Deck 11: Aggregate Expenditure

Question 1

The acronym MPC stands for:

A) marginal production cost.
B) marginal propensity to consume.
C) marginally perfect consumption.
D) macro production cost.

Answer 1

marginal propensity to consume.

Question 2

Consumption spending is said to make up about ______ to _______ of most countries spending.

A) 3/4, 7/8
B) 1/2, 2/3
C) 2/3, 3/4
D) 1/3, 1/2

Answer 2

2/3, 3/4

Question 3

If the MPC = 0.75 and a household obtains $50,000 more dollars then how much would the household spend of the additional $50,000?

A) $50,000
B) $12,500
C) $37,500
D) $40,000

Answer 3

$37,500

Question 4

Which of the following is not a primary determinant of consumption spending?

A) Interest rates on savings
B) Real income
C) Wealth
D) Rate of return on capital

Question 5

What type of relationship exists between expected future income and consumption?

A) Negative
B) Positive
C) Indirect
D) Constant

Question 6

The equation for aggregate expenditure can be written as:

A) C+I+GDP
B) C+Inventory+G+NX
C) C+I+G+NX
D) C+I+G+Exports

Question 7

Economist John Maynard Keynes noted one of the main contributors to the Great Depression in the 1930s was:

A) insufficient spending causing below natural rate output.
B) poor infrastructure for manufacturing.
C) a labor market that could not meet the demands of the market at the time.
D) an insufficient agriculture sector, unable to produce enough food for the large US population.

Question 8

Suppose that John allocates $10,000 of his disposable income for necessities. Any additional income beyond that is both spent and saved. Assume he has a disposable annual income of $50,000 and an MPC=0.8. Based on this information the amount of money John should save would be:

A) $10,000.
B) $40,000.
C) $12,000.
D) $8,000.

Question 9

Which of the following could be a cause of consumption decreasing?

A) Real income increases.
B) Interest rates increase.
C) Wealth increases.
D) Expected future income increases.

Question 10

Wealth can be thought of as:

A) The sum total of all assets less any debts.
B) The sum of all assets you have at any one point in time.
C) The income that you have earned that year.
D) The sum of all assets and any expected future assets.

Question 11

Which of the following could be a cause of consumption increasing?

A) Income decreases.
B) Interest rates increase.
C) Wealth increases.
D) Expected future income decreases.

Question 12

The popular and dominant school of economists in the 1930s who could not explain why the economy went into a depression were the:

A) Classical School.
B) Austrian School.
C) Mercantilists.
D) Ricardians.

Question 13

Suppose that John allocates $10,000 of his disposable income for necessities. Any additional income beyond that is both spent and saved. Assume he has a disposable annual income of $50,000 and an MPC=0.8. Based on this information the additional amount spent on non-necessities should be:

A) $10,000.
B) $40,000.
C) $32,000.
D) $35,000.

Question 14

The four components of aggregate expenditure (AE) are:

A) consumption, investment, exports, and imports.
B) consumption, investment, government, and capital spending.
C) consumption, investment, government, and net export spending.
D) consumption, internet, government, and capital spending.

Question 15

Which component of consumption has a negative or indirect relationship with consumption?

A) Expected future income
B) Real income
C) Wealth
D) Interest rates

Question 16

The marginal propensity to consume (MPC) is defined to be:

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

Question 17

In general we can note that households with lower wealth tend to have a ____ MPC relative to wealthier households.

A) lower
B) higher
C) similar
D) exactly equivalent

Question 18

If the MPC = 0.9 and a household obtains $20,000 more dollars then how much would the household spend of the additional $20,000?

A) $20,000
B) $2,500
C) $17,500
D) $18,000

Question 19

If the MPC = 0.75 for a particular person this means that:

A) they will spend 75 cents of each new dollar they get.
B) if they receive $1 they want to spend roughly 75%, but probably won't do so.
C) they will spend 25 cents of the $1 and save 75 cents.
D) if they receive $1 then they want to spend 25% of it.

Question 20

The economist in the 1930s who is credited with key insights into causes of economic downturns was:

A) John Maynard Keynes
B) Ben Bernanke
C) Adam Smith
D) David Ricardo

Question 21

What type of relationship does the real interest rate have with respect to Investment spending?

