Chapter 11 The Nature And Causes Of Economic Exam Questions - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 11
The Nature and Causes of Economic Fluctuations
Multiple Choice
1. Which of the following statements is ?
a. | Economic fluctuations include recessions and rapid expansions. |
b. | Economic fluctuations seem to have diminished in severity. |
c. | Economic fluctuations are an important subject in the study of economics. |
d. | Economic fluctuations did not occur until the twentieth century. |
e. | Economic fluctuations are departures from the long-run growth trend. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
2. The 2008-09 recession was
a. | longer lasting and much more severe than the 2001 recession. |
b. | shorter than the 2001 recession, but much more severe. |
c. | longer lasting than the 2001 recession, but less severe. |
d. | the first recession of the 21st century in the United States. |
e. | shorter and less severe than the 2001 recession. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Recession
MSC: Bloom's: Knowledge
3. The text defines economic fluctuations as
a. | the rise and fall of real GDP. |
b. | periods of time when there is excessive GDP volatility. |
c. | periods of time when the economy is in either a recession or a boom. |
d. | departure of the economy from its long-term growth trend. |
e. | the rise and fall of unemployment. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
4. Between 2001 and 2007
a. | the United States economy was in recession. |
b. | the United States economy moved upward and millions of jobs were created. |
c. | the United States economy grew, but not many jobs were created. |
d. | the United States economy moved downward, but still many jobs were created. |
e. | the United States economy remained stationary. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
5. Between December 2007 and June 2009,
a. | the United States economy was in recession and millions of jobs were lost. |
b. | the United States economy moved upward and millions of jobs were created. |
c. | the United States economy grew, but not many jobs were created. |
d. | the United States economy moved downward, but still many jobs were created. |
e. | the United States economy remained stationary. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
6. Over the period from 1982 to 2007, economic fluctuations
a. | have become more severe than in the past. |
b. | have occurred more often than in the past. |
c. | have not changed in severity when compared to past economic fluctuations. |
d. | have become less severe than in the past. |
e. | have occurred just as often as in the past. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
7. The study of economic fluctuations is
a. | more important than the study of long-run economic growth. |
b. | not necessary to understanding economics. |
c. | as important as the study of long-run economic growth. |
d. | less important than the study of long-run economic growth. |
e. | overrated, because economic fluctuations don't affect many people. |
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
/
8. The 2008-09 recession proved to be mild and very short-lived.
Basic
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Recession
MSC: Bloom's: Knowledge
9. Economic fluctuations in the United States have occurred more and more frequently as time has passed.
Basic
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
10. Economic fluctuations have been common for at least 200 years, but they have diminished in frequency and severity in the United States and many other countries, particularly in the last 25 years.
Moderate
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Recession
MSC: Bloom's: Knowledge | AACSB: Analytic
11. Economic fluctuations have been common only since the beginning of the twentieth century.
Basic
OBJ: factual
SEC: 0. The Nature and Causes of Economic Fluctuations
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
Multiple Choice
12. Changes in aggregate demand occur when
a. | foreign countries are experiencing recession. |
b. | the government changes the tax laws. |
c. | the government reduces military spending. |
d. | consumers become more optimistic about the future and increase their spending. |
e. | All of these |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Aggregate Demand
MSC: Bloom's: Knowledge | AACSB: Analytic
13. At the end of a recession
a. | real GDP is greater than potential GDP. |
b. | potential GDP is greater than real GDP. |
c. | potential GDP is less than real GDP. |
d. | real GDP is falling. |
e. | potential GDP equals real GDP. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Recession
MSC: Bloom's: Knowledge
Exhibit 23-1
14. According to Exhibit 23-1, which of the following is ?
a. | All recessions are of the same duration. |
b. | In normal times, real GDP is above potential GDP. |
c. | Aggregate demand fell between year B and year D. |
d. | Potential GDP fell between year B and year D. |
e. | Unemployment rose between year D and year F. |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
15. According to Exhibit 23-1, which of the following best explains the change in real GDP from year B to year D?
a. | The available supply of labor fell. |
b. | Foreign countries must have decided to purchase more U.S. goods. |
c. | The government must have cut taxes. |
d. | Consumers must have become more optimistic. |
e. | Firms must have become more pessimistic. |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Economic Fluctuations
MSC: Bloom's: Analysis | AACSB: Analytic
16. In a boom year,
a. | potential GDP equals real GDP. |
b. | prices fall. |
c. | aggregate demand has increased. |
d. | unemployment is rising. |
e. | potential GDP is greater than real GDP. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
17. To compare economic fluctuations in different countries, one should look at
a. | the percent difference between real and nominal GDP. |
b. | the difference between potential and real GDP measured in dollars. |
c. | the difference between real and nominal GDP measured in dollars. |
d. | the difference between aggregate demand and real GDP measured in dollars. |
e. | the percent difference between potential and real GDP. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge | AACSB: Analytic
/
18. The economy's long-term growth trend for GDP is known as real GDP and is determined by the available supply of capital, labor, and technology.
Moderate
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
19. Potential GDP represents what firms would want to produce in "normal times," when the economy is in neither a recession nor a boom.
Moderate
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
20. Manufacturing capacity utilization in normal times typically equals
a. | 60 percent. |
b. | 99 percent. |
c. | 110 percent. |
d. | 100 percent. |
e. | 80 percent. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Capacity Utilization
MSC: Bloom's: Knowledge
21. When the unemployment rate is equal to the natural unemployment rate, capacity utilization is usually close to
a. | 80 percent. |
b. | 90 percent. |
c. | 70 percent. |
d. | 60 percent. |
e. | 100 percent. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Capacity Utilization
MSC: Bloom's: Knowledge | AACSB: Analytic
22. If capacity utilization is 98 percent,
a. | the unemployment rate will be below the natural rate of unemployment. |
b. | the unemployment rate will equal the natural unemployment rate. |
c. | real GDP equals potential GDP. |
d. | workers will be laid off. |
e. | real GDP is below potential GDP. |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Capacity Utilization
MSC: Bloom's: Analysis | AACSB: Analytic
23. When the unemployment rate drops below the natural unemployment rate,
a. | the economy is in a recession. |
b. | real GDP is rising above potential GDP. |
c. | real GDP is falling below potential GDP. |
d. | the capacity utilization rate is declining. |
e. | All of these |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Unemployment and Economic Fluctuations
MSC: Bloom's: Analysis | AACSB: Analytic
24. Which of the following does not occur when real GDP rises above potential GDP?
a. | The unemployment rate falls below the natural unemployment rate. |
b. | The capacity utilization rate increases. |
c. | Firms increase their prices. |
d. | The unemployment rate rises above the natural unemployment rate. |
e. | Demand increases. |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Unemployment and Economic Fluctuations
MSC: Bloom's: Knowledge
/
25. When firms are at full capacity, real GDP equals potential GDP.
Moderate
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Capacity Utilization
MSC: Bloom's: Knowledge | AACSB: Analytic
26. In normal times, when the economy is in neither a recession nor a boom, manufacturing capacity utilization is at 100 percent.
