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Chapter 11- Income and Expenditure

Terms in this set (35)

What type of spending depends primarily on these three factors: the interest rate, the expected future level of real GDP, and the current level of production capacity?


planned investment spending

actual investment spending

actual consumer spending

unplanned inventory investment
planned investment spending
Suppose the island of Catsylvania experiences a recession. As a result, consumers reduce spending on Kitty Chow and planned aggregate expenditures fall short of real GDP.
As a result, unplanned inventories at Kitty Chow firms will

decrease

increase

remain unchanged
increase
Thankfully, the recession is very short and consumer spending on Kitty Chow increases to prerecession levels.
What is most likely to occur first at Kitty Chow firms during this period of recovery?

Firms will sell off excess inventories before returning to increased production levels.

Firms will immediately increase production to meet increased demand.

Firms will decrease current production to increase the price of Kitty Chow.
Firms will sell off excess inventories before returning to increased production levels.
The Wilson family has a disposable income of $70,000 annually. Currently, the Wilson family spends 80% of new disposable income on consumption. Assume that their marginal propensity to consume is 0.8 and that their autonomous consumption spending is equal to $10,000.

What is the amount of the Wilson family's annual consumer spending?
66 000
Suppose that Kim K decides to spend $30,000 on an American‑made purse instead of donating it to Haitian earthquake relief. Assume that the multiplier is 1.7.
How much will GDP rise when Kim K buys her purse according to the multiplier effect?


Buying the purse increases America's GDP __________ donating the money to Haitian earthquake relief. Suppose she instead donated to tornado relief in Joplin, MO. Buying the purse increases GDP ______________ spending on tornado relief.
51 000

more than

about the same amount as
Which of the statements best describes the paradox of thrift?

Households increase savings during recessions, which causes consumption to fall, aggregate expenditures to fall, and may possibly lead to or make worse a recession.

Households decrease saving during a recession, reducing opportunities for business investment.

Unlike most retailers, thrift stores tend to have increased profits when the economy is in a recession.

Households substitute to thrifty, lower-priced items during a recession, causing aggregate expenditures to fall.
Households increase savings during recessions, which causes consumption to fall, aggregate expenditures to fall, and may possibly lead to or make worse a recession.
Income and consumption changes for five people are shown in the table. Given this information, rank the marginal propensities to consume (MPC) for the five people from largest to smallest.

Name. Income change. Consumption Andrew. +$10,000. +$6,000
Barry +$5,000 +$1,600
Colin +$2,000 +$1,600
Dan −$5,000 −$3,500
Ed −$10,000 −$4,000
1. Colin
2. Dan
3. Andrew
4. Ed
5. Barry
Identify how planned investment will change in each scenario.

Airwings, a commercial airline manufacturer, becomes optimistic about economic conditions after seeing reports of strong growth in consumer spending.
Due to Airwings, planned investment increases.
Identify how planned investment will change in each scenario.

The Federal Reserve announces an end to accommodative monetary policy, and is now implementing policy tools that will increase the real interest rate.
Due to the Fed, planned investment decreases.
Identify how planned investment will change in each scenario.

In an effort to reduce constant budget deficits, Congress announces plans to increase the corporate income tax rate.
Due to the Congress, planned investment decreases.
Identify how planned investment will change in each scenario.

A major recession has reduced consumption spending, which has hurt profit levels for Aston-Benz, a high-end car manufacturer.
Due to the recession, planned investment decreases.
The multiplier (expenditure multiplier) is the ratio between which two measures?

marginal propensity to consume AND the size of an autonomous change in nominal GDP

total change in nominal GDP caused by an autonomous change in aggregate spending AND the size of the autonomous change in aggregate spending

marginal propensity to save AND marginal propensity to consume

total change in real GDP due to an autonomous change in aggregate spending AND the size of the autonomous change in aggregate spending
total change in real GDP due to an autonomous change in aggregate spending AND the size of the autonomous change in aggregate spending
Suppose disposable income increases by $2,000. As a result, consumption increases by $1,500. Answer the questions based on this information. Where appropriate, enter your answer as a decimal rather than as a percentage.

The increase in savings resulting directly from this change in income is

The marginal propensity to save (MPS) is

The marginal propensity to consume (MPC) is
$500

0.25

0.75
Complete the statements and then calculate the change in consumption.
The consumption function shows the relationship between consumption spending and ___________________

The slope of the consumption function is the
_____________________

Changes in consumption can be predicted by multiplying the change in
___________________ by the __________________

If the MPC=0.80 and disposable income increases by $1000, then consumption will increase by what amount? Assume that there is no multiplier effect.
disposable income

marginal propensity to consume.

disposable income
marginal propensity to consume.

