Deck 6: Aggregate Expenditure Aggregate Demand

Question 1

When the price level is constant:

A) the aggregate supply curve slopes upward from left to right.
B) the aggregate supply curve is horizontal.
C) there is no aggregate supply curve.
D) the aggregate supply curve is vertical.

Answer 1

the aggregate supply curve is horizontal.

Question 2

In the short run with fixed wages and prices:

A) equilibrium real GDP is determined by aggregate demand.
B) equilibrium real GDP is determined by aggregate supply.
C) labour and the productive capacity of firms are always fully employed.
D) equilibrium real GDP is a fixed amount and will not change.

Answer 2

equilibrium real GDP is determined by aggregate demand.

Question 3

When there is an intersection of an economy's aggregate demand and aggregate supply curves:

A) output may be greater or less then potential output.
B) an equilibrium price level is established in the economy.
C) an equilibrium level of real GDP is established.
D) all of the above are correct.

Answer 3

all of the above are correct.

Question 4

Which of the following statements is false?

A) Disposable income is income plus transfers minus taxes.
B) Higher the disposable income, higher is the consumption, lower is the saving.
C) Higher the disposable income, higher is the consumption, higher is the saving.
D) Disposable income equals consumption plus saving.

Question 5

Which of the following statements is true?

A) Higher the income, higher is the marginal propensity to consume.
B) Higher the autonomous consumption expenditure, higher is the marginal propensity to consume.
C) Higher the autonomous consumption expenditure, lower is the marginal propensity to save.
D)Marginal propensity to consume and marginal propensity to save are constant, irrespective of whether . income or autonomous expenditures increase or decrease.

Question 6

Autonomous investment and autonomous consumption are:

A) related to income
B) unrelated to income
C) dependent on income
D) dependent on GDP

Question 7

The relationship between household spending and the household income is given by the:

A) consumption function.
B) savings function.
C) investment function.
D) aggregate expenditure function.

Question 8

According to the consumption function, as real disposable income increases:

A) consumption will rise by the same amount as the increase in disposable income.
B) both consumption and saving will rise.
C) consumption falls but saving rises.
D) consumption rises but saving falls.

Question 9

Which one of the following expressions best describes the marginal propensity to consume? The MPC equals:

A) change in consumption/change in income.
B) consumption/income.
C) change in consumption/income.
D) consumption/change in income.

Question 10

Empirical data show that a strong, positive relationship exists between personal consumption expenditures and:

A) planned investment spending.
B) the real interest rate.
C) the level of personal disposable income.
D) progressive taxes.

Question 11

Which of the following statements about the consumption function is true?

A) The consumption function describes the relationship between aggregate consumption and the price level.
B) The consumption function describes the relationship between aggregate consumption and the level of national income.
C) The consumption function describes all equilibrium levels of income where aggregate saving and investment are equal.
D) The consumption function describes the relationship between aggregate consumption and the wealth.

Question 12

The marginal propensity to consume (MPC):

A) shows how much income changes when consumption falls.
B) is always greater than one.
C) will be equal to one if the MPS is equal to one.
D) shows the fraction of an extra dollar of income that is spent on consumption.

Question 13

In the absence of a government sector, household consumption expenditure is as follows:


-The marginal propensity to consume is:

A) 0.25.
B) 0.75.
C) 0.20.
D) 0.80.

Question 14

-In Figure 6.1:

A) the point A represents autonomous consumption.
B) c represents the slope of the line.
C) c represents the marginal propensity to consume.
D) all of the above

Question 15

The relationship between household saving and the household income is the:

A) consumption function.
B) savings function.
C) investment function.
D) aggregate demand function.

Question 16

Which one of the following statements about household consumption and saving is false?

A) The slope of the consumption function is the marginal propensity to consume.
B) Both the marginal propensity to consume and the marginal propensity to save are positive but less than one.
C) The marginal propensity to consume becomes negative when aggregate consumption exceeds aggregate income.
D) The slope of the savings function is the marginal propensity to save.