Basic
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Capacity Utilization
MSC: Bloom's: Knowledge
27. The actual unemployment rate will fall below the natural unemployment rate when real GDP rises above potential GDP.
Basic
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Natural Rate of Unemployment
MSC: Bloom's: Knowledge
Multiple Choice
28. Proponents of real business cycle theories argue that economic fluctuations are a response to changes in
a. | money velocity. |
b. | the money supply. |
c. | potential GDP. |
d. | real GDP. |
e. | aggregate demand. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Knowledge
29. A macroeconomic theory that stresses the fact that shifts in potential GDP are a primary cause of fluctuations in real GDP is known as
a. | potential GDP theory. |
b. | real business cycle theory. |
c. | economic cycle theory. |
d. | perennial growth theory. |
e. | None of these |
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Knowledge | AACSB: Analytic
30. Which of the following would a real business cycle theorist emphasize as a primary cause of economic fluctuations?
a. | Changes in the weather that severely impact the agricultural sector |
b. | Changes in investment spending |
c. | Changes in technology |
d. | Changes in taxes |
e. | Changes in government spending |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Knowledge | AACSB: Analytic
31. Changes in the factors that underlie potential GDP growth
a. | are the major sources of economic fluctuations. |
b. | evolve too quickly to be able to explain economic fluctuation. |
c. | are as important as changes in aggregate demand in explaining economic fluctuations. |
d. | evolve too slowly to be able to explain economic fluctuations. |
e. | were, until the 1920s, a valid explanation of economic fluctuations. |
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Changes in Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
/
32. Economic fluctuations are largely a result of changes in aggregate demand.
Basic
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
33. Real business cycle theories focus on changes in potential GDP as the source of economic fluctuations.
Basic
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Knowledge
34. In real business cycle theories, changes in tastes are most frequently assumed to be the reason for changes in potential GDP.
Basic
OBJ: conceptual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Knowledge
35. Potential GDP growth is relatively smoother than aggregate demand growth.
Moderate
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
36. President Obama’s State of the Union address in 2011 made it clear that the recovery from the 2008/09 recession was strong and widespread across the entire U.S. economy.
Basic
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Forecasting Real GDP
MSC: Bloom's: Knowledge
Short Answer
37. Why is it relevant to study economic fluctuations?
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Studying Economic Fluctuations
MSC: Bloom's: Knowledge | AACSB: Analytic
38. Explain the connection between fluctuations in the unemployment rate around the natural rate of unemployment and fluctuations in real GDP around potential GDP.
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Analysis | AACSB: Analytic
39. Is it possible for economic fluctuations to occur for reasons not associated with changes in aggregate demand? Explain.
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Knowledge | AACSB: Analytic
40. Why are most economists skeptical about the real business cycle theory of economic fluctuations?
OBJ: factual
SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Real Business Cycle Theory
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
41. Which of the following relationships do forecasters use to make their one-year-ahead predictions for real GDP?
a. | Real GDP is the sum of consumption, investment, government purchases, and net exports. |
b. | Real GDP is determined by the amount of capital, labor, and technology employed in the economy. |
c. | Real GDP is determined by the capital and labor employed in the economy. |
d. | Real GDP in any year should equal real GDP in the previous year. |
e. | Real GDP equals nominal GDP during the base year. |
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Forecasting Real GDP
MSC: Bloom's: Knowledge
/
42. Economic forecasters seldom differ in their one-year-ahead forecasts of real GDP.
Basic
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Economic Forecasts
MSC: Bloom's: Knowledge
43. To forecast real GDP, economic forecasters divide aggregate demand into its four key components: private sector, public sector, investment sector, and foreign sector.
Basic
OBJ: conceptual
SEC: SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Economic Forecasts
MSC: Bloom's: Knowledge
44. Most short-term forecasts are based on expected changes in aggregate demand.
Moderate
OBJ: factual
SEC: SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Forecast Methods
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
45. One year-ahead-forecasts for real GDP
a. | reflect forecasters' beliefs about the determinants of potential GDP over the next year. |
b. | are usually equal to the current year's GDP. |
c. | are usually equal to a weighted average of real GDP over the past five years. |
d. | reflect what forecasters believe will happen to the different spending components of real GDP. |
e. | have no real use and are seldom done. |
OBJ: factual
SEC: SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: One-Year-Ahead Forecasts
MSC: Bloom's: Knowledge | AACSB: Analytic
46. Suppose real GDP in 2015 is $6,105 billion. If the forecasted rate of growth for the year 2016 is 2.75 percent, then in the year 2016, real GDP will be
a. | $6,500 billion. |
b. | $6,273 billion. |
c. | $7,784 billion. |
d. | $5,942 billion. |
e. | $6,300 billion. |
OBJ: conceptual
SEC: SEC: 1. Changes in Aggregate Demand Lead to Changes in Production
TOP: Forecasts
MSC: Bloom's: Application
47. Suppose real GDP in 2015 is $15,500 billion, and the forecast for real GDP in 2016 is $15,950 billion, then the forecast of real GDP growth for the year 2016 was
a. | 0.3 percent. |
b. | 2.9 percent. |
c. | 29 percent. |
d. | 4.5 percent. |
e. | 3.5 percent. |
OBJ: conceptual
TOP: Forecasts
MSC: Bloom's: Application | AACSB: Analytic
/
48. An improvement in consumer confidence will affect the growth rate of the economy.
Basic
OBJ: conceptual
SEC: 2. Forecasting Real GDP
TOP: Short-Term Forecasts
MSC: Bloom's: Knowledge | AACSB: Analytic
49. Other things being equal, the forecast for real GDP is likely higher if government purchases increase by a sizable amount.
Basic
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Short-Term Forecasts
MSC: Bloom's: Knowledge | AACSB: Analytic
50. An expected change in any of the four GDP components has no effect on the forecast for real GDP.
Moderate
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Short-Term Forecasts
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
51. The type of forecast that describes what real GDP will be under alternative assumptions about the components of spending is commonly known as
a. | a conditional forecast. |
b. | a prudential forecast. |
c. | an alternatives forecast. |
d. | a sensible forecast. |
e. | None of these |
OBJ: conceptual
SEC: 2. Forecasting Real GDP
TOP: Conditional Forecast
MSC: Bloom's: Knowledge
52. A conditional forecast of real GDP is
a. | a forecast using one of the 54 forecasts listed in Blue Chip Economic Indicators. |
b. | a forecast based on potential GDP as opposed to the spending components of GDP. |
c. | another name for the Blue Chip Consensus forecast. |
d. | a forecast that explains what real GDP will be under alternative assumptions about the spending components. |