A) negative relationship
B) positive relationship
C) No relationship
D) constant relationship

Question 22

Transfer payments are payments that are:

A) made to firms in order to transfer goods and services to the government.
B) payments made to households that can then be spent by the households.
C) made in market transactions in order to get the seller to transfer the goods or services to the buyer.
D) made in order to obtain public goods or services.

Question 23

When we say investment in economics we are talking about:

A) stocks.
B) bonds.
C) physical capital.
D) None of these are examples of investment in economics.

Question 24

If the marginal propensity to consume was 0.75, it would mean that:

A) $0.75 of an additional $1 of individuals' after-tax income is spent on consumption.
B) $0.75 of an additional $1 of individuals' after-tax income is saved.
C) $0.25 of an additional $1 of individuals' after-tax income is spent on consumption.
D) None of these is true.

Question 25

During the Great Depression in the 1930s unemployment was so bad that nearly _____ of the labor force was unemployed.

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

Question 26

If the expected profitability of a business activity increased we might expect investment spending to:

A) increase.
B) decrease.
C) remain constant.
D) there is not enough information to determine what would happen.

Question 27

Which of the following is a determinant of Investment spending?

A) Disposable income
B) Expected future income
C) Expected profitability
D) Real Income

Question 28

If the business taxes decreased for a firm, then we might expect investment spending to:

A) increase.
B) decrease.
C) remain constant.
D) there is not enough information to determine what would happen.

Question 29

What type of relationship does expected profitability have with respect to Investment spending?

A) Negative
B) Positive
C) Indirect
D) Constant

Question 30

Which of the following is not a determinant of Investment spending?

A) Real income
B) Interest rates
C) Taxes
D) Expected profitability

Question 31

What type of relationship do business taxes have with respect to Investment spending?

A) Negative
B) Positive
C) Secondary
D) Constant

Question 32

During the Great Depression in the 1930s the banking industry was crippled so badly that nearly _____ of the banks failed.

A) 50%
B) 20%
C) 25%
D) 33%

Question 33

If the marginal propensity to consume was 0.9, it would mean that:

A) consumers spend $9 out of every $10 of additional disposable income.
B) consumers save $9 out of every $10 of additional disposable income.
C) consumers spend $1 out of every $10 of additional disposable income.
D) people should save more.

Question 34

Which of the following could be a direct cause of investment spending decreasing?

A) Real income increases.
B) Real interest rates increase.
C) A firms revenues increases while their costs remain constant.
D) Expected future income increases.

Question 35

Which of the following could be a direct cause of investment spending increasing?

A) The wealth of consumers increasing causing them to radically increase their purchases.
B) Interest rates increase.
C) A firms costs unexpectedly drop making their profit margin higher.
D) Expected future income decreases.

Question 36

A main reason the federal government may choose to spend would be the:

A) real interest rates decrease.
B) real interest rates increase.
C) desire to achieve full-employment GDP.
D) government expected to earn a large return on its spending.

Question 37

Which of the following is a determinant of Investment spending?

A) Real income
B) Expected future income
C) Taxes
D) Wealth

Question 38

The component of aggregate expenditure that is not like other components because, in general, it is directly neutral to macroeconomic changes is:

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

Question 39

The marginal propensity to consume:

A) is the amount by which consumption increases when after-tax income increases by $1.
B) is closely linked to the multiplier effect of government spending.
C) is a value between 0 and 1.
D) All of these are true.

Question 40

One of reasons the government may choose to spend would be the:

A) real interest rates decrease.
B) real interest rates increase.
C) government expected to earn a large return on its spending.
D) beliefs about what citizens may need.

Question 41

The real exchange rate is defined to be the:

A) value of goods in one nation relative to the value a similar set of goods in another country.
B) rate people exchange goods and services in a domestic market.
C) rate at which firms in different nations would be willing to exchange goods.
D) value of goods in one nation relative to the value the same set of goods in another country.

Question 42

If transfer payments increase then we would most likely conclude what about government spending as a result of this increase?

