Deck 3: The Goods Market

Question 1

Disposable income equals:

A) income minus both saving and taxes.
B) consumption minus taxes.
C) the sum of consumption and income.
D) income after adding transfers and subtracting taxes.
E) income minus saving.

Answer 1

income after adding transfers and subtracting taxes.

Question 2

Suppose the consumption equation is represented by C = 380 + 0.75YD. The multiplier in this economy is:

A) 4.0.
B) 0.5.
C) 5.0.
D) 1.0.
E) 2.0.

Answer 2

4.0.

Question 3

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
Refer to the information above. The exogenous variables in this model are

A) T only.
B) S and I.
C) G only.
D) T, G, and I.
E) C and Y.

Answer 3

T, G, and I.

Question 4

Suppose consumer confidence falls causing a decrease in consumption. From the goods market model we know with certainty that a decrease in consumption will cause:

A) a reduction in the multiplier.
B) a decrease in the propensity to save.
C) an increase in the multiplier.
D) an increase in the propensity to save.
E) a decrease in output.

Question 5

Which of the following represents the autonomous spending in a closed economy?

A) c0 + I - c1T.
B) c0 + G - c1T.
C) c0 + I - G + c1T.
D) c0 + I + G - c1T.
E) c0 + I + G + c1T.

Question 6

Suppose, as unrealistic as this might be, that disposable income is zero for a country. Given this information, we know that:

A) private saving is negative.
B) consumption must be zero.
C) the propensity to save must be zero.
D) private saving must be zero.
E) private saving must be positive.

Question 7

A decrease in taxes will cause:

A) a decrease in autonomous spending.
B) a decrease in investment.
C) no change in investment.
D) no change in autonomous spending.
E) an increase in investment.

Question 8

A decrease in the marginal propensity to save from 0.42 to 0.13 will cause:

A) the ZZ line to become steeper and a given change in autonomous spending (c0) to have no effect on output.
B) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a larger effect on output.
C) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a smaller effect on output.
D) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a larger effect on output.
E) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a smaller effect on output.

Question 9

For a closed economy, which of the following conditions must be satisfied for equilibrium to be maintained?

A) X = IM.
B) G = T.
C) Y = Z.
D) S = I.
E) X = Z.

Question 10

A decrease in the propensity to consume from 0.89 to 0.64 will cause:

A) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a larger effect on output.
B) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a smaller effect on output.
C) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a larger effect on output.
D) the ZZ line to become flatter and a given change in autonomous spending (c0) to have no effect on output.
E) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a smaller effect on output.

Question 11

A tax hike will cause:

A) a decrease in government spending.
B) an increase in autonomous spending.
C) an increase in government spending.
D) no change in autonomous spending.
E) no change in government spending.

Question 12

Suppose the propensity to consume equals 0.83. Given this information, which of the following events will cause the largest decrease in output?

A) G decreases by 400.
B) T increases by 400.
C) I decreases by 250.
D) c0 decreases by 350.
E) I increases by 250.

Question 13

Which of the following components of GDP was the largest for Australia in 2011?

A) Consumption.
B) Imports.
C) Exports.
D) Government spending.
E) Investment.

Question 14

The equilibrium condition in the goods market holds that:

A) production equals income.
B) production equals demand.
C) consumption equals income.
D) government spending equals taxes minus transfers.
E) consumption equals saving.

Question 15

The goods market is in equilibrium when which of the following conditions is satisfied?

A) Output equals consumption.
B) Total saving equals zero.
C) Output equals total saving plus investment.
D) Total saving equals investment.
E) Consumption equals saving.

Question 16

Which of the following equals demand in a closed economy?

A) C + I + G + X - IM.
B) C + I + G.
C) C + I + G + X.
D) C + I + G + IM - X.
E) C + I + G - IM.

Question 17

In the goods market model presented in Chapter 3, which of the following variables is exogenous?

A) Consumption (C).
B) Aggregate demand (Z).
C) Disposable income (YD).
D) Taxes (T).
E) Saving (S).