e. | a forecast that is conditional on the time period in which it was made. |
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Conditional Forecast
MSC: Bloom's: Knowledge
/
53. A conditional forecast is based on what is likely to happen.
Basic
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Conditional Forecast
MSC: Bloom's: Knowledge
Short Answer
54. Why are most short-term forecasts based on expected changes in aggregate demand?
OBJ: conceptual
SEC: 2. Forecasting Real GDP
TOP: Short-Term Forecasts
MSC: Bloom's: Knowledge
55. What is meant by a conditional forecast, and what is it used for?
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Conditional Forecast
MSC: Bloom's: Knowledge
Multiple Choice
56. Which of the following statements is ?
a. | Most conditional forecasts assume that a change in government purchases has no effect on the other spending components of real GDP. |
b. | Only consumption spending is affected by changes in government purchases. |
c. | A change in government purchases has no effect on the other spending components of real GDP. |
d. | Consumption, investment, and net export spending are all likely to change as a result of a change in government purchases. |
e. | An increase in government purchases by $10 million will cause real GDP to increase by exactly $10 million. |
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Simplifying Assumptions
MSC: Bloom's: Knowledge | AACSB: Analytic
57. To simplify the analysis, the textbook assumes that
a. | consumption is the only component of expenditures that responds to income and income is the only influence on consumption. |
b. | consumption is the only component of expenditures that responds to government purchases and government purchases are the only influence on consumption. |
c. | net exports are zero. |
d. | there is no investment spending. |
e. | expenditures change only because of changes in consumption. |
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Simplifying Assumptions
MSC: Bloom's: Knowledge | AACSB: Analytic
58. Which of the following statements is ?
a. | The assumption that income is the only influence on consumption is a simplifying assumption. |
b. | Assuming consumption spending responds to income will improve a forecast. |
c. | The assumption that only consumption spending responds to income is a simplifying assumption. |
d. | Consumption responds to changes in other factors besides income. |
e. | The assumption that investment and net exports do not respond to changes in income is based on evidence from the U.S. economy. |
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Simplifying Assumptions
MSC: Bloom's: Analysis | AACSB: Analytic
/
59. Because it represents a completely separate section of the economy, government purchases do not often affect the other elements of aggregate demand: consumption, investment, and net exports.
Basic
OBJ: conceptual
SEC: 2. Forecasting Real GDP
TOP: Aggregate Demand; Simplifying Assumptions
MSC: Bloom's: Knowledge
60. In the United States, consumption is by far the largest component of aggregate demand.
Basic
OBJ: factual
SEC: 2. Forecasting Real GDP
TOP: Consumption Function
MSC: Bloom's: Knowledge
Multiple Choice
61. The notion of the consumption function originated with
a. | Edmund Phelps. |
b. | John Maynard Keynes. |
c. | Robert Lucas. |
d. | Milton Friedman. |
e. | Joseph Schumpeter. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function
MSC: Bloom's: Knowledge
62. The consumption function shows the relationship between consumption and
a. | the interest rate. |
b. | the money supply. |
c. | the price level. |
d. | potential GDP. |
e. | income. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function
MSC: Bloom's: Knowledge
63. According to the consumption function, as income increases, consumption
a. | increases by the same amount. |
b. | decreases by a smaller amount. |
c. | decreases by a greater amount. |
d. | increases by a greater amount. |
e. | increases by a smaller amount. |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function
MSC: Bloom's: Knowledge | AACSB: Analytic
64. The consumption function describes
a. | the negative relationship between consumption and government spending. |
b. | the positive relationship between consumption and income. |
c. | the negative relationship between consumption and the interest rate. |
d. | the negative relationship between consumption and income. |
e. | the positive relationship between consumption and the interest rate. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function
MSC: Bloom's: Knowledge
65. The relationship describing how consumption depends on income is known by economists as
a. | the income function. |
b. | the budget constraint function. |
c. | the purchasing function. |
d. | the affordable function. |
e. | None of these |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function
MSC: Bloom's: Knowledge
66. The slope of the consumption function is equal to
a. | the nominal interest rate. |
b. | the real interest rate. |
c. | the marginal propensity to consume. |
d. | the relative price of consumption. |
e. | the marginal propensity to save. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Marginal Propensity to Consume
MSC: Bloom's: Knowledge
Exhibit 23-2
67. Given the data in Exhibit 23-2, what is the marginal propensity to consume?
a. | 0.80 |
b. | 0.90 |
c. | 0.75 |
d. | 1.25 |
e. | 0.60 |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Knowledge
68. Given the data in Exhibit 23-2, what is the level of consumption if income increases to 400?
a. | 480 |
b. | 450 |
c. | 515 |
d. | 465 |
e. | 470 |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
69. Marginal propensity to consume measures
a. | how much consumption changes for a given change in income. |
b. | the amount of consumption at a given income level. |
c. | how much is saved as income increases. |
d. | the amount needed for basic food and shelter. |
e. | how much real GDP changes for a given change in consumption. |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
70. Suppose consumption is $2,700 million when income equals $2,000 million, and consumption increases to $3,125 million when income equals $2,500. What is the marginal propensity to consume?
a. | 425 |
b. | 0.85 |
c. | 0.15 |
d. | 850 |
e. | None of these |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function; Marginal Propensity to Consume
MSC: Bloom's: Application | AACSB: Analytic
71. Suppose consumption increases by $250 million when income increases by $300. What is the marginal propensity to consume?
a. | 0.833 |
b. | 83.3 |
c. | 250 |
d. | 50 |
e. | None of these |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function; Marginal Propensity to Consume
MSC: Bloom's: Application | AACSB: Analytic
72. The marginal propensity to consume is best defined as
a. | the change in consumption expenditure caused by an increase in the interest rate. |
b. | the change in consumption expenditure caused by a one-unit increase in income. |
c. | the change in real GDP caused by a change in consumption expenditure. |
d. | the change in consumption expenditure caused by a change in some other spending category. |
e. | total consumption divided by total income. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Knowledge
73. When Tom's income is $20,000, he spends $18,000 and when his income increases to $30,000, he spends $23,000. His MPC is
a. | 0.3. |
b. | 0.5. |
c. | 0.65. |
d. | 0.77. |
e. | 0.90. |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
74. If two successive levels of disposable personal income are $160 and $190 billion, respectively, and if the change in consumption spending is $20 billion between these two levels of disposable personal income, then the MPC will equal
a. | .50. |
b. | .67. |
c. | .80. |
d. | .20. |
e. | 1.50. |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
75. If the marginal propensity to consume declines, then
a. | for any given change in income, there will be a smaller change in saving. |
b. | nothing will happen to the consumption function. |
c. | for any given change in income, there will be a larger change in consumption. |
d. | for any given change in consumption, there will be a smaller change in income. |
e. | for any given change in income, there will be a smaller change in consumption. |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Analysis | AACSB: Analytic
76. Which of the following statements is ?
a. | Aggregate income is equal to real GDP. |
b. | The consumption function is a linear relationship between consumption and income. |
c. | The consumption function shows the relationship between consumption and disposable income. |
d. | The consumption function shows the relationship between consumption and real GDP. |
e. | The consumption function is a nonlinear relationship between consumption and income. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Aggregate Income
MSC: Bloom's: Knowledge
77. The consumption function for the whole economy
a. | looks different when real GDP is used instead of disposable income. |
b. | looks similar for either real GDP or disposable income. |
c. | is nonlinear when real GDP is used. |
d. | is nonlinear when aggregate income is used. |
e. | is nonlinear when disposable income is used instead of real GDP. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Aggregate Consumption
MSC: Bloom's: Knowledge | AACSB: Analytic
78. Which of the following statements is ?
a. | A change in sales tax has no effect of disposable income. |
b. | Interest and dividend payments are not included in disposable income. |
c. | A decrease in transfer payments reduces disposable income. |
d. | Household consumption is not sensitive to changes in disposable income. |
e. | All of these |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Aggregate Consumption
MSC: Bloom's: Analysis | AACSB: Analytic
79. Disposable income is the income that households
a. | save for entertainment purposes and vacations. |
b. | receive in wages, dividends, and interest payments minus taxes they pay to the government and minus mortgage payments. |
c. | have available for saving, once the necessary living expenses have been subtracted from the wages, dividends, and interest payments they receive. |
d. | receive in wages, dividends, and interest payments plus transfers they may receive from the government minus any taxes they pay to the government. |
e. | None of these |
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Disposable Income
MSC: Bloom's: Knowledge | AACSB: Analytic
80. Disposable income and real GDP behave the same way because
a. | taxes and transfer payments are not proportional to income. |
b. | disposable income is the same as real GDP. |
c. | taxes and transfer payments are less than 10 percent of income. |
d. | taxes and transfer payments are nearly proportional to income. |
e. | taxes and transfer payments are a negligible fraction of income. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Real GDP and Disposable Income
