Question 1

The investment function will shift when there is a change in

Accepted Answer

A)  the interest rate. 
B)  firms' profit expectations. 
C)  the cost of borrowing. 
D)  the opportunity cost of retained earnings.

Question 2

-In the above table, the marginal propensity to consume (MPC) is

Accepted Answer

A)  0.9. 
B)  0.75. 
C)  0.8. 
D)  0.85.

Question 3

The investment function intersects the saving schedule at an interest rate of 8 percent and a level of investment of $1.2 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then

Accepted Answer

A)  the C + I curve will intersect the 45-degree reference line at $1.2 trillion. 
B)  the C + I curve will intersect the 45-degree line at $1.8 trillion. 
C)  the equilibrium level of real GDP is $1.8 trillion. 
D)  the equilibrium level of real GDP is $4.2 trillion.

Question 4

If consumption is $750 when real disposable income is $1,000, the average propensity to consume is

Accepted Answer

A)  0.80. 
B)  0.75. 
C)  0.50. 
D)  0.25.

Question 5

Autonomous consumption

Accepted Answer

A)  is measured by the slope of the consumption function. 
B)  is the reciprocal of consumption. 
C)  is equal to the minimum savings. 
D)  is measured by the intercept of the consumption function and the Y-axis.

Question 6

Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that

Accepted Answer

A)  saving equals $200 billion. 
B)  consumption expenditures equal $12 trillion less saving less $200 billion. 
C)  planned investment is $200 billion more than planned saving. 
D)  planned investment is $200 billion less than planned saving.

Question 7

-The above figure shows a consumption function and a 45-degree line. Real consumption is a function of disposable income. Why is real GDP used here instead? What is measured along the vertical axis? What is measured by point B? Explain the significance of point A.

Accepted Answer

The answer of 
-The above figure shows a consumption function...

Question 8

-Refer to the above figure. The equilibrium level of real Gross Domestic Product (GDP) is

Accepted Answer

A)  $6 trillion. 
B)  $7 trillion. 
C)  $12 trillion. 
D)  $20 trillion.

Question 9

Suppose the marginal propensity to consume is 0.75. What does this mean? What do we know about the marginal propensity to save? What do we know about the average propensity to consume?

Accepted Answer

The answer of Suppose the marginal propensity to consume is...

Question 10

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

Accepted Answer

A)  real GDP will rise. 
B)  real GDP remains unchanged. 
C)  real GDP will either fall or remain unchanged, depending on the MPC. 
D)  unplanned inventories will increase and real GDP will fall.

Question 11

The consumption function relates

Accepted Answer

A)  a household's consumption to its wealth. 
B)  planned household consumption to real disposable income. 
C)  planned household consumption and real interest rates. 
D)  real disposable incomes earned by households with the level of consumption credit desired in the economy.

Question 12

The relationship between planned real investment spending and the interest rate is

Accepted Answer

A)  inverse. 
B)  direct. 
C)  constant. 
D)  highly volatile.

Question 13

The difference between a stock and a flow is

Accepted Answer

A)  a stock is something measured at one point in time while a flow is something that is expressed per unit of time. 
B)  a stock is something measured at one point in time while a flow is something that is fixed. 
C)  a stock is expressed per unit of time while a flow is measured at one point in time. 
D)  a stock refers to the solid inventory firms have on hand while a flow refers to the liquid inventory firms have on hand.

Question 14

What can we say about APC + APS and MPC + MPS?

Accepted Answer

A)  Each must sum to 1. 
B)  MPC + MPS = 100% of total income. 
C)  APC + APS = 100% of the change in income. 
D)  MPC + MPS always equals 1, but the sum of APC + APS can vary.

Question 15

An increase in autonomous consumption means that

Accepted Answer

A)  the consumption function shifts down. 
B)  the consumption function shifts up. 
C)  the consumption function becomes steeper. 
D)  the consumption function becomes less steep.

Question 16

The consumption function shifts upward when

Accepted Answer

A)  real income increases. 
B)  saving increases. 
C)  the real wealth of the average household increases. 
D)  population decreases.

Question 17

Which of the following would be expected to shift the consumption function up?

Accepted Answer

A)  Decreases in wealth 
B)  Expectations of harder times ahead 
C)  Increases in the nation's population 
D)  Changes in real disposable income

Question 18

Aging baby-boomers, predisposed to hearing loss because of years of listening to loud music, are now approaching the age range in which hearing loss starts to become apparent. What effect does this have on investment spending within the hearing aid industry?

Accepted Answer

A)  There will no longer be an opportunity cost associated with investment spending. 
B)  There will be no change in real investment spending, because hearing aid manufacturers will look only at the interest rate in determining whether to expand production. 
C)  The investment function relating planned real investment spending to the interest rate can be expected to shift rightward. 
D)  The investment function relating planned real investment spending to the interest rate can be expected to shift leftward.

Question 19

Suppose that the marginal propensity to save (MPS) equals 0.2. The value of the multiplier would be

Accepted Answer

A)  )8. 
B)  1.25. 
C)  2. 
D)  5.

Question 20

Suppose the marginal propensity to consume (MPC) is 0.9 and there is a $3,000 increase in planned investment. Given this information, real GDP will increase by

Accepted Answer

A)  $3,000. 
B)  $2,700. 
C)  $30,000. 
D)  $3,333.

Exam 12: Consumption, Real GDP, and the Multiplier