Question 18

Suppose the consumption equation is represented by C = 380 + 0.75YD, the propensity to save is:

A) 0.25.
B) 4.55.
C) 0.85.
D) 5.75.
E) 1.20.

Question 19

Inventory investment is the difference between which two variables?

A) Production and sales.
B) Production and income.
C) Production and demand.
D) Export and import.
E) Demand and sales.

Question 20

Which of the following types of government spending is included when calculating GDP?

A) Spending at the local level.
B) Spending at the federal level.
C) Spending at the state level.
D) All of the above
E) Only B and C.

Question 21

Suppose business confidence rises causing an increase in investment. From the goods market model we know with certainty that an increase in investment will cause:

A) a decrease in the multiplier.
B) an increase in output.
C) an increase in the propensity to save.
D) a decrease in the propensity to save.
E) an increase in the multiplier.

Question 22

What is the effect when there is an equal and simultaneous increase in G and T ?

A) An increase in output.
B) A decrease in investment.
C) No change in output.
D) A decrease in output.
E) An increase in investment.

Question 23

Based on our understanding of the paradox of saving, we know that a decrease in the desire to save will cause:

A) a decrease in equilibrium output.
B) an increase in equilibrium output.
C) an increase in the desire to invest.
D) a permanent decrease in the level of private saving.
E) no change in equilibrium output.

Question 24

Which of the following expenditures is not included in fixed investment spending (I)?

A) Ford increases its inventories of unsold automobiles.
B) Dell Computer buys a new robot for its assembly line.
C) Holden builds a new factory.
D) An individual buys a newly built home.
E) All of the above.

Question 25

Based on our understanding of consumption and saving, we know that the propensity to consume and the propensity to save must:

A) be equal to the multiplier.
B) sum to more than one.
C) sum to exactly one.
D) be equal to each other.
E) sum to less than one.

Question 26

Refer to the information above. The multiplier for the above economy equals:

A) 3.86.
B) 4.86.
C) 2.86.
D) 5.86.
E) 6.86.

Question 27

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
Refer to the information above. Suppose government spending decreases by 400 for the above economy. Given the above information, we know that equilibrium output will decrease by:

A) 844.
B) 244.
C) 2144.
D) 1144.
E) 444.

Question 28

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
Refer to the information above. The equation for private saving, S, for the above economy is:

A) - 1000+ 0.35(Y- 900).
B) - 800+ 0.35(Y- 750).
C) - 800+ 0.35(Y- 900).
D) - 1000+ 0.35(Y- 750).
E) - 800+ 0.35Y.

Question 29

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
Refer to the information above. The equilibrium level of GDP for the above economy equals:

A) 7043.
B) 10033.
C) 3013.
D) 9043.
E) 5063.

Question 30

What is the effect when there is an equal and simultaneous decrease in G and T ?

A) A decrease in investment.
B) No change in output.
C) A decrease in output.
D) An increase in investment.
E) An increase in output.

Question 31

When the economy is in equilibrium, we know with certainty that:

A) total saving equals investment.
B) government spending equals taxes.
C) private saving equals investment.
D) public saving equals investment.
E) public saving equals government spending minus taxes.

Question 32

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
Refer to the information above. Which of the following events would cause an increase in the size of the multiplier?

A) An increase in the propensity to save.
B) A reduction in taxes.
C) An increase in investment.
D) A reduction in government spending.
E) An increase in the propensity to consume.

Question 33

Which of the following equals demand in an open economy?

A) C + I + G + IM - X.
B) C + I + G + X.
C) C + I + G.
D) C + I + G - IM.
E) C + I + G + X - IM.

Question 34

An economy is assumed to be closed when:

A) G = T = 0.
B) S = I.
C) X = IM = 0.
D) G = T.
E) X = IM.

Question 35

Consider the consumption function, C = c0 + c1YD, we assume that c1 is

A) larger than c0.
B) negative.
C) equal to one.
D) between zero and one.
E) different depending on the levels of disposable income.

Question 36

An increase in the propensity to save from 0.36 to 0.56 will cause:

A) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a smaller effect on output.
B) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a smaller effect on output.
C) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a larger effect on output.
D) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a larger effect on output.
E) the ZZ line to become flatter and a given change in autonomous spending (c0) to have no effect on output.

