Deck 8: The Reserve Bank and the Economy

Question 1

All of the following would be included in planned aggregate expenditure EXCEPT

A) purchases of services provided by government employees.
B) planned changes in inventories.
C) sales of domestically produced goods to foreigners.
D) Canada Pension Plan payments.
E) consumer spending on services.

Answer 1

Canada Pension Plan payments.

Question 2

Consumption,planned private-sector investment,government purchases,and net exports are the four components of

A) value added.
B) potential output.
C) planned aggregate expenditure.
D) aggregate supply.
E) economic productivity.

Answer 2

planned aggregate expenditure.

Question 3

Menu costs are the costs of

A) running a restaurant.
B) changing prices.
C) increasing planned aggregate expenditure.
D) changing production.
E) obtaining computer softwarE.

Answer 3

changing prices.

Question 4

Economists refer to the costs of changing prices as ________ costs.

A) scarcity
B) average variable
C) fixed
D) menu
E) opportunity

Question 5

Total planned spending on final goods and services is called

A) labour income.
B) labour productivity.
C) planned aggregate expenditure.
D) aggregate supply.
E) consumption.

Question 6

The basic Keynesian model assumes that,in the _______,producers sell whatever is demanded at _______ prices.It,therefore,assumes that the price level is constant and the inflation rate is _______.

A) short run;preset;zero
B) short run;preset;low
C) long run;preset;zero
D) medium run;preset;zero
E) short run;variable;zero

Question 7

The basic Keynesian model explains how the economy as a whole performs in the

A) short run.
B) long run.
C) medium run.
D) short run and the long run.
E) medium run and the long run.

Question 8

In the basic Keynesian model,all of the following are true EXCEPT

A) planned consumption always equals actual consumption.
B) planned private-sector investment always equals actual investment.
C) planned government spending always equals actual government spending.
D) planned net exports always equal actual net exports.
E) planned total spending equals planned aggregate expenditurE.

Question 9

The only component of planned aggregate expenditure for which planned spending is not always assumed to equal actual spending is

A) consumption.
B) private-sector investment.
C) government purchases.
D) exports.
E) imports.

Question 10

The key assumption of the basic Keynesian model is that

A) planned aggregate expenditure is autonomous.
B) actual investment equals planned investment.
C) planned aggregate expenditure is constant.
D) short-run equilibrium output equals potential output.
E) firms meet demand at preset prices.

Question 11

The largest component of planned aggregate expenditure in Canada is ________,which has amounted to about ________ of GDP in recent years.

A) business investment;57%
B) government purchases;57%
C) consumption;57%
D) consumption;75%
E) business investment;75%

Question 12

All of the following would be included in planned aggregate expenditure EXCEPT

A) spending on consumer durables.
B) planned changes in inventories.
C) sales of domestically produced goods to foreigners.
D) interest paid on the public debt.
E) consumer spending on services.

Question 13

The decision whether to change prices frequently,or infrequently,is an application of the

A) principle of comparative advantage.
B) scarcity principle.
C) principle of increasing opportunity cost.
D) cost-benefit principle.
E) equilibrium principlE.

Question 14

Firms do not change prices frequently because

A) there are legal prohibitions against doing so.
B) it is easier to change the quantity of capital used in production.
C) it is costly to do so.
D) customers will refuse to patronize firms that change prices frequently.
E) managers are lazy.

Question 15

The basic Keynesian model assumes that,in the _______,the economy's potential output is ________.Potential output depends only on available resources (labour force,capital stock,and the state of technology)which change little in the ________.

A) short run;constant;long run
B) short run;variable;short run
C) long run;constant;short run
D) short run;constant;short run
E) short run;variable;long run

Question 16

The four components of planned aggregate expenditure are

A) spending on domestic goods,domestic services,foreign goods,and foreign services.
B) spending on durable goods,inventory investment,government debt,and net exports.
C) consumption,planned private-sector investment,government transfers,and net interest.
D) consumption,interest payments,transfer payments,and net exports.
E) consumption,planned private-sector investment,government purchases,and net exports.