Question 17

Other things constant, the slope of the savings function shows us that:

A) increases in the level of national income results in increases in the level of planned saving.
B) the level of planned saving will increase if there are increases in the real interest rate.
C) any increase in the level of planned saving will be accompanied by a reduction in the level of planned investment.
D) as the level of income rises, consumers will spend less and save more out of each extra dollar of income.

Question 18

The arithmetic value of 1 - MPC equals:

A) the marginal propensity to invest.
B) the investment multiplier.
C) the marginal propensity to save.
D) the marginal propensity to tax.

Question 19

Other things constant, an increase in households' willingness to save more at every level of income will cause:

A) the consumption function to become flatter because the MPC rises.
B) the consumption function to make a downward parallel shift.
C) the consumption function to remain stationary but the saving function to shift upward.
D) the consumption function to become steeper because the MPC declines.

Question 20

Other things remaining the same, if households become more frugal and decide to spend less at each level of income, then the consumption function will:

A) become less steep because the MPS rises.
B) remain unchanged but the savings function will shift downward.
C) become steeper because the MPC falls.
D) make a parallel shift downward.

Question 21

The arithmetic value of 1 - MPS equals:

A) the marginal propensity to invest.
B) the investment multiplier.
C) the marginal propensity to consume.
D) the marginal propensity to tax.

Question 22

All of the following are components of investment except:

A) increases in plant and equipment.
B) inventory expansion.
C) residential housing construction.
D) purchases of stocks and bonds.

Question 23

In the short run model of an aggregate economy, the investment function:

A) is considered less stable than the consumption function.
B) varies with the level of savings.
C) contains expenditures on plant and equipment but not inventory.
D) is a component of aggregate supply.

Question 24

An increase in the economy's stock of physical productive capital is called:

A) saving.
B) inventory adjustment.
C) investment.
D) crowding out.

Question 25

Investment expenditure is considered to be part of autonomous expenditure:

A) because it increases when savings increase.
B) decreases when real GDP decreases.
C) does not change when real GDP changes.
D) decreases when consumption decreases.

Question 26

If the MPC is 0.8 and if Y= C = 1000, then the autonomous consumption is:

A) 1000.
B) 800.
C) 500.
D) 200.

Question 27

If the autonomous consumption is 250 and if Y= C = 1000, then the marginal propensity to save is:

A) 0.80.
B) 0.75.
C) 0.50.
D) 0.25.

Question 28

If the marginal propensity to import (MPZ) is positive but less than unity:

A) the import function is horizontal.
B) the import function has a negative slope.
C) the import function has a positive slope.
D) the import function is vertical.

Question 29

If the marginal propensity to import is 0.2, each additional dollar of national income adds ____ to planned
________.

A) 2 cents, exports
B) 2 cents, imports
C) 20 cents, exports
D) 20 cents, imports

Question 30

The expression AE = C + I + X - Z refers to:

A) aggregate expenditure in a closed economy.
B) aggregate expenditure in an economy trading internationally.
C) aggregate expenditure in an economy with a government sector.
D) aggregate expenditure in an economy with international trade and without government sector.

Question 31

Net exports will increase if imports ____and exports _______.

A) fall, rise
B) fall, fall
C) rise, rise
D) rise, fall

Question 32

_____ export expenditure decreases equilibrium output and a ______ MPZ increases equilibrium output.

A) higher, lower
B) higher, higher
C) lower, lower
D) lower, higher

Question 33

In an open economy, economy's net exports:

A) increase if domestic income increases.
B) increase if foreign income increases.
C) increase if MPZ increases.
D) investment increases.

Question 34

Other things equal, serious recessions in Canada's trading partners will:

A) have no perceptible impact on the Canadian economy.
B) cause inflation in the Canadian economy.
C) lead to lower exports, lower real output and lower employment in the Canadian economy.
D) lead to higher domestic consumption in the Canadian economy.

Question 35

The autonomous expenditure multiplier in an open economy is affected by the:

A) marginal propensity to save.
B) marginal propensity to tax.
C) marginal propensity to import.
D) all of the above.

