Deck 10: Aaggregate Expenditure and Agregate Demand

Question 1

Saving in our simple model

A)varies inversely with income
B)is determined primarily by the interest rate
C)is positive when a person spends less than her income
D)can never be negative because it is a stock
E)can never be negative because it is a flow

Answer 1

C

Question 2

The difference between consumption spending and disposable income

A)decreases as income increases
B)stays proportionally the same as income increases
C)decreases if the interest rate increases
D)equals the amount of taxes paid
E)equals saving

Answer 2

E

Question 3

Autonomous consumption expenditures are

A)identical to induced consumption
B)determined primarily by transfer payments
C)not influenced by disposable income
D)increasing at a decreasing rate
E)increasing at an increasing rate

Answer 3

C

Question 4

Exhibit 9-1

Given the data in Exhibit 9-1, the level of saving decreases as disposable income increases.

Question 5

The most important determinant of a household's consumption spending is

A)its disposable income
B)its total wealth
C)the number of persons in the household
D)its net wealth
E)the ratio of wage to nonwage income the household earns

Question 6

Historically, consumption spending in the United States has

A)increased as a percentage of income
B)remained approximately constant as a percentage of income
C)decreased as a percentage of income
D)remained constant over time
E)increased more than income

Question 7

Which is true of disposable income?

A)it excludes transfer payments
B)the portion of income is used solely for consumption
C)it is that part of aggregate income that is taken in taxes by government
D)all of disposable income contributes directly to aggregate expenditure
E)disposable income equals consumption expenditures plus saving

Question 8

The primary determinant of consumption spending is the price level.

Question 9

If consumption is greater than income, saving must be negative.

Question 10

If disposable income decreases, there is typically a decrease in consumption spending.

Question 11

Sarah moves from Upperland, which has no taxes or transfer payments, to Lowerland, where she is hit with taxes of $2,000 and receives transfer payments of $3,000. She earns the same wage in both countries, but in Lowerland her disposable income is

A)$1,000 higher
B)$1,000 lower
C)$5,000 higher
D)$2,000 lower
E)$3,000 higher

Question 12

The primary determinant of saving is the interest rate.

Question 13

Out of disposable income, households

A)consume and save
B)consume and invest
C)save and invest
D)consume, save, and pay taxes
E)consume, save, pay taxes, and make transfer payments

Question 14

Which must be true when consumption exceeds income?

A)the consumption function shifts upward
B)the consumption function shifts downward
C)aggregate expenditures equal real GDP
D)saving must be negative
E)aggregate expenditures will fall

Question 15

Exhibit 9-1

Given the data in Exhibit 9-1, the level of saving at a disposable income of $1,200 is

A)$80
B)$240
C)$950
D)$1,200
E)$1,300

Question 16

The primary determinant of saving is income.

Question 17

Disposable income is

A)the major determinant of consumption spending
B)total salary and wage income minus taxes and transfer payments
C)the income households earn before taxes
D)aggregate income plus taxes minus transfer payments
E)a measure of income that is equivalent to GDP

Question 18

An increase in the interest rate would shift the consumption function upward.

Question 19

Disposable income is equal to consumption

A)plus investment
B)plus taxes
C)plus saving
D)minus taxes
E)minus saving

Question 20

As disposable income increases, consumption spending

A)increases by the same amount
B)decreases by the same amount
C)increases by less than the increase in disposable income
D)decreases by less than the increase in disposable income
E)does not change at all

Question 21

If a household's income rises from $20,000 to $22,000 and its consumption spending rises from $19,000 to $20,500, then its

A)marginal propensity to save is 0.70
B)marginal propensity to save is 0.02
C)marginal propensity to consume is 0.93
D)marginal propensity to consume is 0.95
E)marginal propensity to consume is 0.75

Question 22

Induced saving

A)is that part of saving that is inversely related to the interest rate
B)plus autonomous saving equals disposable income
C)is that portion of saving that is directly related to income
D)is less than disposable income at every level of income
E)equals autonomous saving at every income level

Question 23

As disposable income increases,

A)consumption and saving both increase
B)consumption increases and saving decreases
C)consumption and saving both decrease
D)consumption decreases but saving increases
E)saving increases, but we cannot predict what happens to consumption

Question 24

If a household's income falls from $26,000 to $24,000 and its saving falls from $1,000 to $500, then its

A)marginal propensity to consume is 0.98
B)marginal propensity to consume is 1.33
C)marginal propensity to consume is 0.75
D)marginal propensity to save is 0.02
E)marginal propensity to save is 0.4

Question 25

The MPC is a relationship between

A)a change in consumption and a change in income
B)a change in consumption and a change in saving
C)changes in consumption and changes in saving
D)the ratio of income to consumption at any given level of income
E)the total level of consumption and the total level of saving

Question 26

If disposable income increases, consumption spending increases and saving decreases.

