Test Questions & Answers Ch13 Consumption And The Aggregate

Chapter 13: Consumption and the Aggregate Expenditures Model

Multiple Choice

1. The bulk of aggregate demand in the United States consists of

A) consumption.

B) investment.

C) government spending.

D) net exports.

Difficulty: Easy

2. During an economic downturn, households respond to a decline in income by

A) reducing taxes.

B) reducing consumption.

C) increasing the quantity of labor supplied.

D) negotiating higher wages.

Difficulty: Easy

3. The income households receive less the personal income taxes they pay is

A) net savings.

B) disposable personal income.

C) gross private domestic investment.

D) gersonal consumption.

Difficulty: Easy

4. Disposable personal income is

A) the income households receive after paying personal taxes and personal debt.

B) the income households receive after paying personal taxes and saving.

C) the income households receive after paying personal taxes and purchasing necessities.

D) the income households receive that is available for consumption and saving.

Difficulty: Easy

5. Disposable personal income is

A) the income households receive after paying personal taxes and personal debt.

B) the income households earn from supplying labor services for the production of aggregate output.

C) the income households receive after paying personal taxes.

D) the income households have leftover after paying personal taxes and purchasing necessities.

Difficulty: Easy

6. The amount of consumption at each level of disposable personal income, all other determinants of consumption unchanged, is shown by the

A) aggregate demand curve.

B) consumption function.

C) price-consumption curve.

D) income curve.

Difficulty: Easy

7. The consumption function expresses the

A) purposes of consumption.

B) relationship between consumption and prices.

C) relationship between consumption and saving.

D) relationship between consumption and disposable personal income.

Difficulty: Easy

8. The consumption function shows

A) the amount of consumption at each level of aggregate demand, holding all other determinants constant.

B) the amount of consumption at each price level, holding all other determinants constant.

C) the amount of consumption at each level of disposable income, holding all other determinants constant.

D) the amount of consumption at each wage rate holding all other determinants constant.

Difficulty: Easy

9. An increase in aggregate demand causes an increase in

A) income, which in turn induces an increase in consumption.

B) investment, which in turn induces an increase in consumption.

C) government, which in turn induces an increase in net exports.

D) consumption, which in turn induces an increase in price.

Difficulty: Medium

10. The marginal propensity to consume is given by

A) the change in consumption divided by the change in saving.

B) the change in consumption divided by the change in disposable personal income.

C) consumption divided by the change in disposable personal income.

D) consumption divided by disposable income.

Difficulty: Easy

11. The marginal propensity to consume is the

A) slope of the saving function.

B) slope of the consumption-saving curve.

C) slope of the saving-investment curve.

D) change in consumption divided by the change in disposable personal income.

Difficulty: Medium

12. The marginal propensity to consume is the

A) slope of the saving function.

B) slope of the consumption function.

C) proportion of disposable personal income used for consumption.

D) change in consumption divided by the change in saving.

Difficulty: Medium

13. Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to consume?

A) 0.2

B) 0.4

C) 0.6

D) 0.8

Difficulty: Medium

14. Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $13,000. What is the marginal propensity to consume?

A) 0.2

B) 0.4

C) 0.6

D) 0.8

Difficulty: Medium

15. Personal saving equals

A) gross domestic income − consumption.

B) personal disposable income − consumption.

C) gross domestic product − consumption.

D) personal disposable income − taxes − consumption.

Difficulty: Easy

16. The saving function expresses the relationship between

A) personal saving and consumption.

B) gross domestic income and saving.

C) disposable personal income and saving.

D) wage income and personal saving.

Difficulty: Easy

17. The saving function shows

A) the amount of saving at each level of aggregate demand, holding all other determinants of saving constant.

B) the amount of saving on at each level of disposable income, holding all other determinants of saving constant.

C) the amount of saving at each price level, holding all other determinants of saving constant.

D) the amount of saving at each wage rate, holding all other determinants of saving constant.

Difficulty: Medium

18. Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $13,000. What is the marginal propensity to save?

A) 0.2

B) 0.4

C) 0.6

D) 0.8

Difficulty: Medium

19. Suppose when disposable personal income increases from $10,000 to $15,000, consumption increases from $9,000 to $12,000. What is the marginal propensity to save?

A) 0.2

B) 0.4

C) 0.6

D) 0.8

Difficulty: Medium

20. Which of the following is true?

I. 1 − MPS = MPC where MPS = marginal propensity to save and MPC = marginal propensity to consume.

II. personal saving + consumption = gross income

III. ∆disposable income = ∆saving + ∆consumption where ∆ = change in

A) I, II, and III

B) I and II only

C) I and III only

D) II and III only

Difficulty: Medium

21. The marginal propensity to save is given by

A) the change in saving divided by the change in consumption.

B) saving divided by the change in disposable personal income.

C) saving divided by disposable income.

D) the change in saving divided by the change in disposable personal income.

Difficulty: Easy

22. Personal saving is

A) total income not spent on consumption.

B) disposable personal income not spent on consumption.

C) found by subtracting consumption from disposable personal income.

D) disposable income spent on investment.

Difficulty: Easy

23. The relationship between personal saving and the level of disposable personal income is shown by the

A) supply of savings curve.

B) consumption function.

C) saving function.

D) personal investment schedule.

Difficulty: Easy

24. In graph that shows disposable income on the horizontal axis and consumption on the vertical axis, at every point on the 45-degree line,

A) the value of disposable income equals the sum of personal saving and consumption.

B) the value of disposable income equals consumption.

C) the value of disposable income equals personal saving.

D) the value of disposable income and consumption equals 1.

Difficulty: Medium

Use the following to answer questions 25-33.

Exhibit: Consumption and Disposable Personal Income

25. (Exhibit: Consumption and Disposable Personal Income) When disposable personal income is $1,200 billion, consumption is

A) $600 billion.

B) $800 billion.

C) $1,200 billion.

D) $2,000 billion.

Difficulty: Medium

26. (Exhibit: Consumption and Disposable Personal Income) When disposable personal income is $2,000 billion, consumption is

A) $400 billion.

B) $1,000 billion.

C) $1,200 billion.

D) $1,600 billion.

Difficulty: Medium

27. (Exhibit: Consumption and Disposable Personal Income) The marginal propensity to consume is

A) 0.25.

B) 0.50.

C) 0.60.

D) 0.67.

Difficulty: Medium

28. (Exhibit: Consumption and Disposable Personal Income) The marginal propensity to save is

A) 0.25.

B) 0.50.

C) 0.60.

D) cannot be determined without a savings function.

Difficulty: Medium

29. (Exhibit: Consumption and Disposable Personal Income) When disposable personal income is $2,000 billion,

A) personal saving is $1,200 billion.

B) consumption is $1,600 billion.

C) saving is $800 billion.

D) consumption is $800 billion.

Difficulty: Medium

30. (Exhibit: Consumption and Disposable Personal Income) When disposable personal income goes up by $400 billion, personal saving increases by

A) $0.

B) $100 billion.

C) $200 billion.

D) $400 billion.