Question 36

If the investment multiplier in an economy is 5, an increase in exports by $20 billion will:

A) increase GDP by any amount, since we do not know the investment multiplier.
B) increase GDP by $20 billion.
C) decrease GDP by $20 billion.
D) increase GDP by $100 billion.

Question 37

Other things equal, an increase in an economy's exports will:

A) lower the marginal propensity to import.
B) have no effect on equilibrium GDP because imports will change by an offsetting amount.
C) decrease its aggregate expenditures and therefore decrease its equilibrium GDP.
D) increase its aggregate expenditures and therefore increase its equilibrium GDP.

Question 38

As used in the income-expenditure diagram in macroeconomics, the 45 degree line:

A) shows all the points at which spending and real income are equal.
B) contains only a consumption component.
C) represents consumption plus planned investment.
D) shows those income levels where the marginal propensity to save is 1.

Question 39

In the short run model, equilibrium real GDP occurs when:

A) households spend all their income on consumption.
B) businesses cannot produce any more goods and services.
C) real GDP (Y) equals planned aggregate expenditure (AE).
D) business investment expenditure is zero.

Question 40

Suppose that the macro economy is in short run equilibrium. We can be sure that the level of:

A) income equals the level of output.
B) output equals consumption.
C) output equals the level of aggregate expenditure.
D) investment equals the level of depreciation.

Question 41

The equilibrium GDP in a private sector closed model is the level of output:

A) where consumption equals saving.
B) where actual investment equals consumption.
C) where planned expenditure by households and business equals output
D) where full employment exists.

Question 42

According to short run macroeconomic analysis, once an economy attains equilibrium:

A) there will be no unemployment in the economy.
B) investment must be zero.
C) consumption will be equal to or greater than income.
D) there may or may not be unemployment.

Question 43

When an economy is at its equilibrium level of output, we know that:

A) aggregate spending by the private sector equals the value of the output produced by the economy minus the capital consumption.
B) firms will not hold any inventories.
C) aggregate expenditure will always equal the value of the aggregate output produced by the economy.
D) consumption expenditures equal the total value of the goods produced by the economy.

Question 44

In a closed economy without government, the marginal propensity to consume is 0.75, consumption equals income at $120 billion and the level of investment is $40 billion. What is the equilibrium level of income?

A) $280 billion.
B) $320 billion.
C) $262 billion.
D) $198 billion.

Question 45

Suppose that planned spending for consumer and investment goods is greater than the level of total output produced by the economy, then:

A) the resulting shortage of goods and reductions in inventories will cause producers to increase their level of output and national income will rise.
B) an unplanned build-up in inventories with the result that national income rises.
C) a decline in national income because planned spending is less than actual spending.
D) either an increase or decrease in national income, it depends on the relative size of the marginal propensity to consume.
Respectively.

Question 46

The letters Y, C, S, and I are used to represent GDP, consumption, saving, and investment


-Equilibrium Y (GDP) in a no-government closed economy is:

A) $100.
B) $200.
C) $300.
D) $400.

Question 47

The letters Y, C, S, and I are used to represent GDP, consumption, saving, and investment


-In a closed economy with no government: (a) the marginal propensity to consume is 0.5, (b) autonomous consumption $60 billion and (c) the level of autonomous investment is $40 billion. What is the equilibrium level of income?

A) $250 billion.
B) $300 billion.
C) $200 billion.
D) $100 billion.

Question 48

-The above graph represents a closed private-sector economy. Which of the following statements is false?

A) Autonomous expenditures equal $150 and equilibrium Y is 300.
B) MPS is 0.5.
C) The slope of the AE line cannot be found from the graph.
D) MPC is constant at 0.5.

Question 49

-When the closed economy's GDP is $400:

A) the aggregate expenditures exceed GDP.
B) consumption is $350 and planned investment is zero so that aggregate expenditures are $350.
C) consumption is $300 and planned investment is $50 so that aggregate expenditures are $350.
D) consumption is $300 and actual investment is $100 so that aggregate expenditures are $400.

Question 50

-At the $300 level of GDP:

A) aggregate expenditures and GDP are equal.
B) consumption is $250 and planned investment is $50.
C) saving equals investment.
D) all of the above are true.