MSC: Bloom's: Analysis | AACSB: Analytic
/
81. The size of the MPC determines how a change in spending affects income.
Moderate
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Knowledge | AACSB: Analytic
82. Real GDP and real disposable income behave in similar ways.
Basic
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Real GDP and Real Disposable Income
MSC: Bloom's: Knowledge
83. The consumption function is a straight-line relationship between consumption and income.
Basic
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Consumption Function
MSC: Bloom's: Knowledge
84. The marginal propensity to consume is best defined as the change in consumption expenditure caused by a one-unit increase in income.
Basic
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Marginal Propensity to Consume
MSC: Bloom's: Knowledge
85. When examining consumption behavior at the household level, it does not make a difference whether real household income or disposable income is used.
Moderate
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Disposable Income
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
86. The consumption relationship in this chapter assumes that interest and wealth do not affect consumption
a. | because the interest rate effect cancels out the wealth effect. |
b. | in order to keep the analysis manageable at this stage. |
c. | because economists do not understand how interest rates and wealth affect consumption. |
d. | because interest rates and wealth have little effect on consumption. |
e. | because data on interest rates and wealth are hard to acquire |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Interest and Wealth Effects
MSC: Bloom's: Analysis | AACSB: Analytic
87. During economic fluctuations
a. | changes in the interest rate are the major factor affecting consumption. |
b. | income has little effect on consumption. |
c. | wealth is the major factor affecting consumption. |
d. | changes in income have a large effect on consumption. |
e. | there is little movement in consumption. |
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge | AACSB: Analytic
/
88. Interest rates do not affect consumption.
Basic
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Interest Rate
MSC: Bloom's: Knowledge
89. Income has a strong effect on consumption during a recession.
Moderate
OBJ: factual
SEC: 3. The Response of Consumption to Income
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
90. Define the marginal propensity to consume. Graphically, how is the marginal propensity to consume shown?
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Comprehension | AACSB: Analytic
91. Does it make a difference whether disposable income is used instead of real GDP when working with the relationship between aggregate consumption and aggregate income? Explain.
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: Measures of Income
MSC: Bloom's: Analysis | AACSB: Analytic
92. Answer the questions below:
(A) | Suppose your boss gives you a $100 raise. Identify the three categories or uses among which you will divide the $100. Hint: Do you get to keep the entire $100? |
(B) | Suppose consumption increases by $400 when disposable income increases by $500. What is the marginal propensity to consume (MPC)? |
(A) | Consumption, saving, and taxes. |
(B) | MPC = $400 / $500 = 0.80. |
DIF: challenging
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
Exhibit 23-3
93. Refer to the data in Exhibit 23-3.
(A) | What is the marginal propensity to consume? |
(B) | If real GDP were $340 billion, what would consumption equal? |
(A) | The table shows that, for every $25 billion increase in real GDP, consumption increases by $15 billion. The |
(B) | At $315 billion, consumption is $290 billion. If real GDP were $25 billion more, or $340 billion, consumption would be $15 billion more, or $305 billion. |
.OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
Exhibit 23-4
94. Plot the consumption function based on the data in Exhibit 23-4. What is the marginal propensity to consume? If the marginal propensity to consume changes to 0.85, show what happens to the consumption function.
OBJ: conceptual
SEC: 3. The Response of Consumption to Income
TOP: MPC
MSC: Bloom's: Application | AACSB: Analytic
Multiple Choice
95. To understand how a change in government purchases affects real GDP in the short run, we need to focus on
a. | the identity between real GDP and income and the identity between real GDP and potential GDP. |
b. | the consumption function and the identity between real GDP and income. |
c. | the identity between real GDP and income and the identity between disposable income and real GDP. |
d. | the consumption function and the identity between real GDP and disposable income. |
e. | the consumption function and the identity between real GDP and potential GDP. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Consumption and Income
MSC: Bloom's: Knowledge
96. Which of the following statements is ?
a. | A change in government purchases affects income. However, the change in income does not affect consumption. |
b. | A change in government purchases does not affect income or consumption. |
c. | A change in government purchases affects GDP, which is the same as income. The change in income affects consumption. |
d. | A change in government purchases affects GDP but not income. |
e. | A change in government purchases has no effect on GDP, but it does affect consumption. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending and Income
MSC: Bloom's: Knowledge | AACSB: Analytic
97. Which of the following statements is ?
a. | A change in income has no effect on consumption, but a change in consumption will cause income to change. |
b. | A change in income will affect consumption, but a change in consumption will not affect income. |
c. | A change in income has no effect on consumption, and a change in consumption has no effect on income. |
d. | A change in income causes consumption to change, and a change in consumption will cause income to change. |
e. | None of these |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Consumption and Income
MSC: Bloom's: Knowledge | AACSB: Analytic
98. If firms decide to decrease their purchases of U.S.-produced goods,
a. | the decrease in investment will have no effect on U.S. income or consumption. |
b. | the decrease in investment will cause U.S. income to increase, which will cause consumption to increase. |
c. | the decrease in investment will cause U.S. income to decrease, which will cause consumption to decrease. |
d. | real GDP will increase by the same amount that investment spending decreased. |
e. | real GDP will decrease by the same amount that investment spending decreased. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending and Income
MSC: Bloom's: Knowledge | AACSB: Analytic
99. If foreigners decide to increase their purchases of U.S.-made goods by $15 million, real GDP will
a. | remain unchanged. |
b. | increase by more than $15 million. |
c. | increase by less than $15 million. |
d. | increase by $15 million. |
e. | decrease by more than $15 million. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending and Income
MSC: Bloom's: Application | AACSB: Analytic
100. The slope of the 45-degree line
a. | equals zero. |
b. | equals one. |
c. | equals infinity. |
d. | depends on the level of income. |
e. | undefined. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending and Income
MSC: Bloom's: Knowledge
101. Along the 45-degree line,
a. | spending equals income. |
b. | real GDP equals potential GDP. |
c. | spending is greater than income. |
d. | real GDP equals nominal GDP. |
e. | spending is equal to the marginal propensity to consume times income. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending and Income