Difficulty: Medium

31. (Exhibit: Consumption and Disposable Personal Income) Assuming that the relationship between consumption and disposable personal income remains linear throughout its entire range, what would the level of consumption be if disposable personal income were zero?

A) −$200 billion

B) $0

C) $100 billion

D) $200 billion

Difficulty: Medium

32. (Exhibit: Consumption and Disposable Personal Income) Assuming that the relationship between consumption and disposable personal income remains linear throughout its entire range, if disposable personal income were zero, what would personal saving be?

A) −$200 billion

B) $0

C) $200 billion

D) $400 billion

Difficulty: Medium

33. (Exhibit: Consumption and Disposable Personal Income) If disposable personal income is $400 billion, what is the amount of personal saving?

A) −$200 billion

B) $0

C) $200 billion

D) $400 billion

Difficulty: Medium

Use the following to answer questions 34-38.

Exhibit: Income and Consumption

34. (Exhibit: Income and Consumption) Calculate the marginal propensity to consume based on the information in the table.

A) 0.00

B) 0.20

C) 0.80

D) 1.40

Difficulty: Medium

35. (Exhibit: Income and Consumption) When disposable personal income is $100, what is the amount of personal saving?

A) −$40

B) −$20

C) $0

D) $20

Difficulty: Medium

36. (Exhibit: Income and Consumption) When disposable personal income is $300, what is the amount of personal saving?

A) −$40

B) −$20

C) $0

D) $20

Difficulty: Medium

37. (Exhibit: Income and Consumption) When disposable personal income is $400, what is the amount of personal saving?

A) −$40

B) −$20

C) $0

D) $20

Difficulty: Medium

38. (Exhibit: Income and Consumption) Negative personal saving occurs when disposable personal income is

A) equal to $300.

B) greater than $300.

C) less than $300.

D) between $300 and $400.

Difficulty: Medium

39. The amount of consumption that would take place if real GDP were zero is called

A) induced consumption.

B) exogenous consumption.

C) autonomous consumption.

D) break even consumption.

Difficulty: Medium

40. Let real GDP =Y = Y_d, and the consumption function is C = $1,000 + .06Y.

What is the value of autonomous consumption (A) and what is the marginal propensity to consume (MPC)?

A) A = $600; MPC = 0.4

B) A = $1,000; MPC = 0.6

C) A = $1,600; MPC = 2.5

D) A = $2,500; MPC = 0.6

Difficulty: Medium

41. Suppose the consumption function is C = $500 + 0.8Y. If Y = $1,000, then autonomous consumption is

A) $500.

B) $800.

C) $1,000.

D) $1,300.

Difficulty: Medium

42. Suppose the consumption function is C = $500 + 0.8Y. If Y = $1,000, then induced consumption is

A) $500.

B) $800.

C) $1,000.

D) $1,300.

Difficulty: Medium

43. Suppose the consumption function is C = $500 + 0.8Y. If Y = $1,000, what is the amount of consumption?

A) $300

B) $500

C) $1,000

D) $1,300

Difficulty: Medium

Use the following to answer questions 44-48.

Exhibit: Consumption and Real GDP

44. (Exhibit: Consumption and Real GDP) The marginal propensity to consume equals

A) 0.

B) 0.5.

C) 1.0.

D) 2.0.

Difficulty: Medium

45. (Exhibit: Consumption and Real GDP) An equation for the consumption function is

A) C = 1 + Y.

B) C = Y.

C) C = 1 + 2Y.

D) C = 1 + 0.5Y.

Difficulty: Medium

46. (Exhibit: Consumption and Real GDP) If real GDP is $4 trillion, consumption equals

A) 0.75 trillion.

B) 1 trillion.

C) 3 trillion.

D) 4 trillion.

Difficulty: Medium

47. (Exhibit: Consumption and Real GDP) If real GDP were $12 trillion, consumption equals

A) 5 trillion.

B) 7 trillion.

C) 9 trillion.

D) 11 trillion.

Difficulty: Medium

48. (Exhibit: Consumption and Real GDP) If real GDP is $8 trillion, saving equals

A) $4 trillion.

B) $3 trillion.

C) $2 trillion.

D) $1 trillion.

Difficulty: Medium

49. The assertion that consumption depends on expected average annual income is called

A) permanent income.

B) the current income hypothesis.

C) current income.

D) the permanent income hypothesis.

Difficulty: Easy

50. Consumption spending in any one period that is determined by income in that period is explained by the

A) current income hypothesis.

B) disposable personal income theory of consumption.

C) transitory income theory of consumption.

D) permanent income hypothesis.

Difficulty: Easy

51. The average annual income that people expect to receive for the remainder of their lives is called

A) lifetime income.

B) permanent income.

C) disposable personal income.

D) current income.

Difficulty: Easy

52. According to the permanent income hypothesis,

A) consumption in any period depends on the stable annual income that people expect to earn in their jobs.

B) the amount of income that people require depends on the amount of consumption they need and want to undertake.

C) consumption in any period depends on the average annual income people expect to receive for the rest of their lives.

D) the amount of personal saving depends on the amount of consumption people plan to undertake when they retire.

Difficulty: Medium

53. Suppose that your annual income has averaged $40,000 for the past 10 years and that you expect it will average $40,000 over the next 10 years. If your income this year increases to $50,000 and you increase your consumption expenditures by $10,000, then you are most likely acting according to the

A) transitory income theory of consumption.

B) current income hypothesis.

C) permanent income hypothesis.

D) disposable personal income theory of consumption.

Difficulty: Medium

54. Suppose that your annual income has averaged $40,000 for the past 10 years and that you expect it will average $40,000 over the next 10 years. If your income this year increases to $50,000 but your consumption expenditures don’t change, then you are most likely acting according to the

A) transitory income theory of consumption.

B) current income hypothesis.

C) permanent income hypothesis.

D) disposable personal income theory of consumption.

Difficulty: Medium

55. Which of the following statements is false?

A) Two individuals who have the same current income but different permanent incomes are likely to make very similar savings decisions.

B) An individual with a relatively low current income but a high permanent income might save little or nothing now, expecting to save for retirement and for bequests later.

C) A person with a relatively low income now with no expectation of higher income later might try to save some now to provide for retirement or bequests later.

D) A decision to save a certain amount determines how much will be available for future consumption.

Difficulty: Medium

56. According to the current income hypothesis,

A) a change in income regarded as temporary will not affect consumption much since it will have little effect on average lifetime income.

B) regardless of whether a change in disposable personal income is permanent or temporary; people will change consumption by moving along the consumption function.

C) a change in income regarded as permanent will have a greater impact on saving than on consumption.

D) a change in income regarded as temporary will have a greater impact on saving than on consumption.

Difficulty: Medium

57. According to the permanent income hypothesis,

A) a change in income regarded as permanent will have a greater impact on saving than on consumption.

B) a change in income regarded as temporary will have a greater impact on saving than on consumption.

C) regardless of whether a change in disposable personal income is permanent or temporary; people will change consumption by moving along the consumption function.

