Deck 9: The Sticky-Price Income-Expenditure Framework: Consumption and the Multiplier

Question 1

The questions with which Chapter 9 is concerned include each of the following except

A) what are "sticky" prices?
B) what are "flexible" prices?
C) what factors might make prices sticky?
D) what factors determine the size of the spending multiplier?

Answer 1

what are "flexible" prices?

Question 2

The questions with which Chapter 9 is concerned include each of the following except

A) in the short run in which prices are sticky, what determines the level of real GDP?
B) in the short run in which prices are sticky, what happens to real GDP if some component of planned total expenditures decreases?
C) in the short run in which prices are sticky, what happens to real GDP if some component of planned total expenditures increases?
D) in the short run in which prices are sticky, what determines the level of real GDP in the long run?

Answer 2

in the short run in which prices are sticky, what determines the level of real GDP in the long run?

Question 3

The questions with which Chapter 9 is concerned include each of the following except

A) in the short run in which prices are flexible, what determines the level of real GDP?
B) in the short run in which prices are sticky, what happens to real GDP if some component of aggregate demand decreases?
C) in the short run in which prices are sticky, what happens to real GDP if some component of aggregate demand increases?
D) what factors determine the size of the spending multiplier?

Answer 3

in the short run in which prices are flexible, what determines the level of real GDP?

Question 4

Each of the following facts about the economy of the United States over the decade of the 1990s is true except

A) real GDP has grown at an average rate of 3.7 percent per year.
B) the unemployment rate has fluctuated around an average level consistent with stable inflation of 4.5 to 5.0 percent.
C) net exports have been consistently positive.
D) the inflation rate has averaged about 1.8 percent per year.

Question 5

The flexible-price model does not give a complete picture of the macroeconomy for each of the following reasons except

A) real GDP growth is not always smooth.
B) real GDP growth is sometimes negative.
C) the unemployment rate is not always equal to the natural rate.
D) inflation is sometimes negative.

Question 6

Fluctuations in real GDP are called

A) business expansions.
B) business cycles.
C) business contractions.
D) stock market crashes.

Question 7

In the expansion or boom phase of the business cycle,

A) production and employment increase while the price level decreases.
B) production, unemployment, and the price level increase.
C) production, employment, and the price level increase.
D) production, employment, and the price level decrease.

Question 8

In the recession or depression phase of the business cycle,

A) production and employment increase while the inflation rate decreases.
B) production, employment, and the inflation rate increase.
C) production, unemployment, and the inflation rate increase.
D) production, employment, and the inflation rate decrease.

Question 9

In the expansion or boom phase of the business cycle, each of the following generally occurs except

A) real GDP grows faster than trend.
B) the investment spending share of real GDP increases.
C) unemployment increases.
D) inflation increases.

Question 10

In the recession or depression phase of the business cycle, each of the following generally occurs except

A) real GDP decreases.
B) the investment spending share of real GDP increases.
C) unemployment increases.
D) inflation decreases.

Question 11

To understand business cycles, we need a model that does not guarantee always-full employment because

A) business cycles are fluctuations in actual output, not potential output.
B) business cycles are fluctuations in potential output, not actual output.
C) business cycles are fluctuations in the natural rate of inflation, not the actual rate of inflation.
D) business cycles are fluctuations in actual net exports, not potential net exports.

Question 12

In the sticky price model of the macroeconomy,

A) prices fluctuate quickly in response excess demand or supply and output remains fixed.
B) prices and output remain fixed in response to excess demand or supply.
C) prices remain fixed and output fluctuates in response to excess demand or supply.
D) prices and output fluctuate in response to excess demand or supply.

Question 13

The key to understanding how the level of real GDP can fall below and fluctuate around potential output is

A) money supply adjustment.
B) net export adjustment.
C) output adjustment.
D) inventory adjustment.

Question 14

In the flexible-price model, the consequences of a decrease in the marginal propensity to consume include each of the following except

A) a decrease in consumption spending.
B) a decrease in real GDP.
C) a decrease in the real interest rate.
D) an increase in investment spending.

Question 15

In the flexible-price model, the consequences of a decrease in the marginal propensity to consume include each of the following except

A) an increase in savings.
B) a decrease in the price level.
C) a decrease in the nominal wage rate.
D) an increase in real GDP.

