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Interest and Topic

CHAPTER 9

Basic Macroeconomic Relationships Topic

Question numbers:

  1. Consumption function/APC/MPC 1-39
  2. Saving function/APS/MPS 40-53
  3. Shifts in consumption and saving functions 54-69
  4. Graphs/tables: mixed consumption and saving 70-106
  5. Investment demand 107-145
  6. Multiplier effect 146-181
  7. Consider This 182-183
  8. Last Word 184-185
  9. True-False 186-200
  10. Multiple Choice Questions Consumption function/APC/MPC

Type: A Topic: 1 E: 152 MA: 152 .

The most important determinant of consumer spending is:

  • A)the level of household debt.
  • B)the stock of wealth.
  • C)consumer expectations.
  • D)the level of income.

Answer: D

Type: D Topic: 1 E: 152 MA: 152

2. The most important determinant of consumption and saving is the:

  • A)level of bank credit.
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  • B) level of income.
  • C) interest rate.
  • D) price level.

Answer: B

Type: A Topic: 1 E: 156 MA: 156

3. If Smith’s disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:

  • A)save is three-fifths.
  • C)consume is three-fifths.
  • B)consume is one-half.
  • D)consume is one-sixth.

Answer: C

Type: A Topic: 1 E: 156 MA: 156

4. With an MPS of . 4, the MPC will be:

  • A)1. 0 minus . 4.
  • B) . 4 minus 1. 0.
  • C) the reciprocal of the MPS.
  • D) . 4.

Answer: A

Type: D Topic: 1 E: 156 MA: 156

5. The MPC can be defined as that fraction of a:

  • A)change in income that is not spent.
  • C)given total income that is not consumed.
  • B)change in income that is spent.
  • D)given total income that is consumed.

Answer: B

Type: A Topic: 1 E: 154 MA: 154

6. The 45-degree line on a graph relating consumption and income shows:

  • A)all points where the MPC is constant.
  • B)all points at which saving and income are equal.
  • C)all the points at which consumption and income are equal.
  • D)the amounts households will plan to save at each possible level of income.

Answer: C

Type: A Topic: 1 E: 154 MA: 154

7. As disposable income goes up the:

  • A)APC falls.
  • C)volume of consumption declines absolutely.
  • B)APS falls.
  • D)volume of investment diminishes.

Answer: A

Type: D Topic: 1 E: 153 MA: 153

8. The consumption schedule shows:

  • A)that the MPC increases in proportion to GDP.
  • B)that households consume more when interest rates are low.
  • C)that consumption depends primarily on the level of business investment.
  • D)the amounts households plan or intend to consume at various possible levels of aggregate income.

Answer: D

Type: D Topic: 1 E: 153 MA: 153

9. The consumption schedule relates:

  • A)consumption to the level of disposable income.
  • C)disposable income to domestic income.
  • B)saving to the level of disposable income.
  • D)consumption to saving.

Answer: A

Type: A Topic: 1 E: 153 MA: 153

10. A decline in disposable income:

  • A)increases consumption by moving upward along a specific consumption schedule.
  • B)decreases consumption because it shifts the consumption schedule downward.
  • C)decreases consumption by moving downward along a specific consumption schedule.
  • D)increases consumption because it shifts the consumption schedule upward.

Answer: C

Type: D Topic: 1 E: 154 MA: 154

11. The APC is calculated as:

  • A)change in consumption / change in income
  • C)change in income / change in consumption
  • B)consumption / income
  • D)income / consumption

Answer: B

Type: A Topic: 1 E: 153 MA: 153

12. The consumption schedule shows:

  • A)a direct relationship between aggregate consumption and accumulated wealth.
  • B)a direct relationship between aggregate consumption and aggregate income.
  • C)an inverse relationship between aggregate consumption and accumulated financial wealth.
  • D)an inverse relationship between aggregate consumption and aggregate income.

Answer: B

Type: D Topic: 1 E: 153 MA: 153

13. The APC can be defined as the fraction of a:

  • A)change in income that is not spent.
  • B)change in income that is spent.
  • C)specific level of total income that is not consumed.
  • D)specific level of total income that is consumed.

Answer: D

Type: G Topic: 1 E: 154-155 MA: 154-155

14. The consumption schedule in the above diagram indicates that:

  • A)consumers will maximize their satisfaction where the consumption schedule and 45° line intersect.
  • B)up to a point consumption exceeds income, but then falls below income.
  • C)the MPC falls as income increases.
  • D)households consume as much as they earn.

Answer: B

Type: A Topic: 1 E: 154 MA: 154

15. The consumption schedule is drawn on the assumption that as income increases consumption will:

  • A)be unaffected.
  • B)increase absolutely, but remain constant as a percentage of income.
  • C)increase absolutely, but decline as a percentage of income.
  • D)increase both absolutely and as a percentage of income.

Answer: C

Type: A Topic: 1 E: 154 MA: 154

16. Which of the following is correct?

  • A)APC + APS = 1.
  • B) APC + MPS = 1.
  • C) APS + MPC = 1.
  • D) APS + MPS = 1.

Answer: A

Type: A Topic: 1 E: 154-156 MA: 161

17. The consumption schedule is such that:

  • A)both the APC and the MPC increase as income rises.
  • B)the APC is constant and the MPC declines as income rises.
  • C)the MPC is constant and the APC declines as income rises.
  • D)the MPC and APC must be equal at all levels of income.

Answer: C

Type: A Topic: 1 E: 154 MA: 154

18. For all levels of income to the left of the intersection of the 45-degree line and the consumption schedule, the APC is:

  • A)greater than 100 percent.
  • B) less than the APS.
  • C) equal to the MPC.
  • D) equal to 100 percent.

Answer: A

Type: A Topic: 1 E: 156 MA: 156

19. The consumption and saving schedules reveal that the:

  • A)MPC is greater than zero, but less than one.
  • B)MPC and APC are equal at the point where the consumption schedule intersects the 45-degree line.
  • C)APS is positive at all income levels.
  • D)MPC is equal to or greater than one at all income levels.

Answer: A

Type: A Topic: 1 E: 156 MA: 156

20. The size of the MPC is assumed to be:

  • A)less than zero.
  • B) greater than one.
  • C) greater than zero, but less than one.
  • D) two or more.

Answer: C

Type: A Topic: 1 E: 153-154 MA: 153-154

21. As disposable income increases, consumption:

  • A)and saving both increase.
  • C)decreases and saving increases.
  • B)and saving both decrease.
  • D)increases and saving decreases.

Answer: A

Type: D Topic: 1 E: 154 MA: 154

22. The average propensity to consume indicates the:

  • A)amount by which income exceeds consumption.
  • B)relationship between a change in saving and the consequent change in consumption.
  • C)percentage of total income that will be consumed.
  • D)percentage of a change in income that will be consumed.

