Question 1

Consider the simplest macro model with a constant price level and demand-determined output.If national income is less than its equilibrium level,it is likely that firms' inventories are ________,and so national income tends to ________.

Accepted Answer

A) accumulating; rise 
B) accumulating; fall 
C) being depleted; rise 
D) being depleted; fall 
E) constant; fall

Question 2

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

Accepted Answer

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

Question 3

The table below shows disposable income and desired consumption for a closed economy with no government.
  TABLE 21-2
-Refer to Table 21-2.The marginal propensity to consume is equal to

Accepted Answer

A) 0.2. 
B) 0.4. 
C) 0.6. 
D) 0.67. 
E) 0.8.

Question 4

The table below shows disposable income and desired consumption for a closed economy with no government.
  TABLE 21-2
-Refer to Table 21-2.The marginal propensity to save is equal to

Accepted Answer

A) 0.8. 
B) 0.67. 
C) 0.6. 
D) 0.4. 
E) 0.2.

Question 5

In the simple macro model,desired investment is assumed to be autonomous with respect to national income.Which of the following will cause a shift of the investment function?
1)a decrease in interest rates
2)an increase in firms' optimism about the economy
3)an expectation of a downturn in future economic activity

Accepted Answer

A) 1 and 2 
B) 2 and 3 
C) 1 and 3 
D) 1,2,and 3 
E) 1 only

Question 6

Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired saving rises from $50 billion to $60 billion.We can conclude that the marginal propensity to save for this economy is

Accepted Answer

A) 0.10. 
B) 0.20. 
C) 0.25. 
D) 0.75. 
E) 1.0.

Question 7

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade.  TABLE 21-8
-Refer to Table 21-8.The simple multiplier in this economy is

Accepted Answer

A) 2.0. 
B) 2.5. 
C) 3.0. 
D) 4.0. 
E) 5.0.

Question 8

Desired investment expenditure will generally fall as a result of which of the following changes?

Accepted Answer

A) a decrease in business confidence 
B) a decrease in interest rates 
C) an increase in government purchases 
D) an increase in sales volume 
E) an increase in business confidence

Question 9

The 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) and desired saving will both rise. 
D) remains constant and desired saving will rise. 
E) remains constant and desired saving will fall.

Question 10

Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $3.5 billion.The marginal propensity to spend in this economy is 0.6.What is the eventual total new expenditure in this economy due to the increase in investment?

Accepted Answer

A) $2.1 billion. 
B) $5.8 billion. 
C) $3.5 billion. 
D) $7.0 billion. 
E) $8.75 billion.

Question 11

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

Question 12

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 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 13

The marginal propensity to save refers to the

Accepted Answer

A) additional saving that occurs out of an additional dollar of income. 
B) additional saving that occurs out of an additional dollar of investment. 
C) total saving divided by a change in income. 
D) change in saving divided by total income. 
E) additional saving that occurs over time.

Question 14

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 0.6,the simple multiplier is

Accepted Answer

A) 0. 
B) 0.6. 
C) 1.67. 
D) 2.5. 
E) 6.0

Question 15

Consider a simple macro model with demand-determined output.In such a model,the smaller the marginal propensity to spend,the

Accepted Answer

A) smaller the MPS. 
B) smaller the simple multiplier. 
C) larger is investment. 
D) larger the MPC. 
E) larger the simple multiplier.

Question 16

Consider a consumption function that is upward sloping but flatter than the 45-degree line.When real disposable income rises

Accepted Answer

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

Question 17

The simple multiplier applies to short-run situations in which the price level is constant.The simple multiplier can be defined as

Accepted Answer

A) national income divided by aggregate expenditure. 
B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about. 
C) the change in national income resulting from a change in expenditure,multiplied by the number of years since the initial change. 
D) a change in aggregate expenditures multiplied by the equilibrium level of national income. 
E) the change in national income resulting from a change in saving.

Question 18

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) 4/5. 
E) 5.

Question 19

In a simple macro model with no government and no foreign trade,the equilibrium level of national income is the level of income at which

Accepted Answer

A) aggregate desired expenditure is greater than actual national income. 
B) aggregate desired expenditure equals actual national income. 
C) aggregate desired expenditure equals consumer spending. 
D) saving equals income. 
E) saving equals consumer spending.

Question 20

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

Accepted Answer

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

Exam 21: The Simplest Short-Run Macro Model

Consider the simplest macro model with a constant price level and demand-determined output.If national income is less than its equilibrium level,it is likely that firms' inventories are ,and so national income tends to .