Deck 24: Aggregate Demand and the Powerful Consumer

Question 1

The tax cuts of 2008 and 2009 reduced the disposable income of U.S. consumers.

Answer 1

False

Question 2

The relationship between consumption and disposable income is very unreliable and unpredictable.

Answer 2

False

Question 3

The slope of the consumption function is equal to the marginal propensity to save.

Answer 3

False

Question 4

Government spending is a leakage out of the circular flow of income and spending.

Question 5

A scatter diagram could help a policy maker decide on the size of a tax cut necessary to increase consumer expenditures by a certain amount.

Question 6

The marginal propensity to consume is calculated by dividing the change in consumer spending by the change in disposable income.

Question 7

Disposable income does not influence the amount of consumer expenditures.

Question 8

Taxes are not considered a leakage because they become transfers in the circular flow of income and spending model.

Question 9

If U.S. consumers become more optimistic about their future income and wealth, the consumption function will shift upward.

Question 10

Aggregate demand is the sum of total domestic spending by the private sector.

Question 11

The MPC can be used to predict the effect of a tax increase.

Question 12

Both President Bush and President Obama wanted tax cuts to stimulate consumer spending during the 2007-2009 recession.

Question 13

If consumers receive an increase in income of $1,000, their spending will increase by a smaller amount.

Question 14

The MPC for a country will likely be measured as less than 1.0.

Question 15

Consumer spending is an injection in the circular flow of income and spending.

Question 16

A scatter diagram is a way to show the relationship between disposable income and consumer expenditures.

Question 17

The consumption function shows an indirect relationship between consumer spending and disposable income.

Question 18

A change in the value of consumer's stock market holdings will cause a shift in the consumption function.

Question 19

Aggregate demand is the total demand for the final goods and services produced in an economy.

Question 20

A decrease in disposable income causes a shift in the consumption function.

Question 21

To economists, investment means buying stocks and bonds.

Question 22

If households decrease the amount of bank account withdrawals, the consumption function may shift upward.

Question 23

An economic boom in one country usually causes a recession in other countries.

Question 24

The value of both exports and imports are added to the value of national product.

Question 25

Government purchases are included in national product.

Question 26

A savings account is an example of consumer income.

Question 27

Financial investments, such as mutual fund purchases, are included in the national income component.

Question 28

Consumers increased consumption by a relatively small amount in 2008 and 2009 because they believed the tax cuts were temporary.

Question 29

Changes in the price level will shift the consumption function, since it is an indicator of household wealth and not household income.

Question 30

New residential housing is placed under consumer expenditures in aggregate demand.

Question 31

Investment spending, in economic terms, includes spending toward physical capital, machinery, new factories, and new housing.

Question 32

U.S. imports rise when income in the United States increases.

Question 33

Government transfer payments are income earned by individuals who work for the federal government.

Question 34

If inflation rises more quickly in the United States than in France, U.S. exports to France should rise.

Question 35

Capital goods are counted the same as consumer goods in the national product accounts.

Question 36

When the price level falls, consumers may feel wealthier and the consumption function will shift upward.

Question 37

Bank accounts and bonds are examples of money-fixed assets.

Question 38

National income minus personal taxes net of transfer payments equals disposable income.

Question 39

Money-fixed assets include government bonds, corporate bonds, and certificates of deposit.

Question 40

The temporary tax cuts of 2008 and 2009 were ineffective to boost the economy out of a recession.

Question 41

When aggregate demand decreases rapidly, the economy is likely to experience

A) inflation.
B) an economic boom.
C) economic growth.
D) recession.

Question 42

Aggregate demand is the total demand for

A) all intermediate and final goods.
B) all monetary investments.
C) real and financial investments.
D) all final goods and services.

Question 43

In which of the following years was a tax cut ineffective in stimulating aggregate demand?

A) 1964
B) 1975
C) 1981
D) 1999

Question 44

Consumers most likely decide on their current consumption spending by looking at their short-run income prospects.

Question 45

Aggregate demand is defined as the total spending

A) of all consumers, business firms, government agencies, and foreigners on final goods and services produced in the United States.
B) by all consumers, business firms, government agencies, and foreigners in the United States.
C) consumers, businesses, government agencies, and foreigners wish to make in one year.
D) of consumers, businesses, and government agencies on final output.

Question 46

Aggregate demand is a ____ rather than a ____.

A) fixed number; concept
B) schedule; fixed number
C) set number; concept
D) government aggregate; private aggregate

Question 47

Which of the following would be removed from the U.S. aggregate demand measurement?

A) Japan's purchase of General Electric combines from the United States
B) China's purchase of soybeans from U.S. farmers
C) A foreign tourist's purchase of New York City Statue of Liberty keychains
D) An American professor's purchase of a vintage manuscript from Rome, Italy

Question 48

In 1975, Congress passed a tax rebate to spur consumer spending. Consumers

A) spent the entire amount of the tax savings, boosting the economy, as planned.
B) did not spend any of the amount of the tax savings.
C) saved a substantial share of the tax savings and spent the rest.
D) saved a small portion of the tax savings, and spent the rest.

Question 49

Which of the following would is included as Investment Spending in aggregate demand?

A) Sandra finances her business from the sale of $200,000 of treasury securities.
B) Marco buys a new building off the Santa Monica coast for his startup.
C) Maria purchases $100,000 of foreign bonds.
D) Allen sells the old truck he used for transporting goods.

Question 50

The net export component of aggregate demand is defined as U.S.

A) imports minus U.S. exports.
B) imports plus U.S. exports.
C) exports minus U.S. imports.
D) exports minus taxes and customs duties.