Answer: C

Type: A Topic: 1 E: 153 MA: 153

23. The relationship between consumption and disposable income is such that:

  • A)an inverse and stable relationship exists between consumption and income.
  • B)a direct, but very volatile, relationship exists between consumption and income.
  • C)a direct and relatively stable relationship exists between consumption and income.
  • D)the two are always equal.

Answer: C

Type: A Topic: 1 E: 156 MA: 156

24. If the MPC is . 8 and disposable income is $200, then

  • A)consumption and saving cannot be determined from the information given.
  • B)saving will be $20.
  • C)personal consumption expenditures will be $80.
  • D)saving will be $40.

Answer: A

Type: A Topic: 1 E: 156 MA: 156

25. The MPC for an economy is:

  • A)the slope of the consumption schedule or line.
  • B)the slope of the savings schedule or line.
  • C)1 divided by the slope of the consumption schedule or line.
  • D)1 divided by the slope of the savings schedule or line.

Answer: A

Type: F Topic: 1 E: 158 MA: 158

26. In contrast to investment, consumption is:

  • A)relatively stable.
  • B) relatively unstable.
  • C) measurable.
  • D) unmeasurable.

Answer: A

Use the following to answer questions 27-28: Advanced analysis) Answer the next question(s) on the basis of the following consumption schedule: C = 20 + . 9Y , where C is consumption and Y is disposable income.

Type: E Topic: 1 E: 156 MA: 156

27. Refer to the above data. The MPC is:

  • A). 45.
  • B) . 20.
  • C) . 50.
  • D) . 90.

Answer: D

Type: E Topic: 1 E: 156 MA: 156

28. Refer to the above data. At an $800 level of disposable income, the level of saving is:

  • A)$180.
  • B) $740.
  • C) $60.
  • D) $18.

Answer: C

Type: A Topic: 1 E: 156 MA: 156

29. Which one of the following will cause a movement down along an economy’s consumption schedule?

  • A)an increase in stock prices
  • C)an increase in consumer indebtedness
  • B)a decrease in stock prices
  • D)a decrease in disposable income

Answer: D

Type: G Topic: 1 E: 156 MA: 156

30. The above diagram shows consumption schedules for economies A and B. We can say that the:

  • A)MPC is greater in B than in A.
  • B)APC at any given income level is greater in B than in A.
  • C)MPS is smaller in B than in A.
  • D)MPC is greater in A than in B.

Answer: D

Type: A Topic: 1 E: 154 MA: 154

31. At the point where the consumption schedule intersects the 45-degree line:

  • A)the MPC is 1. 00.
  • C)saving is equal to consumption.
  • B)the APC is 1. 0.
  • D)the economy is in equilibrium.

Answer: B

Type: C Topic: 1 E: 156 MA: 156

32. Holly’s break-even level of income is $10,000 and her MPC is 0. 75. If her actual disposable income is $16,000, her level of:

  • A)consumption spending will be $14,500.
  • C)consumption spending will be $13,000.
  • B)consumption spending will be $15,500.
  • D)saving will be $2,500.

Answer: A

Type: A Topic: 1 E: 156 MA: 156

33. If Ben’s MPC is . 80, this means that he will:

  • A)spend eight-tenths of any increase in his disposable income.
  • B)spend eight-tenths of any level of disposable income.
  • C)break even when his disposable income is $8,000.
  • D)save two-tenths of any level of disposable income.

Answer: A

Type: A Topic: 1 E: 154 MA: 154

34. Suppose a family’s consumption exceeds its disposable income. This means that its:

  • A)MPC is greater than 1.
  • B) MPS is negative.
  • C) APC is greater than 1.
  • D) APS is positive.

Answer: C

Type: E Topic: 1 E: 154 MA: 154

35. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0. 8Y , where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is:

  • A)$80.
  • B) $100.
  • C) $120.
  • D) $160.

Answer: B

Type: E Topic: 1 E: 156 MA: 156

36. (Advanced analysis) The equation C = 35 + . 75Y , where C is consumption and Y is disposable income, shows that:

  • A)households will consume three-fourths of whatever level of disposable income they receive.
  • B)households will consume $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.
  • C)there is an inverse relationship between disposable income and consumption.
  • D)households will save $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.

Answer: B

Type: E Topic: 1 E: 156 MA: 156

37. Advanced analysis) If the equation C = 20 + . 6Y , where C is consumption and Y is disposable income, were graphed:

  • A)the vertical intercept would be +. 6 and the slope would be +20.
  • B)it would reveal an inverse relationship between consumption and disposable income.
  • C)the vertical intercept would be negative, but consumption would increase as disposable income rises.
  • D)the vertical intercept would be +20 and the slope would be +. 6.

Answer: D

Type: A Topic: 1 E: 154 MA: 154

38. One can determine the amount of any level of total income that is consumed by:

  • A)multiplying total income by the slope of the consumption schedule.
  • B)multiplying total income by the APC.
  • C)subtracting the MPS from total income.
  • D)multiplying total income by the MPC.

Answer: B

Type: C Topic: 1 E: 154, 156 MA: 154, 156

39. Which of the following is correct?

  • A)MPC + MPS = APC + APS
  • C)APC + MPC = APS + MPS
  • B)APC + MPS = APS + MPC
  • D)APC – APS = MPC – MPS

Answer: A Saving function/APS/MPS

Type: A Topic: 2 E: 154 MA: 154

40. The consumption and saving schedules reveal that:

  • A)consumption rises, but saving declines, as disposable income rises.
  • B)saving varies inversely with the profitability of investment.
  • C)saving varies directly with the level of disposable income.
  • D)saving is inversely related to the rate of interest.

Answer: C

Type: D Topic: 2 E: 154 MA: 154

41. Dissaving means:

  • A)the same thing as disinvesting.
  • B)that households are spending more than their current incomes.
  • C)that saving and investment are equal.
  • D)that disposable income is less than zero.

Answer: B

Type: D Topic: 2 E: 154 MA: 154

42. Dissaving occurs where:

  • A)income exceeds consumption.
  • C)consumption exceeds income.
  • B)saving exceeds consumption.
  • D)saving exceeds income.

Answer: C

Type: A Topic: 2 E: 156 MA: 156

43. Which of the following relations is not correct?

  • A)1 – MPC = MPS
  • B) APS + APC = 1
  • C) MPS = MPC + 1
  • D) MPC + MPS = 1

Answer: C

Type: A Topic: 2 E: 154 MA: 154

44. The saving schedule is drawn on the assumption that as income increases:

  • A)saving will decline absolutely and as a percentage of income.
  • B)saving will increase absolutely, but remain constant as a percentage of income.
  • C)saving will increase absolutely, but decline as a percentage of income.
  • D)saving will increase absolutely and as a percentage of income.

Answer: D

Type: A Topic: 2 E: 154 MA: 154

45. At the point where the consumption schedule intersects the 45-degree line:

  • A)the MPC equals 1.
  • B) the APC is zero.
  • C) saving equals income.
  • D) saving is zero.