D) a change in income regarded as temporary will not affect consumption much since it will have little effect on average lifetime income.

Difficulty: Medium

Use the following to answer questions 58-62.

Exhibit: Consumption Functions

Figure 13-3

58. (Exhibit: Consumption Functions) Suppose the consumption function is given by curve C₁. What will cause an upward shift to curve C₂?

A) an increase in the amount consumed as disposable personal income increases.

B) an increase in consumption at any level of disposable personal income

C) an increase in the price level

D) an increase in transfer payments

Difficulty: Medium

59. (Exhibit: Consumption Functions) Suppose the consumption function is given by curve C₁. Which of the following will cause an upward shift to curve C₂?

A) a decrease in wealth

B) an increase in price level

C) an increase in interest rates

D) an increase in consumer confidence

Difficulty: Medium

60. (Exhibit: Consumption Functions) Upward shifts of the consumption function, for example from C₀ to C₁ to C₂ demonstrate

A) an increase in the marginal propensity to save.

B) increases in the amount of consumption for a given level of disposable income.

C) increases in the amount of disposable income available for consumption.

D) a decrease in the marginal propensity to save.

Difficulty: Medium

61. (Exhibit: Consumption Functions) Which of the following statements is false?

A) At points j, k, and m, consumers spend all their disposable income on consumption.

B) The amount of consumption is positive even when disposable income equals zero.

C) The slope of the consumption function is the marginal propensity to consume.

D) At points j, k, and m, the marginal propensity to save equals zero.

Difficulty: Hard

62. (Exhibit: Consumption Functions) Suppose the consumption function is given by curve C₁. Which of the following will cause a downward shift to curve C₁?

A) a stock market crash that decreases household wealth

B) a decrease in price level

C) an increase in withholding tax rate

D) rising optimism about economic conditions

Difficulty: Medium

63. An increase in the wealth of households, all other things unchanged, will

A) not affect the consumption function.

B) shift the consumption function upward.

C) shift the consumption function downward.

D) cause a movement to the right along the consumption function.

Difficulty: Medium

64. An increase in the price level, all other things unchanged, will

A) not affect the consumption function.

B) shift the consumption function upward.

C) shift the consumption function downward.

D) cause a movement to the right along the consumption function.

Difficulty: Medium

65. An upward shift in the consumption function can be caused by

A) expectations of product shortages.

B) expectations of less income in the future.

C) a decrease in consumer confidence.

D) a reduction in the wealth of households.

Difficulty: Medium

66. A downward shift in the consumption function can be caused by

A) expectations of product shortages.

B) expectations of more income in the future.

C) a decrease in consumer confidence.

D) rising property values that increases households’ net worth.

Difficulty: Medium

67. In the summer of 2001, tax rebate checks of $300 per single taxpayer and $600 for married couples were distributed to 92 million people in the U.S. Economic researchers found that over a nine-month period spending increased to about 40% of the rebate. These findings support

A) the permanent income hypothesis.

B) the current income hypothesis.

C) the transitory income hypothesis.

D) the consumption function.

Difficulty: Medium

68. Aggregate expenditures are the

A) sum of planned levels of consumption, investment, government purchases, and net exports, at a given price level, as they relate to real GDP.

B) sum of consumption, saving, investment, government purchases, and net exports, at a given price level, as they relate to real GDP.

C) total of all spending, and equal to the value of real GDP at all price levels.

D) value of GDP, in nominal values, for all price levels, all other things unchanged.

Difficulty: Easy

69. The sum of planned levels of consumption, investment, government purchases, and net exports, at a given price level, is called

A) total production.

B) aggregate supply.

C) aggregate demand.

D) aggregate expenditures.

Difficulty: Easy

70. Planned investment is

A) equal to gross private domestic investment, less depreciation.

B) equal to gross private domestic investment.

C) the level of investment firms intend to make in a period.

D) the level of investment government will require firms to make in a period.

Difficulty: Easy

71. Unplanned investment is

A) the level of investment minus depreciation.

B) the level of investment plus depreciation.

C) investment that occurs that is unexpected by the government.

D) investment that firms did not intend to make.

Difficulty: Easy

72. Investment equals

A) planned investment plus unplanned investment.

B) planned investment minus unplanned investment.

C) unplanned investment minus planned investment.

D) planned investment in a free market economy.

Difficulty: Easy

73. Unplanned investment occurs when

I. aggregate expenditures exceed real GDP produced.

II. aggregate expenditures fall short of real GDP produced.

III. when real GDP produced is less than potential real GDP.

IV. when real GDP produced is greater than potential real GDP.

A) I and II only

B) I and IV only

C) II and III only

D) I, II, III, and IV

Difficulty: Medium

74. If an economy is in equilibrium,

A) planned investment equals zero.

B) unplanned investment equals zero.

C) there is no change in inventories.

D) inventories equals zero.

Difficulty: Medium

75. Expenditures that do not vary with the level of real GDP are called

A) exogenous aggregate expenditures.

B) induced aggregate expenditures.

C) endogenous aggregate expenditures.

D) autonomous aggregate expenditures.

Difficulty: Medium

76. Expenditures that vary with the level of real GDP are called

A) aggregate expenditures.

B) induced aggregate expenditures.

C) marginal expenditures.

D) autonomous aggregate expenditures.

Difficulty: Medium

77. In a graph with real GDP on the horizontal axis and aggregate expenditures on the vertical axis, autonomous aggregate expenditures are represented by

A) a ray from the origin.

B) an upward sloping line with a positive vertical intercept.

C) a 45-degree line.

D) a horizontal line.

Difficulty: Medium

78. In a graph with real GDP on the horizontal axis and aggregate expenditures on the vertical axis, induced aggregate expenditures are represented by

A) a ray from the origin.

B) an upward sloping line.

C) a 45-degree line.

D) a horizontal line.

Difficulty: Medium

79. The relationship between aggregate expenditures and real GDP is shown by the

A) aggregate expenditures curve.

B) consumption function.

C) aggregate demand curve.

D) autonomous expenditures curve.

Difficulty: Easy

80. The slope of the aggregate expenditures curve is given by

A) aggregate expenditures ÷ ∆real GDP where ∆= change in.

B) aggregate expenditures ÷ real GDP.

C) ∆aggregate expenditures ÷ real GDP.

D) ∆aggregate expenditures ÷ ∆real GDP.

Difficulty: Medium

81. If real GDP increases from $2,000 to $2,500 and aggregate expenditures increase from $1,900 to $2,200, the slope of the aggregate expenditures curve is

A) 0.6.

B) 0.7.

C) 0.8.

D) 0.9.

Difficulty: Medium

82. Consider a simple economy that is made up of three sectors: households, firms, and government. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption,

I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous.

In this case, the slope of the aggregate expenditures curve is

A) 1.

B) infinity (since the AE curve is horizontal).

C) equal to the marginal propensity to consume.

D) the value of the multiplier.

Difficulty: Medium

Use the following to answer questions 83-96.

Exhibit: Aggregate Expenditures and Real GDP 1

83. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. What is the value of autonomous AE?