Question 16

In the flexible-price model, the consequences of an increase in the baseline level of consumption spending include each of the following except

A) an increase in consumption spending.
B) an increase in the real interest rate.
C) an increase in real GDP.
D) a decrease in investment spending.

Question 17

In the sticky-price model, the consequences of a decrease in the marginal propensity to consume include each of the following except

A) a decrease in consumption spending.
B) a decrease in production.
C) an increase in investment spending.
D) a decrease in real GDP.

Question 18

In the sticky-price model, the consequences of a decrease in the marginal propensity to consume include each of the following except

A) a decrease in consumption spending.
B) an increase in exports.
C) a decrease in the employment level.
D) a decrease in real GDP.

Question 19

In the sticky-price model, a decrease in the baseline level of consumption spending will not result in an increase in savings, and thus a reduction in the real interest rate, because

A) the reduction in consumption spending is not saved in financial markets.
B) the decrease in national income reduces savings enough to offset the increase which comes from the decrease in C_o.
C) the reduction in net exports reduces savings enough to offset the increase which comes from the decrease in C_o.
D) the reduction in potential output reduces savings enough to offset the increase which comes from the decrease in C_o.

Question 20

In the short-run, each of the following is true except

A) prices are sticky.
B) nominal wages are sticky.
C) real GDP fluctuates around potential output.
D) unemployment remains at its natural rate.

Question 21

In the long-run, each of the following is true except

A) prices are flexible.
B) nominal wages are flexible.
C) real GDP fluctuates around potential output.
D) unemployment remains at its natural rate.

Question 22

Each of the following is a possible reason why prices are sticky except

A) managers and workers find that changing prices or renegotiating wages is costly.
B) managers and workers lack information and so confuse changes in total economywide spending with . changes in demand for their specific products.
C) the level of prices is as much a sociological as well as an economic variable.
D) managers and workers suffer from "real illusion."

Question 23

Each of the following is a possible reason why prices are sticky except

A) managers and workers find that changing prices or renegotiating wages is costly.
B) managers and workers lack information and so confuse changes in total economywide spending with . changes in demand for their specific products.
C) the level of prices is as much a physical as well as an economic variable.
D) managers and workers suffer from "money illusion."

Question 24

Each of the following is a possible reason why prices are sticky except

A) managers and workers find that changing prices or renegotiating wages is costly.
B) managers and workers lack the ability to differentiate between changes in total economywide spending . and changes in demand for their specific products.
C) the level of prices is as much a sociological as well as an economic variable.
D) managers and workers suffer from "money illusion."

Question 25

Each of the following is a possible reason why prices are sticky except

A) managers and workers are philosophically opposed to changing prices or renegotiating wages.
B) managers and workers lack information and so confuse changes in total economy-wide spending with changes in demand for their specific products.
C) the level of prices is as much a sociological as well as an economic variable.
D) managers and workers suffer from "money illusion."

Question 26

Economists call the costs associated with changing prices

A) "unnecessary costs."
B) "irrelevant costs."
C) "menu costs."
D) "unlikely costs."

Question 27

The reasons why changing prices or wages may be costly include each of the following except

A) the possibility that people attempt to stabilize their commercial relationships by signing long-term contracts.
B) the possibility that people attempt to stabilize their nonmarket relationships by signing long-term contracts.
C) the possibility that customers find frequent price changes annoying.
D) the possibility that other firms are not changing their prices.

Question 28

If prices are sticky, lower planned expenditure will

A) increase production which will increase incomes, which will increase consumption spending, which will further increase planned expenditure.
B) decrease production which will decrease incomes, which will decrease investment spending, which will further decrease planned expenditure.
C) decrease production which will decrease incomes, which will decrease consumption spending, which will further decrease planned expenditure.
D) decrease production which will increase incomes, which will increase consumption spending, which will further increase planned expenditure.

Question 29

If prices are sticky, higher planned expenditure will

A) increase production which will increase incomes, which will increase consumption spending, which will further increase planned expenditure.
B) increase production which will increase incomes, which will increase investment spending, which will further increase planned expenditure.
C) decrease production which will decrease incomes, which will decrease consumption spending, which will further decrease planned expenditure.
D) decrease production which will increase incomes, which will increase consumption spending, which will further increase planned expenditure.

Question 30

In the multiplier process, an increase in spending

A) causes a decrease in production and incomes, which leads to a further decrease in spending.
B) causes an increase in prices and wages, which causes a further increase in spending.
C) causes an increase in production and incomes, which leads to a decrease in spending.
D) causes an increase in production and incomes, which leads to a further increase in spending.

