Deck 21: The Simplest Short-Run Macro Model

Question 1

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

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

Answer 1

D

Question 2

Undesired or unplanned inventory decumulation is likely to occur when

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

Answer 2

D

Question 3

an expectation of a downturn in future economic activity

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

Answer 3

E

Question 4

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

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

Question 5

Suppose aggregate output is demand- determined. The simple multiplier will increase as a result of

A)a decrease in the marginal propensity to consume.
B)an increase in investment.
C)an increase in autonomous consumption.
D)an increase in the marginal propensity to consume.
E)a decrease in autonomous consumption.

Question 6

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

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

Question 7

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

Question 8

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

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

Question 9

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

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

Question 10

Jean Tremblay's 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 his

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

Question 11

Robert Tetley's 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 his

A)marginal propensity to consume decreased.
B)marginal propensity to consume is 0.05.
C)marginal propensity to save is 0.20.
D)average propensity to consume is constant.
E)average propensity to save is always 0.05.

Question 12

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

Question 13

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

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 14

Total desired saving divided by total income is called the

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

Question 15

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 $8 billion, the marginal propensity to spend must be

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

Question 16

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?

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

Question 17

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

Question 18

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

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

Question 19

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

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 20

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

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

Question 21

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

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 22

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

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

Question 23

Undesired or unplanned inventory accumulation is likely to occur when

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

Question 24

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

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

Question 25

Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the saving function is S = - 100 + (0.2)Y, the simple multiplier is

A)0.2.
B)1.
C)2.5.
D)5.
E)- insufficient information to know.

Question 26

Consider a simple macro model with demand- determined output. If z is the marginal propensity to spend out of national income, Y is national income and A is autonomous expenditure, then the simple multiplier is equal to

A)Y/(1- z).
B)z.
C)1 - z.
D)1/(1- z).
E)1/z.

Question 27

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

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

Question 28

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

Question 29

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

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 30

Consider a simple macro model with a constant price level. If the AE function is horizontal, then we know the simple multiplier is

A)less than zero.
B)zero.
C)between zero and one.
D)exactly one.
E)greater than one.

Question 31

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

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

Question 32

Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y. Assuming that we have no government, no international trade and desired investment is autonomous and is equal to $56 billion, then which of the following is the correct statement of the consumption function?

A) C = $244 billion + (0.13)Y
B) C = $244 billion + (0.87)Y
C) C = $300 billion + (0.13)Y
D) C = $356 billion + (0.87)Y
E) C = $356 billion + (0.13)Y

Question 33

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

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 34

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

Question 35

The Smith family's 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)marginal propensity to save is 0.8.
B)marginal propensity to consume is $800.
C)average propensity to consume is 0.8.
D)marginal propensity to consume is 0.8.
E)average propensity to save is 0.8.

Question 36

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

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

Question 37

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

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

Question 38

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 0.4, the simple multiplier is

A)0.
B)0.4.
C)1.67.
D)2.5.
E)4.0.

Question 39

Which of the following statements must be true in the simple macro model ?

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

Question 40

Consider the simplest macro model with a constant price level and demand- determined output. In such a model, an upward shift of the saving function causes equilibrium national income to

A)remain constant but consist of more consumption and less investment.
B)fall because the AE function shifts downward simultaneously.
C)remain constant but consist of less consumption and more investment.
D)remain constant because it does not affect desired aggregate expenditure.
E)rise because the AE function shifts upward simultaneously.

Question 41

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

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 42

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

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 43

In a simple model of the economy 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)to the right 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 saving equals consumption.
E)where aggregate desired expenditure equals consumption.

Question 44

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

Question 45

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,

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 46

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

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

Question 47

In a simple macro model with demand- determined output, the simple multiplier is equal to 1/(1- z), where z equals the

A)average propensity not to spend.
B)level of autonomous expenditure.
C)marginal propensity not to spend.
D)average propensity to spend.
E)marginal propensity to spend.

Question 48

Consider a simple macro model with a constant price level and demand- determined output. If the simple multiplier is 3 and there is a $2 million increase in autonomous investment spending, then the equilibrium level of income will increase by

A)$6 million.
B)$3 million.
C)$4.5 million.
D)$1.2 million.
E)$2 million

Question 49

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

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 50

Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the consumption function is C = (1/2)Y, the simple multiplier is

A)2/3.
B)1.
C)2.
D)3.
E)- insufficient information to know.

Question 51

Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the saving function is S = - 100 + (0.4)Y, the simple multiplier is

A)0.2.
B)1.
C)2.5.
D)5.
E)- insufficient information to know.

Question 52

Consider a simple macro model with demand- determined output. In such a model, the multiplier is larger, the

A)lower the APC.
B)flatter the slope of the AE function.
C)higher the level of autonomous expenditures.
D)lower the level of autonomous expenditures.
E)steeper the slope of the AE function.

Question 53

Aggregate desired consumption divided by aggregate disposable income is called the

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

Question 54

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

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

Question 55

Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the marginal propensity to spend is 0.7, the simple multiplier is

A)0.33.
B)0.70.
C)1.00.
D)1.42.
E)3.33.

Question 56

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

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

Question 57

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend is 0.9, the simple multiplier is

A)0.1.
B)1.0.
C)0.9.
D)1.1.
E)10.0.

Question 58

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

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 59

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

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

Question 60

Desired aggregate consumption expenditure divided by aggregate disposable income is called the

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

Question 61

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)saving equals consumer spending.
C)aggregate desired expenditure equals consumer spending.
D)saving equals income.
E)aggregate desired expenditure equals actual national income.

Question 62

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

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

Question 63

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

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

Question 64

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

Question 65

In each of the four expenditure categories, national income accounts measure expenditures, while national income theory deals with expenditures.

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

Question 66

In the simple macroeconomic model, "autonomous expenditures" are

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

Question 67

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

Question 68

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

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

Question 69

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

Question 70

Consider a simple macro model with demand- determined output. Using such a 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 reciprocal of one minus

A)the marginal propensity not to spend.
B)the marginal propensity to spend.
C)the marginal propensity to save.
D)the average propensity to save.
E)the equilibrium level of national income.

Question 71

In Canada, consumption expenditure in the national accounts is typically of GDP.

A)35 - 40 percent
B)50 - 55 percent
C)40 - 45 percent
D)55 - 60 percent
E)45 - 50 percent

Question 72

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

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

Question 73

The marginal propensity to consume is defined to be

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 74

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

Question 75

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

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

Question 76

"The marginal propensity to consume" refers to the additional

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

Question 77

Suppose aggregate output is demand- determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will and the marginal propensity to spend must equal .

A)increase by $40 billion; 0.75
B)decrease by $10 billion; 0.25
C)increase by $10 billion; 4.0
D)increase by $40 billion; 0.25
E)decrease by $40 billion; 0.75

Question 78

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

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

Question 79

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

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 80

If a family's 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 family's

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