Econ 10 & 12

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Disposable Income

Income after tax;
Consumption + Saving

45 degree line

A reference line where consumption = disposable income

B

If the marginal propensity to consume is .9, then the marginal propensity to save must be:
A. 1
B. 0.1
C. 1.1
D. 0.9

C

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.

C

Capital goods, because their purchases can be postponed like ______ consumer goods, tend to
contribute to ________ in investment spending.
A. nondurable; instability
B. nondurable; stability
C. durable; instability
D. durable; stability

A

The aggregate demand curve shows the:
A. Inverse (or negative) relationship between the price level and real domestic output purchased
B. Direct (or positive) relationship between the price level and real domestic output produced
C. Inverse relationship between interest rates and real domestic output produced
D. Direct relationship between real-balances and real domestic output purchased

A

The real-balances, interest-rate, and foreign purchases effects all help explain:
A. why the aggregate demand curve is downsloping.
B. why the aggregate supply curve is upsloping.
C. shifts in the aggregate demand curve.
D. shifts in the aggregate supply curve

B

Which combination of factors would most likely increase aggregate demand?
A. An increase in household indebtedness and a decrease in net exports
B. An increase in consumer wealth and a decrease in interest rates
C. An increase in personal taxes and a decrease in government spending
D. An increase in business taxes and a decrease in profit expectations

C

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:
A. leftward by $50 billion at each price level.
B. rightward by $10 billion at each price level.
C. rightward by $50 billion at each price level.
D. leftward by $40 billion at each price level.

B

The long-run aggregate supply curve represents circumstances where:
A. both input and output prices are fixed.
B. both input and output prices are flexible.
C. input prices are fixed, but output prices are flexible.
D. input prices are flexible, but output prices are fixed.

C

Other things equal, appreciation of the U.S. dollar:
A. increases aggregate demand in the United States and may increase aggregate supply by reducing the
prices of imported resources.
B. increases aggregate demand in the United States and may decrease aggregate supply by reducing the
prices of imported resources.
C. decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.
D. decreases aggregate demand in the United States and may reduce aggregate supply by increasing the
prices of imported resources.

D

Which would be considered to be one of the factors that shift the short-run aggregate supply curve? A change in:
A. Consumer spending
B. Net exports spending
C. Investment spending
D. Profit expectations on investment projects

C

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

D

If the MPC is .8 and disposable income is $200, then:
A. consumption and saving cannot be determined from the info given
B. saving will be $20
C. personal consumption expenditures will be $80
D. saving will be $40

B

In contrast to investment, consumption is:
A. relatively unstable
B. relatively stable
C. measurable
D. unmesurable

C

(Consider this..) The so-called Paradox of Thrift that became quite obvious in the Great Recession of 2007-2009 refers to all the following except:
A. saving may be virtuous for the individual, but it could be bad for the economy as a whole
B. Consumers becoming thriftier may help long-term growth, but ironically reduces current output
C. in trying to spend less now, consumers will end up spending more later
D. as individuals try to save more, the whole group may end up saving less as total income declines

A

The investment demand curve will shift to the left as a result of:
A. an increase in the excess production capacity available
B. a decrease in business taxes
C. increased business optimism with respect to future economic conditions
D. a decrease in labor costs

D

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

D

In annual percentage terms, investment spending in the United States is:
A. less variable than real GDP
B. less variable than consumption spending
C. less variable than the price level
D. more variable than the real GDP

D

(Consider This...) During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that:
A. the investment demand curve was positively sloped during this period.
B. purchases of capital from abroad increased, and these were not reflecting in investment spending figures for that period.
C. firms were optimistic about future sales.
D. the investment demand curve shifted inward.

B

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.

A

Suppose that an initial $200 billion increase in government spending creates $200 billion of new
income in the first round of the multiplier process. If GDP and consumption both rise by $160 billion in
the second round, the marginal propensity to consume and the multiplier are, respectively:
A. 0.8 and 5.0
B. 0.4 and 2.5
C. 0.4 and 1.67
D. 0.2 and 1.25

A

The conventional substitution and income effects that explain an individual demand curve do not explain the downward slope of the aggregate demand because:
A. When consumers pay lower prices for all goods and services, less income flows to resource suppliers in the form of wages, rents, and profits. Thus, a decline in the price level needs not produce an income effect.
B. When the price level is falling, positive and negative substitution effects among different goods and services cancel each other out and the net substitution effect becomes negligible.
C. When consumers pay lower prices for all goods and services, producers become relatively poorer than
consumers. As a result, the net income effect among buyers and sellers becomes negligible.
D. All of the above explanations are correct.

C

The interest-rate effect suggests that:
A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption
and investment spending.
B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
C. an increase in the price level will increase the demand for money, increase interest rates, and decrease
consumption and investment spending.
D. an increase in the price level will decrease the demand for money, reduce interest rates, and increase
consumption and investment spending.

C

Which of the following would most likely shift the AD curve to the left?
A. A reduced amount of excess capacity.
B. Increased government spending on military equipment.
C. An appreciation of the U.S. dollar.
D. Increased consumer optimism regarding future economic conditions

D

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much eventually will the change in investment spending increase aggregate demand?
A. $12 billion.
B. $20 billion.
C. $33.3 billion.
D. $50 billion.

