Deck 8: Aggregate Demand

Question 1

Vannah earned $250 000 in 2011 as a celebrity endorser and spokesperson.She spent 85 percent of her earnings.In 2012,with a new contract she earned $750 000 per year.Her consumption increased by $250 000.Which of the following statements about her propensity to consume is NOT accurate?

A)Her 2012 marginal propensity to consume is 0.50.
B)Her 2011 average propensity to consume is 0.85.
C)Her average propensity to consume fell between 2011 and 2012.
D)Her marginal propensity to save falls to 0.15 in 2012.

Answer 1

Her marginal propensity to save falls to 0.15 in 2012.

Question 2

How do economists define aggregate demand?

A)as the total spending by all consumers, business firms, governments, and foreigners in Canada
B)as the total amount that all consumers, business firms, governments, and foreigners wish to spend on all final goods and services at various price levels
C)as the total spending by consumers, business firms, and governments in one year
D)as the total spending by consumers, business firms, and governments on final goods and services

Answer 2

as the total amount that all consumers, business firms, governments, and foreigners wish to spend on all final goods and services at various price levels

Question 3

Which of the following statements about consumer expenditures is the most accurate?

A)They increase when prices rise.
B)They include purchases of all consumer goods.
C)They include the purchase of new housing.
D)They increase when disposable income increases.

Answer 3

They increase when disposable income increases.

Question 4

Which of the following expenditures would be counted as consumption in GDP accounts?

A)Mark buys a new computer for his medical economic consulting business.
B)Juan leases a new computer for his graphic design company.
C)Leslie, a Health Canada scientist, buys a new computer for her lab at work.
D)Mary buys a new computer to check her e-mail and play computer games.

Question 5

If the country is experiencing rapid economic growth and increasing personal incomes,what is the expected result on consumption and investment?

A)Consumption and investment will both increase.
B)Consumption will decrease and investment will increase.
C)Consumption will increase and investment will decrease.
D)Consumption and investment will both decrease.

Question 6

If consumption is a direct function of disposable income,what would an increase in personal taxes do?

A)decrease both consumption and aggregate demand
B)decrease net exports
C)decrease consumption but not aggregate demand
D)increase consumption but not aggregate demand

Question 7

If Rhonda's taxes rose by $20 000,other things being equal,which of the following statements about her consumption is accurate?

A)It would fall by $15 000 if her MPC was equal to 0.75.
B)It would fall by $15 000 if her APC was equal to 0.75.
C)It would rise by $15 000 if her APC was equal to 0.75.
D)It would rise by $15 000 if her MPC was equal to 0.75.

Question 8

Which of the following describes marginal propensity to consume (MPC)and average propensity to consume (APC)?

A)MPC is less than 1, but APC can be either greater or less than 1.
B)Both MPC and APC are always less than 1.
C)MPC is less than 1, but APC is always equal to 1.
D)MPC and APC are always greater than or equal to 1.

Question 9

What is the largest component of aggregate demand?

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

Question 10

What effect will a reduction in personal income taxes,other things being equal,have?

A)It will decrease aggregate demand.
B)It will leave consumers with more disposable income.
C)It will leave consumers with less disposable income.
D)It will increase aggregate supply.

Question 11

If Alice's taxes fell by $10 000,other things being equal,which of the following statements about her consumption is accurate?

A)It would rise by $6000 if her APC was equal to 0.6.
B)It would fall by $6000 if her APC was equal to 0.6.
C)It would rise by $6000 if her MPC was equal to 0.6.
D)It would fall by $6000 if her MPC was equal to 0.6.

Question 12

What is aggregate demand the sum of?

A)C + I + G
B)C + I + G + (X - M)
C)C + I + G + X
D)C + I + G + (X + M)

Question 13

Other things being equal,what effect would an appreciable increase in interest rates have?

A)an increase in exports
B)a decrease in consumption
C)an increase in investment spending
D)a decrease in savings

Question 14

How do economists define the average propensity to consume (APC)?