A) $1,500 billion

B) $3,000 billion

C) $4,500 billion

D) $6,000 billion

Difficulty: Medium

84. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. What is the value of AE when Y = $12,000 billion?

A) $6,000 billion

B) $9,000 billion

C) $12,000 billion

D) $15,000 billion

Difficulty: Medium

85. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. What is the amount of consumption when real GDP is $6,000 billion?

A) 1,000 billion

B) 2,000 billion

C) 3,000 billion

D) 4,000 billion

Difficulty: Hard

86. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If Y= $6,000 billion, what is the value of consumption and planned investment?

A) C = $3,000 billion, I_P = $3,000 billion

B) C = $4,000 billion, I_P = $2,000 billion

C) C = $5,000 billion, I_P = $1,000 billion

D) C = $6,000 billion, I_P = zero

Difficulty: Hard

87. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If I_P = $2,000 billion, what is the equilibrium level of real GDP?

A) $4,500 billion

B) $6,000 billion

C) $7,500 billion

D) $9,000 billion

Difficulty: Hard

88. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. Which of the following statements is true?

A) The multiplier = 0.5

B) The multiplier = (1 − 0.5)/1 = 0.5

C) The multiplier = 2

D) The multiplier = ∆AE ÷ ∆Y

Difficulty: Hard

89. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. If potential real GDP is $7,000 billion, what must happen to planned investment for the economy to reach its potential real GDP?

A) I_P must be decreased by $1,000 billion

B) I_P must be increased by $1,000 billion

C) I_P must be decreased by $500 billion

D) I_P must be increased by $500 billion

Difficulty: Hard

90. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment and Y* = equilibrium real GDP. Suppose AE = C + I_P, I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If firms produced a real GDP greater than the Y*,

A) AE would be greater than real GDP.

B) AE would fall short of real GDP.

C) actual investment would be less than I_P.

D) there would be an excess demand for real GDP.

Difficulty: Hard

91. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If real GDP = $5,000 billion, what is the amount of aggregate expenditures?

A) $4,500 billion

B) $5,000 billion

C) $5,500 billion

D) $6,000 billion

Difficulty: Hard

92. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. At a real GDP of $5,000 billion,

A) planned investment is greater than actual investment.

B) planned investment equals actual investment.

C) planned investment is less than actual investment.

D) there will be no unplanned investment.

Difficulty: Hard

93. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. If the level of real GDP equals $5,000 billion, and if there are no changes in the consumption function or in planned investment, then we can expect that, in the next period, real GDP will

A) rise.

B) remain unchanged.

C) fall.

D) fall, but only if there is an offsetting change in autonomous consumption.

Difficulty: Hard

94. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If real GDP = $7,000 billion, what is the amount of aggregate expenditures?

A) $6,000 billion

B) $6,500 billion

C) $7,000 billion

D) $7,500 billion

Difficulty: Hard

95. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. At a real GDP of $7,000 billion

A) planned investment is greater than actual investment.

B) planned investment equals actual investment.

C) planned investment is less than actual investment.

D) there will be no unplanned investment.

Difficulty: Hard

96. (Exhibit: Aggregate Expenditures and Real GDP 1) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. If the level of real GDP equals $7,000 billion, and if there are no changes in the consumption function or in planned investment, then we expect that, in the next period, real GDP will

A) rise.

B) remain unchanged.

C) fall.

D) fall, but only if there is an offsetting change in autonomous consumption.

Difficulty: Hard

Use the following to answer questions 97-104.

Exhibit: Aggregate Expenditures and Real GDP 2

97. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, and I_P is autonomous. What is the value of autonomous AE?

A) $2,000 billion

B) $3,000 billion

C) $4,500 billion

D) $8,000 billion

Difficulty: Medium

98. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, and I_P is autonomous. What is the value of AE when Y = $12,000 billion?

A) $2,000 billion

B) $8,000 billion

C) $11,000 billion

D) $12,000 billion

Difficulty: Medium

99. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. What is the value of consumption when real GDP is $6,000 billion?

A) $1,000 billion

B) $2,500 billion

C) $4,500 billion

D) $5,500 billion

Difficulty: Hard

100. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. What is the value of planned investment when real GDP is $6,000 billion?

A) $3,000 billion

B) $1,500 billion

C) $1,000 billion

D) zero

Difficulty: Hard

101. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. What is the value of equilibrium real GDP (Y*)?

A) $2,000 billion

B) $6,000 billion

C) $7,500 billion

D) $8,000 billion

Difficulty: Hard

102. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. What is the value of the multiplier?

A) 0.75

B) 1.33

C) 4.00

D) It depends on the ∆AE and the ∆Y since the multiplier formula is ∆AE ÷∆Y.

Difficulty: Medium

103. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. If potential real GDP is $9,000 billion, by how much must planned investment change to reach potential real GDP?

A) I_P must increase by $250 billion.

B) I_P must decrease by $250 billion.

C) I_P must increase by $1,000 billion.

D) I_P must decrease by $1,000 billion.

Difficulty: Hard

104. (Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment and Y* = equilibrium real GDP. Suppose AE = C + I_P, I_P is autonomous and the consumption function is C = $1,000 billion + 0.75Y. If firms produced a real GDP less than the Y*,

A) AE would be greater than real GDP.

B) AE would fall short of real GDP.

C) actual investment would be greater than I_P.

D) there would be an excess supply real GDP.

Difficulty: Hard

105. Which of the following statements is true about equilibrium in the aggregate expenditures model?

I. Equilibrium is found at the level of real GDP at which the aggregate expenditures curve

crosses the 45-degree line.

II. In equilibrium, real GDP produced equals aggregate expenditures.

III. In equilibrium, inventories equal zero.

IV. In equilibrium, real GDP produced equals potential real GDP.

A) I only

B) I and II only

C) I, II, and III only

D) I, II, III, and IV

Difficulty: Medium

Use the following to answer questions 106-109.

Exhibit: Aggregate Expenditures (AE) in a Simplified Economy

106. (Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that all investment is autonomous. Further, disposable personal income = real GDP and the economy is currently producing at its level of potential real GDP. What is the marginal propensity to consume in this economy?

A) 0.5

B) 0.6

C) 0.75

D) 0.8

Difficulty: Medium

107. (Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that investment is autonomous. Further, disposable personal income = real GDP. Suppose that actual real GDP in this economy is $500 billion in a particular period. We would expect to see

A) unintended reductions in inventory, planned investment will exceed actual investment.

B) unintended reductions in inventory, planned investment will be less than actual investment.

C) unintended increases in inventory, planned investment will exceed actual investment.

D) unintended increases in inventory, planned investment will be less than actual investment.

Difficulty: Medium

108. (Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that investment is autonomous. Further, disposable personal income = real GDP. Suppose that actual real GDP in this economy is $300 billion in a particular period. We would expect to see

A) unintended reductions in inventory, planned investment will exceed actual investment.

B) unintended reductions in inventory, planned investment will be less than actual investment.

