Deck 21: The Simplest Short-Run Macro Model

Question 1

For firms or individual households,desired expenditure is

A)always greater than planned expenditure.
B)always greater than actual expenditure.
C)not relevant because human wants are unlimited.
D)what they plan on spending,given the resources at their command.
E)not a useful concept because it cannot be measured.

Answer 1

what they plan on spending,given the resources at their command.

Question 2

With respect to consumption,investment,government purchases and net exports,the national -income and product accounts measure

A)desired expenditures in each of the categories.
B)both actual and desired expenditures,since actual expenditure must equal desired expenditure in each category.
C)the flow of saving at any income.
D)neither actual nor desired expenditures.
E)actual expenditures in each of the categories.

Answer 2

actual expenditures in each of the categories.

Question 3

If a familyʹs annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000,it can be concluded that the familyʹs

A)marginal propensity to consume is $800.
B)average propensity to consume is 0.8.
C)marginal propensity to consume is 0.8.
D)average propensity to save is 0.8.
E)marginal propensity to save is 0.8.

Answer 3

marginal propensity to consume is 0.8.

Question 4

The percentage of disposable income that is saved by Canadian households has been changing over time.In 2014,it was estimated to be about ________ percent.

A)0
B)4
C)15
D)20
E)25

Question 5

Undesired or unplanned inventory accumulation is likely to occur when

A)consumption exceeds investment.
B)investment exceeds consumption.
C)autonomous expenditure exceeds induced expenditure.
D)desired aggregate expenditure exceeds actual aggregate expenditure.
E)actual aggregate expenditure exceeds desired aggregate expenditure.

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

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

Question 7

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

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.

Question 8

Consider the consumption function in our macro model.The key factors that influence desired consumption are assumed to be

A)expectations about the future.
B)wealth.
C)interest rates.
D)disposable income.
E)all of the above

Question 9

Undesired or unplanned inventory decumulation is likely to occur when

A)consumption exceeds investment.
B)investment exceeds consumption.
C)autonomous expenditure exceeds induced expenditure.
D)desired aggregate expenditure exceeds actual aggregate expenditure.
E)actual aggregate expenditure exceeds desired aggregate expenditure.

Question 10

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

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 11

In the simple macroeconomic model,ʺautonomous expendituresʺ are

A)dependent on national income.
B)not dependent on national income.
C)induced expenditures.
D)those which are constant.
E)non-domestic expenditures.

Question 12

The table below shows disposable income and desired consumption for a closed economy with no government. TABLE 21-1
Refer to Table 21-1.The marginal propensity to consume is equal to

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

Question 13

In each of the four expenditure categories, national income accounts measure ________ expenditures, while the theoretical model of the economy deals with ________ expenditures.

A)actual; autonomous
B)desired; actual
C)induced; exogenous
D)endogenous; exogenous
E)actual; desired

Question 14

In macroeconomics,the consumption function

A)and the aggregate expenditure function are the same.
B)describes the relationship between desired consumption expenditure and the factors that determine it,like national income.
C)refers to the relationship between consumption expenditure and relative prices.
D)refers to the relationship between an individualʹs consumption and his/her wealth.
E)is relatively unimportant in macroeconomics,because consumption is such a small component of aggregate expenditure.

Question 15

Consider the consumption function in a simple macro model with no taxes.At the level of national income where APC = 1,the nationʹs households are

A)consuming all of their disposable income.
B)allocating their income equally between saving and consumption.
C)saving a portion of their income,but saving is less than consumption.
D)spending more than their current income.
E)saving all of their disposable income.

Question 16

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

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

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 18

Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired consumption rises from $350 billion to $380 billion.We can conclude that the marginal propensity to consume for this economy is

A)0.65.
B)0.75.
C)0.80.
D)0.90.
E)1.33.

Question 19

The table below shows disposable income and desired consumption for a closed economy with no government. TABLE 21-1
Refer to Table 21-1.The marginal propensity to save is equal to

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

Question 20

Consider the equation: AE = C + I + G + (X - IM).Which of the following statements correctly describes this sum?

A)This summation tells us total desired expenditures on domestically produced output.
B)It is a summation of actual expenditures and is equivalent to GDP.
C)This summation of planned expenditures is equal to actual nominal GDP.
D)It is a summation of planned expenditures and is always equal to real GDP.
E)It is a summation of the desired expenditures of domestic households,firms and government.

Question 21

If the marginal propensity to consume (MPC)is equal to 0.9,an increase in household income causes desired consumption expenditure to

A)rise by more than the increase in income.
B)rise by the full increase in income.
C)rise by less than the full increase in income.
D)fall,as an increase in income will increase saving.
E)remain constant,because the MPC is also constant.

Question 22

The marginal propensity to consume is defined to be

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

Question 23

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.