A)as the proportion of any change in disposable income that becomes a change in consumption
B)as the proportion of any change in disposable income that does not become a change in consumption
C)as the fraction of total disposable income that households do not spend on consumption
D)as the fraction of total disposable income that households spend on consumption

Question 15

What does empirical evidence suggest about consumption?

A)It decreases with any tax cut.
B)It increases with an increase in income.
C)It decreases with any increase in income.
D)It increases with any decrease in consumer confidence.

Question 16

What does aggregate demand include?

A)the demand for intermediate goods and final goods
B)the demand for final goods and services
C)the demand for investment, including stocks, bonds, and gold
D)the demand for all monetary and nonmonetary transactions

Question 17

Which of the following does NOT contribute to aggregate demand?

A)the labour force
B)government expenditures
C)investment expenditures
D)consumption

Question 18

How do economists define the marginal propensity to consume (MPC)?

A)as the fraction of total disposable income that households save
B)as the fraction of total disposable income that households spend on consumption
C)as the additional disposable income households earn in a given period
D)as the additional consumption that results from one dollar increase in disposable income

Question 19

Bill's disposable income goes from $100 000 in 2011 to $200 000 in 2012,and his consumption spending goes from $80 000 in 2011 to $140 000 in 2012.Which of the following statements about Bill's consumption is accurate?

A)Bill's MPC is equal to 0.6.
B)Bill's MPC is equal to 0.7.
C)Bill's APC rose between 2011 and 2012.
D)Bill's APC is equal to 0.20 in 2011.

Question 20

Fred's consumption purchases fall from $140 000 in 2011 to $100 000 in 2012,as his disposable income falls from $200 000 in 2011 to $150 000 in 2012.Which of the following statements about Fred's consumption is accurate?

A)Fred's APC in 2012 equals 0.7.
B)Fred's MPC equals 0.8.
C)Fred's APC was higher in 2012 than in 2011.
D)Fred's MPC equals 0.7.

Question 21

If consumption in Canada was 68 percent of GDP,investment was 19 percent,government purchases were 13 percent,exports were 14 percent,and imports were 14 percent,what is the net exports percentage of GDP?

A)-28 percent
B)-1 percent
C)0 percent
D)28 percent

Question 22

With which of the following marginal propensities to consume would a given change in disposable income have the smallest effect on aggregate demand?

A)0.2
B)0.4
C)0.6
D)0.8

Question 23

If private consumption in Canada was 69 percent of GDP,investment was 18 percent,government purchases were 18 percent,exports were 9 percent,and imports were 14 percent,what percentage of GDP would net exports be equal to?

A)-5
B)5
C)23
D)-23

Question 24

Which of the following changes in disposable income would lead to the greatest increase in consumption?

A)a $20 000 increase in disposable income, if MPC equals 0.5
B)a $15 000 increase in disposable income, if MPC equals 0.6
C)a $12 000 increase in disposable income, if MPC equals 0.75
D)a $30 000 increase in disposable income, if MPC equals 0.25

Question 25

In adding the nation's total output,which of the following best describes net exports?

A)They always total to a positive figure.
B)They would include purchases of Canadian automobiles by foreigners plus purchases of foreign automobiles by Canadian citizens.
C)They are a positive number when the value of exports from Canada exceeds the value of imports into Canada.
D)They represent exports of final goods and services plus imports of final goods and services.

Question 26

With which of the following marginal propensities to consume would a given change in disposable income have the greatest effect on consumption?

A)0.2
B)0.4
C)0.6
D)0.8

Question 27

Which of the following changes in taxes would lead to the greatest increase in consumption?

A)a $15 000 decrease in taxes, if MPC equals 0.6
B)a $20 000 decrease in taxes, if MPC equals 0.5
C)a $12 000 decrease in taxes, if MPC equals 0.75
D)a $30 000 decrease in taxes, if MPC equals 0.25

Question 28

If private consumption in Canada was 67 percent of GDP,investment was 16 percent,government purchases were 13 percent,exports were 12 percent,and imports were 8 percent,what is the net exports percentage of GDP?

A)-20 percent
B)-4 percent
C)4 percent
D)20 percent

Question 29

What is an increase in interest rates likely to result in?