MSC: Bloom's: Knowledge
/
102. Along the 45-degree line spending and income are equal.
Basic
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: The 45-Degree Line
MSC: Bloom's: Knowledge
Multiple Choice
103. The components that make up aggregate expenditures are
a. | consumption and government purchases. |
b. | investment, government purchases, and net exports. |
c. | consumption, investment, government purchases, and net exports. |
d. | income and consumption. |
e. | consumption and investment. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Knowledge
104. The expenditure line
a. | is steeper than the 45-degree line. |
b. | slopes upward because consumption depends positively on income. |
c. | slopes upward because the MPC is less than 1. |
d. | slopes upward because consumption and investment depend positively on income. |
e. | shows the relationship between consumption spending and income. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Knowledge
105. If adding net exports to C + I + G causes the expenditure line to shift up in a parallel way, it implies that
a. | imports and exports are not sensitive to changes in income. |
b. | both exports and imports are sensitive to changes in income. |
c. | exports are sensitive to changes in income. |
d. | imports are sensitive to changes in income. |
e. | imports and exports have an uncertain effect on income. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
106. The slope of the expenditure line is
a. | greater than the slope of the 45-degree line. |
b. | equal to 1. |
c. | equal to the MPC. |
d. | the same as the slope of the 45-degree line. |
e. | equal to one-MPC. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Slope of Expenditure Line
MSC: Bloom's: Knowledge
107. An increase in the marginal propensity to consume results in
a. | the expenditure line shifting up in a parallel direction. |
b. | no change in the expenditure line. |
c. | the expenditure line becoming steeper. |
d. | the expenditure line shifting down in a parallel direction. |
e. | the expenditure line becoming flatter. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Slope of Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
108. If government expenditures decrease, the expenditure line will
a. | shift up in a parallel direction. |
b. | stay constant. |
c. | shift down in a parallel direction. |
d. | pivot down to the right. |
e. | pivot up to the left. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line Shifting
MSC: Bloom's: Knowledge
109. Which of the following would not shift the expenditure line?
a. | An increase in government spending to finance a war |
b. | An increase in investment |
c. | A decrease in net exports brought about by an appreciation of the dollar |
d. | All of these would shift the expenditures curve. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line Shifting
MSC: Bloom's: Analysis | AACSB: Analytic
110. An increase in lump-sum taxes results in
a. | both the intercept and the slope of the expenditure line increasing. |
b. | the intercept of the expenditure line getting larger. |
c. | the intercept of the expenditure line decreasing. |
d. | the slope of the expenditure line decreasing. |
e. | the slope of the expenditure line getting larger. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Tax Increase and the Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
111. An increase in investment results in
a. | a downward shift of the expenditure line. |
b. | a steeper expenditure line. |
c. | a flatter expenditure line. |
d. | an upward shift of the expenditure line. |
e. | both the intercept and the slope of the expenditure line increasing. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Investment and the Expenditure Line
MSC: Bloom's: Knowledge
112. Which of the following will cause an upward shift of the expenditure line?
a. | A decrease in wealth |
b. | A decrease in government purchases |
c. | A decrease in taxes |
d. | An increase in imports |
e. | An increase in saving |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
/
113. Each of the four spending components depends on income.
Moderate
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Knowledge
114. The sum of the four spending components depends on income.
Basic
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Knowledge
115. The slope of the expenditure line is greater than 1.
Challenging
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Slope of Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
116. Changes in T, I, G, and X affect only the intercept of the expenditure line.
Basic
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line Shifting
MSC: Bloom's: Knowledge
117. The expenditure line will shift if government spending increases, but not if it decreases.
Basic
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line Shifting
MSC: Bloom's: Knowledge
118. Only changes in consumption spending will shift the expenditure line.
Moderate
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
119. Changes in spending behavior shift the expenditure line and help explain economic fluctuations.
Moderate
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
120. Which of the following best explains why the expenditure line intersects the 45-degree line?
a. | The slopes of both lines are the same. |
b. | The slope of the expenditure line is greater than the slope of the 45-degree line. |
c. | The slope of the 45-degree line is greater than the slope of the expenditure line. |
d. | The slope of the expenditure line is greater than 1. |
e. | The slope of the expenditure line is negative. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Intersection of the Expenditure and Degree Line
MSC: Bloom's: Analysis | AACSB: Analytic
121. The 45-degree line identifies
a. | all possible equilibrium points. |
b. | All of these |
c. | all points of spending balance. |
d. | points where people consume according to the consumption function. |
e. | points where real GDP equals income. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Degree Line
MSC: Bloom's: Knowledge | AACSB: Analytic
122. Which of the following statements best describes what is meant by a spending balance?
a. | People's consumption is described by the consumption function. |
b. | Consumption and spending are the same, and people's consumption is described by the consumption function. |
c. | Income and output are the same. |
d. | Consumption and income are the same, and people's consumption is described by the consumption function. |
e. | Income and spending are the same, and people's consumption is described by the consumption function. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
123. Spending balance exists if
a. | the economy is at potential GDP. |
b. | income and spending are the same, and we are on the expenditure line. |
c. | income and spending are the same. |
d. | income and spending are the same, we are on the expenditure line, and we are at potential GDP. |
e. | All of these |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
Exhibit 23-5
124. If output was at the level corresponding to point E in Exhibit 23-5, then
a. | income would increase. |
b. | aggregate output would decrease. |
c. | it would be in equilibrium. |
d. | the marginal propensity to consume would decrease. |
e. | spending would decrease. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Equilibrium Point
MSC: Bloom's: Application | AACSB: Analytic
125. If spending was equal to the amount corresponding to point B in Exhibit 23-5,
a. | aggregate output would increase. |
b. | aggregate output would decrease. |
c. | spending is too high, and the expenditure line will shift down. |
d. | the economy would be in equilibrium. |
e. | the marginal propensity to consume would increase. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Equilibrium
MSC: Bloom's: Analysis | AACSB: Analytic
126. Suppose the expenditure line is given by the equation E = 800 + .75Y, and output is equal to 3,000. Which of the following is ?
a. | There is an incentive for firms to increase output. |
b. | Spending is less than income. |
c. | Spending is equal to income. |
d. | The economy is in equilibrium. |
e. | There is too much output. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
127. If the marginal propensity to consume increases,
a. | firms will increase production. |
b. | spending will remain above output until interest rates increase and equilibrium is restored. |
c. | the expenditure line will shift upward in a parallel fashion. |
d. | investment will have to fall to restore equilibrium. |
e. | too much output is being produced, and firms will cut production until equilibrium is restored. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
128. According to the table below, when the economy is at the point of spending balance, consumption equals
a. | 25. |
b. | 4. |
c. | 20. |
d. | 16. |
e. | 12. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Application | AACSB: Analytic
/
129. Spending balance occurs when people consume according to the consumption function.
Moderate
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
130. When spending equals income, people consume according to the consumption function.
Moderate
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
131. If real GDP is less than spending, output will rise.
Moderate
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
132. If spending as given by the expenditure line is greater than output, then spending is too high, and the expenditure line will shift down until equilibrium is achieved.
Moderate
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
133. When spending balance is achieved, the economy has reached a long-run equilibrium.
Moderate
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
134. If spending is greater than output, a firm's inventories will increase, and output will decrease.
Moderate
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
135. Equilibrium output in the short run, as given by spending balance, can be above or below potential GDP.
Moderate
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
136. If there is an increase in government purchases, real GDP will
a. | increase by more than the amount of the purchases. |
b. | increase by less than the amount of the purchases. |
c. | not change. |
d. | increase by the amount of the purchases. |
e. | decrease by less than the amount of the purchases. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Forecasting GDP
MSC: Bloom's: Analysis
/
137. According to the spending balance model, a change in spending causes a change in income, which causes further changes in spending and income.
