Chapter 27 Worksheet – Flashcards
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Which of the following is correct? A. APS + MPS = 1. B. APS + MPC = 1. C. APC + MPS = 1. D. APC + APS = 1.
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D. APC + APS = 1.
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At an income level of $400 billion, the average propensity to save in economy (2) is: A. .9125. B. .9305. C. .0875. D. .0725.
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C. .0875
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If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when: A. i rises. B. r falls. C. r is greater than i. D. i is greater than r.
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C. r is greater than i.
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The average propensity to consume is 1 at point: A. D. B. F. C. B. D. A.
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point A.
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A decline in disposable income: A. decreases consumption because it shifts the consumption schedule downward. B. increases consumption because it shifts the consumption schedule upward. C. increases consumption by moving upward along a specific consumption schedule. D. decreases consumption by moving downward along a specific consumption schedule.
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D. decreases consumption by moving downward along a specific consumption schedule.
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The consumption schedule indicates that: A. consumers will maximize their satisfaction where the consumption schedule and 45° line intersect. B. up to a point consumption exceeds income, but then falls below income. C. households consume as much as they earn. D. the MPC falls as income increases.
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B. up to a point consumption exceeds income, but then falls below income.
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The figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier? A. 1 B. 3 C. 2 D. 4
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D. 4
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In contrast to investment, consumption is: A. unmeasurable. B. relatively stable. C. relatively unstable. D. measurable.
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B. relatively stable.
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If disposable income was $325, we should expect consumption to be: A. $290. B. $20. C. $305. D. $315.
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C. $305.
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Dissaving means: A. that disposable income is less than zero. B. the same thing as disinvesting. C. that households are spending more than their current incomes. D. that saving and investment are equal.
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C. that households are spending more than their current incomes.
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The marginal propensity to consume is equal to: A. CB/AB. B. AE/0E. C. CD/CF. D. CF/CD.
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A. CB/AB.
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If for some reason households become increasingly thrifty, we could show this by: A. an upward shift of the consumption schedule. B. an increase in the equilibrium GDP. C. an upshift of the saving schedule. D. a downshift of the saving schedule.
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C. an upshift of the saving schedule.
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The most important determinant of consumer spending is: A. consumer expectations. B. the level of income. C. the stock of wealth. D. the level of household borrowing.
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B. the level of income.
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As disposable income goes up the: A. volume of consumption declines absolutely. B. APS falls. C. volume of investment diminishes. D. APC falls.
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D. APC falls.
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Which of the following would increase investment, while leaving an existing investment demand curve, say, ID2, in place? A. a higher interest rate B. lower expected returns on investment C. higher expected returns on investment D. a lower interest rate
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D. a lower interest rate
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Which one of the following will cause a movement down along an economy's consumption schedule? A. a decrease in disposable income B. an increase in stock prices C. a decrease in stock prices D. an increase in consumer indebtedness
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A. a decrease in disposable income
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Other things equal, if the real interest rate falls and business taxes rise: A. we can be certain that investment will rise. B. we can be certain that investment will fall. C. we will be uncertain as to the resulting change in investment. D. investment will rise until it is equal to saving.
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C. we will be uncertain as to the resulting change in investment.
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The investment demand curve will shift to the left as a result of: A. a decrease in business taxes. B. a decrease in labor costs. C. an increase in the excess production capacity available in industry. D. increased business optimism with respect to future economic conditions.
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C. an increase in the excess production capacity available in industry.
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If the MPC is .6, the multiplier will be: A. 1.67. B. 4.0. C. 2.5. D. 6.0.
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C. 2.5.
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Consumption equals disposable income when: A. Cd equals A. B. B equals CD. C. disposable income is B. D. disposable income is D.
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C. disposable income is B.
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As disposable income increases, consumption: A. decreases and saving increases. B. and saving both decrease. C. and saving both increase. D. increases and saving decreases.
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C. and saving both increase.
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The wealth effect is shown graphically as a: A. shift of the consumption schedule. B. movement along an existing consumption schedule. C. shift of the investment schedule. D. movement along an existing investment schedule.
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A. shift of the consumption schedule.
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The multiplier is: A. 1/MPC. B. 1/(1 + MPC). C. 1/MPS. D. 1/(1 - MPS).
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C. 1/MPS.
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(Consider This) U.S. consumption increased between March 2000 and July 2002 even though stock values declined by $3.7 trillion. One of the reasons was that: A. the unemployment rate dramatically declined. B. lower interest rates allowed many households to reduce their monthly loan payments and increase their consumption spending. C. deflation occurred, which increased purchasing power. D. economic growth accelerated relative to the prior two years.
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B. lower interest rates allowed many households to reduce their monthly loan payments and increase their consumption spending.
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In the late 1990s the U. S. stock market boomed, causing U. S. consumption to rise. Economists refer to this outcome as the: A. multiplier effect. B. wealth effect. C. Keynes effect. D. interest-rate effect.
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B. wealth effect.
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A shift of the consumption schedule from C1 to C2 might be caused by a: A. wealth effect of an increase in stock market prices. B. recession. C. increase in income tax rates. D. increase in saving.