Answer: D

Type: A Topic: 2 E: 154 MA: 154

46. The saving schedule is such that as aggregate income increases by a certain amount saving:

  • A)increases by the same amount as the increase in income.
  • B)does not change.
  • C)increases, but by a smaller amount.
  • D)increases by an even larger amount.

Answer: C

Type: A Topic: 2 E: 156 MA: 156

47. If the consumption schedule is linear, then the:

  • A)saving schedule will also be linear.
  • C)MPC will decline as income rises.
  • B)MPS will decline as income rises.
  • D)APC will be constant at all levels of income.

Answer: A

Type: A Topic: 2 E: 153 MA: 153

48. Given the consumption schedule, it is possible to graph the relevant saving schedule by:

  • A)subtracting the MPC from 1 at each level of income.
  • B)subtracting investment from consumption at each level of GDP.
  • C)plotting the horizontal differences between the consumption schedule and the 45-degree line.
  • D)plotting the vertical differences between the consumption schedule and the 45-degree line.

Answer: D

Type: A Topic: 2 E: 154 MA: 154

49. As aggregate income decreases, the APC:

  • A)and APS will both increase.
  • C)will increase, but the APS will decrease.
  • B)will decrease, but the APS will increase.
  • D)and APS will both decrease.

Answer: C

Type: A Topic: 2 E: 156 MA: 156

50. If the marginal propensity to consume is . 9, then the marginal propensity to save must be:

  • A)1.
  • B) . 1.
  • C) 1. 1.
  • D) . 9.

Answer: B

Type: A Topic: 2 E: 156 MA: 156

51. The greater is the marginal propensity to consume, the:

  • A)smaller is the marginal propensity to save.
  • C)lower is the average propensity to consume.
  • B)higher is the interest rate.
  • D)lower is the price level.

Answer: A

Type: A Topic: 2 E: 156 MA: 156

52. If the saving schedule is a straight line, the:

  • A)MPS must be constant.
  • C)APC must be constant.
  • B)APS must be constant.
  • D)MPC must be rising.

Answer: A

Type: A Topic: 2 E: 154 MA: 154

53. Which one of the following will cause a movement up along an economy’s saving schedule?

  • A)an increase in household debt outstanding
  • C)an increase in stock prices
  • B)an increase in disposable income
  • D)an increase in interest rates

Answer: B Shifts in consumption and saving functions

Type: D Topic: 3 E: 156-157 MA: 156-157

54. In the late 1990s the U. S. stock market boomed, causing U. S. consumption to rise. Economists refer to this outcome as the:

  • A)Keynes effect.
  • B) interest-rate effect.
  • C) wealth effect.
  • D) multiplier effect.

Answer: C

Type: A Topic: 3 E: 157 MA: 157

55. The wealth effect is shown graphically as a:

  • A)shift of the consumption schedule.
  • B)movement along an existing consumption schedule.
  • C)shift of the investment schedule.
  • D)movement along an existing investment schedule.

Answer: A

Use the following to answer questions 56-59:

Type: G Topic: 3 E: 157 MA: 157

56. Refer to the above graph. A movement from b to a along C1 might be caused by a:

  • A)recession.
  • B)wealth effect of an increase in stock market prices.
  • C)decrease in income tax rates.
  • D)increase in saving.

Answer: A

Type: G Topic: 3 E: 157 MA: 157

57. Refer to the above graph. A shift of the consumption schedule from C1 to C2 might be caused by a:

  • A)recession.
  • B)wealth effect of an increase in stock market prices.
  • C)increase in income tax rates.
  • D)increase in saving.

Answer: B

Type: G Topic: 3 E: 157 MA: 157

58. Refer to the above graph. A movement from a to b along C1 might be caused by a:

  • A)recession.
  • B)wealth effect of an increase in stock market prices.
  • C)increase in income tax rates.
  • D)increase in real GDP.

Answer: D

Type: G Topic: 3 E: 157 MA: 157

59. Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be caused by a:

  • A)increase in real GDP.
  • B)reverse wealth effect, caused by a decrease in stock market prices.
  • C)decrease in income tax rates.
  • D)decrease in saving.

Answer: B

Type: C Topic: 3 E: 157 MA: 157

60. An upward shift of the saving schedule suggests:

  • A)nothing with respect to changes in the APC and APS.
  • B)that the APC and APS have both decreased at each GDP level.
  • C)that the APC and APS have both increased at each GDP level.
  • D)that the APC has decreased and the APS has increased at each GDP level.

Answer: D

Type: A Topic: 3 E: 157 MA: 157

61. Which of the following will not tend to shift the consumption schedule upward?

  • A)a currently small stock of durable goods in the possession of consumers
  • B)the expectation of a future decline in the consumer price index
  • C)a currently low level of household debt.
  • D)the expectation of future shortages of essential consumer goods.

Answer: B

Type: A Topic: 3 E: 157 MA: 157

62. If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule:

  • A)will not shift.
  • C)will shift downward.
  • B)may shift either upward or downward.
  • D)will also shift upward.

Answer: C

Type: A Topic: 3 E: 156 MA: 156

63. Which of the following will not cause the consumption schedule to shift?

  • A)a sharp increase in the amount of wealth held by households
  • B)a change in consumer incomes
  • C)the expectation of a recession
  • D)a growing expectation that consumer durables will be in short supply

Answer: B

Type: A Topic: 3 E: 157 MA: 157

64. An increase in personal taxes will shift:

  • A)both the consumption and saving schedules downward.
  • B)both the consumption and saving schedules upward.
  • C)the consumption schedule upward and the saving schedule downward.
  • D)the consumption schedule downward and the saving schedule upward.

Answer: A

Type: A Topic: 3 E: 157 MA: 157

65. If for some reason households become increasingly thrifty, we could show this by:

  • A)a downshift of the saving schedule.
  • C)an upshift of the saving schedule.
  • B)an upshift of the consumption schedule.
  • D)an increase in the equilibrium GDP.

Answer: C

Type: G Topic: 3 E: 156 MA: 156

66. Suppose the economy’s saving schedule shifts from S1 to S 2 as shown in the above diagram. We can say that its:

  • A)MPC has increased.
  • B)MPS has increased.
  • C)APS has increased at all levels of disposable income.
  • D)APS has decreased at all levels of disposable income.

Answer: B

Type: C Topic: 3 E: 154 MA: 154

67. If a consumption schedule shifts upward, this necessarily means that the:

  • A)MPC has increased.
  • B)MPS has decreased.
  • C)APC is now higher at each level of disposable income.
  • D)APC is now lower at each level of disposable income.

Answer: C

Type: A Topic: 3 E: 158 MA: 158

68. Assume the economy’s consumption and saving schedules simultaneously shift downward. This must be the result of:

  • A)an increase in disposable income.
  • C)an increase in personal taxes.
  • B)an increase in household wealth.
  • D)the expectation of a recession.