Question 51

If an individual's income increases by $100, then their spending will increase by less than $100.

Question 52

The difference between national income and disposable income is

A) residential investment.
B) federal deficits.
C) net exports.
D) financial investment.
E) the amount of taxes collected.

Question 53

Government spending and income taxes can affect the level of

A) aggregate demand.
B) income taxes.
C) exports.
D) investment.

Question 54

Aggregate demand is the sum of

A) C + I + G + (X − IM).
B) C + I + X.
C) C + I + X − IM.
D) C + I + G.

Question 55

The "investment" component of aggregate demand will include all of the following except

A) expenditures of business firms on new plants.
B) expenditures of business firms on new equipment.
C) resales of existing physical assets.
D) household spending on new homes.

Question 56

National income and domestic product must be equal.

Question 57

The largest component of aggregate demand is

A) investment spending.
B) consumer spending.
C) government spending.
D) net exports.

Question 58

If a U.S. citizen buys a car produced in Germany, this transaction will add to

A) U.S. aggregate demand.
B) U.S. aggregate supply.
C) German aggregate demand.
D) German imports.

Question 59

Melissa purchases shares in a government bond mutual fund. Is this included in the aggregate demand component "Investment"?

A) Yes, if it is a domestic mutual fund.
B) Yes, if the purchase is made out of current income.
C) No, unless the funds are deposited in a domestic financial institution.
D) No, it would never be included.

Question 60

The sum of wages and salaries, interest, rent, and profits equals

A) net national product.
B) national interest.
C) gross national product.
D) national income.

Question 61

The circular flow diagram is best described as a(n)

A) abstraction of little value in macroeconomics.
B) exact representation of the cause and effect relationship between spending and employment.
C) model that clarifies the relationship between spending and income.
D) model to explain the relationship between the federal deficit and tax revenues.

Question 62

The __________ shows a direct relationship between consumption spending and disposable income.

A) consumption function
B) aggregate demand curve
C) investment demand curve
D) supply of income curve

Question 63

The net exports adjustments in aggregate demand includes

A) capital inflows minus capital outflows.
B) capital outflows minus capital inflows.
C) the sum of exports minus imports.
D) the sum of imports minus exports.

Question 64

Imports are a leakage in the sense that

A) the international financial system is unstable.
B) consumers buy foreign output of goods and services.
C) foreigners earn less than U.S. workers.
D) a trade deficit increases aggregate demand.

Question 65

The largest component of aggregate demand is

A) investment spending.
B) consumer spending.
C) government spending.
D) total imports.

Question 66

On a graph with consumption on the vertical axis and disposable income on the horizontal axis, the slope of the line is

A) greater than 1.
B) equal to 1.
C) less than 1.
D) undefined.

Question 67

Data from the World War II era showed that

A) savings and disposable income were at their lowest.
B) the level of savings increased.
C) consumption and disposable income had a negative relationship.
D) the stock market tumbled due to lack of individual savings.

Question 68

Disposable income can be defined as national product

A) minus federal and state taxes.
B) minus taxes plus transfers.
C) minus indirect taxes.
D) plus taxes plus transfers.

Question 69

Why is it true that domestic product and national income must be equal?

A) The IRS national accounting system assures that taxes equal total income.
B) The total amount of spending must equal total national sales.
C) The value of final product must equal the sum of resource income that produced it.
D) The total amount of income earned is eventually spent.

Question 70

Which of the following would be counted as investment in the national income accounts?

A) The purchase of a newly issued stock
B) The purchase of a newly built apartment house
C) The purchase of a newly minted coin
D) The payment of tuition at a private college

Question 71

In the circular flow model, which of the following is considered a leakage?

A) Investment spending
B) Business spending
C) Household saving
D) Total exports

Question 72

In economic analysis, which of the following is considered an injection?

A) Saving
B) Taxes
C) Imports
D) Exports

Question 73

Which of the following is the injection into the circular flow model?

A) Money deposited in a savings account
B) Income earned through exports
C) Goods imported from abroad
D) Taxes paid by the individuals

Question 74

Which of the following would be added to U.S. national income?

A) An American consumer buying French wine
B) An American business selling aircraft to British Airways
C) A Swedish firm selling mobile phones to Americans
D) A French firm buying a Swedish cellular phone

Question 75

The relationship between consumption and disposable income is such that as

A) consumption rises, disposable income falls.
B) disposable income rises, consumption rises.
C) disposable income rises, consumption falls.
D) disposable income rises, saving falls.

Question 76

In the circular flow model, which of the following is an injection?

A) Investment spending
B) Government taxes
C) Total exports
D) Imports

Question 77

Which of the following is an example of a transfer payment?

A) Your grandma buys you a new watch for graduation.
B) A military contractor pays to move its employee from the East Coast to the West Coast.
C) The county office gives its low-income residents food stamps.
D) The government floats bonds for a new highway.

Question 78

When saving leaks out of the circular flow of income and spending,

A) total income necessarily falls.
B) it leaks out of the financial system.
C) it flows to borrowers.
D) it increases the size of the spending flow.

Question 79

In the circular flow model, savings is considered a leakage because

A) it does not get counted toward an individual's accumulated wealth.
B) it becomes an input toward venture capital
C) it contributes to the budget surplus.
D) it is the amount that consumers do not spend of their disposable income.

Question 80

Government spending is an injection in the sense that it

A) increases the amount of total spending.
B) increases the size of the federal deficit.
C) decreases the amount of household saving.
D) decreases the amount of taxes paid.