C) unintended increases in inventory, planned investment will exceed actual investment.

D) unintended increases in inventory, planned investment will be less than actual investment.

Difficulty: Medium

109. (Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy that is made up of only two sectors, households and firms, and that all investment is autonomous. Further, disposable personal income = real GDP. Suppose autonomous investment rises by $50 billion. In the short run, this will cause

A) an increase in equilibrium AE of $100 billion, a shift to the right of the aggregate demand (AD) curve of $100 billion, and an increase in Y of more than $100 billion.

B) an increase in autonomous AE of $50 billion, a shift to the right of the AD curve of $100 billion, and an increase in Y of less than $100 billion.

C) an increase in autonomous AE of $50 billion, a shift to the right of the AD curve of $100 billion, and an increase in Y of more than $200 billion.

D) an increase in equilibrium AE of $50 billion, a shift to the right of the AD curve of $300 billion, and an increase in Y of less than $300 billion.

Difficulty: Difficult

Use the following to answer questions 110-121.

Exhibit: Aggregate Expenditures Curve

Figure 13-6

110. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. The equilibrium level of real GDP is

A) $800 billion.

B) $1,000 billion.

C) $1,600 billion.

D) $3,200 billion.

Difficulty: Medium

111. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. What is the level of autonomous aggregate expenditures at equilibrium real GDP?

A) $800 billion

B) $1,000 billion

C) $1,600 billion

D) $3,200 billion

Difficulty: Medium

112. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. What is the marginal propensity to consume?

A) 0.25

B) 0.5

C) 1.0

D) 2

Difficulty: Medium

113. (Exhibit: Aggregate Expenditures Curve) What is the value of the multiplier?

A) 1

B) 2

C) 3

D) 5

Difficulty: Medium

114. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. What is the equation of the aggregate expenditures curve? All figures in billions of dollars.

A) AE = G + I_P

B) AE = 800 + G + I_P

C) AE = 800 + G + I_P + 0.5Y

D) AE = 800 + 0.5Y

Difficulty: Difficult

115. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. If real GDP produced is $4,000, what is the amount of aggregate expenditures?

A) AE = $4,800 billion

B) AE = $4,000 billion

C) AE = $2,800 billion

D) AE = $2,000 billion

Difficulty: Difficult

116. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. If real GDP produced is $4,000, what is the amount of unplanned investment?

A) zero

B) $1,200 billion

C) $2,400 billion

D) $2,800 billion

Difficulty: Difficult

117. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. If real GDP produced is $4,000,

A) consumers and firms would demand more than was produced.

B) the economy experiences an inflationary gap.

C) firms will experience unplanned inventories accumulation.

D) the price level must rise to reduce aggregate expenditures and restore equilibrium.

Difficulty: Medium

118. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. If real GDP produced is $4,000, how will equilibrium be restored in the economy?

A) Policymakers must conduct contractionary policies to move the economy toward its equilibrium real GDP.

B) Firms will reduce their output in subsequent periods, moving the economy toward its equilibrium real GDP.

C) The price level must rise to reduce aggregate expenditures and restore equilibrium.

D) The price level must fall to increase aggregate expenditures and restore equilibrium.

Difficulty: Medium

119. (Exhibit: Aggregate Expenditures Curve) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment, G = Government Purchases. Further, I_P and G are autonomous. Suppose government purchases rise by $100. As a result,

A) the aggregate expenditures curve shifts upward by $100.

B) there is a movement along the aggregate expenditures curve from $1,600 to $1,700.

C) the aggregate expenditures curve shifts upward by $100 × the multiplier.

D) there is a movement along the aggregate expenditures curve from $1,600 to an amount equal to [$1,600 + ($100 × the multiplier)].

Difficulty: Medium

120. (Exhibit: Aggregate Expenditures Curve) Suppose the government purchases economy rise by $100. What is the new equilibrium level of real GDP?

A) $1,700

B) $1,800

C) $1,900

D) $2,100

Difficulty: Difficult

121. (Exhibit: Aggregate Expenditures Curve) Suppose government purchases rise by $100. In the aggregate demand/aggregate supply model,

A) the aggregate demand curve shifts to the right by $100 at any given price level.

B) the aggregate demand curve shifts to the right by ($100 × the multiplier) at any given price level.

C) there is a downward movement along the aggregate demand curve such that real GDP demanded increases by $100.

D) there is a downward movement along the aggregate demand curve such that real GDP demanded increases by ($100 × the multiplier).

Difficulty: Difficult

122. In the aggregate expenditures model, in equilibrium,

A) aggregate expenditures equal real GDP produced.

B) inventory changes equal saving.

C) inventory changes equal investment.

D) aggregate expenditures equal consumption.

Difficulty: Medium

123. In the aggregate expenditures model, in equilibrium,

A) consumption equals investment.

B) unplanned inventory changes equal zero.

C) inventory changes equal investment.

D) aggregate expenditures equal consumption.

Difficulty: Medium

124. In the aggregate expenditures model, if aggregate expenditures are greater than real GDP,

A) there will be unplanned decreases in inventories.

B) employment decreases.

C) aggregate output decreases.

D) actual real output is greater than equilibrium real output.

Difficulty: Medium

125. In the aggregate expenditures model, if aggregate expenditures are less than real GDP,

A) actual real output is less than equilibrium real output.

B) employment increases.

C) aggregate output increases.

D) there will be unplanned increases in inventories.

Difficulty: Medium

126. In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion,

A) unplanned inventory accumulation equals $200 billion.

B) unplanned inventory depletion equals $200 billion.

C) consumption plus investment equals $200 billion.

D) net investment equals $200 billion.

Difficulty: Medium

127. In the aggregate expenditures model, if real GDP equals $700 billion and aggregate expenditures equal $400 billion,

A) consumption plus investment equals $300 billion.

B) planned investment equals $300 billion.

C) investment plus saving equals $300 billion.

D) unplanned inventory accumulation equals $300 billion.

Difficulty: Medium

128. Using the aggregate expenditures model, which of the following occurs if aggregate expenditures exceed real GDP?

I. The economy will expand causing an increase in employment.

II. The economy will experience an inflationary gap.

III. The price level will rise.

IV. Actual investment will be less than planned investment.

A) I, II, and IV

B) I, III, and IV

C) I and IV

D) I, II, III, and IV

Difficulty: Medium

129. Using the aggregate expenditures model, which of the following occurs if aggregate expenditures fall short of real GDP?

I. Actual investment exceeds planned investment.

II. Unemployment rises.

III. The price level will fall.

IV. The economy will experience a recessionary gap.

A) I and II

B) I and III

C) I, II, and III

D) I, II, III, and IV

Difficulty: Medium

130. The notion that a change in autonomous aggregate expenditures produces a larger change in equilibrium real GDP in the aggregate expenditures model is called the

A) permanent income effect.

B) current income effect.

C) multiplier effect.

D) marginal propensity to consume.

Difficulty: Medium

131. The multiplier effect indicates that

A) the aggregate demand curve is downward sloping.