Answer: C

Type: G Topic: 3 E: 154 MA: 154

69. Suppose an economy’s consumption schedule shifts from C1 to C2 as shown in the above diagram. We can say that its:

  • A)MPC has increased but its APC at each income level is unchanged.
  • B)APC at each income level is increased but its MPC is unchanged.
  • C)MPC and APC at each income level have both increased.
  • D)MPC and APC at each income level have both decreased.

Answer: C

Graphs/tables: mixed consumption and saving Use the following to answer questions 70-72:

Type: T Topic: 4 E: 156 MA: 156

70. Refer to the above data. The marginal propensity to consume is:

  • A). 25.
  • B) . 75.
  • C) . 20.
  • D) . 80.

Answer: D

Type: T Topic: 4 E: 154 MA: 154

71. Refer to the above data. At the $200 level of disposable income:

  • A)the marginal propensity to save is 2? percent.
  • C)the average propensity to save is . 20.
  • B)dissaving is $5.
  • D)the average propensity to consume is . 80.

Answer: B

Type: T Topic: 4 E: 156 MA: 156

72. Refer to the above data. If disposable income was $325, we would expect consumption to be:

  • A)$315.
  • B) $305.
  • C) $20.
  • D) $290.

Answer: B

Use the following to answer questions 73-78:

Type: G Topic: 4 E: 154 MA: 154

73. Refer to the above diagram. The average propensity to consume is 1 at point:

  • A)F.
  • B) A.
  • C) D.
  • D) B.

Answer: B

Type: G Topic: 4 E: 156 MA: 156

74. Refer to the above diagram. The marginal propensity to consume is equal to:

  • A)AE/0E.
  • B) CF/CD.
  • C) CB/AB.
  • D) CD/CF.

Answer: C

Type: G Topic: 4 E: 154-155 MA: 154-155

75. Refer to the above diagram. At income level F the volume of saving is:

  • A)BD.
  • B) AB.
  • C) CF-BF.
  • D) CD.

Answer: D

Type: G Topic: 4 E: 154 MA: 154

76. Refer to the above diagram. Consumption will be equal to income at:

  • A)an income of E.
  • B) an income of F.
  • C) point C.
  • D) point D.

Answer: A

Type: G Topic: 4 E: 154-155 MA: 154-155

77. Refer to the above diagram. The economy is dissaving:

  • A)in the amount CD.
  • C)at income level H.
  • B)at all income levels greater than E.
  • D)at income level E.

Answer: C

Type: G Topic: 4 E: 156 MA: 156

78. Refer to the above diagram. The marginal propensity to save is:

  • A)CD/EF.
  • B) CB/CF.
  • C) CB/AF.
  • D) EF/CB.

Answer: A

Use the following to answer questions 79-80:

Type: A Topic: 4 E: 153 MA: 153

79. The above figure suggests that:

  • A)consumption would be $60 billion even if income were zero.
  • B)saving is zero at the $120 billion income level.
  • C)as income increases, consumption decreases as a percentage of income.
  • D)as income increases, consumption decreases absolutely.

Answer: C

Type: A Topic: 4 E: 154-155 MA: 154-155

80. Refer to the above figure. If the relevant saving schedule were constructed:

  • A)saving would be minus $20 billion at the zero level of income.
  • B)aggregate saving would be $60 at the $60 billion level of income.
  • C)its slope would be 1/2.
  • D)it would slope downward and to the right

Answer: A

Use the following to answer questions 81-83:

Answer the next question(s) on the basis of the following data for a hypothetical economy.

Type: T Topic: 4 E: 156 MA: 156

81. Refer to the above data. The marginal propensity to consume is:

  • A). 80.
  • B) . 75.
  • C) . 20.
  • D) . 25.

Answer: A

Type: T Topic: 4 E: 154 MA: 154

82. Refer to the above data. At the $100 level of income, the average propensity to save is:

  • A). 10.
  • B) . 20.
  • C) . 25.
  • D) . 90.

Answer: A

Type: T Topic: 4 E: 156 MA: 156

83. Refer to the above data. If plotted on a graph, the slope of the saving schedule would be:

  • A). 80.
  • B) . 10.
  • C) . 20.
  • D) . 15.

Answer: C

Use the following to answer questions 84-88:

Type: G Topic: 4 E: 156 MA: 156

84. Refer to the above diagram. The marginal propensity to save is equal to:

  • A)CD/0D.
  • B) 0B/0A.
  • C) 0D/0D.
  • D) CD/BD.

Answer: D

Type: G Topic: 4 E: 154 MA: 154

85. Refer to the above diagram. At disposable income level D, the average propensity to save is equal to:

  • A)CD/BD.
  • B) CD/D.
  • C) D/CD.
  • D) A/B.

Answer: B

Type: G Topic: 4 E: 154-155 MA: 154-155

86. Refer to the above diagram. At disposable income level D, consumption is:

  • A)equal to CD.
  • B) equal to D minus CD.
  • C) equal to CD/D.
  • D) equal to CD plus BD.

Answer: B

Type: G Topic: 4 E: 154-155 MA: 154-155

87. Refer to the above diagram. Consumption equals disposable income when:

  • A)disposable income is B.
  • B) disposable income is D.
  • C) CD equals A.
  • D) B equals CD.

Answer: A

Type: A Topic: 4 E: 156-157 MA: 156-157

88. The saving schedule shown in the above diagram would shift downward if, all else equal:

  • A)the average propensity to save increased at each income level.
  • B)the marginal propensity to save rose at each income level.
  • C)consumer wealth rose rapidly because of a significant increase in stock market prices.
  • D)the real interest rate fell.

Answer: C

Use the following to answer questions 89-96:

Answer the next question(s) on the basis of the following consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars.

Type: T Topic: 4 E: 156 MA: 156

89. Refer to the above data. The marginal propensity to consume in economy (1) is:

  • A). 5.
  • B) . 3.
  • C) . 8.
  • D) . 7.

Answer: D

Type: T Topic: 4 E: 156 MA: 156

90. Refer to the above data. The marginal propensity to consume:

  • A)is highest in economy (1).
  • C)is highest in economy (3).
  • B)is highest in economy (2).
  • D)cannot be calculated from the data given.

Answer: C

Type: T Topic: 4 E: 156 MA: 156

91. Refer to the above data. The marginal propensity to save:

  • A)is highest in economy (1).
  • C)is highest in economy (3).
  • B)is highest in economy (2).
  • D)cannot be determined from the data given.

Answer: A

Type: T Topic: 4 E: 154 MA: 154

92. Refer to the above data. At an income level of $40 billion, the average propensity to consume:

  • A)is highest in economy (1).
  • C)is highest in economy (3).
  • B)is highest in economy (2).
  • D)cannot be determined from the data given.

Answer: B

Type: T Topic: 4 E: 154 MA: 154

93. Refer to the above data. At an income level of $400 billion, the average propensity to save in economy (2) is:

  • A). 9125.
  • B) . 0725.
  • C) . 0875.
  • D) . 9305.

Answer: C

Type: T Topic: 4 E: 156 MA: 156

94. (Advanced analysis) Refer to the above data. When plotted on a graph, the vertical intercept of the consumption schedule in economy (3) is _____ and the slope is _____.