Question 31

In the multiplier process, a decrease in spending

A) causes an increase in production and incomes, which leads to a further increase in spending.
B) causes a decrease in production and incomes, which leads to a further decrease in spending.
C) causes a decrease in prices and wages, which causes a further decrease in spending.
D) causes a decrease in production and incomes, which leads to an increase in spending.

Question 32

If prices are sticky, the level of real GDP is determined by

A) the level potential output.
B) the level of the money supply.
C) the level of the stock market.
D) the level of planned total expenditure.

Question 33

The level of consumption spending is equal to

A) the baseline level of consumption spending times disposable income plus the marginal propensity to consume.
B) the baseline level of consumption spending plus the marginal propensity to consume times income.
C) the baseline level of consumption spending plus the marginal propensity to consume times disposable income.
D) the marginal propensity to consume times disposable income.

Question 34

The level of consumption spending (C) is equal to

A) C₀Y + C_y
B) C₀ + C_yY
C) C₀ + C_y (1-t)Y
D) C_y(1-t)Y

Question 35

The change in consumption expenditures which results from a $1 change in income is equal to

A) C₀.
B) C_y(1-t).
C) C_y.
D) C₀(1-t).

Question 36

The change in consumption expenditures which results from a change in income is equal to

A) C₀.
B) C_y(1-t).
C) C_y(1-t))Y
D) C₀(1-t))Y

Question 37

If the level of income is $9 trillion, C₀ = $2 trillion, C_y = .8 and t =.25, the level of consumption spending
(C) would equal

A) $5.4 trillion.
B) $3.8 trillion.
C) $9.2 trillion.
D) $7.4 trillion.

Question 38

If the level of income changes by $1 trillion, C₀ = $2 trillion, C_y = .8 and t =.25, the change in level of consumption spending (C) would equal

A) $6 trillion.
B) $.6 trillion.
C) $.8 trillion.
D) $.2 trillion.

Question 39

The intercept term of the consumption function is

A) the marginal propensity to consume (C_y).
B) the marginal propensity to consume times one minus the tax rate (C_y x(1-t)).
C) the marginal propensity to save.
D) the baseline level of consumption spending (C₀).

Question 40

Each of the following drive a wedge between GDP and consumption spending except

A) depreciation: goods produced that merely replaces obsolete and worn-out capital.
B) the tax system.
C) government transfer payments.
D) private savings.

Question 41

The largest component of GDP is

A) consumption spending.
B) investment spending.
C) government purchases.
D) net exports.

Question 42

The level of investment spending is determined by

A) the nominal interest rate and assessments of profitability made by business investment committees.
B) the nominal exchange rate and assessments of profitability made by business investment committees.
C) the real exchange rate and assessments of profitability made by business investment committees.
D) the real interest rate and assessments of profitability made by business investment committees.

Question 43

The level of investment spending I is equal to

A) I₀ + I_yY.
B) I₀ - I_yY.
C) I₀ - I_rr.
D) I₀ + I_rr.

Question 44

The parameters of the investment spending equation are

A) I₀: the baseline level of investment spending, and I_y: the marginal propensity to invest.
B) I₀: the baseline level of investment spending, and I_r: the interest sensitivity of investment.
C) I₀: the interest sensitivity of investment, and I_r: the baseline level of investment spending.
D) I₀: the interest sensitivity of investment, and I_r: the marginal propensity to invest.

Question 45

Net exports are determined by

A) the real interest rate, the level of foreign real GDP, and national income.
B) the real exchange rate, the level of real GDP, and autonomous spending.
C) the real exchange rate, the level of foreign real GDP, and national income.
D) the nominal exchange rate, the level of foreign GDP, and national income.

Question 46

In the planned total expenditure equation, the autonomous spending group

A) is made up of those components which depend directly on the level of national income.
B) is made up of those components which depend directly on the level of potential output.
C) is made up of those components which never change.
D) is made up of those components which do not depend directly on the level of national income.

Question 47

In the planned total expenditure equation, the group that is not the autonomous spending group

A) is made up of those components which depend directly on the level of national income.
B) is made up of those components which depend directly on the level of potential output.
C) is made up of those components which never change.
D) is made up of those components which do not depend directly on the level of national income.