B) a change in any autonomous component of aggregate expenditure is buffered by the multiplier effect

C) a change in income causes a magnified change in investment.

D) a change in any autonomous component of aggregate expenditure brings about a magnified change in income.

Difficulty: Medium

132. The ratio of the change in equilibrium real GDP to the change in autonomous aggregate expenditures that produced it is the:

A) multiplier.

B) current income.

C) permanent income.

D) marginal propensity to consume.

Difficulty: Medium

133. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G =Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G, and all components of aggregate expenditures except consumption are autonomous. In this model, the multiplier is found using the formula

A) ∆Y* ÷ initial ∆AE where Y* = equilibrium real GDP by the ∆ = change in, AE = aggregate expenditures.

B) ∆AE ÷ ∆Y*.

C) ∆Y* × MPC where MPC = marginal propensity to consume.

D) 1 ÷ MPC.

Difficulty: Medium

134. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. In this model, the slope of the AE curve is the

A) MPC and the multiplier is 1 ÷ (1 − MPC).

B) MPC and the multiplier is 1 ÷ MPC.

C) multiplier and the multiplier is 1 ÷ MPS.

D) MPC and the multiplier is ∆AE ÷ ∆Y where Y = real GDP.

Difficulty: Medium

135. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. In this model, the multiplier is _____.

A) 1 ÷ (1 − MPS) where MPS = marginal propensity to save

B) 1 ÷ MPC where MPC = marginal propensity to consume

C) 1 ÷ MPS where MPS = marginal propensity to save

D) MPC ÷ MPS ÷ ∆Y

Difficulty: Medium

136. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G =Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. If the MPS is 0.4, then the multiplier is

A) 1.33

B) 2.5

C) 5

D) 15

Difficulty: Medium

137. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. The MPC is 0.6. If investment expenditures rise by $100 billion, the equilibrium level of real GDP of rises by

A) $250 billion.

B) $300 billion.

C) $500 billion.

D) $1,500 billion.

Difficulty: Medium

138. The smaller the marginal propensity to consume,

A) the greater of the multiplier.

B) the lower the value of the multiplier.

C) the greater the initial change in real GDP.

D) the greater the initial change in aggregate expenditures.

Difficulty: Medium

139. If the economy spends 80% of any increase in real GDP, then an increase in autonomous investment of $1 billion would result ultimately in an increase in equilibrium real GDP of

A) $0.8 billion.

B) $1.0 billion.

C) $1.8 billion.

D) $5.0 billion.

Difficulty: Medium

140. If an economy spends 90% of any increase in real GDP, then an increase in autonomous investment of $1 billion would result ultimately in an increase in equilibrium real GDP of

A) $1.0 billion.

B) $1.9 billion.

C) $10 billion.

D) $100 billion.

Difficulty: Medium

141. Suppose the slope of the aggregate expenditures curve is 0.75. An increase in autonomous investment expenditure of $6 billion would produce an ultimate increase in equilibrium real GDP of

A) $0.25 billion.

B) $6 billion.

C) $12 billion.

D) $24 billion.

Difficulty: Difficult

142. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, what is the value of the multiplier if the slope of the aggregate expenditures curve is 0.8?

A) 1

B) 4

C) 5

D) Cannot be determined without information on marginal propensity to consume.

Difficulty: Medium

143. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, what is the value of the multiplier if the marginal propensity to save is 0.1?

A) 1

B) 4

C) 5

D) 10

Difficulty: Medium

144. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, what is the value of the multiplier if the marginal propensity to consume is 0.75?

A) 1

B) 4

C) 5

D) infinity

Difficulty: Medium

145. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, the size of the multiplier depends on the

A) 45-degree line.

B) height of the consumption function.

C) slope of the aggregate demand curve.

D) slope of the aggregate expenditures curve.

Difficulty: Medium

146. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, if the slope of the aggregate expenditures curve increases, the multiplier

A) increases.

B) decreases.

C) remains constant.

D) is undefined.

Difficulty: Medium

147. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, if the slope of the aggregate expenditures curve decreases, the multiplier

A) increases.

B) decreases.

C) remains constant.

D) is undefined.

Difficulty: Medium

148. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, suppose when autonomous aggregate expenditures rise by $1,000 billion, equilibrium real GDP increases by $2,500 billion. Which of the following statements is true?

A) The multiplier is 2.5.

B) The MPC = 0.5.

C) The MPC = 0.75.

D) The MPC = 0.8.

Difficulty: Medium

149. In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, suppose when autonomous aggregate expenditures rise by $500 billion, equilibrium real GDP increases by $2,500 billion. Which of the following statements is true?

A) The MPS = 0.8.

B) The MPC = 0.2

C) The MPS = 0.2.

D) The MPC = 5.

Difficulty: Difficult

150. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If the consumption function is

C = $500 + 0.8Y, planned investment = $200, government purchases = $300,

net exports = $100, and real GDP = $1,000, what is the amount of autonomous expenditures?

A) $500

B) $1,000

C) $1,100

D) $1,900

Difficulty: Difficult

151. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If the consumption function is

C = $500 + 0.8Y, planned investment = $200, government purchases = $300,

net exports = $100, and real GDP = $1,000, what is the amount of induced expenditures?

A) $500

B) $800

C) $1,100

D) $1,900

Difficulty: Difficult

152. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If the consumption function is

C = $500 + 0.8Y, planned investment = $200, government purchases = $300,

net exports = $100, and real GDP = $1,000, what is the amount of aggregate expenditures?

A) $800

B) $1,000

C) $1,100

D) $1,900

Difficulty: Difficult

153. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. Which of the following causes the aggregate expenditures curve to shift downwards?

A) a decrease in taxes

B) an increase in imports

C) an increase in government spending

D) an increase in investment

Difficulty: Medium

154. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. Which of the following events causes the aggregate expenditures curve to shift downwards?

A) Firms become optimistic about future profits and increase investment spending.

B) The government reduces property tax rates.

C) The government cuts spending on education.

D) Households save a greater portion of any change in disposable income.

Difficulty: Medium

155. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. Which of the following causes the aggregate expenditures curve to shift upwards?

A) an increase in taxes

B) an increase in exports

C) a decrease in the national debt

D) a decrease in interest rate

Difficulty: Medium

156. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. Which of the following events causes the aggregate expenditures curve to shift upwards?

A) Foreign economies go into a recession and buy less domestically produced goods.

B) Households become more present oriented and decrease the autonomous component of saving.

C) Firms expect future profits to fall and cut investments accordingly.

D) The government cuts spending on healthcare.

Difficulty: Medium

157. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If government purchases increases by $200 billion, the aggregate expenditures curve will shift up by

A) $200 billion.

B) $200 billion × the multiplier.

C) $200 billion × marginal propensity to consume.

D) $200 billion × (1 ÷ marginal propensity to consume).

Difficulty: Medium

158. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is 0.8. Suppose the equilibrium level of real GDP at the prevailing price is $500 billion below potential real GDP. All else constant, by how much should autonomous aggregate expenditures be increased to reach potential output?

