Deck 10: Income and spending

Question 1

When calculating the multiplier for government purchases (G), we

A)must know the marginal propensity to save (mps)
B)must know the income tax rate (t)
C)must know the average propensity to consume (apc)
D)can ignore the size of the marginal propensity to consume (mpc)
E)both A)and B)

Answer 1

both A)and B)

Question 2

The size of the expenditure multiplier depends on

A)the marginal propensity to consume
B)the marginal propensity to import
C)the marginal income tax rate
D)all of the above
E)only A and B

Answer 2

all of the above

Question 3

In a simple model with no government or foreign sector, a decline in investment of $10 billion will lead to a $50 billion decline in the equilibrium level of income if

A)the mps is 0.2
B)the mpc is 0.5
C)the ratio of total consumption to total income is 0.8
D)changes in consumption divided by changes in income equal 0.2
E)changes in saving divided by changes in income equal 0.8

Answer 3

the mps is 0.2

Question 4

The size of the expenditure multiplier

A)changes with a change in investment spending
B)increases as the mps increases
C)increases as the mps decreases
D)increases as the income tax rate increases
E)varies with the apc

Question 5

The expenditure multiplier measures

A)the number of steps it takes to move from one equilibrium to another
B)the rise in saving resulting from a rise in income
C)the change in investment resulting from a change in income
D)the change in induced consumption caused by a change in income
E)none of the above

Question 6

If there is no government or foreign sector and planned investment equals planned saving, then

A)actual output is equal to planned spending on consumption and investment
B)consumption plus investment equals income
C)the quantity of output produced is equal to aggregate demand
D)there are no unplanned inventory changes
E)all of the above

Question 7

The marginal propensity to consume (mpc)

A)shows the fraction of total national income that is used for consumption
B)added to the marginal propensity to save (mps) always equals zero
C)is the relationship between a change in consumer purchases and the change in disposable income that allows consumption to change
D)declines as disposable income declines, eventually becoming zero as disposable income reaches zero
E)decreases as autonomous saving increases

Question 8

In a model with no government or foreign sector, if saving is defined as S = - 200 + (0.1)Y and investment is I? = 200, what is the equilibrium level of consumption?

A)3,800
B)3,600
C)1,800
D)2,000
E)1,000

Question 9

The expenditure multiplier is used to calculate the change in

A)spending caused by a change in income
B)equilibrium income caused by a change in autonomous spending
C)intended spending caused by a change in consumption
D)disposable income caused by a change in saving
E)government expenditures caused by a change in income

Question 10

Assume a model with no government, where consumption is the only component of aggregate demand.If the consumption function is of the form C = 400 + (0.9)Y, what is the equilibrium level of consumption?

A)400
B)1)000
C)1,600
D)3,600
E)4,000

Question 11

Assume a simple model without any government.If an increase in autonomous investment of 40 leads to an increase in consumption of 160, then the marginal propensity to save is

A)0)10
B)0)20
C)0)25
D)0)40
E)0)80

Question 12

A consumption function of the form C = Co + cYD has a positive vertical intercept Co, which indicates that

A)some consumption is unaffected by changes in disposable income
B)the mpc will increase as disposable income increases
C)the apc will always increase as disposable income increases
D)the apc will always be less than the mpc
E)all of the above

Question 13

In a simple model with no government or foreign sector, the change in unplanned inventory at equilibrium is

A)dependent upon the amount of consumption
B)equal to output minus consumption
C)zero
D)always positive
E)usually negative

Question 14

Assume a model with no government or foreign sector.If national income is Y = 800, autonomous consumption is Co = 100, and the marginal propensity to consume is c = 0.7, then total consumption is

A)100
B)560
C)660
D)700
E)800

Question 15

In a Keynesian model of income determination, when intended spending is greater than actual output, the adjustment to a new macro-economic equilibrium is based on changes in

A)autonomous consumption
B)unplanned inventories
C)government spending
D)net exports
E)all of the above

Question 16

Assume a model with no government or foreign sector.If actual output is $13.1 trillion while aggregate demand is $13.2 trillion, we know that

A)the magnitude of unintended inventory adjustments is - $100 billion
B)the magnitude of unintended inventory adjustments is + $100 billion
C)the magnitude of unintended inventory adjustments is + $10 billion
D)the actual income level is above its equilibrium
E)there currently is an excess supply of goods and services

Question 17

Total autonomous spending

A)is dependent on the level of output
B)is only determined by the equation for the consumption function
C)is not part of aggregate demand
D)is independent of the level of income
E)increases when disposable income increases

Question 18

Assume a simple model of the expenditure sector with no income taxes.If a lump sum tax decrease of 200 leads to an increase in income of 800, what is the size of the mps?