Moderate
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
138. Answer the questions below:
(A) | Explain the significance of the 45-degree line. |
(B) | Explain what the expenditure line measures and how it is derived. |
(C) | Explain how the 45-degree line and the expenditure line can be combined to find the point of spending balance. |
(A) | The 45-degree line identifies all points where spending is equal to output. These represent the possible equilibrium points because, when spending is equal to output, there is no incentive to increase or decrease production. |
(B) | The expenditure line measures desired spending by the four groups for any level of income. It is derived by adding up the four spending categories. |
(C) | Spending balance is where the 45-degree line and the expenditure line intersect. At this point, output is equal to desired spending, and there is no incentive for the firm to change production. At any other level of output, spending will either be above or below output, and firms will either increase or decrease production. |
OBJ: factual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance
MSC: Bloom's: Knowledge | AACSB: Analytic
139. When does the slope of the expenditure line equal the MPC?
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Slope of Expenditure Line
MSC: Bloom's: Knowledge | AACSB: Analytic
140. Answer the questions below:
(A) | Suppose a firm finds that its inventory is rising. What does this imply about the level of spending as compared to the level of output? |
(B) | Is the firm likely to continue producing at the same level? |
(C) | Explain why inventory changes for the whole economy are monitored as a sign of future economic activity. |
(A) | If inventories are rising, spending by customers is less than output. |
(B) | Eventually the firm will reduce output so that inventory will not keep growing. |
(C) | If inventory changes are positive and significantly large for some period of time, this indicates that firms will be reducing output. This will also cause income and spending to fall. |
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance and Inventory
MSC: Bloom's: Analysis | AACSB: Analytic
141. When spending is equal to output and the economy has reached spending balance, inventory investment must equal zero. Please answer or and explain.
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: Spending Balance and Inventory
MSC: Bloom's: Analysis | AACSB: Analytic
142. Answer the questions below:
(A) | Plot the line showing where income and spending are equal. What does the slope of this line equal? |
(B) | Using the information in the table below, plot the line showing the relationship between expenditure and income. What is the slope of this line? |
| |
(C) | Using the graphical approach and the information in the above table, show what happens to the spending balance if government expenditures increase by 9. |
(D) | Using the graphical approach and the information in the above table, show what happens to the spending balance if the MPC increases to 0.9. |
(A) | As shown in the figure below, this line is the 45-degree line. The slope of the line is 1. |
| |
(B) | The figure below is a graph of the expenditure line. The slope of the line is equal to the MPC, which is 0.7. |
| |
(C) | The increase in government expenditures causes the expenditure line to shift up from E1 to E2. The new spending balance is at 60 as opposed to 30. |
| |
(D) | The expenditure line pivots up from E1 to E2. The spending balance occurs at 60 instead of 30. |
|
OBJ: conceptual
SEC: 4. Finding Real GDP When Consumption and Income Move Together
TOP: 45-Degree Line and Expenditure Line
MSC: Bloom's: Knowledge
Multiple Choice
143. Which of the following statements is ?
a. | A recession occurs when the expenditure line shifts down the 45-degree line. |
b. | A recession occurs whenever potential GDP is less than real GDP at the point of spending balance. |
c. | A recession occurs whenever income and expenditures are not equal. |
d. | A recession occurs when the expenditure line crosses the 45-degree line at a level of income less than potential GDP. |
e. | The expenditure line cannot be used to identify recessions or expansions. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Recession
MSC: Bloom's: Analysis | AACSB: Analytic
144. Which of the following is ?
a. | Potential GDP is determined by the available supply of labor, capital, and technology only in the long run. |
b. | Real GDP is determined by aggregate demand only in the short run. |
c. | Potential GDP is equal to aggregate demand in the long run. |
d. | Real GDP is determined by aggregate demand only in the long run. |
e. | Potential and real GDP are always equal. |
OBJ: factual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Real GDP and Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
Exhibit 23-6
145. According to Exhibit 23-6, line abd shows the path of potential GDP. Suppose that the Year 2 spending balance has the economy at point b where real GDP equals potential GDP. Which of the following would cause the economy to be at point c in Year 3?
a. | There is an increase in wealth. |
b. | Firms decrease their optimism about the state of the economy. |
c. | The marginal propensity to consume decreases. |
d. | The quantity of imports increases. |
e. | The government increases taxes. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Real GDP and Potential GDP
MSC: Bloom's: Analysis | AACSB: Analytic
146. According to Exhibit 23-6, line abd shows the path of potential GDP. In Year 2, suppose the expenditure line intersects the 45-degree line at the level of spending corresponding to point b. If, in Year 3, the economy is at point c, then
a. | the expenditure line has shifted up the 45-degree line more than it would have if real GDP equaled potential GDP in Year 3. |
b. | the expenditure line has shifted down the 45-degree line. |
c. | the expenditure line has shifted up the 45-degree line and equals a level of income greater than real GDP. |
d. | the expenditure line has shifted up the 45-degree line to a point where real GDP equals potential GDP in Year 3. |
e. | potential GDP has risen, and we've moved to a new point of spending balance. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Stepping away from Potential GDP
MSC: Bloom's: Analysis | AACSB: Analytic
147. According to Exhibit 23-6, line abd shows the path of potential GDP. In Year 2, suppose the expenditure line intersects the 45-degree line at the level of spending corresponding to point b. If, in Year 3, the economy is at point e, then
a. | the expenditure line has shifted up the 45-degree line to a point where real GDP equals potential GDP in Year 3. |
b. | the expenditure line has shifted up the 45-degree line, but the level of income is less than the amount corresponding to real GDP. |
c. | the expenditure line has shifted down the 45-degree line. |
d. | the expenditure line has shifted up the 45-degree line more than it would have if real GDP equaled potential GDP in Year 3. |
e. | potential GDP has declined, and we've moved to a new point of spending balance. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Stepping away from Potential GDP
MSC: Bloom's: Analysis | AACSB: Analytic
/
149. If the economy is growing along the same path as potential GDP, the expenditure line will not shift over time.
Moderate
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
150. Suppose that the expenditure line initially intersects the 45-degree line at a point where potential GDP is equal to real GDP. Now, suppose over the next year the economy goes into a boom. Draw a graph showing what happens to the expenditure line as the economy moves into a boom.
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Shifting away from Potential GDP
MSC: Bloom's: Analysis | AACSB: Analytic
151. Assume initially that real GDP is equal to potential GDP. Explain carefully whether each of the following would cause real GDP to rise above or fall below potential GDP.