A) $625 billion

B) $500 billion

C) $400 billion

D) $100 billion

Difficulty: Difficult

159. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is 0.75. Suppose the equilibrium level of real GDP at the prevailing price is $600 billion below potential real GDP. All else constant, by how much should autonomous aggregate expenditures be increased to reach potential output?

A) $150 billion

B) $450 billion

C) $600 billion

D) $800 billion

Difficulty: Difficult

Use the following to answer questions 160-166.

Exhibit: Real GDP and the Multiplier

160. (Exhibit: Real GDP and the Multiplier) What is the value of the marginal propensity to consume?

A) 0.5

B) 0.6

C) ⅔

D) 0.75

Difficulty: Medium

161. (Exhibit: Real GDP and the Multiplier) What is the value of the multiplier?

A) 2.5

B) 3

C) 5

D) 15

Difficulty: Medium

162. (Exhibit: Real GDP and the Multiplier) What is the equilibrium level of GDP?

A) $6,000 billion

B) $6,500 billion

C) $7,000 billion

D) $7,500 billion

Difficulty: Difficult

163. (Exhibit: Real GDP and the Multiplier) If government purchases increase by $100 billion, the aggregate expenditures curve will shift up by $_______ billion.

A) 100

B) 250

C) 400

D) 500

Difficulty: Medium

164. (Exhibit: Real GDP and the Multiplier) Holding everything else constant, if government purchases increase by $100 billion, equilibrium real GDP will increase by

A) $100 billion.

B) $200 billion.

C) $250 billion.

D) $300 billion.

Difficulty: Difficult

165. (Exhibit: Real GDP and the Multiplier) Holding everything else constant, if net exports fall by $400 billion, equilibrium real GDP will decrease

A) $1,000 billion.

B) $800 billion.

C) $500 billion

D) $400 billion.

Difficulty: Difficult

166. (Exhibit: Real GDP and the Multiplier) Suppose the equilibrium level of real GDP at the prevailing price is $500 billion below potential real GDP. All else constant, by how much should autonomous aggregate expenditures be increased to reach potential output?

A) $150 billion

B) $200 billion

C) $400 billion

D) $500 billion

Difficulty: Difficult

167. In general, an increase in the income tax rate will make the aggregate expenditures curve

A) steeper and the multiplier larger.

B) steeper and the multiplier smaller.

C) flatter and the multiplier larger.

D) flatter and the multiplier smaller.

Difficulty: Medium

168. In general, we expect that a reduction in the income tax rate will make the aggregate expenditures curve

A) steeper and the multiplier larger.

B) steeper and the multiplier smaller.

C) flatter and the multiplier larger.

D) flatter and the multiplier smaller.

Difficulty: Medium

169. Let Y = real GDP and Y_d = disposable income. Suppose initially, Y = Y_d and the marginal propensity to consume (MPC) is 0.9. All components of aggregate expenditures except consumption are autonomous. Now suppose the government imposes an income tax rate of 20% on real GDP. What is the marginal propensity to consume following the imposition of an income tax?

A) 0.7

B) 0.72

C) 0.18

D) 1.1

Difficulty: Difficult

170. Let Y = real GDP and Y_d = disposable income. Suppose initially, Y = Y_d and the marginal propensity to consume (MPC) is 0.8. All components of aggregate expenditures except consumption are autonomous. Now suppose the government imposes an income tax rate of 30% on real GDP. As a result, one additional dollar will increase consumption by

A) $0.24.

B) $0.30.

C) $0.56.

D) $0.50.

Difficulty: Difficult

171. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. All other things unchanged, an increase in the price level,

A) shifts the aggregate expenditures curve upwards.

B) shifts the aggregate expenditures curve downwards.

C) causes a movement up along a given aggregate expenditures curve.

D) causes a movement down a given aggregate expenditures curve.

Difficulty: Medium

172. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. All other things unchanged, an increase in the price level,

A) causes a movement up along a given aggregate expenditures curve and raises the equilibrium real GDP.

B) causes a movement down a given aggregate expenditures curve and lowers the equilibrium real GDP.

C) shifts the aggregate expenditures curve upwards and raises the equilibrium real GDP.

D) shifts the aggregate expenditures curve downwards and lowers the equilibrium real GDP.

Difficulty: Medium

173. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G =Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. All other things unchanged, an increase in the price level,

A) shifts the aggregate expenditures curve upwards and causes the aggregate demand curve to shift right.

B) shifts the aggregate expenditures curve downwards and causes the aggregate demand curve to shift left.

C) shifts the aggregate expenditures curve down and causes a movement up along a given aggregate demand curve.

D) shifts the aggregate expenditures curve upwards and causes a movement down along a given aggregate demand curve.

Difficulty: Difficult

174. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. All other things unchanged, a decrease in the price level

A) shifts the aggregate expenditures curve upwards.

B) shifts the aggregate expenditures curve downwards.

C) causes a movement up along a given aggregate expenditures curve.

D) causes a movement down along a given aggregate expenditures curve.

Difficulty: Medium

175. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. All other things unchanged, a decrease in the price level

A) causes a movement up along a given aggregate expenditures curve and raises the equilibrium real GDP.

B) shifts the aggregate expenditures curve upwards and raises the equilibrium real GDP.

C) causes a movement down a given aggregate expenditures curve and lowers the equilibrium real GDP.

D) shifts the aggregate expenditures curve downwards and lowers the equilibrium real GDP.

Difficulty: Medium

176. Let AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment,

G = Government Purchases. Consider a simple aggregate expenditures model, where

AE = C + I_P + G and all components of aggregate expenditures except consumption are autonomous. All other things unchanged, a decrease in the price level

A) shifts the aggregate expenditures curve upwards and causes the aggregate demand curve to shift right.

B) shifts the aggregate expenditures curve downwards and causes the aggregate demand curve to shift left.

C) shifts the aggregate expenditures curve downwards and causes a movement up along a given aggregate demand curve.

D) shifts the aggregate expenditures curve upwards and causes a movement down along a given aggregate demand curve.

Difficulty: Medium

177. An increase in autonomous aggregate expenditures

A) causes a movement along the aggregate expenditures curve.

B) causes a movement along the aggregate demand curve.

C) increases the value of the multiplier.

D) shifts the aggregate demand curve to the right.

Difficulty: Medium

178. The wealth effect is the tendency for

A) changes in the price level to change nominal wealth and consumption.

B) changes in the price level to change real wealth and consumption.

C) household wealth to fluctuate with changes in the level of economic activity.

D) the marginal propensity to rise with increases in wealth.

Difficulty: Medium

179. May has been holding her retirement savings in a safe in her house. If the economy is currently experiencing a falling price level,

1. the real purchasing power of her money remains constant.
2. the real value of her savings is decreasing as long as the price level is falling.
3. the real value of her savings is increasing as long as the price level is falling.
4. the nominal value of her savings remains constant.

Difficulty: Medium

180. According to the real wealth effect, if you are living in a period of rising price levels, the cost of the goods and services you buy

A) decreases and your real income increases.

B) increases and your real income increases.