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

Question 24

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

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

Question 25

The ʺmarginal propensity to consumeʺ refers to the additional

A)desired saving that occurs out of an additional dollar of disposable income.
B)desired consumption that occurs out of an additional dollar of disposable income.
C)desired consumption that occurs out of an additional dollar of investment.
D)desired consumption caused by a change in tastes.
E)desired consumption that occurs over time.

Question 26

If the Jones familyʹs disposable income increases from $1200 to $1700 and their desired saving increases from -$100 to +$100,then the familyʹs

A)average propensity to consume is 0.60.
B)average propensity to consume is 0.40.
C)marginal propensity to consume is 0.40.
D)marginal propensity to consume is 0.60.
E)marginal propensity to save is 1.

Question 27

Jeff and Loriʹs disposable income rose from $80 000 per year to $84 000 and their desired consumption expenditure rose from $76 000 to $79 000.It can be concluded that their

A)average propensity to consume is constant.
B)average propensity to save is always 0.25.
C)marginal propensity to consume decreased.
D)marginal propensity to consume is 0.25.
E)marginal propensity to save is 0.25.

Question 28

The marginal propensity to save refers to the

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 29

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

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 30

When desired consumption exceeds disposable income, desired saving is ________; when desired consumption is less than the disposable income, desired saving is ________.

A)negative; negative
B)positive; negative
C)negative; positive
D)positive; positive
E)zero; positive

Question 31

Investment expenditure is the ________ volatile component of GDP, and changes in investment are ________associated with business-cycle fluctuations.

A)most; strongly
B)most; weakly
C)least; strongly
D)least; weakly
E)least; not

Question 32

The change in desired consumption divided by the change in disposable income that brought it about is called the

A)average propensity to consume.
B)average propensity not to consume.
C)consumption function.
D)marginal propensity to consume.
E)marginal propensity not to spend.

Question 33

The consumption function is based on a number of assumptions.Given these assumptions,which of the following statements is true?

A)Below a certain level of income,APC > 1 and MPC < 0.
B)The MPC and APC are always less than unity.
C)As income rises,the MPC falls and the APC rises.
D)The MPC is greater than zero and less than one,and the APC falls as income rises.
E)The APC is greater than zero and less than one,and the MPC falls as income rises.

Question 34

Desired consumption divided by disposable income is called the

A)average propensity to consume.
B)average propensity to save.
C)average propensity to spend.
D)marginal propensity to save.
E)total propensity to save.

Question 35

Total desired saving divided by total income is called the

A)average propensity to consume.
B)average propensity to save.
C)average propensity to spend.
D)marginal propensity to save.
E)total propensity to save.

Question 36

Which of the following statements must be true in the simple macro model (with a closed economy and no government)?

A)APC increases as income rises.
B)APS decreases as income rises.
C)MPS and MPC are both negative.
D)MPC is negative below a certain level of income.
E)The sum of MPC and MPS is one.

Question 37

The Smith familyʹs disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600.It can be concluded that their

A)average propensity to consume decreased from 0.950 to 0.943.
B)average propensity to save decreased from 0.950 to 0.943.
C)marginal propensity to consume is 0.050.
D)marginal propensity to consume increased from 0.050 to 0.058.
E)marginal propensity to save is 0.80.

Question 38

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

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

Question 39

Desired consumption divided by disposable income is called the

A)consumption function.
B)marginal propensity to consume.
C)average propensity to consume.
D)average propensity to save.
E)relative consumption ratio.

Question 40

The Smith familyʹs disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600.It can be concluded that their

A)average propensity to consume is 0.8.
B)average propensity to save is 0.8.
C)marginal propensity to consume is $800.
D)marginal propensity to consume is 0.8.
E)marginal propensity to save is 0.8.

Question 41

A decrease in the marginal propensity to spend out of national income will cause

A)a movement to the right along the AE curve.
B)a movement to the left along the AE curve.
C)an increase in the slope of the AE curve,which rotates it upward.
D)a decrease in the slope of the AE curve,which rotates it downward.
E)a parallel downward shift in the AE curve.

Question 42

In the simplest macroeconomic model,with a closed economy and no government,the aggregate expenditure (AE)function is the sum of

A)saving and desired investment.
B)consumption and disposable income.
C)desired consumption and desired investment.
D)consumption and saving.
E)actual consumption and actual investment.

Question 43

Which of the following correctly describes the meaning of the aggregate expenditure (AE)function?

A)The AE function relates the level of desired aggregate expenditure to the level of actual national income.
B)The AE function relates the level of desired consumption expenditure to desired aggregate expenditure.
C)The AE function relates the level of desired investment expenditure to desired aggregate expenditure.
D)The AE function relates the level of nominal GDP to the level of real GDP.
E)The AE function relates the level of aggregate demand to the price level.