(A) | Many of the people who grew up in the 1930s, because they grew up in the Great Depression, have much higher rates of savings than the current generations. Suppose many of these wealthy Depression-era people begin to pass away and leave their accumulated wealth to their heirs. |
(B) | The European economies experience a surge in growth as a result of the weak euro, which has stimulated exports and hence production in the European countries. |
(A) | As people pass away and leave their wealth to their heirs, consumption spending will increase and/or saving will fall. People will have more wealth to spend. The expenditure line will shift or pivot upward, and real GDP will rise above potential GDP. |
(B) | As growth in the European economies surges, they will have more income to spend on U.S. goods and services. Our exports will increase, and the expenditure line will shift up. Real GDP will rise above potential GDP. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Real GDP and Potential GDP
MSC: Bloom's: Analysis | AACSB: Analytic
152. Suppose the information in the following table describes the economic situation in the United States at the end of 2017:
Year | Real GDP (billions of 2010 dollars) | Potential GDP (billions of 2010 dollars) |
2014 | 13,604.6 | 13,604.6 |
2015 | 14,034.2 | 14,034.2 |
2016 | 14,477.3 | 14,477.3 |
2017 (optimistic forecast) | 15,490.7 | 14,911.6 |
2017 (pessimistic forecast) | 14,043.0 | 14,911.6 |
(A) | Graph real GDP over time, placing the year on the horizontal axis. Calculate the growth rate of real GDP between 2016 and 2017. |
(B) | What will be the growth rate of real GDP between 2016 and 2017 if the optimistic forecast of real GDP is correct? |
(C) | What will be the growth rate of real GDP between 2016 and 2017 if the pessimistic forecast of real GDP is correct? |
(D) | What is the deviation (in terms of dollars and as a percentage) of real GDP from potential GDP in 2017 if the optimistic forecast is correct? What is the deviation (in terms of dollars and as a percentage) of real GDP from potential GDP in 2017 if the pessimistic forecast is correct? |
(A) | The diagram below shows the plot of real GDP between 2014 and 2016 as well as the possible forecasts for 2017. Real GDP grew by 3 percent between 2015 and 2016. |
(B) | According to the optimistic forecast, real GDP is expected to grow at a rate of 7 percent between 2016 and 2017. |
(C) | According to the pessimistic forecast, real GDP is expected to decline by 3 percent between 2016 and 2017. |
(D) | According to the optimistic forecast, the gap between real and potential GDP is expected to be $579.1 billion or 4 percent. According to the pessimistic forecast, the gap between real and potential GDP is expected to be $868.6 billion or 6 percent. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Real and Potential GDP
MSC: Bloom's: Application | AACSB: Analytic
153. Suppose the economy is booming and many firms begin to experience an increase in the demand for their goods and services.
(A) | Suppose the firms do not know whether the change is temporary or permanent. How will they adjust price and output? |
(B) | Suppose the firms determine that the change is permanent. How will they adjust price and output? |
(C) | Explain the relationship between imperfect information and economic fluctuations based on your answers to (A) and (B) above. |
(A) | They will increase output first and decide on price later. Many firms have some excess capacity, so they can easily adjust output first. The price adjustment will come later after they evaluate whether the change is temporary or permanent. In addition, the idea of implicit contracts suggests that firms are reluctant to change price frequently. |
(B) | They will increase price. As price increases, some of the increase in demand will be offset. |
(C) | With imperfect information, firms adjust output first, based on demand, and price later. Fluctuations are larger than if firms had perfect information, in which case firms would change price for permanent changes but not for temporary changes. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Limited Information and Implicit Contracts
MSC: Bloom's: Analysis | AACSB: Analytic
154. The following table shows the relationship between income and consumption in an economy.
Assume that investment (I) is $5 billion, government purchases (G) are $4 billion, and net exports (X) are $1 billion.
(A) | What is the numerical value of the marginal propensity to consume? |
(B) | Construct a table that is analogous to the one presented in the text for this economy. What is the level of income at the point of spending balance? |
(C) | For this level of income, calculate national saving. Is national saving equal to investment plus net exports? |
(D) | Suppose the above problem is modified to include taxes. Suppose first that, at any level of income, consumers must pay taxes equal to $3 billion. Find the new level of spending balance by modifying the table. Hint: If consumers have to pay taxes, this is income that they cannot use for consumption. Verify again that national saving is equal to investment plus net exports. Find private and government saving. |
(E) | Graphically illustrate what happens to spending balance when the government increases taxes by $3 million. |
(A) | The value of the marginal propensity to consume is .7. |
(B) | At the point of spending balance, real GDP is 60. |
| |
(C) | National saving at the point of spending balance is Y C G = 60 50 4 = 6. At the point of spending balance, investment plus net exports equals 6. |
(D) | To modify the table, you will need to subtract 3 from each level of consumption and each level of AE. Spending balance is now at a level of 50. |
National saving is Y C G = 50 40 4 = 6 = I + X. Private saving is Y C T = 50 40 3 = 7, and government saving is T G = 3 4 = 1. | |
| |
(E) | See graph below. The expenditure line will shift down. The new spending balance is 40. |
|
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Point of Spending Balance
MSC: Bloom's: Application | AACSB: Analytic
155. Describe what happens to the aggregate expenditure line in each of the following cases:
(A) | The Republicans eliminate the marriage penalty tax and cut capital gains tax. |
(B) | The European Union imposes a ban on U.S.-produced dairy products. |
(C) | A law is enacted requiring builders of new homes to pay a $5,000 excise tax. |
(D) | Baby boomers begin to worry about retirement and increase their marginal propensity to save. |
(A) | The decrease in taxes causes the expenditure line to shift up. |
(B) | This ban causes U.S. net exports to decline. The expenditure line shifts down. |
(C) | The excise tax causes a decline in residential investment. The expenditure line shifts down. |
(D) | The increase in the MPS causes a decrease in MPC. The expenditure line shifts down and becomes flatter. |
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Aggregate Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
156. Sketch the 45-degree line and the expenditure line on a diagram. What determines the slope of each line? Explain why the point of intersection is the only possible equilibrium point. Use this diagram to show what happens to the level of income if government purchases decline.
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Point of Spending Balance
MSC: Bloom's: Analysis | AACSB: Analytic
157. Suppose business executives become very pessimistic and reduce their investment spending. Sketch a diagram that illustrates how this change in opinion affects real GDP.
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Investment Expenditure
MSC: Bloom's: Analysis | AACSB: Analytic
158. Suppose most European economies are in a recession. How would you expect this to affect the European demand for American goods? What happens to net exports? Sketch a diagram that illustrates how this change in net exports affects real GDP in the United States.
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Export Spending
MSC: Bloom's: Analysis | AACSB: Analytic
159. Suppose you read in the paper that government purchases will decrease by $50 billion. Next to the article are three forecasting companies' predictions of the effect the reduction in government purchases will have on real GDP. The predictions are:
Firm A: There will be no other changes in spending, and real GDP will fall by $50 billion.
Firm B: There will be no other changes in spending, and real GDP will fall by $75 billion.
Firm C: Investment will increase by $50 billion, and real GDP will remain the same.
Which forecast do you believe?