  • A)minus $2; . 9.
  • B) $2; . 18.
  • C) $100; . 5.
  • D) $2; . 9.

Answer: D

Type: T Topic: 4 E: 158 MA: 158

95. Refer to the above data. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the:

  • A)marginal propensity to consume will remain unchanged in each of the three countries.
  • B)marginal propensity to consume will decline in each of the three countries.
  • C)average propensity to save will fall at each level of DI in each of the three countries.
  • D)marginal propensity to save will rise in each of the three countries.

Answer: A

Type: T Topic: 4 E: 157 MA: 157

96. Refer to the above data. A $2 billion increase in consumption at each level of DI could be caused by:

  • A)a decrease in consumer wealth.
  • C)an increase in taxation.
  • B)new expectations of higher future income.
  • D)an increase in saving.

Answer: B

Use the following to answer questions 97-100:

Type: G Topic: 4 E: 154 MA: 154

97. Refer to the above diagram. The break-even level of disposable income:

  • A)is zero.
  • B) is minus $10.
  • C) is $100.
  • D) cannot be determined from the information given.

Answer: C

Type: G Topic: 4 E: 156 MA: 156

98. Refer to the above diagram. The marginal propensity to consume is:

  • A). 2.
  • B) . 8.
  • C) . 4.
  • D) . 3.

Answer: B

Type: G Topic: 4 E: 156 MA: 156

99. (Advanced analysis) The equation for the above saving schedule is:

  • A)Yd = -20 + . 8S.
  • B) Yd = 20 + . 2S.
  • C) S = -20 + . 2Yd.
  • D) S = 20 + . 8Yd.

Answer: C

Type: G Topic: 4 E: 154-155 MA: 154-155

100. Refer to the above diagram. The average propensity to consume:

  • A)is greater than 1 at all levels of disposable income above $100.
  • B)is greater than 1 at all levels of disposable income below $100.
  • C)is equal to the average propensity to save.
  • D)cannot be determined from the information given.

Answer: B

Use the following to answer questions 101-104:

Type: G Topic: 4 E: 154 MA: 154

101. Refer to the above diagram. The break-even level of income is:

  • A)zero.
  • B) $150.
  • C) $60.
  • D) $120.

Answer: B

Type: G Topic: 4 E: 154 MA: 154

102. Refer to the above diagram. The average propensity to consume is:

  • A)greater than 1 at all levels of income above $150.
  • B)greater than 1 at all levels of income below $150.
  • C)zero.
  • D). 6.

Answer: B

Type: G Topic: 4 E: 156 MA: 156

103. Refer to the above diagram. The marginal propensity to consume is:

  • A). 4.
  • B) . 6.
  • C) . 5.
  • D) . 8.

Answer: B

Type: G Topic: 4 E: 156 MA: 156

104. (Advanced analysis) Refer to the above diagram. The equation for the consumption schedule is:

  • A)C = . 6Y .
  • B) Y = 60 + . C.
  • C) C = 60 + . 6Y .
  • D) C = 60 + . 4Y .

Answer: C

Use the following to answer questions 105-106: (Advanced analysis) Answer the next question(s) on the basis of the following data:

Type: T Topic: 4 E: 156 MA: 156

105. Which of the following equations correctly represents the above data?

  • A)Yd = 40 + . 6C
  • B) C = 60 + . 4Yd
  • C) C = 40 + . 6Yd
  • D) C = . 6Yd

Answer: C

Type: T Topic: 4 E: 156 MA: 156

106. Which of the following equations represents the saving schedule implicit in the above data?

  • A)S = C – Yd
  • B) S = 40 + . 4Yd
  • C) S = 40 + . 6Yd
  • D) S = -40 + . Yd

Answer: D

Investment demand

Type: F Topic: 5 E: 160 MA: 160 Status: New

107. The investment demand curve portrays an inverse (negative) relationship between:

  • A)investment and real GDP.
  • C)the nominal interest rate and investment.
  • B)the real interest rate and investment.
  • D)the price level and investment.

Answer: B

Type: F Topic: 5 E: 160 MA: 160 Status: New

108. The investment demand slopes downward and to the right because lower real interest rates:

  • A)expand consumer borrowing, making investments more profitable.
  • B)boost expected rates of returns on investment.
  • C)enable more investment projects to be undertaken profitably.
  • D)create tax incentives to invest.

Answer: C

Type: A

Topic: 5 E: 159 MA: 159 Status: New

109. Other things equal, a decrease in the real interest rate will:

  • A)shift the investment demand curve to the right.
  • B)shift the investment demand curve to the left.
  • C)move the economy upward along its existing investment demand curve.
  • D)move the economy downward along its existing investment demand curve.

Answer: D

Type: A Topic: 5 E: 159 MA: 159

110. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is:

  • A)80 percent.
  • B) 8 percent.
  • C) 2 percent.
  • D) 20 percent.

Answer: D

Type: A Topic: 5 E: 159 MA: 159

111. Assume a machine which has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is:

  • A)7. 5 percent.
  • B) 10 percent.
  • C) 15 percent.
  • D) 20 percent.

Answer: C

Type: A Topic: 5 E: 159 MA: 159

112. If the firm in the previous question finds it can borrow funds at an interest rate of 10 percent the firm should:

  • A)not purchase the machine because the expected rate of return exceeds the interest rate.
  • B)not purchase the machine because the interest rate exceeds the expected rate of return.
  • C)purchase the machine because the expected rate of return exceeds the interest rate.
  • D)purchase the machine because the interest rate exceeds the expected rate of return.

Answer: C

Type: D Topic: 5 E: 159-160 MA: 159-160

113. The relationship between the real interest rate and investment is shown by the:

  • A)investment demand schedule.
  • C)saving schedule.
  • B)consumption of fixed capital schedule.
  • D)aggregate supply curve.

Answer: A

Type: A Topic: 5 E: 159-160 MA: 159-160

114. Given the expected rate of return on all possible investment opportunities in the economy:

  • A)an increase in the real rate of interest will reduce the level of investment.
  • B)a decrease in the real rate of interest will reduce the level of investment.
  • C)a change in the real interest rate will have no impact on the level of investment.
  • D)an increase in the real interest rate will increase the level of investment.

Answer: A

Type: A Topic: 5 E: 159-160 MA: 159-160

115. A decline in the real interest rate will:

  • A)increase the amount of investment spending.
  • C)shift the investment demand curve to the right.
  • B)shift the investment schedule downward.
  • D)shift the investment demand curve to the left.

Answer: A

Type: A Topic: 5 E: 159-160 MA: 159-160

116. The immediate determinants of investment spending are the:

  • A)expected rate of return on capital goods and the real interest rate.
  • B)level of saving and the real interest rate.
  • C)marginal propensity to consume and the real interest rate.
  • D)interest rate and the expected price level.