Question 17

The key assumption of the basic Keynesian model is that firms meet the demand for their products at preset prices.This means that once a firm has set the price of its product,it

A) never changes that price.
B) will only change the price when a customer offers to pay a different amount.
C) will change the price infrequently.
D) will change the price when the benefits of doing so outweigh the costs associated with making the change.
E) will only ever decrease the price of its product.

Question 18

Planned aggregate expenditure is total

A) value added in the economy.
B) planned spending on final goods and services.
C) profits in the economy.
D) revenue from the sale of goods and services.
E) income of households,businesses,governments,and foreigners.

Question 19

The basic Keynesian model assumes that,in the _______,the economy's potential output is ________.

A) short run;unknown
B) short run;variable
C) long run;constant
D) short run;constant
E) long run;variable

Question 20

The basic Keynesian model assumes that,in the _______,producers sell whatever is demanded at _______ prices.

A) short run;preset
B) long run;variable
C) long run;preset
D) medium run;preset
E) short run;variable

Question 21

As disposable income decreases,consumption

A) increases.
B) decreases.
C) remains constant
D) may either increase or decrease depending on the average propensity to consume.
E) may either increase or decrease depending on the marginal propensity to consumE.

Question 22

As disposable income increases,consumption

A) increases.
B) decreases.
C) remains constant
D) may either increase or decrease depending on the average propensity to consume.
E) may either increase or decrease depending on the marginal propensity to consumE.

Question 23

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year.The company purchases $300,000 of new equipment during the year.Sales for the year turn out to be $900,000.Actual investment by Dave's Mirror Company equals ________ and planned investment equals _______.

A) $250,000;$150,000
B) $300,000;$200,000
C) $550,000;$450,000
D) $650,000;$550,000
E) $900,000;$800,000

Question 24

Ron's Desk Company expects to sell $10,000,000 worth of desks and to produce $10,500,000 worth of desks in the coming year.The company purchases $100,000 of new equipment during the year.Sales for the year turn out to be $9,000,000.Actual investment by Ron's Desk Company equals _______ and planned investment equals _______.

A) $1,000,000;$100,000
B) $1,500,000;$100,000
C) $1,500,000;$600,000
D) $1,600,000;$100,000
E) $1,600,000;$600,000

Question 25

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce 1,250,000 worth of mirrors in the coming year.The company purchases $300,000 of new equipment during the year.Sales for the year turn out to be $1,000,000.Actual investment by Dave's Mirror Company equals ________ and planned investment equals _______.

A) $250,000;$250,000
B) $300,000;$300,000
C) $550,000;$550,000
D) $300,000;$550,000
E) $550,000;$300,000

Question 26

The two parts of the Keynesian consumption function are consumption that depends on _________ and consumption that depends on ________.

A) disposable income;factors other than disposable income
B) planned spending;unplanned spending
C) real income;nominal income
D) money;wealth
E) gross taxes;net taxes

Question 27

If firms sell more output than expected,planned investment

A) is greater than actual investment.
B) is less than actual investment.
C) equals actual investment.
D) equals zero.
E) equals planned aggregate expenditurE.

Question 28

Data on disposable income and consumption spending for the Adam Smith family are given below:
Based on these data,the Adam Smith family has a marginal propensity to consume of

A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
E) 0.5.

Question 29

The consumption function is the relationship between consumption and

A) planned aggregate expenditure.
B) total spending.
C) investment.
D) its determinants,such as disposable income.
E) unplanned changes in spending,particularly inventory investment.

Question 30

Data on disposable income and consumption spending for the Adam Smith family are given below:
Based on these data,the Adam Smith family has a marginal propensity to consume of

A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
E) 0.5.

Question 31

Data on disposable income and consumption spending for the Adam Smith family are given below:
Based on these data,the Adam Smith family has a marginal propensity to consume of

A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
E) 0.5.

Question 32

The tendency of changes in asset prices to affect spending on consumption goods is called the _________ effect.

A) income
B) substitution
C) wealth
D) multiplier
E) net tax

Question 33

If firms sell less output than expected,planned investment

A) is greater than actual investment.
B) is less than actual investment.
C) equals actual investment.
D) equals zero.
E) equals planned aggregate expenditurE.