A)an increase in investment spending
B)a decrease in investment spending
C)an increase in consumption spending
D)no change in either consumption or investment spending

Question 30

Which of the following changes in tax income would lead to the smallest increase in consumption?

A)a $20 000 decrease in taxes, if MPC equals 0.5
B)a $12 000 decrease in taxes, if MPC equals 0.75
C)a $30 000 decrease in taxes, if MPC equals 0.25
D)a $15 000 decrease in taxes, if MPC equals 0.6

Question 31

With which of the following marginal propensities to consume would a given change in disposable income have the smallest effect on consumption?

A)0.2
B)0.4
C)0.6
D)0.8

Question 32

Which of the following will decrease aggregate demand?

A)imports falling faster than exports
B)exports rising faster than imports
C)exports rising and imports falling
D)exports falling faster than imports

Question 33

Which of the following changes in disposable income would lead to the smallest increase in consumption?

A)a $30 000 increase in disposable income, if MPC equals 0.25
B)a $15 000 increase in disposable income, if MPC equals 0.6
C)a $20 000 increase in disposable income, if MPC equals 0.5
D)a $12 000 increase in disposable income, if MPC equals 0.75

Question 34

If Don spends $10 000 on consumption when he has no disposable income and then spends 75 cents out of every dollar of disposable income he earns on consumption,which of the following statements about Don's consumption is the most accurate?

A)Don's MPC equals 0.75.
B)Don's APC will rise as his income rises.
C)Don spends $20 000 on consumption when his disposable income is $20 000.
D)Don's APC equals 0.75.

Question 35

What is a decrease in interest rates likely to result in?

A)no change in either consumption or investment spending
B)a decrease in investment spending
C)an increase in consumption spending
D)a decrease in consumption spending

Question 36

If our exports of final goods and services increase more than our imports,other things being equal,how will aggregate demand be affected?

A)It will be negative.
B)It will increase.
C)It will decrease by the change in net exports.
D)It will stay the same.

Question 37

With which of the following marginal propensities to consume would a given change in disposable income have the greatest effect on aggregate demand?

A)0.2
B)0.4
C)0.6
D)0.8

Question 38

If a U.S.citizen buys a science fiction book printed in Canada,how does that transaction affect the measurement of aggregate demand in Canada?

A)It increases U.S. aggregate demand by the purchase price of the book.
B)It enters aggregate demand as investment.
C)It is an export, and is included in aggregate demand.
D)It is an import, and is not included in aggregate demand.

Question 39

What is included in investment (I)?

A)the amount spent on stocks and bonds
B)the amount spent on consumer goods that last more than one year
C)the amount spent on purchases of art
D)the amount spent on new factories and machinery

Question 40

If a person's consumption goes from $8 000 to $12 000 when her disposable income goes from $10 000 to $20 000,what is her MPC equal to?

A)0.4
B)0.6
C)0.75
D)0.8

Question 41

What impact will a higher real interest rate have?

A)It will increase the dollar amount of investment but not change the investment demand curve.
B)It will decrease the investment demand curve.
C)It will decrease the dollar amount of investment but not change the investment demand curve.
D)It will increase the investment demand curve.

Question 42

How is the investment demand curve for the economy drawn as it relates to real interest rates?

A)as a vertical line
B)as a horizontal line
C)as a downward sloping line
D)as an upward sloping line

Question 43

What occurs at higher real interest rates?

A)People consume less.
B)People consume more.
C)People save less.
D)People pay more taxes.

Question 44

Which of the following factors does NOT affect investment?

A)the level of profits
B)current consumer spending
C)expectations of long-term profit growth
D)optimism

Question 45

Under what circumstances does investment increase?

A)when firms become pessimistic in their expectations
B)when firms have very low capital utilization rates
C)when interest rates are higher
D)when tax rates on businesses are reduced

Question 46

Which of the following will NOT shift the investment demand curve?

A)business inventories that have fallen far below desired levels
B)the introduction of new, profitable, technological investment opportunities
C)a decrease in real interest rates
D)business expectations of higher future sales and profits

Question 47

Which of the following will NOT increase the investment demand curve?

