Deck 12: Aggregate Expenditure and Output in the Short Run

Question 1

Consumption spending is $16 million,planned investment spending is $4 million,unplanned investment spending is $2 million,government purchases are $6 million,and net export spending is $1 million.What is aggregate expenditure?

A) $22 million
B) $26 million
C) $27 million
D) $29 million

Answer 1

$27 million

Question 2

The key idea of the aggregate expenditure model is that in any particular year,the level of GDP is determined mainly by

A) investment spending.
B) export spending.
C) government spending.
D) the level of aggregate expenditure.

Answer 2

the level of aggregate expenditure.

Question 3

Economists first began studying the relationship between changes in aggregate expenditures and changes in GDP

A) in the 1950s.
B) during the Great Depression.
C) at the end of the Civil War.
D) during the Industrial Revolution.

Answer 3

during the Great Depression.

Question 4

A decrease in consumer confidence can put your job at risk if

A) aggregate expenditures fall.
B) consumers expect their incomes to rise in the future.
C) aggregate expenditures rise.
D) consumers expect firms to increase investment in the future.

Question 5

Household spending on goods and services is known as

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

Question 6

If inventories decline by more than analysts predict they will decline,this implies that

A) actual investment spending was greater than planned investment spending.
B) actual investment spending was less than planned investment spending.
C) actual investment spending was equal to than planned investment spending.
D) there is no relationship between actual investment spending and planned investment spending.

Question 7

Consumption spending is $22 million,planned investment spending is $7 million,actual investment spending is $7 million,government purchases are $9 million,and net export spending is $3 million.Based on this information,which of the following is true?

A) There was an unplanned change in inventories.
B) Aggregate expenditure is equal to GDP.
C) Aggregate expenditure is greater than GDP.
D) Aggregate expenditure is less than GDP.

Question 8

All of the following are one of the four main categories of spending identified by John Maynard Keynes except

A) consumption.
B) net exports.
C) government purchases.
D) taxes.

Question 9

The aggregate expenditure model focuses on the ________ relationship between real spending and ________.

A) short-run; real GDP
B) short-run; inflation
C) long-run; real GDP
D) long-run; inflation

Question 10

The formula for aggregate expenditure is

A) AE = C + I + G.
B) AE = C + I + G - NX.
C) AE = C + I + G + NX.
D) AE = C + I + depreciation - NX.

Question 11

All of the following are components of aggregate expenditure except

A) consumption spending.
B) net export spending.
C) actual investment spending.
D) government spending.

Question 12

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run,assuming ________ is constant.

A) total production; total income; real GDP
B) total spending; real GDP; total income
C) total spending; real GDP; the price level
D) total income; real GDP; the price level

Question 13

Actual investment spending does not include

A) spending on consumer durable goods.
B) spending on new capital equipment.
C) spending on new houses.
D) changes in inventories.

Question 14

Consumption spending is $5 million,planned investment spending is $8 million,unplanned investment spending is $2 million,government purchases are $10 million,and net export spending is $2 million.What is GDP?

A) $15 million
B) $23 million
C) $25 million
D) $27 million

Question 15

Consumption is $5 million,planned investment spending is $8 million,government purchases are $10 million,and net exports are equal to $2 million.If GDP during that same time period is equal to $27 million,what unplanned changes in inventories occurred?

A) There was an unplanned increase in inventories equal to $2 million.
B) There was no unplanned change in inventories.
C) There was an unplanned decrease in inventories equal to $2 million.
D) There was an unplanned decrease in inventories equal to $19 million.

Question 16

At macroeconomic equilibrium,

A) total investment equals total inventories.
B) total spending equals total production.
C) total consumption equals total production.
D) total taxes equal total transfers.

Question 17

When aggregate expenditure = GDP,

A) macroeconomic equilibrium occurs.
B) the federal budget is balanced.
C) net exports equal zero.
D) saving equals zero.

Question 18

Inventories refer to

A) goods which have been presold before they are produced.
B) goods that have been produced but not yet sold.
C) goods that have been planned but not yet produced.
D) goods that have been produced and sold in the same year.