Question 51

-At every level of GDP the MPC and MPS:

A) are 1/2 and 1/2 respectively.
B) are equal to the 3/4 and 1/4 respectively.
C) are 4/5 and 1/5 respectively.
D) cannot be determined from the information given.

Question 52

-A build-up of unwanted inventories:

A) occurs when the consumers are saving more than businesses want to invest.
B) never occurs in a closed private economy.
C) indicates a lack of confidence by consumers.
D) will lead to higher income.

Question 53

C=60+.8Y
I=I₀=30
X=40
Z=10+0.2Y

-The equilibrium level of income (Y) is:

A) 350.
B) 300.
C) 200.
D) 135.

Question 54

C=60+.8Y
I=I₀=30
X=40
Z=10+0.2Y

-Which of the following statements is false in equilibrium situations?

A) We fund that (Z-X) is +30 and (I-S) is +30.
B) We find that NX is -30.
C) We find that investment equals saving.
D) We find that the aggregate expenditure is 300.

Question 55

C=60+.8Y
I=I₀=30
X=40
Z=10+0.2Y

-The equilibrium the level of saving is:

A) 30.
B) 20.
C) 10.
D) zero.

Question 56

Table 6.3

-Refer to Table 6.3. The equation representing the consumption schedule for the above economy is:

A) C = 120 + 0.8Y.
B) C = 60 + 0.6Y.
C) C = 60 + 0.5Y.
D) C=60.

Question 57

Table 6.3

-Refer to Table 6.3. Fill in the column of AE schedule. The AE equation is:

A) AE = 90 + 0.6Y.
B) AE = 120 + 0.6Y.
C) AE = 90 + 0.5Y.
D) AE = 200 + 0.5Y.

Question 58

Table 6.3

-Refer to Table 6.3. The equilibrium level of real GDP in the above economy is:

A) 225.
B) 400.
C) 300.
D) 500.

Question 59

Table 6.3

-Refer to Table 6.3. Which of the following statements is false?

A) The equilibrium NX is 70.
B) The equilibrium (S - I) is 70.
C) (I - S) is minus 70.
D) (I -S) is greater than (Z - X).

Question 60

If national income is $1500 billion and the level of planned spending by households and businesses is $1575 billion, then we can say that:

A) there will be an accumulation of inventories and output will rise.
B) there will be an accumulation of inventories and output will fall.
C) there will be an unplanned reduction in inventories and output will fall.
D) there will be an unplanned reduction in inventories and output will rise.

Question 61

Suppose that the economy experiences an unplanned increase in its inventories. Firms will react by:

A) increasing their output and as a result, equilibrium income rises.
B) not changing their output because the disequilibrium in inventories will be self-correcting.
C) reducing their output and as a result, equilibrium income falls.
D) reducing their output with no significant change on equilibrium income.

Question 62

Suppose that all firms in the economy experience a sudden and unexpected increase of $125 billion in their inventories. We can say that:

A) firms will be reluctant to reduce their level of output, because they believe that consumption spending will eventually increase.
B) household spending was more than what the firms had initially estimated.
C) the level of planned inventories has remained constant.
D) firms over estimated aggregate expenditure by $125 billion.

Question 63

If national income is above its equilibrium level, then:

A) there are unplanned reductions in inventories and national income will fall.
B) there are unplanned reductions in inventories and national income will rise.
C) there are unplanned increases in inventories and national income will rise.
D) there are unplanned increases in inventories and national income will fall.

Question 64

One of the early signs that an economy should increase its level of aggregate output is:

A) the willingness of firms to increase their level of investment in plant and equipment.
B) a reduction in the overall price level.
C) a surplus of consumer goods on the market.
D) an unplanned reduction in business inventories.

Question 65

In a simple economy with no government and no foreign trade, aggregate income is in equilibrium when:

A) tax revenues equal government spending.
B) planned savings equals planned investment.
C) planned investment equals planned consumption.
D) consumption equals aggregate income.

Question 66

Assume that a private-sector open economy is in equilibrium. Which of the following statements is false?