Answer: A

Type: A Topic: 5 E: 160 MA: 160

117. The investment demand curve suggests:

  • A)that changes in the real interest rate will not affect the amount invested.
  • B)there is an inverse relationship between the real rate of interest and the level of investment spending.
  • C)that an increase in business taxes will tend to stimulate investment spending.
  • D)there is a direct relationship between the real rate of interest and the level of investment spending.

Answer: B

Type: T Topic: 5 E: 160 MA: 160

118. Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but that there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. The investment-demand curve for this economy is:

Answer: B

Type: T Topic: 5 E: 160 MA: 160

119. In view of your answer to the previous question, if the real interest rate is 15 percent in this economy, the aggregate amount of investment will be:

  • A)$25.
  • B) $20.
  • C) $15.
  • D) $10.

Answer: D

Type: C Topic: 5 E: 162 MA: 162

120. If business taxes are reduced and the real interest rate increases:

  • A)consumption and saving will necessarily increase.
  • B)the level of investment spending might either increase or decrease.
  • C)the level of investment spending will necessarily increase.
  • D)the level of investment spending will necessarily decrease.

Answer: B

Type: A Topic: 5 E: 162 MA: 162

121. Other things equal, a 10 percent decrease in corporate income taxes will:

  • A)decrease the market price of real capital goods.
  • B)have no effect on the location of the investment-demand curve.
  • C)shift the investment-demand curve to the right.
  • D)shift the investment-demand curve to the left.

Answer: C

Type: A Topic: 5 E: 162 MA: 162

122. The investment demand curve will shift to the right as the result of:

  • A)the availability of excess production capacity.
  • B)an increase in business taxes.
  • C)businesses becoming more optimistic about future business conditions.
  • D)an increase in the real interest rate.

Answer: C

Type: A Topic: 5 E: 159-160 MA: 159-160

123. Other things equal, the real interest rate and the level of investment are:

  • A)related only when saving equals planned investment.
  • B)unrelated.
  • C)inversely related.
  • D)directly related.

Answer: C

Use the following to answer questions 124-125:

Answer the next question(s) on the basis of the following table:

Type: T Topic: 5 E: 160 MA: 160

124. The above table reflects a(n):

  • A)interest rate schedule.
  • C)investment demand schedule.
  • B)demand-for-money schedule.
  • D)profit schedule.

Answer: C

Type: T Topic: 5 E: 160 MA: 160

125. The above schedule indicates that if the real interest rate is 8 percent, then:

  • A)we cannot tell what volume of investment will be profitable.
  • B)$30 billion will be both saved and invested.
  • C)$30 billion of investment will be undertaken.
  • D)$60 billion of investment will be undertaken.

Answer: C

Type: C Topic: 5 E: 162 MA: 162

126. Other things equal, if the real interest rate falls and business taxes rise:

  • A)investment will rise until it is equal to saving.
  • B)we will be uncertain as to the resulting change in investment.
  • C)we can be certain that investment will rise.
  • D)we can be certain that investment will fall.

Answer: B

Type: A Topic: 5 E: 162 MA: 162

127. The investment demand curve will shift to the right as a result of:

  • A)an increase in the excess production capacity available in industry.
  • B)an increase in business taxes.
  • C)technological progress.
  • D)an increase in the acquisition and maintenance cost of capital goods.

Answer: C

Type: A Topic: 5 E: 162 MA: 162

128. The investment demand curve will shift to the left as a result of:

  • A)an increase in the excess production capacity available in industry.
  • B)a decrease in business taxes.
  • C)increased business optimism with respect to future economic conditions.
  • D)a decrease in labor costs.

Answer: A

Type: A Topic: 5 E: 159 MA: 159

129. If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when:

  • A)r falls.
  • B) i is greater than r.
  • C) r is greater than i.
  • D) i rises.

Answer: C

Type: A Topic: 5 E: 162 MA: 162

130. A rightward shift of the investment demand curve might be caused by:

  • A)an increase in the price level.
  • B)a decline in the real interest rate.
  • C)an increase in the expected rate of return on investment.
  • D)an increase in business taxes.

Answer: C

Type: A Topic: 5 E: 159 MA: 159

131. The real interest rate is:

  • A)the percentage increase in money that the lender receives on a loan.
  • B)the percentage increase in purchasing power that the lender receives on a loan.
  • C)also called the after-tax interest rate.
  • D)usually higher than the nominal interest rate.

Answer: B

Type: A Topic: 5 E: 160 MA: 160

132. When we draw an investment demand curve we hold constant all of the following except:

  • A)the expected rate of return on the investment.
  • C)the interest rate.
  • B)business taxes.
  • D)the present stock of capital goods.

Answer: C

Type: A Topic: 5 E: 159 MA: 159

133. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:

  • A)18 percent.
  • B) 24 percent.
  • C) 12 percent.
  • D) 6 percent.

Answer: C

Type: A Topic: 5 E: 159-160 MA: 159-160

134. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:

  • A)2 percent.
  • B) zero percent.
  • C) 10 percent.
  • D) 22 percent.

Answer: D

Type: A Topic: 5 E: 160 MA: 160

135. A high rate of inflation is likely to cause a:

  • A)high nominal interest rate.
  • C)low rate of growth of nominal GDP.
  • B)low nominal interest rate.
  • D)decrease in nominal wages.

Answer: A

Type: A Topic: 5 E: 160 MA: 160

136. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

  • A)more investment will be forthcoming when i exceeds r.
  • B)less investment will be forthcoming when r rises.
  • C)r will fall as more investment is undertaken.
  • D)r will exceed i at all possible levels of investment.

Answer: C

Type: A Topic: 5 E: 159 MA: 159

137. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

  • A)investment will take place until i and r are equal.
  • B)investment will take place until r exceeds i by the greatest amount.
  • C)r will rise as more investment is undertaken.
  • D)i will fall as more investment is undertaken.

Answer: A

Type: G Topic: 5 E: 160 MA: 160

138. Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. Which of the lines on the above diagram represents these data?

  • A)A
  • B) B
  • C) C
  • D) D

Answer: B

Use the following to answer questions 139-141:

Answer the next question(s) on the basis of the following information for a private closed economy. Assume that for the entire business sector of the economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.

Type: G Topic: 5 E: 159 MA: 159

139. Refer to the above information. If the real interest rate is 15 percent, what amount of investment will be undertaken?

  • A)$15
  • B) $30
  • C) $45
  • D) $60

Answer: B

Type: G Topic: 5 E: 159 MA: 159

140. Refer to the above information. If the real interest rate is 5 percent, what amount of investment will be undertaken?

  • A)$15
  • B) $30
  • C) $45
  • D) $60

Answer: D

Type: G Topic: 5 E: 160 MA: 160

141. Refer to the above information. The expected rate of return curve:

  • A)shows a direct relationship between the interest rate and investment.
  • B)is also the investment demand curve.
  • C)is indeterminant.
  • D)implies a direct (positive) relationship between the interest rate and the level of GDP.