Question 19

As a result of slow economic growth in 2011,many companies including Cisco Systems,Lockheed Martin,and Cracker Barrel Old Country Store cut production and employment as a result of the sluggish growth in the total amount of spending in the economy.The total amount of spending in the economy is known as

A) deficit spending.
B) planned investment spending.
C) aggregate expenditure.
D) equilibrium spending.

Question 20

An unplanned increase in inventories results from

A) an increase in planned investment.
B) a decrease in planned investment.
C) actual investment that is greater than planned investment.
D) actual investment that is less than planned investment.

Question 21

Why do economists care about aggregate expenditures?

Question 22

If economists forecast a decrease in aggregate expenditure,which of the following is likely to occur?

A) GDP will rise.
B) GDP will fall.
C) Wages will rise.
D) Inventories will fall.

Question 23

When aggregate expenditure is more than GDP,which of the following is true?

A) There was an unplanned decrease in inventories.
B) Firms spent less on capital goods than they planned.
C) Households bought fewer new homes than they planned.
D) All of the above must be true when aggregate expenditure is more than GDP.

Question 24

Firms in a small economy planned that inventories would grow over the past year by $500,000.Over that year,inventories did grow by exactly $500,000.This implies that

A) aggregate expenditure that year was equal to GDP that year.
B) there was an unplanned increase in inventories that year.
C) there was an unplanned decrease in inventories that year.
D) aggregate expenditure that year was greater than GDP that year.

Question 25

Which is the largest component of aggregate expenditure?

A) planned investment expenditures
B) consumption expenditures
C) government expenditures
D) net export expenditures

Question 26

The five most important variables that determine the level of consumption are

A) disposable income, wealth, expected future income, price level, and interest rate
B) wealth, savings account balances, checking account balances, stock portfolio balances, and bond portfolio balances
C) government purchases, interest rates, income, taxes, and transfers
D) government purchases, saving account balances, wealth, interest rates, portfolio balances

Question 27

If planned investment is greater than actual investment,then aggregate expenditure is less than GDP.

Question 28

Explain,in detail,how the adjustment to macroeconomic equilibrium occurs when spending is less than production.Be sure to discuss how inventories play a crucial role in the adjustment process.State what happens to GDP and employment during the adjustment process.

Question 29

A decrease in Social Security payments will

A) decrease consumption spending.
B) decrease investment spending.
C) decrease government spending.
D) decrease export spending.

Question 30

Firms in a small economy planned that inventories would grow over the past year by $300,000.Over that year,inventories actually grew by $400,000.This implies that

A) aggregate expenditure that year was less than GDP that year.
B) there was an unplanned decrease in inventories that year.
C) there was a planned decrease in inventories that year.
D) aggregate expenditure that year was equal to GDP that year.

Question 31

In a small economy in 2011,aggregate expenditure was $800 million while GDP that year was $850 million.Which of the following can explain the difference between aggregate expenditure and GDP that year?

A) Aggregate expenditure is always less than GDP in developed countries.
B) Firm investment in inventories was less than anticipated in 2011.
C) Firm investment in inventories was greater than anticipated in 2011.
D) Aggregate expenditure is always less than GDP in developing countries.

Question 32

If aggregate expenditure is less than GDP,how will the economy reach macroeconomic equilibrium?

A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.

Question 33

Aggregate expenditure includes consumption spending,unplanned investment spending,government purchases,and net exports.

Question 34

If firms find that consumers are purchasing more than expected,which of the following would you expect?

A) Aggregate expenditure will likely be greater than GDP.
B) Aggregate expenditure will likely be less than GDP.
C) The economy will adjust to macroeconomic equilibrium as inventories rise, and production and employment fall.
D) The economy will adjust to macroeconomic equilibrium as inventories fall, and production and employment fall.

Question 35

Table 23-1

Refer to Table 23-1.Using the table above,compute aggregate expenditure and identify the macroeconomic equilibrium.

Question 36

________ in taxes will decrease consumption spending,and ________ in transfer payments will increase consumption spending.

A) An increase; an increase
B) A decrease; an increase
C) An increase; a decrease
D) A decrease; a decrease

Question 37

If aggregate expenditure is more than GDP,then inventories fall and GDP rises.