Question 27

If a household's income falls from $26,000 to $24,000 and its consumption spending falls from $25,000 to $23,500, then its

A)marginal propensity to consume is 0.98
B)marginal propensity to consume is 1.33
C)marginal propensity to consume is 0.94
D)marginal propensity to save is 0.02
E)marginal propensity to save is 0.25

Question 28

Which of the following is true of the relationship between disposable income and consumption?

A)Disposable income and consumption are both dependent variables.
B)Disposable income and consumption are both independent variables.
C)Disposable income is the dependent variable and consumption is the independent variable.
D)Consumption is the dependent variable and disposable income is the independent variable.
E)Neither is dependent nor independent since they are related by the equation DI = C + S.

Question 29

Induced consumption spending

A)represents consumption that is independent of income
B)plus saving equals total consumption spending
C)is positively related to disposable income
D)is equal to autonomous consumption spending in equilibrium
E)is the difference between autonomous consumption spending and disposable income

Question 30

If a household's income rises from $46,000 to $46,700 and its consumption spending rises from $35,800 to $36,400, then its

A)marginal propensity to consume is 0.86
B)marginal propensity to consume is 0.99
C)marginal propensity to consume is 0.98
D)marginal propensity to save is 0.01
E)marginal propensity to save is 0.86

Question 31

A simple statement of the consumption behavior suggested in our model is that

A)all income earned from wages is spent
B)total income must be equal to wages plus profits
C)social values and customs are the primary determinants of consumption spending
D)spending increases by less than income
E)people spend more and save more as their disposable income increases

Question 32

As disposable income increases, saving decreases.

Question 33

At the equilibrium level of real GDP, the MPC equals 1.

Question 34

The consumption function relates consumption spending to

A)the price level
B)interest rates
C)disposable income
D)expectations about the price level
E)household wealth

Question 35

The consumption function assumes that

A)only disposable income affects consumption
B)only the price level affects consumption
C)many factors other than disposable income affect consumption, and each is allowed to vary along the consumption function
D)factors other than disposable income affect consumption, but those are held constant along the consumption function
E)only consumer expectations affect consumption

Question 36

If the MPC < 1 and a household's disposable income increases by $2,000, the household's consumption will

A)increase by less than $2,000
B)increase by $2,000
C)decrease if the family was wealthy before the income change
D)remain the same unless the change in income significantly affects the household's wealth
E)remain the same

Question 37

The marginal propensity to consume is the fraction of a change in income that is saved.

Question 38

If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its

A)marginal propensity to consume is -0.67
B)marginal propensity to consume is 0.88
C)marginal propensity to consume is 0.20
D)marginal propensity to save is zero
E)marginal propensity to save is 0.12

Question 39

Consumption spending depends mainly on the level of

A)national income
B)disposable income
C)personal income
D)personal income taxes
E)imports

Question 40

The marginal propensity to save is the fraction of a change in income that is saved.

Question 41

If autonomous net taxes increase by $10 trillion and the marginal propensity to consume is 0.8, consumption initially will

A)increase by $50 trillion
B)decrease by $10 trillion
C)decrease by $8 trillion
D)increase by $10 trillion
E)decrease by $50 trillion

Question 42

The marginal propensity to consume measures the change in consumption divided by the change in income.

Question 43

The marginal propensity to consume

A)is the proportion of disposable income consumed
B)is the reciprocal of the ratio of disposable income to saving
C)is the change in consumption relative to a change in disposable income
D)minus the marginal propensity to save must equal 1
E)is greater than 1 at all levels of income

Question 44

Suppose that when disposable income rises from $3 trillion to $3.2 trillion, consumption rises from $2.5 trillion to $2.6 trillion. What is the marginal propensity to save?

A)0.1
B)0.2
C)0.5
D)0.8
E)0.9

Question 45

If every time disposable income increases by $5 billion, consumption increases by $4 billion and saving increases by $1 billion, the MPC and MPS are, respectively,

A)1/4, 1/2
B)1/2, 1/2
C)1, 0
D)4/5, 1/5
E)the answer is indeterminate from the information given

Question 46

The fraction of an increase in income that is saved is referred to as the

A)marginal propensity to save
B)average propensity to save
C)marginal propensity to consume
D)average propensity to consume
E)saving-consumption ratio (i.e., saving divided by consumption spending)

Question 47

The slope of the consumption function equals the

A)MPC
B)MPS
C)APC
D)APS
E)ratio of the APC to the APS (i.e., APC divided by APS)

Question 48

If income increases by $100 and the MPC is 3/4 (0.75), then consumption increases by

A)$25
B)$66.66
C)$50
D)$33.33
E)$75

Question 49

The inverse of the slope of the consumption function equals the marginal propensity to save.