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A. wealth effect of an increase in stock market prices.
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When we draw an investment demand curve we hold constant all of the following except: A. business taxes. B. the expected rate of return on the investment. C. the interest rate D. the present stock of capital goods.
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C. the interest rate
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Assume a machine which has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. If the firm finds it can borrow funds at an interest rate of 10 percent the firm should: A. purchase the machine because the interest rate exceeds the expected rate of return. B. purchase the machine because the expected rate of return exceeds the interest rate. C. not purchase the machine because the interest rate exceeds the expected rate of return. D. not purchase the machine because the expected rate of return exceeds the interest rate.
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B. purchase the machine because the expected rate of return exceeds the interest rate.
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The marginal propensity to consume is: A. 0.25. B. 0.20. C. 0.75. D. 0.80.
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D. 0.80.
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Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. Which of the lines on the diagram represents these data? A. D B. B C. C D. A
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B. B
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A rightward shift of the investment demand curve might be caused by: A. an increase in the price level. B. an increase in business taxes. C. a decline in the real interest rate. D. businesses planning to increase their stock of inventories.
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D. businesses planning to increase their stock of inventories.
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The marginal propensity to consume is: A. 0.80. B. 0.20. C. 0.75. D. 0.25.
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A. 0.80
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One can determine the amount of any level of total income that is consumed by: A. multiplying total income by the MPC. B. multiplying total income by the APC. C. multi[lying total income by the slope of the consumption schedule. D. subtracting the MPS from total income.
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B. multiplying total income by the APC.
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Which of the following is not correct? A. MPC + MPS = 1. B. 1 - MPC = MPS. C. MPS = MPC + 1. D. APS + APC = 1.
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C. MPS = MPC + 1.
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If the relevant saving-schedule were constructed: A. saving would be minus $20 billion at the zero level of income. B. aggregate saving would be $60 at the $60 billion level of income. C. it would slope downward and to the right. D. its slope would be 1/2.
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A. saving would be minus $20 billion at the zero level of income.
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The consumption schedule is drawn on the assumption that as income increases consumption will: A. increase both absolutely and as a percentage of income. B. increase absolutely, but decline as a percentage of income. C. increase absolutely, but remain constant as a percentage of income. D. be unaffected.
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B. increase absolutely, but decline as a percentage of income.
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The multiplier is defined as: A. 1-MPS. B. change in GDP ´ initial change in spending. C. change in GDP - initial change in spending. D. change in GDP/initial change in spending.
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D. change in GDP/initial change in spending.
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The 45-degree line on a graph relating consumption and income shows: A. all points at which saving and income are equal. B. all points where the MPC is constant. C. all the points at which consumption and income are equal. D. the amounts households will plan to save at each possible level of income.
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C. all the points at which consumption and income are equal.
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If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is: A. 12 percent. B. 6 percent. C. 18 percent. D. 24 percent.
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A. 12 percent
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The diagram below shows consumption schedules for economies A and B. We can say that the: A. MPC is greater in B than in A. B. APC at any given income level is greater in B than in A. C. MPC is greater in A than in B. D. MPS is smaller in B than in A.
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C. MPC is greater in A than in B.
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Consumption will be equal to income at: A. an income of F. B. an income of E. C. point D. D. point C.
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B. an income of E.
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Suppose a family's consumption exceeds its disposable income. This means that its: A. MPC is greater than 1. B. MPS is negative. C. APC is greater than 1. D. APS is positive.
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C. APC is greater than 1.
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The marginal propensity to consume in economy (1) is: A. 0.8. B. 0.3. C. 0.7. D. 0.5.
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C. 0.7.
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Given the consumption schedule, it is possible to graph the relevant saving schedule by: A. subtracting the MPC from 1 at each level of income. B. subtracting investment from consumption at each level of GDP. C. plotting the vertical differences between the consumption schedule and the 45-degree line. D. plotting the horizontal difference between the consumption schedule and the 45-degree line.
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C. plotting the vertical differences between the consumption schedule and the 45-degree line.
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With an MPS of .4, the MPC will be: A. 1.0 minus .4. B. the reciprocal of the MPS. C. .4 minus 1.0. D. .4.
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A. 1.0 minus .4.
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The graph below suggests that: A. as income increases, consumption decreases as a percentage of income. B. an income increases, consumption decreases absolutely. C. saving is zero at the $120 billion income level. D. consumption would be $60 billion even if income was zero.
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A. as income increases, consumption decreases as a percentage of income.
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Capital goods, because their purchases can be postponed like ______ consumer goods, tend to contribute to ________ in investment spending. A. durable; stability B. nondurable; instability C. durable; instability D. nondurable; stability
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C. durable; instability
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For all levels of income to the left of the intersection of the 45-degree line and the consumption schedule, the APC is: A. less than the APS. B. equal to 100 percent. C. greater than 100 percent. D. equal to the MPC.
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C. greater than 100 percent.
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At income level F the volume of saving is: A. CD. B. AB. C. CF-BF. D. BD.
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A. CD.
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A movement from a to b along C1 might be caused by a: A. wealth effect of an increase in stock market prices. B. recession. C. increase in income tax rates. D. increase in real GDP.