Question 48

The marginal propensity to expend (MPE) is equal to

A) C_y(1-t) - I_y.
B) C_y(1-t) - IM_y.
C) C_y(1-t) + IM_y.
D) C_y(1-t) - I_r.

Question 49

The planned total expenditure equation is equal to

A) (C₀ + I + G +GX) + (C_y(1-t) - IM_y)Y.
B) (C₀ + I + G +GX) + (C_y(1-t) + IM_y)Y.
C) (C₀ + I + G +GX) - (C_y(1-t) - IM_y)Y.
D) -(C₀ + I + G +GX) + (C_y(1-t) - IM_y)Y.

Question 50

The planned total expenditure equation is equal to

A) A + (MPE)(r)
B) A + (MPE)(Y)
C) A - (MPE)(Y)
D) A - (MPE)(r)

Question 51

The slope of the planned expenditure line is

A) C₀+I+G+GX.
B) (C₀ + I + G +GX) + (C_y(1-t) - IM_y)Y.
C) (C_y(1-t) - IM_y)Y.
D) C_y(1-t) - IM_y.

Question 52

The intercept of the planned expenditure line is

A) the level of autonomous spending.
B) the level of autonomous spending plus the marginal propensity to expend.
C) the marginal propensity to expend.
D) the inverse of the marginal propensity to expend.

Question 53

The intercept of the planned expenditure line is

A) C₀+I+G+GX.
B) (C₀ + I + G +GX) + (C_y(1-t) - IM_y)Y.
C) (C_y(1-t) - IM_y)Y.
D) C_y(1-t) - IM_y.

Question 54

A change in the value of any determinant of any component of autonomous spending will

A) change the slope of the planned expenditure line.
B) change the intercept of the planned expenditure line.
C) change the intercept and the slope of the planned expenditure line.
D) change the level of potential output.

Question 55

A change in the value of any determinant of any component of the marginal propensity to expend will

A) change the slope of the planned expenditure line.
B) change the intercept of the planned expenditure line.
C) change the intercept and the slope of the planned expenditure line.
D) change the level of potential output.

Question 56

If the tax rate increases,

A) the slope of the planned expenditure line will increase.
B) the intercept of the planned expenditure line will increase.
C) the slope of the planned expenditure line will decrease.
D) the intercept of the planned expenditure line will decrease.

Question 57

If the tax rate increases,

A) the marginal propensity to expend will increase.
B) autonomous spending will increase.
C) the marginal propensity to expend will decrease.
D) autonomous spending will decrease.

Question 58

If the marginal propensity to consume increases,

A) the slope of the planned expenditure line will increase.
B) the intercept of the planned expenditure line will increase.
C) the slope of the planned expenditure line will decrease.
D) the intercept of the planned expenditure line will decrease.

Question 59

If the marginal propensity to consume increases,

A) the marginal propensity to expend will increase.
B) autonomous spending will increase.
C) the marginal propensity to expend will decrease.
D) autonomous spending will decrease.

Question 60

If the real interest rate decreases,

A) the slope of the planned expenditure line will increase.
B) the intercept of the planned expenditure line will increase.
C) the slope of the planned expenditure line will decrease.
D) the intercept of the planned expenditure line will decrease.

Question 61

If the real interest rate decreases,

A) the marginal propensity to expend will increase.
B) autonomous spending will increase.
C) the marginal propensity to expend will decrease.
D) autonomous spending will decrease.

Question 62

If foreign real income decreases,

A) the slope of the planned expenditure line will increase.
B) the intercept of the planned expenditure line will increase.
C) the slope of the planned expenditure line will decrease.
D) the intercept of the planned expenditure line will decrease.

Question 63

If foreign real income decreases,

A) the marginal propensity to expend will increase.
B) autonomous spending will increase.
C) the marginal propensity to expend will decrease.
D) autonomous spending will decrease.

Question 64

If the marginal propensity to consume is equal to .8, the tax rate is equal to .2, and the marginal propensity to import is .1, the marginal propensity to expend will equal

A) .5.
B) .54.
C) .74.
D) .26.

Question 65

If C_y = .75, t = .3, and IM_y = .2, MPE will equal

A) .425.
B) .725.
C) .325
D) .05

Question 66

The economy will be in equilibrium when

A) planned total expenditure equals real GDP.
B) national income equals real GDP.
C) planned total expenditure equals planned private savings.
D) government purchases equal tax revenue.