Question 44

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

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 45

The schedule that relates the level of desired total expenditures to the level of actual national income is called the

A)consumption function.
B)desired aggregate demand function.
C)aggregate expenditure function.
D)dissaving function.
E)equilibrium function.

Question 46

A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size, and therefore ________ desired investment expenditure.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; leaves unaffected
E)decreases; decreases

Question 47

Suppose there is an increase in the marginal propensity to spend out of national income.The result will be

A)a movement to the right along the AE curve.
B)a movement to the left along the AE curve.
C)an increase in the slope of the AE curve.
D)a decrease in the slope of the AE curve.
E)a parallel upward shift in the AE curve.

Question 48

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

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

Question 49

Other things being equal,higher real interest rates tend to

A)increase every component of desired investment expenditure.
B)reduce every component of desired investment expenditure.
C)reduce every component of desired investment expenditure except residential housing.
D)reduce every component of desired investment expenditure except inventories.
E)reduce every component of desired investment expenditure except plant and equipment.

Question 50

Consider a simple macro model with demand-determined output.At the equilibrium level of national income,

A)consumersʹ purchases of goods and services equal firmsʹ purchases of investment goods.
B)firms will hold no inventories of raw materials or final goods.
C)desired aggregate expenditures will equal total output.
D)desired aggregate expenditures will equal total output minus inventory holdings.
E)consumersʹ purchases of goods and services equals their saving.

Question 51

The aggregate expenditure (AE)function is an upward-sloping curve that describes

A)the amount spent on an economyʹs output at each national income.
B)what firms and households would like to spend at each level of national income.
C)what an economy would like to spend,in the absence of income constraints,at each level of output.
D)what is actually spent on an economyʹs output at each level of output.
E)what is actually spent at each level of national income.

Question 52

In a simple macro model with the price level assumed to be constant,a change in firmsʹ level of desired investment is predicted to influence equilibrium national income by

A)shifting the saving function.
B)shifting the consumption function.
C)shifting the aggregate expenditure function.
D)causing movement along the investment function.
E)shifting the 45-degree line.

Question 53

In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________. In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is ________ the marginal propensity to consume.

A)national income; disposable income; greater than
B)national income; disposable income; equal to
C)disposable income; national income; equal to
D)disposable income; national income; greater than
E)national income; disposable income; smaller than

Question 54

Consider the simplest macro model with a constant price level and demand -determined output.If desired aggregate expenditure is less than actual national income,then

A)inventories begin to fall,causing firms to increase production.
B)actual national income is below the equilibrium level.
C)actual national income must be above the equilibrium level.
D)actual national income must be at equilibrium.
E)inventories begin to fall,causing national income to fall.

Question 55

The slope of the aggregate expenditure (AE)function is always equal to the marginal propensity to

A)save.
B)invest.
C)import.
D)spend.
E)tax.

Question 56

In a simple model of the economy with demand-determined output,the equilibrium level of national income is at an income

A)to the right of the point where the AE curve intersects the 45-degree line.
B)to the left of the point where the AE curve intersects the 45-degree line.
C)where aggregate desired expenditure equals the value of total output.
D)where aggregate desired expenditure equals consumption.
E)where saving equals consumption.

Question 57

Consider the simplest macroeconomic model,with a closed economy and no government.If we assume that desired investment is autonomous with respect to national income,then the investment function (which graphs desired investment against actual national income)will be

A)negatively sloped.
B)positively sloped and relatively steep.
C)positively sloped and relatively flat.
D)vertical.
E)horizontal.

Question 58

Consider the simplest macro model with demand-determined output.If desired aggregate expenditure is greater than actual national income,then

A)inventories will likely begin to fall,causing firms to increase production.
B)actual national income must be less than the equilibrium level.
C)actual national income must be greater than the equilibrium level.
D)inventories will likely begin to rise,causing firms to reduce production.
E)both A and B are correct.

Question 59

The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the

A)average propensity to consume.
B)average propensity to save.
C)marginal propensity to spend.
D)marginal propensity to save.
E)marginal propensity to consume.

Question 60

In a simple macro model with demand-determined output,the equilibrium level of national income is at an income

A)to the left of the point where the AE curve intersects the 45-degree line.
B)where the AE curve intersects the 45-degree line.
C)to the right of the point where the AE curve intersects the 45-degree line.
D)where saving equals consumption.
E)where saving equals income.

Question 61

If national income is demand-determined,the condition for national income to be in equilibrium can be stated as

A)unemployment must equal the natural unemployment rate.
B)AE must be greater than Y.
C)desired saving equals actual investment.
D)actual saving equals actual investment.
E)desired aggregate expenditure equals the actual level of national income.

Question 62

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 firmsʹ inventories are ________, and so national income tends to ________.

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

Question 63

Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are ________, and so national income tends to________.

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