OBJ: conceptual
SEC: 5. Spending Balance and Departures of Real GDP from Potential GDP
TOP: Forecasting Real GDP
MSC: Bloom's: Analysis | AACSB: Analytic
Chapter 11 Appendix
Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
Multiple Choice
1. The Keynesian multiplier measures
a. | both the short-run and long-run impacts of an initial change in spending on real GDP. |
b. | the long-run impact of an initial change in spending on real GDP. |
c. | the short-run impact of an initial change in spending on real GDP. |
d. | the long-run impact of a change in real GDP on consumption. |
e. | the short-run impact of a change in real GDP on total spending. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge
2. Which of the following measures the change of real GDP in the short run as a result of an increase in government purchases?
a. | Spending balance |
b. | Potential GDP |
c. | Life-cycle model |
d. | Keynesian multiplier |
e. | 45-degree line |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge
3. The spending multiplier is the ratio of the change in real GDP to
a. | a shift in the expenditure line. |
b. | a movement along the expenditure line. |
c. | a shift in the 45-degree line. |
d. | a change in marginal propensity to consume. |
e. | a change in potential GDP. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge
4. The size of the Keynesian multiplier depends on
a. | the location of the expenditure line. |
b. | the level of spending. |
c. | the level of income. |
d. | the location of the 45-degree line. |
e. | the marginal propensity to consume. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge | AACSB: Analytic
5. The Keynesian multiplier will be higher if
a. | the marginal propensity to consume is larger. |
b. | the marginal propensity to import is larger. |
c. | real GDP is higher. |
d. | the expenditure line is higher. |
e. | the liquidity constraint is greater. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Analysis | AACSB: Analytic
6. The formula for the Keynesian multiplier without net exports is
a. |
|
b. |
|
c. |
|
d. |
|
e. |
|
.
.
.
.
.OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge
7. The formula for the Keynesian multiplier with net exports is
a. |
|
b. |
|
c. |
|
d. |
|
e. |
|
.
.
.
.
.OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge | AACSB: Analytic
8. Suppose that MPC = 0.5 and MPI = 0, the Keynesian multiplier equals
a. | 50. |
b. | 5. |
c. | 10. |
d. | 2.5. |
e. | 2. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Application | AACSB: Analytic
9. Suppose that MPC = 0.9 and MPI = 0.1, the Keynesian multiplier equals
a. | 1. |
b. | 1.25. |
c. | 2.5. |
d. | 5. |
e. | 10. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Application | AACSB: Analytic
10. Suppose that MPC = 0.8 and MPI = 0. According to the Keynesian multiplier, an increase of $20 million in government purchases will
a. | increase real GDP by $16 million. |
b. | decrease real GDP by $16 million. |
c. | increase real GDP by $100 million. |
d. | decrease real GDP by $100 million. |
e. | have no impact on real GDP. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Application | AACSB: Analytic
11. Suppose that MPC = 0.7 and MPI = 0.2. According to the Keynesian multiplier, a decrease of $20 million in government purchases will
a. | increase real GDP by $40 million. |
b. | decrease real GDP by $40 million. |
c. | increase real GDP by $100 million. |
d. | decrease real GDP by $100 million. |
e. | have no impact on real GDP. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Application | AACSB: Analytic
12. Which of the following is about the marginal propensity to consume and the marginal propensity to import?
a. | The marginal propensity to import is typically smaller than the marginal propensity to consume because when income rises, not all goods we consume are imported. |
b. | The marginal propensity to import is always larger than the marginal propensity to consume because when income rises, not all goods we consume are imported. |
c. | The marginal propensity to import is always the same as the marginal propensity to consume because when income rises, not all goods we import are consumed. |
d. | The sum of the marginal propensity to import and the marginal propensity to consume is always equal to one because when income rises, we either consume or import. |
e. | The marginal propensity to import is sometimes larger and sometimes smaller than the marginal propensity to consume because when income rises, all goods we consume are imported. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Marginal Propensity to Consume
MSC: Bloom's: Analysis | AACSB: Analytic
/
13. The Keynesian multiplier is the ratio of the change in spending to a given change in real GDP.
Basic
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge
14. An increase in the marginal propensity to consume leads to an increase in the Keynesian multiplier.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Marginal Propensity to Consume | Keynesian Multiplier
MSC: Bloom's: Knowledge | AACSB: Analytic
15. If the expenditure line is steeper, the Keynesian multiplier will be larger.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge | AACSB: Analytic
16. All else being equal, a higher propensity to import leads to a larger Keynesian multiplier.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge | AACSB: Analytic
17. The Keynesian multiplier relies on the assumption that people are forward looking.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
18. Suppose in 2016, real GDP was $160 trillion. Suppose further that the marginal propensity to consume was 0.75 and the marginal propensity to import was 0.25. Using the Keynesian multiplier, how much should government purchases be changed if policymakers attempt to raise real GDP to $180 trillion by changing government purchases?
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Application | AACSB: Analytic
19. Sketch the 45-degree line and the expenditure line on a diagram. Use this diagram to show what happens to the level of income if government purchases decline. Does income decrease by more or by less than the downward shift in government purchases? Explain.
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Keynesian Multiplier
MSC: Bloom's: Application | AACSB: Analytic
Multiple Choice
20. The forward-looking consumption model assumes that people make consumption decisions based on
a. | their mood. |
b. | their current income. |
c. | their anticipation of their future income. |
d. | their income taxes in the current year. |
e. | their perceptions of other people’s behavior. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Knowledge
21. The permanent income model implies the same relationship between changes in consumption and income as
a. | the backward-looking model. |
b. | the life-cycle model. |
c. | the liquidity constraint model. |
d. | the Keynesian multiplier. |
e. | None of these |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Knowledge
22. According to the forward-looking model, consumption
a. | reacts mostly to a permanent change in income. |
b. | reacts mostly to a temporary change in income. |
c. | reacts equally to permanent or temporary changes in income. |
d. | is always subject to a liquidity constraint. |
e. | does not react to either temporary or permanent changes in income. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Knowledge | AACSB: Analytic
23. The permanent income model implies that
a. | a permanent tax cut has a larger effect on consumption than does a temporary tax cut. |
b. | a permanent tax cut has a smaller effect on consumption than does a temporary tax cut. |
c. | tax cuts should not be used because consumers are not rational. |
d. | both permanent and temporary tax cuts are effective in changing consumption. |
e. | both permanent and temporary tax cuts have no effects on consumption. |
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Knowledge | AACSB: Analytic
/
24. According to the permanent income model, the marginal propensity to consume is larger in the case of a permanent change in income than a temporary change in income.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Knowledge | AACSB: Analytic
25. The forward-looking model predicts that the marginal propensity to consume is constant over time.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Analysis | AACSB: Analytic
26. The forward-looking model implies that the Keynesian multiplier is greater for a temporary tax cut than a permanent tax cut.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Analysis | AACSB: Analytic
27. Evidence from the effect of the 2008 Stimulus Act on consumption supports the permanent income hypothesis.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Knowledge | AACSB: Analytic
28. The rational expectations assumption implies that anticipated tax changes have no impact on consumption at all.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Analysis | AACSB: Analytic
29. Liquidity constraints prevent people from engaging in consumption smoothing.
Moderate
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Liquidity Constraint
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
30. In 2008, the government under the Bush administration implemented a tax cut in the form of a one-time tax rebate. That tax cut had only a small impact on personal consumption expenditure and real GDP. Explain.
OBJ: conceptual
SEC: 7. Appendix—Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
TOP: Forward-Looking Consumption Model
MSC: Bloom's: Analysis | AACSB: Analytic