Lecture 4

Question 1

Refer to Figure 21-1. The APC will be equal to one (1.0) when disposable income is equal to

A) Y1.
B) Y3.
C) Y2.
D) desired saving.
E) 0.

Answer 1

C) Y2.

Question 2

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

Answer 2

D) 3.33

Question 3

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

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

Answer 3

E) cause a downward shift in the consumption function.

Question 4

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

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

Answer 4

B) 0.75.

Question 5

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

Answer 5

C) fall because the AE function shifts downward simultaneously.

Question 6

Refer to Figure 21-1. If disposable income is Y3, the level of desired saving is

A) Y3F.
B) Y3D.
C) DE.
D) Y2Y3.
E) FD.

Answer 6

C) DE.

Question 7

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

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

Answer 7

A) marginal propensity to spend.

Question 8

Undesired or unplanned inventory accumulation is likely to occur when

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

Answer 8

C) actual aggregate expenditure exceeds desired aggregate expenditure.

Question 9

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) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.
B) there will be no change in national income because only actual expenditure is relevant.
C) national income will fall, because desired expenditures are less than actual expenditures.
D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save.
E) inventories will build up, causing national income to rise.

Answer 9

A) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.

Question 10

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.

Answer 10

C) one.

Question 11

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

Answer 11

B) $6 million.

Question 12

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

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

Answer 12

A) negative; positive

Question 13

Refer to Table 21-5. The equilibrium level of national income is

A) $249.
B) $375.
C) $93.75.
D) $75.
E) $155.

Answer 13

B) $375

Question 14

Refer to Table 21-5. At the equilibrium level of national income, the level of desired saving will be

A) $0
B) $25.
C) equal to consumption expenditures.
D) $375.
E) $50.

Answer 14

B) $25

Question 15

Refer to Table 21-5. At the equilibrium level of national income, what is the level of desired consumption expenditures?

A) $375
B) $150
C) $125
D) $350
E) $68.75

Answer 15

D) $350

Question 16

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

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

Answer 16

C) an increase in the marginal propensity to consume.

Question 17

Consider the simplest macro model in which aggregate output is demand-determined. If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion, the marginal propensity to spend must be

A) 1.0.
B) 0.2.
C) 3.0.
D) 0.5.
E) 0.67.

Answer 17

E) 0.67.

Question 18

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

A) It connects all points where desired consumption equals actual disposable income.
B) It connects all points where desired consumption equals desired expenditure.
C) It shows the slope of the average consumption function, against which we measure other consumption functions.
D) It connects all points where desired consumption equals desired saving.
E) Desired consumption is zero at all points along the 45-degree line.

Answer 18

A) It connects all points where desired consumption equals actual disposable income.

Question 19

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

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

Answer 19

E) marginal propensity to save is 0.25.

Question 20

Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause ________ in desired consumption and ________ in desired investment.

A) a decrease; an increase
B) a decrease; no change
C) an increase; an increase
D) an increase; a decrease
E) a decrease; a decrease

Answer 20

E) a decrease; a decrease

Question 21

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

Answer 21

B) increases; decreases

Question 22

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

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

Answer 22

E) a decrease in the slope of the AE curve, which rotates it downward.