Question 67

On the income-expenditure diagram, the economy reaches equilibrium when

A) the planned expenditure line intersects the 35-degree angle equilibrium condition line.
B) the planned expenditure line intersects the vertical axis.
C) the planned expenditure line intersects the 65-degree angle equilibrium condition line.
D) the planned expenditure line intersects the 45-degree angle equilibrium condition line.

Question 68

The equilibrium level of national income is equal to

A) the level of autonomous expenditures divided by the marginal propensity to expend.
B) the level of autonomous expenditures multiplied by one minus the marginal propensity to expend.
C) the level of autonomous expenditures divided by one minus the marginal propensity to expend.
D) the level of autonomous expenditures multiplied by the marginal propensity to expend.

Question 69

If the level of autonomous expenditures is equal to $6000 billion and the marginal propensity to expend is equal to .6, the equilibrium level of national income (Y) is equal to

A) $15000 billion.
B) $10000 billion.
C) $3600 billion.
D) $2400 billion.

Question 70

If the autonomous level of spending is equal to $5000 billion, and the marginal propensity to expend decreases from .5 to .4, the equilibrium level of national income will

A) increase from $10000 billion to $12500 billion.
B) decrease from $10000 billion to $8333 billion.
C) decrease from $2500 billion to $2000 billion.
D) increase from $2500 billion to $3000 billion.

Question 71

The economy can be out of equilibrium even though total expenditures equal national income

A) because planned expenditure can be different from total expenditures.
B) because national income does not always equal real GDP.
C) the value of total sales does not always equal the value of total expenditures.
D) there is something wrong with the circular flow diagram.

Question 72

If the economy is not in equilibrium,

A) planned expenditures will not equal national income and there will be a planned change in inventories.
B) total expenditures will not equal national income and there will be an unplanned change in inventories.
C) planned expenditures will not equal national income and there will be an unplanned change in inventories.
D) planned expenditures will not equal national income and there will be a planned change in investment spending.

Question 73

If the level of autonomous spending is $6000 billion, the marginal propensity to expend is .4, and the level of national income is $12000, planned expenditures would be equal to

A) $10800 billion and inventory accumulation would equal $1200 billion.
B) $13200 billion and inventory accumulation would equal -$1200 billion.
C) $10800 billion and inventory accumulation would equal -$1200 billion.
D) $13200 billion and inventory accumulation would equal $1200 billion.

Question 74

If the level of autonomous spending is $6000 billion, the marginal propensity to expend is .4, and the level of national income is $8000, planned expenditures would be equal to

A) $9200 billion and inventory accumulation would equal $1200 billion.
B) $10800 billion and inventory accumulation would equal -$2800 billion.
C) $9200 billion and inventory accumulation would equal -$1200 billion.
D) $10800 billion and inventory accumulation would equal $2800 billion.

Question 75

If the level of autonomous spending is $6000 billion, the marginal propensity to expend is .4, and the level of national income is $10000, planned expenditures would be equal to

A) $10000 billion and inventory accumulation would equal $0 billion.
B) $12000 billion and inventory accumulation would equal -$2000 billion.
C) $12000 billion and inventory accumulation would equal $2000 billion.
D) $15000 billion and inventory accumulation would equal $5000 billion.

Question 76

The equation for of the spending multiplier is

A) 1 / MPE.
B) 1 / (1-MPE).
C) 1 / (1+MPE).
D) 1-MPE.

Question 77

The equation for the spending multiplier is

A) 1 / (C_y(1-t) - IM_y).
B) 1 / (1-(C_y(1-t) - IM_y))
C) 1 / (1-(C_y(1-t) - IM_y)).
D) 1-C_y(1-t) - IM_y.

Question 78

If C_y = .8, t = .2, IM_y = .1, and autonomous spending increases by $1000 billion, the equilibrium level of national income

A) will increase by $1852 billion.
B) will decrease by $1852 billion.
C) will decrease by $2174 billion.
D) will increase by $2174 billion.

Question 79

If the marginal propensity to expend is equal to .4, and the level of autonomous spending increases by $1500 billion, the equilibrium level of national income will

A) increase by $1500 billion.
B) decrease by $1500 billion.
C) increase by $3750 billion.
D) increase by $2500 billion.

Question 80

If C_y = .8, t = .2, IM_y = .1, the value of the multiplier would be

A) .54.
B) .46.
C) 2.174.
D) 1.852.