A) We cannot reasonably conclude anything about government spending.
B) Since transfer payments have gone up this has caused government spending to decrease.
C) Since transfer payments have gone up this has caused government spending to increase.
D) Government spending would not change if transfer payments increase.

Question 43

Domestic income has a ______ relationship with net export spending.

A) negative
B) positive
C) secondary
D) constant

Question 44

Autonomous expenditure is spending that is:

A) based on the rate of borrowing.
B) that is determined by the government.
C) not sensitive to the level of income in the economy.
D) spent when income changes in the economy.

Question 45

If trade policies change, then we would expect aggregate expenditure to:

A) increase.
B) decrease.
C) remain constant.
D) depends on the policy.

Question 46

Autonomous expenditure is spending that is:

A) depends on the level of income in the economy.
B) that is determined by the government.
C) not sensitive to the level of income in the economy.
D) what is spent when income changes in the economy.

Question 47

If the foreign income decrease, then we might expect net export spending to:

A) increase.
B) decrease.
C) remain constant.
D) there is not enough information to determine what would happen.

Question 48

Suppose that someone has a disposable annual income of $50,000 and an MPC=0.8. They allocate $10,000 of that for necessities. The remainder of the income is both spent and saved. Based on this information autonomous consumption is:

A) $10,000.
B) $40,000.
C) $32,000.
D) $50,000.

Question 49

Net Exports are defined to be:

A) Imports − Exports.
B) Imports + Exports.
C) Exports − Imports.
D) Exports − Investment.

Question 50

Which of the following is not a direct determinant of net export spending?

A) Domestic income.
B) Foreign income.
C) Interest rates.
D) Exchange rates.

Question 51

Foreign income is defined to be income earned:

A) by a nation's firms when they operate abroad.
B) when a domestic citizen works abroad.
C) on investments made abroad.
D) by those living outside a country.

Question 52

If the domestic income of a nation's citizens increase thus causing consumption spending to increase, then we generally expect net export spending to:

A) increase as well because as consumption increases we also buy more foreign goods and services.
B) decrease as well because as consumption increases we also buy more foreign goods and services.
C) remain constant because when we increase domestic purchases it is directly offset by a reduction in foreign purchases.
D) there is not enough information to determine what would happen.

Question 53

If tastes for foreign goods and services go up, then we would expect imports to:

A) increase.
B) decrease.
C) remain constant.
D) increase and then sharply decrease more.

Question 54

The real exchange rate generally has ______ relationship with aggregate expenditure.

A) a negative
B) a positive
C) no
D) a constant

Question 55

Which of the following is not an example of a transfer payment?

A) social security.
B) sales tax.
C) unemployment benefits.
D) workman's compensation.

Question 56

If the domestic income of a nation's citizens increase, then we might expect net export spending to:

A) increase.
B) decrease.
C) remain constant.
D) there is not enough information to determine what would happen.

Question 57

If tastes for foreign goods and services go up, then we would expect aggregate expenditure to:

A) increase.
B) decrease.
C) remain constant.
D) increase and then sharply decrease more.

Question 58

How would the real exchange rate need to change to get aggregate expenditure to increase?

A) Increase
B) Decrease
C) Remain constant
D) Exchanges rates don't generally affect aggregate expenditure.

Question 59

The tastes for foreign goods and services generally has a ______ relationship with aggregate expenditure.

A) negative
B) positive
C) skewed
D) constant

Question 60

We define autonomous expenditure to be expenditure that:

A) depends on how much income changes in the economy.
B) that changes under the guidance of the government.
C) is unaffected by the current level of income in the economy.
D) people make that pertains to the auto industry.

Question 61

Which of the following conveys the correct relationship between production and inventories?

A) If planned inventories > actual inventories then increase production.
B) If planned inventories < actual inventories then decrease production.
C) There is not clear relationship between inventories and production.
D) If planned inventories > actual inventories then reduce production.

Question 62

In Figure 1 above if the economy were at Y3 then we would expect there to be:

A) an increase in production since PAE < actual output.
B) an increase in production since PAE > actual output.
C) no change in production since PAE = actual output.
D) a decrease in production since PAE < actual output.