Answer: B

Use the following to answer questions 142-144:

Type: G Topic: 5 E: 162 MA: 162 Status: New

142. Which of the following would shift the investment demand curve from ID1 to ID2?

  • A)a lower interest rate
  • C)a higher interest rate
  • B)lower expected rates of return on investment
  • D)higher expected rates of return on investment

Answer: D

Type: G Topic: 5 E: 162 MA: 162 Status: New

143. Which of the following would shift the investment demand curve from ID1 to ID3?

  • A)a lower interest rate
  • C)a higher interest rate
  • B)lower expected rates of return on investment
  • D)higher expected rates of return on investment

Answer: B

Type: G Topic: 5 E: 160 MA: 160 Status: New

144. Which of the following would increase investment, while leaving an existing investment demand curve, say, ID2, in place?

  • A)a lower interest rate
  • C)lower expected returns on investment
  • B)a higher interest rate
  • D)higher expected returns on investment

Answer: A

Type: F Topic: 5 E: 162-163 MA: 162-163 Status: New

145. In annual percentage terms, investment spending in the United States is:

  • A)less variable than real GDP.
  • C)less variable than the price level.
  • B)less variable than consumption spending.
  • D)more variable than real GDP.

Answer: D

Multiplier effect

Type: A Topic: 6 E: 164 MA: 164

146. The multiplier effect means that:

  • A)consumption is typically several times as large as saving.
  • B)a change in consumption can cause a larger increase in investment.
  • C)an increase in investment can cause GDP to change by a larger amount.
  • D)a decline in the MPC can cause GDP to rise by several times that amount.

Answer: C

Type: E Topic: 6 E: 166 MA: 166

147. The multiplier is:

  • A)1/MPC.
  • B) 1/(1 + MPC).
  • C) 1/MPS.
  • D) 1/(1 – MPS).

Answer: C

Type: A Topic: 6 E: 164 MA: 164

148. The multiplier is useful in determining the:

  • A)full-employment unemployment rate.
  • B)level of business inventories.
  • C)rate of inflation.
  • D)change in GDP resulting from a change in spending.

Answer: D

Type: D Topic: 6 E: 164 MA: 164

149. The multiplier is defined as:

  • A)1 – MPS.
  • C)change in GDP/initial change in spending.
  • B)change in GDP ? initial change in spending.
  • D)change in GDP – initial change in spending.

Answer: C

Use the following to answer questions 150-151:

Type: G Topic: 6 E: 156 MA: 156

150. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the highest marginal propensity to consume?

  • A)1
  • B) 2
  • C) 3
  • D) 4

Answer: D

Type: G Topic: 6 E: 166 MA: 166

151. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier?

  • A)1
  • B) 2
  • C) 3
  • D) 4

Answer: D

Type: E Topic: 6 E: 166 MA: 166 1

52. If 100 percent of any change in income is spent, the multiplier will be:

  • A)equal to the MPC.
  • B) 1.
  • C) zero.
  • D) infinitely large.

Answer: D

Type: E Topic: 6 E: 166 MA: 166

153. The multiplier can be calculated as:

  • A)1/(MPS + MPC)
  • B) MPC/MPS
  • C) 1/(1 – MPC)
  • D) 1 – MPC = MPS

Answer: C

Type: D Topic: 6 E: 166 MA: 166

154. The multiplier:

  • A)occurs only in response to a change in the level of investment spending.
  • B)can be found by taking the reciprocal of the MPS.
  • C)occurs only when intended investment increases as GDP increases.
  • D)is measured by the slope of the saving schedule.

Answer: B

Type: A Topic: 6 E: 166 MA: 166

155. The size of the multiplier is equal to the:

  • A)slope of the consumption schedule.
  • B)reciprocal of the slope of the consumption schedule.
  • C)slope of the saving schedule.
  • D)reciprocal of the slope of the saving schedule.

Answer: D

Type: C Topic: 6 E: 166 MA: 166

156. If the MPS is only half as large as the MPC, the multiplier is:

  • A)2.
  • B) 3.
  • C) 4.
  • D) 5.

Answer: B

Type: A Topic: 6 E: 166 MA: 166

157. If the MPC is . 70 and gross investment increases by $3 billion, the equilibrium GDP will:

  • A)increase by $10 billion.
  • C)decrease by $4. 29 billion.
  • B)increase by $2. 10 billion.
  • D)increase by $4. 29 billion.

Answer: A

Type: A Topic: 6 E: 166 MA: 166

158. The numerical value of the multiplier will be smaller the:

  • A)larger the average propensity to consume.
  • C)larger the slope of the consumption schedule.
  • B)larger the slope of the saving schedule.
  • D)smaller the slope of the saving schedule.

Answer: B

Type: A Topic: 6 E: 165 MA: 165

159. The practical significance of the multiplier is that it:

  • A)equates the real interest rate and the expected rate of return on investment.
  • B)magnifies initial changes in spending into larger changes in GDP.
  • C)keeps inflation within tolerable limits.
  • D)helps to stabilize the economy.

Answer: B

Type: F Topic: 6 E: 166 MA: 166

160. The multiplier:

  • A)varies directly with the slope of the investment demand schedule.
  • B)is unrelated to the slope of the saving schedule.
  • C)will be greater, the smaller is the slope of the saving schedule.
  • D)will be greater, the steeper is the slope of the saving schedule.

Answer: C

Type: A Topic: 6 E: 166 MA: 166

161. The increase in income that results from an increase in investment spending would be greater the:

  • A)smaller the MPS.
  • B) smaller the APC.
  • C) larger the MPS.
  • D) smaller the MPC.

Answer: A

Type: A Topic: 6 E: 164 MA: 164

162. The multiplier effect:

  • A)reduces the MPC.
  • B)magnifies changes in spending into larger changes in output and income.
  • C)promotes stability of the general price level.
  • D)lessens upswings and downswings in business activity.

Answer: B

Type: E Topic: 6 E: 166 MA: 166

163. If the MPC is . 6, the multiplier will be:

  • A)4. 0.
  • B) 6. 0.
  • C) 2. 5.
  • D) 1. 67.

Answer: C

Type: C Topic: 6 E: 166 MA: 166

164. Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by:

  • A)$3 billion.
  • B) $2/3 billion.
  • C) $6 billion.
  • D) $2 billion.

Answer: C

Type: E Topic: 6 E: 166 MA: 166

165. The multiplier is:

  • A)1/APS.
  • B) 1/APC.
  • C) 1/MPC.
  • D) 1/MPS.

Answer: D

Type: A Topic: 6 E: 164 MA: 164 Status: New

166. The multiplier applies to:

  • A)investment but not to net exports or government spending.
  • B)investment, net exports, and government spending.
  • C)increases in spending but not to decreases in spending.
  • D)spending by the private sector but not by the public sector.

Answer: B

Type: A Topic: 6 E: 164 MA: 164

167. The multiplier effect indicates that:

  • A)a decline in the interest rate will cause a proportionately larger increase in investment.
  • B)a change in spending will change aggregate income by a larger amount.
  • C)a change in spending will increase aggregate income by the same amount.
  • D)an increase in total income will generate a larger change in aggregate expenditures.