Question 50

Exhibit 9-2

In Exhibit 9-2, the marginal propensity to save equals

A)60
B)0
C)0.43
D)0.57
E)0.30

Question 51

Exhibit 9-2

In Exhibit 9-2, the marginal propensity to consume equals

A)140
B)1.00
C)1.43
D)0.43
E)0.70

Question 52

Suppose that when disposable income rises from $3 trillion to $3.2 trillion, consumption rises from $2.5 trillion to $2.6 trillion. What is the marginal propensity to consume?

A)0.1
B)0.2
C)0.5
D)0.8
E)0.9

Question 53

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

Question 54

We can tell from the data in Exhibit 9-2 that planned investment is autonomous because

A)actual investment is constant at each level of income
B)it does not vary as consumption changes
C)it does not vary as income changes
D)it does not vary as the actual investment changes
E)it does not vary as the price level changes

Question 55

The marginal propensity to consume is defined as the

A)fraction of consumption that is spent on goods, both durable and nondurable
B)fraction of a change in income that is spent on consumption
C)fraction of a change in income that is spent on investment
D)average amount of consumption at different levels of income
E)average amount of consumption at a given level of income

Question 56

An increase in the MPC will cause the consumption function to become steeper (rotate upwards).

Question 57

Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion, consumption rises from $5.0 trillion to $5.6 trillion. What is the marginal propensity to save?

A)0.25
B)0.33
C)0.75
D)0.67
E)0.07

Question 58

Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion, consumption rises from $5.0 trillion to $5.6 trillion. What is the marginal propensity to consume?

A)0.25
B)0.33
C)0.75
D)0.67
E)0.07

Question 59

If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion, then consumption spending will rise by

A)$ 6 billion
B)$14 billion
C)$20 billion
D)$28 billion
E)$67 billion

Question 60

The slope of the saving function is equal to the MPS.

Question 61

If income increases by $100 and consumption increases by $75, the slope of the consumption function equals

A)1/4
B)1/5
C)1/2
D)3/4
E)3/5

Question 62

The slope of the consumption function shows how

A)consumption changes over time
B)consumption changes as household size changes
C)consumption changes as the price level changes
D)income changes as the level of consumption changes
E)consumption changes as the level of income changes

Question 63

A decrease in the price level decreases net wealth and increases consumption spending.

Question 64

Which of the following would not shift the consumption function?

A)a change in household wealth
B)a change in the price level
C)a change in household disposable income
D)a change in the level of unemployment
E)a change in the rate of interest

Question 65

A change in which of the following is least likely to cause a shift of the consumption function?

A)the saving rate
B)consumer expectations about future prices
C)household wealth
D)investment spending
E)the interest rate

Question 66

If income increases by $100 and $75 of the increase is spent (consumed), the MPS equals

A)1/4
B)1/2
C)3/4
D)4/5
E)1

Question 67

Exhibit 9-3

In Exhibit 9-3, the MPC is equal to

A)0.25
B)0.33
C)0.67
D)0.75
E)1.33

Question 68

Changes in the price level will not shift the consumption function.

Question 69

Along the aggregate consumption function, an increase in income will

A)cause autonomous consumption to rise
B)shift the consumption function upward
C)cause a corresponding downward shift of the saving function
D)cause movement along the given consumption function
E)shift the consumption function downward

Question 70

Exhibit 9-3

In Exhibit 9-3, when real disposable income is equal to $6 billion, saving is equal to

A)0
B)$1 billion
C)$2 billion
D)$3 billion
E)$4 billion

Question 71

The MPC plus the MPS equals

A)0.5
B)the multiplier
C)the slope of the consumption function
D)1.0
E)the slope of the saving function

Question 72

Exhibit 9-3

In Exhibit 9-3, the MPS is equal to

A)0.25
B)0.33
C)0.67
D)0.75
E)1.33

Question 73

If income increases by $100 and the MPS is 1/4, then the amount saved equals

A)$50
B)$75
C)$25
D)$100
E)$33.33

Question 74

Exhibit 9-3

In Exhibit 9-3, the slope of the consumption function is equal to

A).33
B).5
C).67
D).7
E).9

Question 75

An increase in the interest rate will increase consumption spending.

Question 76

If income increases by $100 and saving increases by $25, the slope of the saving function equals

A)1/4
B)1/5
C)1/2
D)3/4
E)3/5

Question 77

If income rises from $6.0 trillion to $6.4 trillion, consumption rises from $5.5 trillion to $5.8 trillion. What is the slope of the aggregate expenditure line? (Assume there is neither international trade nor any government.)

A)0.25
B)0.33
C)0.67
D)0.75
E)1.33

Question 78

An upward shift of the consumption function might be caused by

A)an increase in disposable income
B)a decrease in disposable income
C)a decrease in the price level
D)a decrease in household wealth
E)an increase in the interest rate

Question 79

Exhibit 9-3

In Exhibit 9-3, when real disposable income is equal to $3 billion, saving is equal to

A)$-2 billion
B)$-1 billion
C)0
D)$1 billion
E)$2 billion

Question 80

Expectations that the price level will rise in the future cause consumption to rise today.