A) If savings exceeds investment, it must mean that export is greater than import.
B) If savings exceeds investment, it must mean that export is less than import.
C) If savings exceeds investment, export can be greater than or less than import.
D) If investment exceeds savings, it must mean that export is more than import.

Question 67

-Refer to Figure 6.3. Figure 6.3 shows that below Y₀:

A) investment is less than savings.
B) savings is always positive.
C) savings is less than investment.
D) investment falls with income.

Question 68

Which of the following statements is correct for a closed economy with no government?

A) Planned saving equals planned investment only at the equilibrium level of domestic output.
B) All levels of domestic output where planned investment exceeds planned saving will be too high for equilibrium.
C) Planned and actual investment are identical at all possible levels of domestic output.
D) Saving equals actual investment only at the equilibrium level of domestic output.

Question 69

Where I is planned investment, S is saving, and Y is gross domestic product (GDP).
I = I₀ = 80 (6.3)
S = -80 + .4Y (6.4)

-Refer to equations (6.3) and (6.4). The equilibrium GDP in a no-government closed economy will be:

A) $160.
B) $400.
C) $360.
D) $480.

Question 70

Where I is planned investment, S is saving, and Y is gross domestic product (GDP).
I = I₀ = 80 (6.3)
S = -80 + .4Y (6.4)

-Refer to equations (6.3) and (6.4). The equilibrium consumption in a private sector closed economy will be:

A) $400.
B) $280.
C) $320.
D) $360.

Question 71

Where I is planned investment, S is saving, and Y is gross domestic product (GDP).
I = I₀ = 80 (6.3)
S = -80 + .4Y (6.4)

-Refer to equations (6.3) and (6.4). The equilibrium saving in a private sector closed economy will be:

A) $40.
B) $120.
C) $60.
D) $80.

Question 72

If S = -60 + 0.25Y and I = I₀ = 60, where S is saving, I₀ is planned investment, and Y is gross domestic product (GDP), then he equilibrium GDP in a private sector closed economy will be:

A) $200.
B) $320.
C) $360.
D) $480.

Question 73

-Refer to Figure 6.4. The equilibrium Y in a private sector closed economy will be:

A) $100.
B) $500.
C) $600.
D) cannot be determined from the information given.

Question 74

If income is at a level at which planned saving is greater than planned investment, then:

A) income will rise.
B) income will fall.
C) income will not change, but saving will.
D) investment will rise.

Question 75

Suppose that national income is initially at its equilibrium level when desired investment falls. We would expect:

A) a fall in national income, but not by as much as the fall in desired investment.
B) no change in national income even though desired investment spending falls.
C) an increase in national income by an amount equal to the reduction in investment spending.
D) a fall in national income by some multiple of the fall in desired investment spending.

Question 76

In a 45-degree line diagram a fall in investment demand causes:

A) a shift along the 45 degree line.
B) a movement along AE.
C) a movement along a new AE curve.
D) a downward shift in the AE curve.

Question 77

The investment multiplier is:

A) negatively related to the MPS.
B) positively related to the MPC.
C) negatively related to the MPZ.
D) all of the above

Question 78

Consider a no government open economy. If the marginal propensity to consume is 0.9 and the marginal propensity to import is 0.15, then:

A) the multiplier is 1/0.9
B) the multiplier is 1/.75.
C) the multiplier is 1/0.25.
D) the multiplier is 1/0.1.

Question 79

The principle of the multiplier states that:

A) any autonomous increase in spending that causes the aggregate expenditure line to shift up will result in a larger increase in national income.
B) any autonomous increase in spending that causes the aggregate expenditure line to shift up several times will result in a larger increase in national income.
C) any equilibrium increase in national income will result in a larger increase in autonomous spending.
D) for any given increase in equilibrium income, there will be a less than proportional increase in consumer spending.

Question 80

Multiplier in an open economy with no government taxing or spending is:

A) 1/(1-MPC).
B) 1/(MPC + MPZ).
C) 1/(1 - MPS).
D) 1/(MPS + MPZ).