Question 34

Ron's Desk Company expects to sell $10,000,000 worth of desks and to produce $10,500,000 worth of desks in the coming year.The company purchases $100,000 of new equipment during the year.Sales for the year turn out to be $10,000,000.Actual investment by Ron's Desk Company equals _______ and planned investment equals _______.

A) $0;$100,000
B) $0;$600,000
C) $100,000;$600,000
D) $100,000;$100,000
E) $600,000;$600,000

Question 35

Data on disposable income and consumption spending for the Adam Smith family are given below:
Based on these data,the Adam Smith family has a marginal propensity to consume of

A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
E) 0.5.

Question 36

The relationship between consumption and its determinants,such as disposable income,is called the

A) marginal propensity to consume.
B) opportunity cost of consumption.
C) marginal benefit of consumption.
D) consumption function.
E) disposable income function.

Question 37

Ron's Desk Company expects to sell $10,000,000 worth of desks and to produce $10,500,000 worth of desks in the coming year.The company purchases $100,000 of new equipment during the year.Sales for the year turn out to be $10,500,000.Actual investment by Ron's Desk Company equals _______ and planned investment equals _______.

A) $100,000;$100,000
B) $100,000;$600,000
C) $500,000;$600,000
D) $600,000;$100,000
E) $600,000;$600,000

Question 38

Data on disposable income and consumption spending for the Adam Smith family are given below:
Based on these data,the Adam Smith family has a marginal propensity to consume of

A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
E) 0.5.

Question 39

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year.The company purchases $300,000 of new equipment during the year.Sales for the year turn out to be $1,100,000.Actual investment by Dave's Mirror Company equals ________ and planned investment equals _______.

A) $300,000;$300,000
B) $300,000;$550,000
C) $450,000;$450,000
D) $450,000;$550,000
E) $550,000;$300,000

Question 40

The largest component of planned aggregate expenditure is

A) consumption.
B) private-sector investment.
C) government purchases.
D) exports.
E) imports.

Question 41

The amount by which consumption increases when disposable income increases by $1 is called

A) an automatic stabilizer.
B) the consumption function expenditure.
C) the marginal propensity to consume.
D) the income-expenditure multiplier.
E) autonomous planned aggregatE.

Question 42

Taxes less transfers refers to _________ taxes

A) negative
B) net
C) gross
D) income
E) government

Question 43

If consumption increases and disposable income remains the same,the average propensity to consume will

A) increase and then decrease.
B) remain constant.
C) increase.
D) decrease.
E) decrease and then increasE.

Question 44

If consumption decreases and disposable income stays the same,the average propensity to consume will

A) increase and then decrease.
B) remain constant.
C) increase.
D) decrease.
E) decrease and then increasE.

Question 45

When the price of a financial or real asset rises much more rapidly than prices in general,we have a(n)

A) negative wealth effect.
B) increase in the marginal propensity to consume.
C) asset price bubble.
D) fundamental change in supply.
E) fundamental change in demand.

Question 46

Net taxes refers to taxes

A) plus transfers.
B) less transfers.
C) collected by both the federal and provincial governments.
D) plus income.
E) less incomE.

Question 47

An increase in disposable income

A) increases consumption because it shifts the consumption function upward.
B) decreases consumption because it shifts the consumption function downward.
C) increases consumption by moving upward along a specific consumption function.
D) decreases consumption by moving downward along a specific consumption function.
E) does not change consumption.

Question 48

As disposable income decreases,the

A) average propensity to consume increases.
B) average propensity to consume decreases.
C) level of consumption increases.
D) level of investment increases.
E) level of savings increases.

Question 49

If disposable income increases,the average propensity to consume will

A) increase and then decrease.
B) remain constant.
C) increase.
D) decrease.
E) decrease and then increasE.

Question 50

If a family's marginal propensity to consume (MPC)is 0.7,it is

A) operating at the break-even point.
B) spending 70% of any increase to its disposable income.
C) necessarily dissaving.
D) spending 70% of its income on consumer goods.
E) saving 70% of its incomE.