B

When national income in other nations decreases, aggregate demand in our economy:
A. Increases because our exports will increase
B. Decreases because our exports will decrease
C. Increases because our imports will decrease
D. Decreases because our imports will increase

C

What percentage of the average U.S. firm's costs are accounted for by wages and salaries?
A. 40
B. 60
C. 75
D. 85

D

Which of the following would not shift the aggregate supply curve?
A. an increase in labor productivity
B. a decline in the price of imported oil
C. a decline in business taxes
D. an increase in the price level

C

A decrease in business taxes will tend to:
A. Increase aggregate demand but not change aggregate supply
B. Increase aggregate supply but not change aggregate demand
C. Increase aggregate demand and increase aggregate supply
D. Decrease aggregate supply and decrease aggregate demand

A

The most significant determinant of the level of consumer spending is disposable income.
A. True
B. False

B

Consumption rises and saving falls when disposable income increases.
A. True
B. False

upward, downward, downward, upward

At a given level of income, an increase in wealth shifts the consumption schedule (upward, downward) and the saving schedule (upward, downward).

At a given level of income, expectations of a recession shifts the consumption schedule (upward, downward) and the saving schedule (upward, downward).

downward, upward, downward, downward

Higher real interest rates shifts the consumption schedule (upward, downward) and the saving schedule (upward, downward).

An increase in taxes shifts the consumption schedule (upward, downward) and the saving schedule (upward, downward).

B

A business firm will purchase additional capital goods if the real rate of interest it must pay exceeds the expected rate of return from the investment.
A. True
B. False

durability; irregularity; variability; variability

The demand for new capital goods tends to be unstable because of the (durability, nondurability) of capital goods, the (regularity, irregularity) of innovation, the (stability, variability) of current and expected profits, and the (stability, variability) of business expectations.

B

The multiplier effect works only in a positive direction in changing GDP
A. True
B. False

larger; smaller

The higher the marginal propensity to consume, the (larger, smaller) the multiplier effect, but the larger the marginal propensity to save, the (larger, smaller) the multiplier effect.

B

The explanation as to why the aggregate demand curve slopes downward is the same as the explanation as to why the demand curve for a single product slopes downward.
A. True
B. False

movement along; aggregate demand

For the aggregate demand curve, when the price level changes, there is a (movement along, change in) the curve. When the entire aggregate demand curve shifts, there is a change in (the quantity of real output demanded, aggregate demand).

A

When the price level rises,
a. the demand for money and interest rates rises.
b. spending that is sensitive to interest-rate changes increases.
c. holders of financial assets with fixed money values increase their spending.
d. holders of financial assets with fixed money values have more purchasing power

determinants of aggregate demand.

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:

Consumer wealth, Household borrowing, Consumer expectations, Personal taxes

List four factors that may change consumer spending (C) at each price level, and thus shift aggregate demand:

A

A rise in excess capacity, or unused existing capital goods, will reduce the demand for new capital goods and therefore reduce aggregate demand.
A. True
B. False

increase; decrease; increase

A depreciation of US dollar relative to foreign currency will tend to (increase; decrease) U.S. exports, (increase; decrease) U.S. imports , and therefore (increase; decrease) U.S. net exports and aggregate demand.

Input prices, Productivity, Business taxes, Government regulation

List four factors that shifts the AS curve.

A

A recession may cause households in the economy to move down along the consumption schedule (or consumption function). A downward movement from one point to another along the consumption schedule indicates that
A. as household incomes fall, their planned spending decreases.
B. as prices fall, households' planned spending increases.
C. as household incomes fall, their planned spending increases.
D. as prices rise, households' planned spending decreases.

D

When households' disposable income is $2,100, they plan to save $210. What is their APS? How much is their planned consumption?
A. APS = 0.9, C = $1,890
B. APS = 0.1, C = $2,310
C. APS = 10, C = $1,890
D. APS = 0.1, C = $1,890

B

If financial institutions toughen up their lending standards for consumers, as in a "credit crunch", what happens to the current consumption and savings schedules?
A. The consumption schedule shifts up while the saving schedule shifts down.
B. The consumption schedule shifts down while the saving schedule shifts up.
C. Both consumption and saving schedules shift up.
D. Both consumption and saving schedules shift down.

A

Initially, MPC = 0.75 in Econland. This means that if income increases by 1,200, consumption would increase by how much? Suppose that an economic crisis strikes Econland, and a major change in attitudes toward saving occurs, so that households' MPS rises to 0.3. What is the new MPC?
A. C would increase by 900; new MPC = 0.7
B. C would increase by 300; new MPC = 0.7
C. C would increase by 900; new MPC = 1.3
D. C would increase by 2,100; new MPC = 0.7

A

The economy's investment demand curve slopes down to illustrate the fact that as the real interest rate increases,
A. business firms will reduce their expenditures on new plant, equipment, machinery, etc.
B. businesses firms will undertake more investment projects.
C. consumers will be demanding fewer goods and services.
D. more people in the economy will put their savings in stocks and bonds.

B

Which of the following factors will cause the investment demand curve to shift to the right?
A. The government raises business taxes significantly.
B. Business executives become more optimistic about future sales and profits.
C. Oil prices rise, triggering an increase in the cost of operating machinery and tools.
D. Firms are finding themselves with a lot of excess capacity.

D

In which of the following situations will the multiplier become smaller?
A. When the "initial change in spending" becomes smaller.
B. When households spend more out of each additional dollar of income they receive.
C. When the "initial change in spending" becomes larger.
D. When households save more of each additional dollar of income they receive.

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