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D. increase in real GDP.
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The multiplier effect means that: A. a change in consumption can cause a larger increase in investment. B. consumption is typically several times as large as saving. C. an increase in investment can cause GDP to change by a larger amount. D. a decline in the MPC can cause GDP to rise by several times that amount.
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C. an increase in investment can cause GDP to change by a larger amount.
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If the marginal propensity to consume is .9, then the marginal propensity to save must be: A. 1.1. B. .9. C. 1. D. .1.
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D. .1.
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A decline in the real interest rate will: A. increase the amount of investment spending. B. shift the investment demand curve to the right. C. shift the investment schedule downward. D. shift the investment demand curve to the left.
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A. increase the amount of investment spending.
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Which of the following is correct? A. APC + MPS = APS + MPC B. APC - APS = MPC - MPS C. APC + MPC = APS + MPS D. MPC + MPS = APC + APS
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D. MPC + MPS = APC + APS
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At the $200 level of disposable income: A. dissaving is $5. B. the average propensity to save is 0.20. C. the average propensity to consume is0.80. D. the marginal propensity to save is 2.5 percent.
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A. dissaving is $5
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The marginal propensity to save: A. cannot be determined from the data given. B. is highest in economy (2). C. is highest in economy (3). D. is highest in economy (1).
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D. is highest in economy (1).
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Other things equal, a decrease in the real interest rate will: A. move the economy downward along its existing investment demand curve. B. shift the investment demand curve to the left. C. shift the investment demand curve to the right. D. move the economy upward along its existing investment demand curve.
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A. move the economy downward along its existing investment demand curve.
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Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is: A. 20 percent. B. 2 percent. C. 8 percent. D. 80 percent.
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A. 20 percent.
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The saving schedule is drawn on the assumption that as income increases: A. savings will increase absolutely, but remain constant as a percentage of income. B. saving will decline absolutely and as a percentage of income. C. saving will increase absolutely, but decline as a percentage of income. D. saving will increase absolutely and as a percentage of income.
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D. saving will increase absolutely and as a percentage of income.
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(Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how: A. an increase in imports eventually leads to a greater increase in exports. B. a government tax rate increase eventually results in the government collecting less tax revenue than before the tax rate hike. C. a price increase on a single product eventually leads to rapid inflation. D. a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.
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D. a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.
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The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because: A. in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes. B. the MPC in the United States is greater than 1. C. the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts. D. the real-world MPS is larger than the MPS in the examples.
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A. in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.
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The consumption schedule shows: A. that the MPC increases in proportion to GDP. B. that consumption depends primarily on the level of business investment. C. that households consume more when interest rates are low. D. the amounts households intend to consume at various possible levels of aggregate income.
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D. the amounts households intend to consume at various possible levels of aggregate income.
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If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule: A. will not shift. B. will also shift upward. C. may shift either upward or downward. D. will shift downward.
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D. will shift downward.
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Which of the following would shift the investment demand curve from ID1 to ID2? A. lower expected rates of return on investment B. a higher interest rate C. higher expected rates of return on investment D. a lower interest rate
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C. higher expected rates of return on investment
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The economy is dissaving: A. at all income levels greater than E. B. in the amount CD. C. at income level E. D. at income level H.
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D. at income level H.
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The marginal propensity to save is equal to: A. CD/0D. B. 0B/0A. C. CD/BD. D. 0D/0D.
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C. CD/BD.
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Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but that there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. If the real interest rate is 15 percent in this economy, the aggregate amount of investment will be: A. $10. B. $15. C. $25. D. $20.
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A. $10.
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Investment spending in the United States tends to be unstable because: A. the price level fluctuates rapidly. B. profits are highly variable. C. capital wears out quickly and must be replaced often. D. investment spending is affected by interest rates.
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B. profits are highly variable.
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A movement from b to a along C1 might be caused by a: A. increase in saving. B. recession. C. decrease in income tax rates. D. wealth effect of an increase in stock market prices.
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B. recession.
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Holly's break-even level of income is $10,000 and MPC is 0.75. If her actual disposable income is $16,000, her level of: A. consumption spending will be $15,500. B. consumption spending will be $14,500. C. consumption spending will be $13,000. D. saving will be $2,500.
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B. consumption spending will be $14,500.
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The immediate determinants of investment spending are the: A. marginal propensity to consume and the real interest rate. B. interest rate and the expected price level. C. expected rate of return on capital goods and the real interest rate. D. level of saving and the real interest rate.
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C. expected rate of return on capital goods and the real interest rate.
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A shift of the consumption schedule from C2 to C1 might be caused by a: A. decrease in income taxes. B. decrease in saving. C. increase in real GDP. D. reverse wealth effect, caused by a decrease in stock market prices.
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D. reverse wealth effect, caused by a decrease in stock market prices.
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If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will: A. increase by $10 billion. B. increase by $4.29 billion. C. increase by $2.10 billion. D. decrease by $4.29 billion.
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A. increase by $10 billion.
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The marginal propensity to save is: A. CB/CF. B. CD/EF. C. EF/CB. D. CB/AF.
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B. CD/EF.