Question 37

Suppose that C = 300 + 0.75YD. How much of a decrease in government spending must occur for equilibrium output to decrease by 1000?

A) 250.
B) 100.
C) 1000.
D) 200.
E) 500.

Question 38

In the goods market model, which of the following variables is not endogenous?

A) Investment (I).
B) Consumption (C).
C) Aggregate demand (Z).
D) Saving (S).
E) Disposable income (YD).

Question 39

Which of the following represents total saving for an economy?

A) The sum of private saving and fixed investment.
B) The sum of private saving and consumption.
C) The sum of private saving and public saving.
D) The excess of taxes over government spending.
E) The sum of taxes and government spending.

Question 40

The propensity to consume represents:

A) the change in output caused by a one- unit change in autonomous demand.
B) the level of consumption that occurs if disposable income is zero.
C) the ratio of total consumption to disposable income.
D) the change in consumption caused by a one- unit change in disposable income.
E) total income minus total taxes.

Question 41

Discuss and explain what effect an increase in the propensity to consume has on the size of the multiplier.

Question 42

Discuss the two components of fixed investment.

Question 43

An increase in the propensity to consume from 0.42 to 0.78 will cause:

A) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller effect on output.
B) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have no effect on output.
C) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output.
D) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a smaller effect on output.
E) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger effect on output.

Question 44

Explain what the multiplier represents.

Question 45

Suppose that, at a given level of disposable income, consumers decide to save more. Explain what effect this decision will have on equilibrium income. Also, explain what effect this decision will have on the level of saving once the economy has reached the new equilibrium.

Question 46

Explain the difference between endogenous and exogenous variables.

Question 47

Which of the following events will cause an increase in equilibrium output?

A) An increase in investment.
B) A decrease in taxes.
C) A decrease in the propensity to save.
D) An increase in the propensity to consume.
E) All of the above.

Question 48

Discuss what is meant by the paradox of saving.

Question 49

Use the goods market model to illustrate the effects of a decrease in consumer confidence on the economy. Also, explain what effect this decrease in consumer confidence has on the economy.

Question 50

For this question, assume that taxes are independent of income change in taxes. Compare and explain the relative size of the changes in government spending and taxes needed to obtain this desired change in output.

Question 51

Explain what factors cause shifts and changes in the slope of the ZZ curve in the goods market model.

Question 52

When C = c0 + c 1YD, an increase in c0 will cause which of the following to increase?

A) Consumption.
B) Equilibrium disposable income.
C) Equilibrium income.
D) Demand.
E) All of the above.

Question 53

There are three macroeconomic variables from the closed economy goods market model C, I, and G. Explain whether each variable is endogenous or exogenous.

Question 54

Suppose the Australian economy is represented by the following equations:
Z = C + I + G C = 1500 + 0.6YD T = 1200 I = 500 YD = Y - T G = 2500
a() Given the above variables, calculate the equilibrium level of output. Illustrate the equilibrium level of output for this economy.
[Hint: First specify (using the above numbers) the demand equation (Z) for this economy. Second, using the equilibrium condition, equate this expression with Y. Once you have done this, solve for the equilibrium level of output. Using the ZZ- Y graph (i.e., a graph that includes the ZZ line and 45- degree line with Z on the vertical axis, and Y on the horizontal axis)]
b() Now, assume that consumer confidence decreases which leads to a decrease in autonomous consumption (c0) from 1500 to 1400. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?
c() Graphically illustrate the effects of this change in autonomous consumption on the demand line (ZZ) and Y. Clearly indicate in your graph the initial and final equilibrium levels of output.
d() Briefly explain why this decrease in output is greater than (in absolute terms) the initial decrease in autonomous consumption.

Question 55

Discuss the nature of inventory investment.

Question 56

A decrease in the desire to save by households will cause:

A) an increase in public saving.
B) an increase in investment.
C) an increase in private saving.
D) an increase in output.
E) an increase in taxes.