Question 51

The marginal propensity to consume (MPC)can be defined as the

A) change in consumption divided by the change in disposable income.
B) change in disposable income divided by the change in consumption.
C) ratio of income to saving.
D) ratio of saving to consumption.
E) ratio of consumption to investment.

Question 52

The slope of the consumption function between two points on the graph is

A) the ratio of the change in consumption to the change in disposable income between those two points.
B) the ratio of the change in disposable income over the change in consumption between those two points.
C) equivalent to one plus the marginal propensity to save.
D) equivalent to the average propensity to consume.
E) equivalent to the average propensity to savE.

Question 53

When the consumption function is plotted on a graph,

A) consumption is on the horizontal axis and saving is on the vertical axis.
B) consumption is on the vertical axis and saving is on the horizontal axis.
C) consumption is on the horizontal axis and disposable income is on the vertical axis.
D) consumption is on the vertical axis and disposable income is on the horizontal axis.
E) consumption is on the horizontal axis and investment is on the vertical axis.

Question 54

If an increase in a household's disposable income from $40,000 to $48,000 leads to an increase in consumption from $35,000 to $41,000,then the

A) slope of the consumption function is 0.75.
B) average propensity to consume is 0.75.
C) marginal propensity to save is 0.20.
D) marginal propensity to consume is 0.6.
E) slope of the consumption function is 0.8.

Question 55

As incomes go up,the

A) average propensity to consume tends to rise.
B) average propensity to consume tends to fall.
C) volume of saving declines.
D) volume of consumption declines.
E) volume of saving is unaffected.

Question 56

The fraction,or percentage,of disposable income that is consumed is called the

A) break-even income.
B) consumption schedule.
C) marginal propensity to consume.
D) average propensity to consume.
E) marginal propensity to savE.

Question 57

The average propensity to consume is consumption

A) divided by disposable income.
B) divided by saving.
C) multiplied by savings.
D) multiplied by investment.
E) divided by investment.

Question 58

The marginal propensity to consume is the change in consumption divided by the change in

A) saving.
B) investment.
C) disposable income.
D) debt.
E) net exports.

Question 59

If disposable income decreases,the average propensity to consume will

A) increase and then decrease.
B) remain constant.
C) increase.
D) decrease.
E) decrease and then increasE.

Question 60

The marginal propensity to consume is the

A) amount by which disposable income increases when consumption increases by $1.
B) amount by which consumption increases when disposable income increases by $1.
C) percentage by which consumption increases when disposable income increases by $1.
D) percentage by which disposable income increases when consumption increases by $1.
E) ratio of consumption to disposable incomE.

Question 61

The portion of planned aggregate expenditure determined outside the model is called ______ planned aggregate expenditure.

A) potential
B) planned
C) actual
D) autonomous
E) induced

Question 62

When actual private-sector investment is greater than planned private-sector investment,

A) firms are selling less output than expected.
B) firms are selling more output than expected.
C) the quantity of output sold is the amount the firm expected to sell.
D) the economy is at short-run equilibrium.
E) autonomous planned aggregate expenditure is greater than induced planned aggregate expenditurE.

Question 63

If consumption increases by $8 when disposable income increases by $10,the marginal propensity to consume is equal to

A) 0.2.
B) 0.8.
C) 2.0.
D) 8.0.
E) 10.0.

Question 64

When actual private-sector investment is less than planned private-sector investment,

A) firms are selling less output than expected.
B) firms are selling more output than expected.
C) the quantity of output sold is the amount the firm expected to sell.
D) the economy is at short-run equilibrium.
E) autonomous planned aggregate expenditure is less than induced planned aggregate expenditurE.

Question 65

Unplanned inventory investment equals zero when

A) planned private-sector investment is greater than actual investment.
B) planned private-sector investment is less than actual investment.
C) planned private-sector investment equals actual investment.
D) expected sales are greater than actual sales.
E) expected sales are less than actual sales.