Question 38

Which of the following will cause a direct increase in consumption spending?

A) an increase in planned investment
B) an increase in government spending
C) an increase in disposable income
D) a decrease in net export spending

Question 39

If firms sell exactly what they expected to sell,all of the following will be true except

A) aggregate expenditure will be greater than GDP.
B) there is no unplanned change in inventories.
C) inventories will not change, and GDP and employment will remain stable.
D) aggregate expenditure will be equal to GDP.

Question 40

________ is defined as the value of a household's assets minus the value of its liabilities.

A) Household income
B) Household wealth
C) Personal household consumption
D) Planned household investment

Question 41

MPC + MPS =

A) 0.
B) 0.5.
C) 1.
D) 100.

Question 42

If the MPC is 0.5,then a $10 million increase in disposable income will increase consumption by

A) $2 million.
B) $5 million.
C) $15 million
D) $50 million.

Question 43

An increase in the real interest rate will

A) cause consumers to spend more and save less.
B) most likely lower consumers' purchases of durable goods.
C) most likely lower the reward to savings.
D) most likely lower the cost of borrowing.

Question 44

Disposable income is defined as

A) national income - transfers + taxes.
B) national income + transfers + taxes.
C) national income - transfers - taxes.
D) national income + transfers - taxes.

Question 45

If disposable income increases by $100 million,and consumption increases by $90 million,then the marginal propensity to consume is

A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.

Question 46

The marginal propensity to save is defined as

A) saving divided by disposable income.
B) disposable income divided by saving.
C) the change in saving divided by the change in disposable income.
D) the change in disposable income divided by the change in saving.

Question 47

The slope of the consumption function is equal to

A) the change in consumption divided by the change in disposable income.
B) the change in consumption divided by the change in personal income.
C) the change in disposable income divided by the change in consumption.
D) the change in national income divided by the change in consumption.

Question 48

If disposable income falls by $50 billion and consumption falls by $40 billion,then the slope of the consumption function is

A) 1.20.
B) 0.80.
C) 0.70.
D) 0.10.

Question 49

Which of the following will raise consumer expenditures?

A) an increase in interest rates
B) a general decline in housing prices
C) an increase in expected future income
D) an increase in the price level

Question 50

Increases in housing prices

A) decrease consumption in direct proportion to the housing price increases.
B) directly increase consumption, as this increases household wealth.
C) have no independent effect on consumption.
D) decrease consumption only when the overall price level decreases in the economy.

Question 51

Decreases in the price level will

A) lower consumption because goods and services are less affordable.
B) raise consumption because goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.

Question 52

If the marginal propensity to save is 0.25,then a $10,000 decrease in disposable income will

A) increase consumption by $7,500.
B) increase consumption by $2,500.
C) decrease consumption by $7,500.
D) decrease consumption by $2,500.

Question 53

Table 23-2

Refer to Table 23-2.Given the consumption schedule in the table above,the marginal propensity to consume is

A) 0.1.
B) 0.3.
C) 0.6.
D) 0.9.

Question 54

A stock market boom which causes stock prices to rise should cause

A) a decrease in consumption spending.
B) an increase in consumption spending.
C) a decrease in wealth.
D) a decrease in net export spending.

Question 55

________ describes the relationship between consumption spending and disposable income.

A) Household wealth
B) The liquidity trap
C) The consumption function
D) The paradox of thrift

Question 56

When we graph consumption as a function of ________ rather than as a function of disposable income,the slope of this consumption function is ________.

A) national income; the MPC
B) personal income; (MPC - MPS)
C) national income; the MPS
D) personal income; the MPS

Question 57

Examples of assets that are included in household wealth would be

A) stocks, bonds, and savings accounts.
B) stocks, loans owed, and savings accounts.
C) stocks, bonds, and mortgages.
D) stocks, credit cards, and savings accounts.

Question 58

Housing wealth is equal to

A) the market value of a house minus the value of loans people have taken out to pay for the house.
B) the actual price paid for a house minus the current value of the house.
C) the actual price paid for a house minus the value of any outstanding loans taken out to pay for the house.
D) the current market value of the house should that house be sold within the next 30 days.