A)0)10
B)0)20
C)0)25
D)0)40
E)0)80

Question 19

In a model with no government or foreign sector, if autonomous consumption is Co = 80, investment is Io = 70, and the marginal propensity to save is s = 0.25, equilibrium income is

A)150
B)200
C)225
D)600
E)750

Question 20

If autonomous investment increases by 100 and government purchases decrease by 100, which of the following is true?

A)income will increase by 100
B)income will increase by 200
C)income will increase by the multiplier times 100
D)income will decrease by the multiplier times 100
E)income will not change

Question 21

Assume a model with an income tax rate of t = 0.25 and a marginal propensity to consume of c = 0.8.What could cause the level of equilibrium income to decrease by 1,000?

A)a decrease in autonomous net exports of 400
B)a decrease in autonomous saving of 200
C)a decrease in government purchases of 250
D)a decrease in government transfer payments of 500
E)an increase in autonomous investment of 500

Question 22

If the savings function is S = - 400 + (0.25)YD, the marginal income tax rate is t = 0.2, and the equilibrium level of income increases by 1,000, by how much will consumption change?

A)250
B)400
C)600
D)750
E)800

Question 23

Assume that the savings function is of the form S = - 100 + (0.2)YD and the marginal income tax rate is t = 0.25.What would be the effect on the equilibrium level of output if autonomous consumption changes by change Co = - 50?

A)a decrease in output of 400
B)a decrease in output of 250
C)a decrease in output of 200
D)a decrease in output of 125
E)a decrease in output of 100

Question 24

Assume a model with no foreign sector, no income taxation, and a consumption function defined as C = 400 + (0.75)YD.If government transfer payments decrease by 200, then

A)income will decrease by 600
B)income will decrease by 800
C)income will increase by 800
D)income will increase by 200
E)income will increase by 150

Question 25

An increase in government spending will

A)not affect aggregate demand unless it is debt-financed
B) not affect aggregate demand if it is financed by a tax increase of equal magnitude
C)decrease aggregate demand if it is financed by a tax increase of equal magnitude
D)stimulate aggregate demand by less than a tax decrease of equal magnitude
E)none of the above

Question 26

Generally speaking, the effect on income resulting from a change in investment spending is greater if

A)the average propensity to consume is smaller
B)the marginal propensity to consume is smaller
C)the marginal propensity to save is smaller
D)the marginal propensity to save is larger
E)the average propensity to save is larger

Question 27

Assume a simple model with no government or foreign sector.If an increase in autonomous investment of 100 leads to an increase in consumption of 300, the size of the expenditure multiplier is

A)0)75
B)1)33
C)3)00
D)4)00
E)5)00

Question 28

Assume a model of the expenditure sector with no government or foreign sector.If the savings function is defined as S = - 300 + (0.1)Y and autonomous investment increases by 200, by how much will consumption increase?

A)180
B)200
C)1,800
D)2,000
E)2,100

Question 29

Which of the following will NOT happen if the income tax rate (t) is increased?

A)the expenditure multiplier and consumption will both decrease
B)disposable income, saving, and consumption will all decrease
C)consumption and income both will decrease, but saving will increase
D)the full-employment budget surplus will increase
E)autonomous spending will stay the same but national income will decrease

Question 30

The fluctuations in the income level that result from changes in investment spending

A) tend to be larger with a larger mpc
B) tend to be larger if the income tax rate (t) is larger
C) tend to be larger with a larger mps
D) tend to be smaller if the apc is smaller
E) depend only on the magnitude of the changes in investment spending but not on the size of the mpc

Question 31

If total autonomous spending is A? = 800, the marginal propensity to save is mps = 0.2, and the marginal tax rate is t = 0.25, what is the level of equilibrium income?

A)800
B)1,000
C)2,000
D)3,200
E)4,000

Question 32

Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3.If autonomous saving decreases by 300, which of the following is true?

A)total consumption will increase by 300
B)national income will increase by 500
C)disposable income will increase by 750
D)the budget surplus will increase by 250
E)the budget surplus will be unaffected

Question 33

Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3.If government transfer payments decrease by 200, which of the following is true?