A)the introduction of new technology offering profitable investment opportunities
B)business expectations of higher future sales and profits
C)a decrease in the real interest rate
D)business inventories that have fallen far below desired levels

Question 48

Which of the following will NOT decrease the investment demand curve?

A)business inventories that have risen far above desired levels
B)business expectations of lower future sales and profits
C)an increase in real interest rates
D)higher business taxes

Question 49

In which of following examples does increased investment NOT occur?

A)The level and rate of change of profits increases.
B)Businesses decide to proceed with an investment on the basis of increases in income or output.
C)Business taxes are increased.
D)Investors become more optimistic in their expectations toward the future.

Question 50

What impact would a combination of the discovery of new,profitable,technological investment opportunities and inventories that have fallen far below desired levels have?

A)It would decrease the investment demand curve.
B)It could either increase or decrease the investment demand curve.
C)It would leave the investment demand curve unchanged.
D)It would increase the investment demand curve.

Question 51

What effect would the discovery of new,profitable,technological investment opportunities,combined with inventory levels that have risen far above desired levels,have on aggregate demand (AD)?

A)AD would increase.
B)AD would decrease.
C)AD could either increase or decrease, depending on which change was of a greater magnitude.
D)AD would stay the same.

Question 52

Which of the following is likely to increase investment and,as a result,increase aggregate demand?

A)decreased business taxes
B)higher interest rates
C)pessimistic business forecasts
D)an increase in inventory levels

Question 53

Under what circumstances will increases in investment tend to occur?

A)when the interest rates start to increase
B)when consumers become more optimistic in their expectations toward the future
C)when the level and rate of change of profits increases
D)when inventories unexpectedly increase

Question 54

What impact will a lower real interest rate have?

A)It will decrease the investment demand curve.
B)It will increase the dollar amount of investment but not change the investment demand curve.
C)It will decrease the dollar amount of investment but not change the investment demand curve.
D)It will increase the investment demand curve.

Question 55

What occurs at higher real interest rates?

A)People save less.
B)People pay more taxes.
C)People save more.
D)People consume more.

Question 56

What occurs at lower real interest rates?

A)Governments consume less.
B)People save less.
C)People save more.
D)Firms invest less.

Question 57

What will lead to an increase in the dollar amount of investment in the investment and saving market?

A)business expectations of lower future sales and profits
B)the introduction of new profitable technology investment opportunities
C)business inventories that have risen far above desired levels
D)an increase in real interest rates

Question 58

Which of the following is likely to reduce investment and,as a result,reduce aggregate demand?

A)higher real interest rates
B)a decrease in inventories
C)decreased business taxes
D)optimistic business forecasts

Question 59

What occurs at higher real interest rates?

A)People save more.
B)People spend more on services.
C)People save less.
D)People consume more durable goods.

Question 60

How is the national saving schedule for the economy drawn as it relates to real interest rates?

A)as a horizontal line
B)as a vertical line
C)as a downward sloping line
D)as an upward sloping line

Question 61

What impact would a combination of higher business taxes,reduced expected future profitability of businesses,and a reduction in the level of new profitable technological investment opportunities have?

A)It would increase the investment demand curve.
B)It would leave the investment demand curve unchanged.
C)It could either increase or decrease the investment demand curve.
D)It would decrease the investment demand curve.

Question 62

If,at a given interest rate,the quantity of savings supplied is less than the quantity of investment demanded,what can we conclude?

A)There is a shortage of savings and real interest rates will fall.
B)There is a surplus of savings and real interest rates will rise.
C)There is a surplus of savings and real interest rates will fall.
D)There is a shortage of savings and real interest rates will rise.

Question 63

What would increase the supply of national savings curve?

A)a decrease in disposable income
B)an increase in expected future earnings
C)an increase in disposable income
D)an increase in real interest rates

Question 64

During a recession,governments tend to run budget deficits.What is the result of this on the real interest rate and investment spending?