Answer: B

Use the following to answer questions 168-173:

Answer the next question(s) on the basis of the following table that illustrates the multiplier process.

Type: T Topic: 6 E: 156 MA: 156

168. Refer to the above table. The marginal propensity to consume is:

  • A). 5.
  • B) . 75.
  • C) . 8.
  • D) . 9.

Answer: C

Type: T Topic: 6 E: 156 MA: 156

169. Refer to the above table. The marginal propensity to save is:

  • A). 5.
  • B) . 25.
  • C) . 2.
  • D) . 1.

Answer: C

Type: T Topic: 6 E: 156 MA: 156

170. Refer to the above table. The change in income in round two will be:

  • A)$4.
  • B) $16.
  • C) $20.
  • D) $24.

Answer: B

Type: T Topic: 6 E: 164 MA: 164

171. Refer to the above table. The total change in income resulting from the initial change in investment will be:

  • A)$100.
  • B) $20.
  • C) $80.
  • D) $200.

Answer: A

Type: T Topic: 6 E: 165 MA: 165

172. Refer to the above table. The total change in consumption resulting from the initial change in investment will be:

  • A)$100.
  • B) $96.
  • C) $180.
  • D) $80.

Answer: D

Type: T Topic: 6 E: 166 MA: 166

173. Refer to the above table. The multiplier in this economy is:

  • A)2.
  • B) 4.
  • C) 5.
  • D) 10.

Answer: C

Type: C Topic: 6 E: 164 MA: 164

174. If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is:

  • A)4.
  • B) 5.
  • C) 3. 33.
  • D) 2. 5.

Answer: B

Type: C Topic: 6 E: 164 MA: 164

175. If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is:

  • A)2.
  • B) 3. 33.
  • C) 5.
  • D) 10.

Answer: A

Type: C Topic: 6 E: 165 MA: 165

176. If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by:

  • A)$200 billion.
  • B) $300 billion.
  • C) $400 billion.
  • D) $500 billion.

Answer: C

Type: C Topic: 6 E: 165 MA: 165

177. If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:

  • A)$2500 billion.
  • B) $3000 billion.
  • C) $4000 billion.
  • D) $5000 billion.

Answer: D

Type: C Topic: 6 E: 166 MA: 166

178. If the marginal propensity to save is 0. 2 in an economy, a $20 billion rise in investment spending will increase:

  • A)GDP by $120 billion.
  • C)saving by $25 billion.
  • B)GDP by $20 billion.
  • D)consumption by $80 billion.

Answer: D

Type: A Topic: 6 E: 166 MA: 166

179. A $1 billion increase in investment will cause a:

  • A)(1/MPS) billion increase in GDP.
  • C)(1 – MPC) billion increase in GDP.
  • B)(MPS) billion increase in GDP.
  • D)(MPC – MPS) billion increase in GDP.

Answer: A

Type: F Topic: 6 E: 166-167 MA: 166-167

180. The Council of Economic Advisers has estimated that the actual multiplier for the U. S. economy is approximately:

  • A)4.
  • B) 3. 5.
  • C) 3.
  • D) 2.

Answer: D

Type: F Topic: 6 E: 166-167 MA: 166-167 Status: New

181. The actual multiplier effect in the U. S. economy is less than the multiplier effect in the text examples because:

  • A)the real-world MPS is larger than the MPS in the examples.
  • B)in addition to saving, households use some of any increase in income to buy imported goods and to pay higher taxes.
  • C)the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts.
  • D)the MPC in the United States is greater than 1.

Answer: B

Consider This Questions

Type: F E: 159 MA: 159 Status: New

182. (Consider This) U. S. consumption increased between March 2000 and July 2002 even though stock values declined by $3. 7 trillion. One of the reasons was that:

  • A)lower interest rates allowed many households to reduce their monthly loan payments and increase their consumption spending.
  • B)deflation occurred, which increased purchasing power.
  • C)economic growth accelerated relative to the prior two years.
  • D)the unemployment rate dramatically declined.

Answer: A

Type: F E: 159 MA: 159 Status: New

183. (Consider This) Part of the wealth effect of a $3. 7 trillion decline in stock values between March 2000 and July 2002 was offset by rising:

  • A)tax rates.
  • B) interest rates.
  • C) house values.
  • D) expectations of future income.

Answer: C

Last Word Questions

Type: A E: 167 MA: 167

184. (Last Word) Art Buchwald’s article “Squaring the Economic Circle” is a humorous description of:

  • A)a negative GDP gap.
  • C)the marginal propensity to save.
  • B)a positive GDP gap.
  • D)the multiplier.

Answer: D

Type: A E: 167 MA: 167

185. Last Word) Art Buchwald’s article “Squaring the Economic Circle” humorously describes how:

  • A)a person’s decision not to buy an automobile eventually reduces many people’s incomes, including that of the person making the original decision.
  • B)a price increase on a single product eventually leads to rapid inflation.
  • C)an increase in imports eventually leads to a greater increase in exports.
  • D)a government tax rate increase eventually results in the government collecting less tax revenue than before the tax rate hike.

Answer: A

True/False Questions

Type: A E: 154 MA: 154

186. If DI is $275 billion and the APC is 0. 8, we can conclude that saving is $55 billion.

Answer: True

Type: A E: 156 MA: 156

187. If the MPC is constant at various levels of income, then the APC must also be constant at all of those income levels.

Answer: False

Type: A E: 154 MA: 154

188. The average propensity to consume is defined as income divided by consumption.

Answer: False

Type: D E: 156 MA: 156

189. 1 – MPC = MPS.

Answer: True

Type: A E: 159 MA: 159

190. A decline in the real interest rate will shift the investment demand curve to the right.

Answer: False

Type: A E: 156 MA: 156

191. If the Brown family’s marginal propensity to consume is 0. 70, then it will necessarily consume seven-tenths of its total income.

Answer: False

Type: A E: 156 MA: 156

192. 1 + MPS = MPC.

Answer: False

Type: A E: 156 MA: 156

193. The slope of the consumption schedule is measured by the MPC.

Answer: True

Type: A E: 159 MA: 159

194. A specific investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i.

Answer: True

Type: A E: 163-164 MA: 163-164

195. Investment is highly stable; it rarely changes.

Answer: False

Type: A E: 156 MA: 156

196. The greater the MPC, the greater the multiplier.

Answer: True

Type: A E: 166 MA: 166

197. If the MPS is 1, the multiplier will be 1.

Answer: True

Type: A E: 166 MA: 166

198. The multiplier is equal to the reciprocal of the MPC.

Answer: False

Type: F E: 164 MA: 164 Status: New

199. The multiplier shows the relationship between changes in a component of spending, say, investment, and the consequent changes in real income and output.

Answer: True

Type: F E: 167 MA: 167 Status: New

200. The estimate for the value of the real-world multiplier is 2.

Answer: True