A)national income will decrease by 450
B)income tax revenues will decrease by 150
C)the budget surplus will increase by 50
D)all of the above
E)only A and B

Question 34

In a model with income taxes, an increase in autonomous imports will

A)increase the budget deficit
B)increase aggregate demand
C)not affect saving
D)increase consumption
E)decrease the trade deficit

Question 35

If the consumption function is defined as C = 800 + (0.75)YD, the marginal income tax rate is t = 0.5, and autonomous investment decreases by 50, then the budget surplus will

A)remain unaffected
B)decrease by 100
C)decrease by 80
D)decrease by 40
E)decrease by 10

Question 36

The reason that an increase in autonomous spending leads to an even greater increase in equilibrium level of output is that

A)as firms increase output to meet demand, income increases, and this induces more consumption spending
B)the multiplier increases with an increase in autonomous spending
C)prices rise with increased output and this raises nominal GDP
D)people save less as their income increases
E)there is unwanted inventory accumulation, leading firms to lower prices and encouraging increased consumer spending

Question 37

Assume the consumption function is of the form C = 200 + (0.75)YD and the income tax rate is t = 0.2.What would be the effect of an increase in government transfers of 200 ?

A)an increase in income of 800
B)an increase in income of 500
C)an increase in income of 375
D)an increase in income of 300
E)an increase in income of 125

Question 38

A decrease in the income tax rate would imply the following:

A)a decrease in saving
B)a decrease in government spending
C)a decrease in government transfer payments
D)an increase in the expenditure multiplier
E)all of the above

Question 39

Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3.What change in government purchases would lead to an increase in national income of 500?

A)50
B)100
C)200
D)300
E)500

Question 40

If the savings function is of the form S = - 200 + (0.1)YD and the marginal income tax rate is t = 0.2, an increase in income of 200 will increase consumption by

A)180
B)144
C)80
D)72
E)20

Question 41

Assume a model where marginal propensity to save is 0.2, the marginal propensity to import is 0.1 and the marginal income tax rate is 0.25.What is the size of the expenditure multiplier?

A)10
B)5
C)4
D)2)5
E)2

Question 42

Assume a model with income taxes in which imports increase proportionally to national income. Which of the following is FALSE?

A) the expenditure multiplier will increase with an increase in the marginal propensity to import
B) the expenditure multiplier will increase with a decrease in the marginal propensity to save
C) the expenditure multiplier will decrease with an increase in the marginal propensity to save
D) the expenditure multiplier will decrease with an increase in the marginal income tax rate
E) the expenditure multiplier will decrease with an increase in the marginal propensity to import

Question 43

In a model with income taxes, if net exports decrease, which of the following is FALSE?

A)the budget deficit will not be affected
B)the budget deficit will increase
C)disposable income will decrease
D)saving will decrease
E)income will decrease by more than net exports

Question 44

Assume the savings function is defined as S = - 200 + (0.25)YD and the marginal income tax rate is t = 0.5.If autonomous investment increased by 50, then the full-employment budget surplus would

A)not be affected
B)increase by 10
C)increase by 40
D)increase by 80
E)increase by 100

Question 45

In a model with income taxes, assume that autonomous investment decreases.Which of the following will be TRUE?

A)the full-employment budget surplus will decrease
B)the actual budget surplus will decrease
C)the cyclical component of the budget surplus will decrease
D)the actual budget surplus will not be affected
E)both B and C

Question 46

The full-employment budget surplus increases if

A)government transfer payments decrease
B)welfare spending increases
C)defense spending increases
D)the economy goes into a recession
E)the economy goes into a boom

Question 47

A decrease in the income tax rate (t) will

A)increase the full-employment budget surplus
B)increase the size of the expenditure multiplier
C)increase disposable income and autonomous spending
D)increase consumption but decrease saving
E)none of the above

Question 48

In 2009, the U.S.federal budget deficit was

A)about $540 billion or roughly 3 percent of GDP
B)about $820 billion or roughly 4 percent of GDP
C)about $1.1 trillion or roughly 8 percent of GDP
D)about $1.4 trillion or roughly 10 percent of GDP
E)about $12.5 trillion and only slightly lower than GDP

Question 49

A decrease in the full-employment budget surplus will

A)increase national income
B)increase saving
C)increase consumption
D)all of the above
E)none of the above

Question 50

If the full-employment budget surplus is positive but the actual budget surplus is negative, what can we conclude?

A)nothing
B)that saving exceeds investment
C)that the economy is in a boom
D)that fiscal policy is too restrictive
E)that fiscal policy is too expansionary