A)The real interest rate decreases and investment spending increases.
B)The real interest rate increases and investment spending decreases.
C)The real interest rate and investment spending both decrease.
D)The real interest rate and investment spending both increase.

Question 65

What impact would a higher real interest rate have?

A)It would increase the supply of national savings.
B)It would decrease the dollar amount of national savings, but not shift the supply of national savings curve to the left.
C)It would decrease the supply of national savings.
D)It would increase the dollar amount of national savings, but not shift the supply of national savings curve to the right.

Question 66

What impact would a combination of improved,expected future profitability of businesses and higher business taxes have?

A)It would leave the investment demand curve unchanged.
B)It would decrease the investment demand curve.
C)It could either increase or decrease the investment demand curve.
D)It would increase the investment demand curve.

Question 67

What would result from a decrease in the investment demand curve?

A)an increase in the dollar amount of savings
B)a decrease in real interest rates
C)an increase in the dollar amount of investment
D)an increase in real interest rates

Question 68

What would increase the supply of national savings curve?

A)an increase in tax rates
B)a decrease in disposable income
C)an increase in real interest rates
D)an increase in disposable income

Question 69

Figure 8-1

Refer to Figure 8-1.Which of the following could NOT shift the investment demand curve from ID₀ to ID₂?

A)the discovery of new, profitable investment opportunities
B)inventories rising above desired levels
C)higher business taxes
D)pessimistic forecasts of sustained future profits

Question 70

If,at a given interest rate,the quantity of savings supplied is greater than the quantity of investment demanded,what can we conclude?

A)There is a shortage of savings and real interest rates will rise.
B)There is a surplus of savings and real interest rates will rise.
C)There is a shortage of savings and real interest rates will fall.
D)There is a surplus of savings and real interest rates will fall.

Question 71

Figure 8-1

Refer to Figure 8-1.Which of the following could shift the investment demand curve from ID₀ to ID₂?

A)the discovery of new, profitable investment opportunities
B)inventories falling below desired levels
C)the development of new, more efficient production machinery
D)higher business taxes

Question 72

What would result from an increase in the investment demand curve?

A)an increase in real interest rates
B)a decrease in real interest rates
C)a decrease in the dollar amount of savings
D)a decrease in the dollar amount of investment

Question 73

What impact would a lower real interest rate have?

A)It would decrease the dollar amount of national savings, but not shift the supply of national savings curve to the left.
B)It would increase the dollar amount of national savings, but not shift the supply of national savings curve to the right.
C)It would decrease the supply of national savings.
D)It would increase the supply of national savings.

Question 74

Figure 8-1

Refer to Figure 8-1.Which of the following could NOT shift the investment demand curve from ID₀ to ID₁?

A)higher real interest rates
B)lower business taxes
C)the discovery of new, profitable investment opportunities
D)inventories falling below desired levels

Question 75

Figure 8-1

Refer to Figure 8-1.Which of the following could shift the investment demand curve from ID₀ to ID₁?

A)the discovery of new, profitable investment opportunities
B)higher business taxes
C)inventories rising above desired levels
D)pessimistic sales and profit forecasts

Question 76

What would decrease the supply of national savings curve?

A)a decrease in disposable income
B)a decrease in real interest rates
C)a decrease in expected future earnings
D)an increase in disposable income

Question 77

What would increase the supply of national savings curve?

A)a decrease in expected future earnings
B)an increase in real interest rates
C)a decrease in disposable income
D)an increase in expected future earnings

Question 78

What would result from an increase in the supply of national savings curve?

A)an increase in real interest rates
B)a decrease in real interest rates
C)a decrease in the dollar amount of savings
D)a decrease in the dollar amount of investment

Question 79

What would result from a decrease in the supply of national savings curve?

A)an increase in the dollar amount of savings
B)an increase in real interest rates
C)an increase in the dollar amount of investment
D)a decrease in real interest rates

Question 80

In a closed economy,what will an increase in government spending without an equivalent increase in tax revenue lead to?

A)a decrease in private saving and a decrease in investment
B)a decrease public saving and a decrease in investment
C)an increase in private saving and an increase in investment
D)an increase in public saving and an increase in investment