Question 1

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that

Accepted Answer

A) firms will decrease autonomous investment by $20 billion until equilibrium national income is reached at $900 billion. 
B) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. 
C) actual national income will decrease until equilibrium national income is reached at $900 billion. 
D) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. 
E) firms will increase autonomous investment by $20 billion until equilibrium national income is reached at $920 billion.

Question 2

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be

Accepted Answer

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

Question 3

In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes shift of the saving function.

Accepted Answer

A) a less- than- equal upward 
B) no 
C) an equal upward 
D) an equal downward 
E) a less- than- equal downward

Question 4

In Canada, as in many other countries, the largest component of domestic investment expenditure is

Accepted Answer

A) plant and equipment. 
B) savings. 
C) residential housing. 
D) inventories. 
E) financial assets.

Question 5

The marginal propensity to consume is defined to be

Accepted Answer

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

Question 6

Suppose aggregate output is demand- determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to

Accepted Answer

A) 0.4. 
B) - 0.6. 
C) - 2.5. 
D) 2.5. 
E) 0.6.

Question 7

Consider a simple macro model with a constant price level and demand- determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,

Accepted Answer

A) there will be no change in national income because only actual expenditure is relevant. 
B) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save. 
C) national income will fall, because desired expenditures are less than actual expenditures. 
D) inventories will build up, causing national income to rise. 
E) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.

Question 8

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is zero, the simple multiplier is

Accepted Answer

A) zero. 
B) a positive number between zero and one. 
C) one. 
D) a positive number greater than one but less than infinity. 
E) infinitely large.

Question 9

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is

Accepted Answer

A) zero. 
B) a positive number between zero and one. 
C) one. 
D) a positive number greater than one but less than infinity. 
E) infinitely large.

Question 10

In a simple macro model, an increase in households' wealth is generally assumed to

Accepted Answer

A) cause no change in desired consumption because the increase is always expected. 
B) cause no change in desired consumption because consumption is a function of disposable income only. 
C) affect only desired saving, not desired consumption. 
D) cause an upward shift in the aggregate consumption function. 
E) cause a downward shift in the aggregate consumption function.

Question 11

On a graph of a consumption function, what is the significance of the 45- degree line?

Accepted Answer

A) Desired consumption is zero at all points along the 45- degree line. 
B) It shows the slope of the average consumption function, against which we measure other consumption functions. 
C) It connects all points where desired consumption equals desired saving. 
D) It connects all points where desired consumption equals desired expenditure. 
E) It connects all points where desired consumption equals actual disposable income.

Question 12

Consider a consumption function of the following form: C = 50 + (0.6)YD. At what level of disposable income will desired savings be equal to zero?

Accepted Answer

A) 50 
B) 125 
C) 31.25 
D) 83.33 
E) 208.33

Question 13

Consider a simple macro model with a constant price level and demand- determined output. In such a model, the level of national income will

Accepted Answer

A) remain constant if firms are accumulating inventories. 
B) tend to rise if firms have unplanned decumulation of inventories. 
C) tend to rise if desired aggregate expenditure is less than actual national income. 
D) be in equilibrium if all of the resources of the economy are fully employed. 
E) remain constant if savings equals consumption.

Question 14

The simple multiplier, which applies to short- run situations in which the price level is constant, describes changes in

Accepted Answer

A) the equilibrium level of national income caused by changes in autonomous expenditure. 
B) investment induced by changes in equilibrium income. 
C) employment induced by changes in equilibrium income. 
D) saving caused by changes in investment. 
E) the rate of interest caused by increased demand for credit.

Question 15

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that

Accepted Answer

A) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. 
B) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. 
C) firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion. 
D) actual national income will increase until equilibrium national income is reached at $900 billion. 
E) firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion.

Question 16

If the consumption function coincides with the 45- degree line, then we know that

Accepted Answer

A) the marginal propensity to consume is greater than one. 
B) desired saving is zero at all levels of disposable income. 
C) desired consumption is constant at all levels of disposable income. 
D) desired consumption equals desired saving at all levels of disposable income. 
E) the marginal propensity to consume is less than one.

Question 17

Consider a simple macro model with a constant price level and demand- determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45- degree line represents

Accepted Answer

A) the amount by which desired expenditures exceeds output. 
B) desired accumulation of inventories. 
C) the output gap. 
D) the amount by which output exceeds desired expenditures. 
E) desired decumulation of inventories.

Question 18

Consider a simple macro model with a constant price level and demand- determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the

Accepted Answer

A) marginal propensity to save. 
B) equilibrium level of national income. 
C) reciprocal of the marginal propensity to spend. 
D) simple multiplier. 
E) average propensity to save.

Question 19

The aggregate consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption

Accepted Answer

A) will fall and desired saving will rise. 
B) will rise and desired saving will fall. 
C) remains constant and desired saving will rise. 
D) and desired saving will both rise. 
E) remains constant and desired saving will fall.

Question 20

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be

Accepted Answer

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

Exam 21: The Simplest Short-Run Macro Model

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be

In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes shift of the saving function.

In Canada, as in many other countries, the largest component of domestic investment expenditure is

The marginal propensity to consume is defined to be

Suppose aggregate output is demand- determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to

Consider a simple macro model with a constant price level and demand- determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is zero, the simple multiplier is

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is

In a simple macro model, an increase in households' wealth is generally assumed to

On a graph of a consumption function, what is the significance of the 45- degree line?

Consider a consumption function of the following form: C = 50 + (0.6) Y_D. At what level of disposable income will desired savings be equal to zero?

Consider a simple macro model with a constant price level and demand- determined output. In such a model, the level of national income will

The simple multiplier, which applies to short- run situations in which the price level is constant, describes changes in

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that

If the consumption function coincides with the 45- degree line, then we know that

Consider a simple macro model with a constant price level and demand- determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45- degree line represents

Consider a simple macro model with a constant price level and demand- determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the

The aggregate consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be

Exam 21: The Simplest Short-Run Macro Model

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be

In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes shift of the saving function.

In Canada, as in many other countries, the largest component of domestic investment expenditure is

The marginal propensity to consume is defined to be

Suppose aggregate output is demand- determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to

Consider a simple macro model with a constant price level and demand- determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is zero, the simple multiplier is

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is

In a simple macro model, an increase in households' wealth is generally assumed to

On a graph of a consumption function, what is the significance of the 45- degree line?

Consider a consumption function of the following form: C = 50 + (0.6) YD. At what level of disposable income will desired savings be equal to zero?

Consider a simple macro model with a constant price level and demand- determined output. In such a model, the level of national income will

The simple multiplier, which applies to short- run situations in which the price level is constant, describes changes in

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that

If the consumption function coincides with the 45- degree line, then we know that

Consider a simple macro model with a constant price level and demand- determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45- degree line represents

Consider a simple macro model with a constant price level and demand- determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the

The aggregate consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be

Consider a consumption function of the following form: C = 50 + (0.6) Y_D. At what level of disposable income will desired savings be equal to zero?