Question 59

If national income increases by $20 million and consumption increases by $5 million,the marginal propensity to consume is

A) 4.
B) 0.75.
C) 0.5.
D) 0.25.

Question 60

Refer to Table 23-2.Given the consumption schedule in the table above,the marginal propensity to save is

A) 0.1.
B) 0.4.
C) 0.7.
D) 0.9.

Question 61

If the marginal propensity to consume is 0.75,the marginal propensity to save is

A) 0.25.
B) 0.5.
C) 1.
D) 3.

Question 62

An increase in the price level in the United States will reduce exports and increase imports.

Question 63

The difference between GDP and net taxes is

A) personal income.
B) actual investment spending.
C) disposable income.
D) unplanned investment spending.

Question 64

When Jack's income increases by $1,000,he spends an additional $850 dollars.This implies that his marginal propensity to consume is 0.85.

Question 65

When Jack's income increases by $5,000,he spends an additional $4,000 dollars.This implies that his marginal propensity to consume is 1.25.

Question 66

From 1983-2011,net exports for the United States

A) grew and then declined.
B) were negative.
C) were positive.
D) increased as exports rose above imports.

Question 67

National income =

A) Consumption + Saving - Taxes
B) Consumption - Saving - Taxes
C) Consumption - Saving +Taxes
D) Consumption + Saving + Taxes

Question 68

Which of the following will decrease aggregate expenditure in the United States?

A) a decrease in the value of the dollar
B) a decrease in the price level
C) a decrease in interest rates
D) a decrease in government purchases

Question 69

If inflation in the United States is higher than inflation in other countries,what will be the effect on net exports for the United States?

A) Net exports will rise as U.S. exports increase.
B) Net exports will rise as U.S. imports decrease.
C) Net exports will decrease as U.S. exports decrease.
D) Net exports will decrease as U.S. imports decrease.

Question 70

If firms are more optimistic that future profits will rise and remain strong for the next few years,then

A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.

Question 71

Investment spending ________ during a recession,and ________ during an expansion.

A) declines; increases
B) increases; declines
C) increases; increases
D) declines; declines

Question 72

Higher interest rates increase both consumption and investment spending.

Question 73

Consumer spending ________ and investment spending ________.

A) is very volatile and subject to fluctuations; follows a smooth trend
B) follows a smooth trend; is more volatile and subject to fluctuations
C) follows a smooth trend; is the most stable component of aggregate expenditure
D) is very erratic; is also erratic, but less erratic than consumer spending

Question 74

The marginal propensity to consume is the slope of the consumption function.

Question 75

________ usually increase(s)when the U.S.economy is in a recession and decrease(s)when the U.S.economy is expanding.

A) Consumer spending
B) Planned investment
C) Net Exports
D) Unplanned investment

Question 76

Investment spending will increase when

A) the interest rate rises.
B) the corporate income tax increases.
C) business cash flow increases.
D) firms become more pessimistic about earning future profits.

Question 77

Concerned that its dependence on sales of microprocessors to computer firms would make it vulnerable to sharp sales declines during the recession of 2007-2009,Intel began to develop memory chips that could be used in portable consumer electronic devices such as cell phones.One reason that Intel chose to branch out from producing microprocessors for computers is that

A) sales of computers have been declining over the past decade.
B) technology with respect to microprocessor production was no longer advancing at a rate where Intel's new products were still wanted by computer manufacturers.
C) Intel had lost a majority of its market share in microprocessor production to foreign competition.
D) computers are durable goods and spending on computers follows the business cycle.

Question 78

U.S.net export spending rises when

A) the price level in the United States rises relative to the price level in other countries.
B) the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.
C) the value of the U.S. dollar increases relative to other currencies.
D) the inflation rate is higher in the United States relative to other countries.

Question 79

You review a salesman's income over a 5-year period.You note it fluctuates tremendously from year to year,yet his consumption of goods and services remains consistently at the same level,year after year.Does this mean that income is not a determinant of consumption,or could something else explain his behavior?

Question 80

During a(n)________ many firms experience increased profits,which increases ________ and investment spending.

A) expansion; government spending
B) recession; cash flow
C) expansion; cash flow
D) recession; business confidence