C) increases and your real income remains the same.

D) increases and your real income decreases.

Difficulty: Medium

181. According to the interest-rate effect, higher prices

A) increase the value of money holdings which reduces consumption and investment spending.

1. decrease the value of money which decreases consumption and investment spending.
2. lower the real quantity of money, which causes interest rates to rise and investment to fall.
3. lead to higher interest rates which reduces investment spending.

Difficulty: Medium

182. The interest rate effect suggests that

A) domestic investments fall when foreign interest rates rise relative to domestic interest rates.

B) changes in the price level affect the real purchasing power of money and therefore the money supply.

C) changes in the price level affect the real quantity of money held by households and firms and therefore the interest rate.

D) changes in the price level affect the level of real income and therefore consumption.

Difficulty: Medium

183. What is the international trade effect?

A) It is the tendency for exports to fall and imports to rise when the domestic price level falls relative to the foreign price level.

B) It is the tendency for exports to rise and imports to fall when the domestic price level falls relative to the foreign price level.

C) It is the tendency for domestic investments to fall when foreign interest rates rise relative to domestic interest rates.

D) It is the tendency for exchange rates to fall when foreign interest rates rise relative to domestic interest rates.

Difficulty: Medium

184. If prices of the goods and services in the domestic market rise relative to those in foreign markets

A) households and firms will buy more foreign products and less domestic products, thereby decreasing net exports.

B) households and firms will buy more foreign products and less domestic products, thereby increasing net exports.

C) exports will rise and imports will fall, leading to an increase in net exports.

D) the exchange rate will rise, leading to an increase in exports.

Difficulty: Medium

185. The aggregate demand traces

A) the total spending by consumers, business firms, and government agencies at a given price level.

B) the locus of equilibrium real GDP associated with each price level in the aggregate expenditures model.

C) the locus of equilibrium aggregate expenditures–real GDP combinations in the aggregate expenditures model.

D) the locus of equilibrium real GDP associated with each income level in the aggregate expenditures model.

Difficulty: Medium

186. The aggregate demand curve can be derived from the aggregate expenditures curves by

A) changing the income level and observing the equilibrium real GDP associated at a given price level.

B) changing the price level and observing the size of the vertical shift in the aggregate expenditures curve.

C) changing the price level and observing the equilibrium real GDP associated with each price level.

D) changing the autonomous expenditure and observing the equilibrium real GDP associated at a given price level.

Difficulty: Medium

187. Holding all else constant, a change in autonomous aggregate expenditures will shift in aggregate demand by an amount equal to

A) the change in autonomous aggregate expenditures.

B) the multiplier times the change in autonomous aggregate expenditures.

C) the change in real GDP divided by the change in autonomous aggregate expenditures.

D) the multiplier.

Difficulty: Medium

188. Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is ⅔. Holding all else constant, if net exports increase by $50 billion, what happens to

aggregate demand?

A) It shifts left by $150 billion.

B) There is a movement down along a given aggregate demand so that aggregate quantity demanded increases by $150 billion.

C) It shifts right by $150 billion

D) There is a movement down along a given aggregate demand so that aggregate quantity demanded increases by $50 billion.

Difficulty: Difficult

189. Suppose at each price level, autonomous aggregate expenditures increase by $50 billion. As a result, the aggregate expenditures curve shifts

A) downward at each price level and results in a leftward shift in aggregate demand.

B) upward at each price level and results in a rightward shift in aggregate demand.

C) downward at each price level and results in a movement down along a given aggregate demand.

D) upward at each price level and results in a movement up along a given aggregate demand.

Difficulty: Medium

190. Suppose at each price level, autonomous aggregate expenditures fall by $80 billion. As a result, the aggregate expenditures curve shifts

A) downward at each price level and results in a leftward shift in aggregate demand.

B) upward at each price level and results in a rightward shift in aggregate demand.

C) downward at each price level and results in a movement down along a given aggregate demand.

D) upward at each price level and results in a movement up along a given aggregate demand.

Difficulty: Medium

True/False

1. Disposable personal income is the total income households spend on consumption.

2. The consumption function shows the negative relationship between consumption and

disposable personal income.

3. The marginal propensity to consume is the change in consumption divided by the change in

disposable personal income.

4. Personal saving is disposable personal income not spent on consumption.

5. The current income theory assumes that current consumption is based on the average

income people expect to receive for the remainder of their lives.

6. An increase in wealth is likely to shift the consumption function curve upward.

7. Autonomous aggregate expenditures are those that automatically vary with real GDP,

whereas induced expenditures only change in response to a change in an external factor.

8. If consumption is given by C = $10 billion + 0.5Y, and autonomous planned investment,

government purchases, and net exports amount to $5 billion, then aggregate expenditures are

$20 billion if Y = $10 billion.

9. The multiplier effect is triggered by a shift in the aggregate expenditures curve.

10. An increase in the slope of the aggregate expenditures curve leads to a decrease in the

value of the multiplier.

11. A change in aggregate demand causes a change in income, which in turn induces a

change in consumption.

12. Personal saving is real GDP not spent on consumption.

13. Aggregate expenditures that do not vary with real GDP are called autonomous aggregate

expenditures.

14. Aggregate expenditures that vary with real GDP are called induced aggregate expenditures.

15. The amount of consumption that takes place when real GDP equals zero is called induced

consumption.

16. If consumption increases by $75 billion when disposable personal income increases by

$100, the marginal propensity to consume is 0.75.

17. If consumption is $80 billion when income is $100, the most likely value for the marginal propensity to consume is 0.8.

18. In the aggregate expenditures model, if a $40 billion increase in autonomous investment leads to an increase in equilibrium real GDP of $100 billion at the initial price level, then the multiplier is 2.5.

19. In the aggregate expenditures model, if a $50 billion increase in investment leads to an increase in equilibrium real GDP of $250 billion at the initial price level, then the multiplier is 4.

20. The multiplier is found by dividing the change in equilibrium real GDP by the change in autonomous aggregate expenditures.

21. An increase in the price level, all other things unchanged, shifts the aggregate expenditures

curve upwards.

22. A decrease in the price level, all other things unchanged, shifts the aggregate expenditures

curve upwards.

23. A change in autonomous aggregate expenditures will shift aggregate demand by an amount

equal to the change in autonomous aggregate expenditures times the multiplier.

24. If C = $500 billion + .6Y, then, if Y = $1,000 billion, induced consumption will be equal to

$1,100 billion.

25. If C = $400 billion + 0.75(Y_d) and if real GDP is $1,000 billion, then for any positive tax

rate, C =$1,150 billion.

Short Answer

1. What is the marginal propensity to consume? Explain why the sum of marginal propensity

to consume and marginal propensity to save must equal 1.

2. Distinguish between planned and unplanned investment, and explain their relationship to

the aggregate expenditures model and to equilibrium real GDP.

3. What is the multiplier effect, that is, why does income change by a multiple of the initial

change in autonomous aggregate expenditures?

4. What is the difference between the aggregate expenditures curve and the aggregate demand

curve?