Question 66

If consumption increases by $9 when disposable income increases by $10,the marginal propensity to consume is equal to

A) 0.1.
B) 0.9.
C) 1.0.
D) 9.0.
E) 10.0.

Question 67

In the short run,when output is less than planned aggregate expenditure,

A) potential output is greater than GDP.
B) potential output is less than GDP.
C) potential output equals GDP.
D) planned private-sector investment is greater than actual private-sector investment.
E) planned private-sector investment is less than actual private-sector investment.

Question 68

In Macroland,autonomous consumption equals 100,the marginal propensity to consume equals 0.75,net taxes are equal to 40,planned investment is equal to 50,government purchases are equal to 150,and net exports are equal to 20.Autonomous planned aggregate expenditure equals

A) 100.
B) 290.
C) 320.
D) 350.
E) 360.

Question 69

When prices are predetermined,the level of output that equals planned aggregate expenditure is called _________ output.

A) the natural rate of
B) potential
C) short-run equilibrium
D) induced
E) autonomous

Question 70

In Econland,autonomous consumption equals 200,the marginal propensity to consume equals 0.9,net taxes are equal to 100,planned private-sector investment is equal to 200,government purchases are equal to 300,and net exports are equal to 50.Autonomous planned aggregate expenditure equals

A) 660.
B) 750.
C) 0.9Y.
D) 0.1Y.
E) 850.

Question 71

In the short run,when output equals planned aggregate expenditure,

A) potential output equals GDP.
B) planned private-sector investment equals actual private-sector investment.
C) autonomous planned aggregate expenditure equals induced planned aggregate expenditure.
D) planned private-sector investment is greater than actual private-sector investment.
E) planned private-sector investment is less than actual private-sector investment.

Question 72

In Macroland,autonomous consumption equals 100,the marginal propensity to consume equals 0.75,net taxes are equal to 40,planned private-sector investment is equal to 50,government purchases are equal to 150,and net exports are equal to 20.Induced planned aggregate expenditure equals ______________.

A) 0.25Y
B) 320 + 0.25Y
C) 0.75Y
D) 290 + 0.75Y
E) 0.75 (Y-T)

Question 73

Short-run equilibrium output is the level of output at which actual output

A) equals potential output.
B) is greater than potential output expenditure.
C) is less than potential output.
D) equals planned aggregate expenditure.
E) is greater than planned aggregate

Question 74

The portion of planned aggregate expenditure determined within the model (because it depends on output)is called ______ planned aggregate expenditure.

A) potential
B) planned
C) actual
D) autonomous
E) induced

Question 75

In Econland,autonomous consumption equals 200,the marginal propensity to consume equals 0.9,net taxes are equal to 100,planned private-sector investment is equal to 200,government purchases are equal to 300,and net exports are equal to 50.Induced planned aggregate expenditure equals _________.

A) 0.1Y
B) 660 + 0.1Y
C) 0.9Y
D) 660 + 0.9Y
E) 6,660

Question 76

In the short run,when output is greater than planned aggregate expenditure,

A) potential output is greater than GDP.
B) potential output is less than GDP.
C) potential output equals GDP.
D) planned private-sector investment is greater than actual private-sector investment.
E) planned private-sector investment is less than actual private-sector investment.

Question 77

Induced planned aggregate expenditure is the portion of planned aggregate expenditure that

A) equals aggregate output.
B) equals planned spending.
C) equals autonomous planned aggregate expenditure.
D) is determined within the model.
E) is determined outside the model.

Question 78

If the marginal propensity to consume is equal to 0.65,then a $100 increase in disposable income leads to a _________ increase in consumption.

A) $0.35
B) $0.65
C) $35
D) $65
E) $100

Question 79

Autonomous planned aggregate expenditure is the portion of planned aggregate expenditure that

A) equals aggregate output.
B) equals planned spending.
C) equals induced planned aggregate expenditure.
D) is determined within the model.
E) is determined outside the model.

Question 80

If the marginal propensity to consume is equal to 0.75,then a $100 increase in disposable income leads to a _________ increase in consumption.

A) $0.25
B) $0.75
C) $25
D) $75
E) $100