$800
To define the multiplier, the text makes which of the following assumptions?

The price level is held constant.
Spending is held constant.
There is no government spending and no taxes.
The country exports and imports goods and services.
There is no government spending and no taxes.
According to the accelerator principle, planned investment spending increases if:

planned aggregate expenditure accelerates faster than planned investment spending.

the economy accelerates faster than planned investment spending.

capital becomes obsolete very quickly.

there is a higher growth rate of real GDP.
there is a higher growth rate of real GDP.
In a closed economy with no taxes, if the marginal propensity to consume (MPC) is 0.8, then the marginal propensity to save (MPS) is:

0.2.
0.4.
0.8.
1.6.
0.2
If the aggregate consumption function is C = 500 + 0.80 × YD, then the marginal propensity to consume is $_____.
0.8
In a closed economy with no taxes, if the marginal propensity to save is 0.25, then the marginal propensity to consume (MPC) is:

0.25
0.50
0.75
3.
0.75
If the aggregate consumption function is C = 250 + 0.75 × YD, then the marginal propensity to save (MPS) is:

0
0.25
0.75
1.25.
0.25
Joe's disposable income increases by $500, and he spends $400 of this increase in disposable income. Joe's marginal propensity to save is:

0.2
0
0.8
0.4.
0.2
Teixeira Pasta Co. produces 25,000 pounds of dried pasta in the current period. The price per pound is $10. If the company sells 27,000 pounds of pasta, then:

unplanned inventory investment is -$20,000.
planned investment is $270,000.
actual investment is $250,000.
unplanned inventory investment is $20,000.
unplanned inventory investment is -$20,000.
When real GDP in an economy is less than the planned aggregate expenditure, unplanned inventories _____.

are positive
are negative
do not change
are equal to zero
are negative
In a closed economy with no taxes, if the marginal propensity to save (MPS) is 0.25, then a decrease in investment spending of $100 will cause a decrease in real GDP of:

$25
$75
$100
$400
$400
Byron Publishing expects similar sales to the previous period and prints 19,000 books. If the price of one book is just $1 and they sell 10,000 copies, then:

unplanned inventory investment is $9,000.
unplanned inventory investment is -$9,000.
planned investment is $10,000.
total sales are $100,000.
unplanned inventory investment is $9,000.
In a closed economy with no government, the aggregate consumption function is C = 250 + 0.75 × YD, real GDP is $4,000, and planned investment spending is $500. In this economy, planned aggregate expenditure is:

$1,500
$2,250
$3,750
$4,500
$3,750
Wilson Sporting Goods makes baseball bats. The firm overestimates expected sales, and the unplanned inventory investment is equal to 3,000. If the number of bats sold in the period was 15,000, what was the planned investment level?

-18,000
-12,000
18,000
12,000
12,000
Suppose the marginal propensity to save (MPS) is equal to 0.25. According to the text, a $100 increase in investment spending will lead to a:

$50 increase in spending in the first round, and a total increase in spending of $400.

$100 increase in spending in the first round, and a total increase in spending of $250.

$100 increase in spending in the first round, and a total increase in spending of $400.

total increase in spending of $100 because an increase in investment spending does not create a multiplier effect.
$100 increase in spending in the first round, and a total increase in spending of $400.
Unplanned inventory investment is negative when actual sales are:

greater than planned sales.
zero.
less than planned sales.
equal to planned sales.
greater than planned sales.
In a closed economy with no taxes, if the marginal propensity to save (MPS) is 0.25, then a decrease in investment spending of $100 will cause a decrease in real GDP of:
$25.
$75.
$100.
$400.
$400
When real GDP in an economy is less than the planned aggregate expenditure:

real GDP will not change.
real GDP will rise.
real GDP will fall.
real GDP will fluctuate randomly.
real GDP will rise.
The larger the marginal propensity to import:

the smaller the spending leakage abroad.
he larger a country's multiplier.
the greater the spending leakage abroad.
the less countries are interdependent.
the greater the spending leakage abroad.
Consumer spending:

remains constant as the level of disposable income increases.

decreases as the level of disposable income increases.

usually accounts for less than one-half of the total spending on goods and services

if changed, will cause the AE function to shift, everything else constant.
if changed, will cause the AE function to shift, everything else constant.
An autonomous change in planned aggregate expenditure leads to change in the income-expenditure equilibrium GDP through a change in:

government taxes.
consumer spending.
exports.
government transfers.
consumer spending.
When the economy is in income-expenditure equilibrium, planned aggregate expenditure _____ aggregate output.

is greater than
equals
is less than
is unrelated to
equals
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