Question 1

Personal saving is equal to:

Accepted Answer

A)   Disposable income plus consumption
B)   Consumption minus disposable income
C)   Disposable income minus consumption
D)   Consumption divided by disposable incomeE) A) and D)
F) All of the above

Question 2

Refer to the consumption schedule above. Disposable income equals consumption at point:

Accepted Answer

A)   A
B)   C
C)   D
D)   GE) A) and C)
F) A) and D)

Question 3

The lower the marginal propensity to consume, the larger is the multiplier.

Accepted Answer

A) True 
 B)False

Question 4

Which statement about the multiplier is correct?

Accepted Answer

A)   If a $20 billion increase in spending creates $20 billion of new income in the first round of the multiplier process and $15 billion in the second round, the multiplier in the economy is 5
B)   If a $40 billion increase in spending creates $40 billion of new income in the first round of the multiplier process and $20 billion in the second round, the multiplier in the economy is 4
C)   If a $60 billion increase in spending creates $60 billion of new income in the first round of the multiplier process and $50 billion in the second round, the multiplier in the economy is 5
D)   If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4E) B) and C)
F) All of the above

Question 5

If the real rate of interest increases, then the level of investment in the economy will also increase.

Accepted Answer

A) True 
 B)False

Question 6

If businesses feel more optimistic about the state of the economy, then this change is likely to:

Accepted Answer

A)   Cause a movement up the investment demand curve
B)   Cause a movement down the investment demand curve
C)   Shift the investment demand curve to the left
D)   Shift the investment demand curve to the rightE) A) and B)
F) A) and C)

Question 7

The saving schedule would be shifted upward by:

Accepted Answer

A)   An increase in the value real and financial assets
B)   A reduction in real interest rates
C)   Expectations of rising prices of products
D)   A decrease in taxesE) A) and B)
F) All of the above

Question 8

The Great Recession of 2007-2009 caused a basic change in consumer behavior, shifting the saving schedule up.

Accepted Answer

A) True 
 B)False

Question 9

If a $100 billion increase in consumption spending creates $100 billion of new income in the first round of the multiplier process and $75 billion in the second round, the multiplier in the economy is 4.

Accepted Answer

A) True 
 B)False

Question 10

A firm invests in a new machine that costs $2,000 a year but which is expected to produce an increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm should:

Accepted Answer

A)   Undertake the investment because the expected rate of return of 12 percent is greater than the real rate of interest
B)   Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest
C)   Undertake the investment because the expected rate of return of 9 percent is greater than the real rate of interest
D)   Not undertake the investment because the expected rate of return of 7 percent is less than the real rate of interestE) C) and D)
F) B) and D)

Question 11

The following factors help explain the instability of investment, except:

Accepted Answer

A)   Business expectations can quickly change for unpredictable reasons
B)   Innovations in the economy occur quite irregularly
C)   Profits of firms are highly variable from one period to the next
D)   Purchases of capital goods are usually nondiscretionary and cannot be postponedE) None of the above
F) A) and D)

Question 12

The variability of business profits:

Accepted Answer

A)   Helps explain the instability of investments over time
B)   Does not affect investment spending, which depends on expected profits not current profits
C)   Explains why the durability of capital goods is variable
D)   Causes the variations in consumption spending over timeE) B) and C)
F) A) and B)

Question 13

Refer to the consumption schedule above. At income level 3, the amount of consumption is represented by the line segment:

Accepted Answer

A)   FG
B)   FH
C)   FD
D)   GHE) None of the above
F) B) and D)

Question 14

If households see the value of their financial assets increase significantly, then the saving schedule will shift upward.

Accepted Answer

A) True 
 B)False

Question 15

The multiplier value is the reciprocal of the marginal propensity to consume.

Accepted Answer

A) True 
 B)False

Question 16

Which factor explains the variability of investment?

Accepted Answer

A)   The regularity of innovation
B)   The durability of capital goods
C)   The constancy of expectations
D)   The constancy of profitsE) A) and D)
F) All of the above

Question 17

If the MPC is 0.8, what change in investment spending is required to effect a total change in income by $60 billion?

Accepted Answer

A)   $12 billion
B)   $15 billion
C)   $20 billion
D)   $25 billionE) A) and B)
F) A) and C)

Question 18

The multiplier can be calculated by dividing:

Accepted Answer

A)   The initial change in spending by the change in real GDP
B)   The change in real GDP by the initial change in spending
C)   One by one minus the marginal propensity to save
D)   One by one minus the marginal propensity to investE) C) and D)
F) A) and B)

Question 19

The average propensity to save is equal to the percentage of total income that is saved.

Accepted Answer

A) True 
 B)False

Question 20

All of the following statements about consuming in excess of one's disposable income are true, except:

Accepted Answer

A)   It is possible, and it's called dissaving
B)   In this case, the values of both saving and the APS are negative
C)   (APC + APS)  will be less than 1 in this situation
D)   The value of APC will be greater than 1 in this caseE) All of the above
F) None of the above

Exam 10: Basic Macroeconomic Relationships

The saving schedule would be shifted upward by:

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The multiplier value is the reciprocal of the marginal propensity to consume.

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The average propensity to save is equal to the percentage of total income that is saved.

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Which factor explains the variability of investment?

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Refer to the consumption schedule above. Disposable income equals consumption at point:

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The variability of business profits:

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If the real rate of interest increases, then the level of investment in the economy will also increase.

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Which statement about the multiplier is correct?

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If households see the value of their financial assets increase significantly, then the saving schedule will shift upward.

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The multiplier can be calculated by dividing:

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The lower the marginal propensity to consume, the larger is the multiplier.

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If businesses feel more optimistic about the state of the economy, then this change is likely to:

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All of the following statements about consuming in excess of one's disposable income are true, except:

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The following factors help explain the instability of investment, except:

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Refer to the consumption schedule above. At income level 3, the amount of consumption is represented by the line segment:

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Personal saving is equal to:

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The Great Recession of 2007-2009 caused a basic change in consumer behavior, shifting the saving schedule up.

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If the MPC is 0.8, what change in investment spending is required to effect a total change in income by $60 billion?

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A firm invests in a new machine that costs $2,000 a year but which is expected to produce an increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm should:

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If a $100 billion increase in consumption spending creates $100 billion of new income in the first round of the multiplier process and $75 billion in the second round, the multiplier in the economy is 4.

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