Question 63

The Keynesian equilibrium is defined to be when:

A) planned inventories equal to actual inventories, which leads to national income equal to planned aggregate expenditure.
B) planned investment is equal to domestic consumption.
C) planned inventories equal to actual inventories, which leads to national net income equal to planned aggregate expenditure.
D) planned spending is equal to expected spending from households.

Question 64

When PAE < Y the economic response for inventories should be:

A) inventories will increase.
B) inventories will decrease.
C) there will be no change in inventories.
D) inventories should decrease initially and then sharply increase.

Question 65

One of the major insights by economist John Maynard Keynes about inventories and demand was that if planned inventories:

A) > actual inventories then demand was higher than anticipated.
B) < actual inventories then demand was lower than anticipated.
C) = actual inventories then demand was higher than anticipated.
D) > actual inventories then demand was lower than anticipated.

Question 66

When we compare PAE and actual output (Y) if PAE is greater than Y we expect that:

A) inventories to increase.
B) inventories to decrease.
C) there will be no change in inventories.
D) the government will spend more than it has collected in taxes.

Question 67

If we consider the equation PAE = A + bY the independent part of the equation that depends on income is:

A) b
B) Y
C) A
D) PAE

Question 68

When we compare PAE and actual output (Y) the macroeconomic variable we generally use to directly assess their equivalence is:

A) unemployment.
B) interest rates.
C) inventories.
D) capital expenditure.

Question 69

When we compare PAE and actual output (Y) if PAE is greater than Y we expect that:

A) eventually production will decrease.
B) eventually production will increase.
C) there will be no change in aggregate production.
D) the government will intervene by cutting down on taxes.

Question 70

In Figure 1 above if the economy were at Y1 then we would expect there to be:

A) an increase in production since PAE < actual output.
B) an increase in production since PAE > actual output.
C) no change in production since PAE = actual output.
D) a decrease in production since PAE > actual output.

Question 71

One of the major insights by economist John Maynard Keynes about production was that:

A) firms may not produce all they can at a given price, but what they can sell.
B) firms generally produce as much as they can at a given price.
C) government spending needs to be kept in check in order for the economy to operate efficiently.
D) household spending patterns don't really influence the health of the economy.

Question 72

Over time in the long run we expect unplanned inventory expenditure to:

A) equal zero as planned inventories should equal actual inventories.
B) increase because firms have a hard time figuring out what consumers want.
C) be negative as firms will tend to reduce production is they think people won't purchase their product.
D) be positive as on average firms tend to be optimistic about sales, but if they don't sell product they store it.

Question 73

In Figure 1 above if the economy were at Y1 then we would expect there to be:

A) a reduction in inventories.
B) an increase in inventories.
C) no change in inventories.
D) an increase in consumption spending.

Question 74

Actual investment is the:

A) spending households engage in based on forecasted budget.
B) amount that firms actually allocate to inventory accumulation.
C) investment a firm makes into stocks and bonds in order to generate profit.
D) amount that firms really allocated to new capital resources and inventory accumulation.

Question 75

When PAE < Y the economic response should be:

A) eventually production will decrease.
B) eventually production will increase.
C) there will be no change in aggregate production.
D) the government will intervene by cutting down on taxes.

Question 76

Planned investment is the:

A) spending households engage in based on forecasted budget.
B) amount that firms decide to allocate to inventory accumulation.
C) investment that a firm decides upon as a result of temporary market changes.
D) amount that firms decide to allocate to new capital resources and inventory accumulation.

Question 77

In Figure 1 above the Keynesian equilibrium occurs at what output level?

A) Y1
B) Y2
C) Y3
D) it does not occur at any output level in the graph.

Question 78

If we consider the equation PAE = A + bY the part of the equation that relates to autonomous sources of spending is:

A) b
B) Y
C) A
D) PAE

Question 79

If we consider the equation PAE = A + bY the part that corresponds to the MPC when we make simplifying assumptions is:

A) b
B) Y
C) A
D) PAE

Question 80

When referring to GDP, which is not a common alternative designation economists use?

A) Net National Income
B) Total Output
C) National Income
D) Aggregate Expenditure