Investment levels depend mainly on:

A) high levels of consumption in the economy.
B) strong government demand.
C) the rate of return on capital.
D) tax incentives.

Question 79

If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will:

A) fall by $25 billion.
B) fall by $125 billion.
C) rise by $25 billion.
D) rise by $125 billion.

Question 80

One implication of a straight-line aggregate expenditure curve is that:

A) the marginal propensity to consume is constant.
B) the average propensity to consume is constant.
C) the average propensity to save is constant.
D) All of the answers are correct.