Chapter 10 - Income And Spending

Question 1

​A consumption function of the form C = Co + cYD has a positive vertical intercept Co, which indicates that

A) ​some consumption is unaffected by changes in disposable income
B) ​the mpc will increase as disposable income increases
C) ​the apc will always increase as disposable income increases
D) ​the apc will always be less than the mpc
E) ​all of the above

Answer 1

A) ​some consumption is unaffected by changes in disposable income

Question 2

2. ​The marginal propensity to consume (mpc)
   A) ​shows the fraction of total national income that is used for consumption
   B) ​added to the marginal propensity to save (mps) always equals zero
   C) ​is the relationship between a change in consumer purchases and the change in disposable income that allows consumption to change
   D) ​declines as disposable income declines, eventually becoming zero as disposable income reaches zero
   E) ​decreases as autonomous saving increases

Answer 2

C) ​is the relationship between a change in consumer purchases and the change in disposable income that allows consumption to change

Question 3

3.  ​In a Keynesian model of income determination, when intended spending is greater than actual output, the adjustment to a new macro-economic equilibrium is based on changes in
A)  ​autonomous consumption
B)  ​unplanned inventories
C)  ​government spending
D)  ​net exports
E)  ​all of the above

Answer 3

B) ​unplanned inventories

Question 4

4. ​Total autonomous spending
   A) ​is dependent on the level of output
   B) ​is only determined by the equation for the consumption function
   C) ​is not part of aggregate demand
   D) ​is independent of the level of income
   E) ​increases when disposable income increases

Answer 4

D) ​is independent of the level of income

Question 5

5. ​The expenditure multiplier is used to calculate the change in
   A)​spending caused by a change in income
   B) ​equilibrium income caused by a change in autonomous spending
   C) ​intended spending caused by a change in consumption
   D)​disposable income caused by a change in saving
   E) ​government expenditures caused by a change in income

Answer 5

B) ​equilibrium income caused by a change in autonomous spending

Question 6

6. ​In a simple model with no government or foreign sector, the change in unplanned inventory at equilibrium is
   A) ​dependent upon the amount of consumption
   B) ​equal to output minus consumption
   C) ​zero
   D) ​always positive
   E) ​usually negative

Answer 6

C) ​zero

Question 7

7. ​If there is no government or foreign sector and planned investment equals planned saving, then
   A) ​actual output is equal to planned spending on consumption and investment
   B) ​consumption plus investment equals income
   C) ​the quantity of output produced is equal to aggregate demand
   D) ​there are no unplanned inventory changes
   E) ​all of the above

Answer 7

E) ​all of the above

Question 8

8. ​Assume a model with no government or foreign sector. If actual output is $13.1 trillion while aggregate demand is $13.2 trillion, we know that
   A) ​the magnitude of unintended inventory adjustments is - $100 billion
   B) ​the magnitude of unintended inventory adjustments is + $100 billion
   C) ​the magnitude of unintended inventory adjustments is + $10 billion
   D) ​the actual income level is above its equilibrium
   E) ​there currently is an excess supply of goods and services

Answer 8

A) ​the magnitude of unintended inventory adjustments is - $100 billion

Question 9

9.​Assume a simple model without any government. If an increase in autonomous investment of 40 leads to an increase in consumption of 160, then the marginal propensity to save is
A)  ​0.10
B)  ​0.20
C)  ​0.25
D)  ​0.40
E)  ​0.80

Answer 9

B) ​0.20

Question 10

10.​In a model with no government or foreign sector, if saving is defined as S = - 200 + (0.1)Y and investment is Io = 200, what is the equilibrium level of consumption?
A)  ​3,800
B)  ​3,600
C)  ​1,800
D)  ​2,000
E)  ​1,000

Answer 10

A) ​3,800

Question 11

11.​In a model with no government or foreign sector, if autonomous consumption is Co = 80, investment is Io = 70, and the marginal propensity to save is s = 0.25, equilibrium income is
A)​150
B) ​200
C)​225
D)​600
E)​750

Answer 11

D)​600

80/.25 + 70/.25 = 600

Question 12

12.​The expenditure multiplier measures
A)​​the number of steps it takes to move from one equilibrium to another
B) ​the rise in saving resulting from a rise in income
C) ​the change in investment resulting from a change in income
D) ​the change in induced consumption caused by a change in income
E) ​none of the above

Answer 12

E) ​none of the above

Question 13

13. ​When calculating the multiplier for government purchases (G), we
    A) ​must know the marginal propensity to save (mps)
    B) ​must know the income tax rate (t)
    C) ​must know the average propensity to consume (apc)
    D) ​can ignore the size of the marginal propensity to consume (mpc)
    E) ​both A) and B)

Answer 13

E) ​both A) and B)

A) ​must know the marginal propensity to save (mps)
B) ​must know the income tax rate (t)

Question 14

14. ​The size of the expenditure multiplier
    A) ​changes with a change in investment spending
    B) ​increases as the mps increases
    C) ​increases as the mps decreases
    D) ​increases as the income tax rate increases
    E) ​varies with the apc

Answer 14

C) ​increases as the mps decreases

Question 15

15. ​The size of the expenditure multiplier depends on
A)  ​the marginal propensity to consume
B)  ​the marginal propensity to import
C)  ​the marginal income tax rate
D)  ​all of the above
E)  ​only A) and B)

Answer 15

D) ​all of the above

Question 16

16.​In a simple model with no government or foreign sector, a decline in investment of $10 billion will lead to a $50 billion decline in the equilibrium level of income if
A) ​the mps is 0.2
B) ​the mpc is 0.5
C) ​the ratio of total consumption to total income is 0.8
D) ​changes in consumption divided by changes in income equal 0.2
E) ​changes in saving divided by changes in income equal 0.8

Answer 16

A) ​the mps is 0.2

Question 17

17.  ​Assume a model with no government or foreign sector. If national income is Y = 800, autonomous consumption is Co = 100, and the marginal propensity to consume is c = 0.7, then total consumption is
A)  ​100
B)  ​560
C)  ​660
D)​700
E)  ​800

Answer 17

C) ​660

Question 18

18. ​Assume a simple model of the expenditure sector with no income taxes. If a lump sum tax decrease of 200 leads to an increase in income of 800, what is the size of the mps?
A) ​0.10  
B) ​0.20
C) ​0.25
D)​0.40
E) ​0.80

Answer 18

B) ​0.20

Question 19

19. If autonomous investment increases by 100 and government purchases decrease by 100,
    which of the following is true?
    A) income will increase by 100
    B) income will increase by 200
    C) income will increase by the multiplier times 100
    D) income will decrease by the multiplier times 100
    E) income will not change

Answer 19

E) income will not change

Question 20

20. Assume a model with no government, where consumption is the only component of
aggregate demand. If the consumption function is of the form C = 400 + (0.9)Y, what is the
equilibrium level of consumption?
A) 400
B) 1.000
C) 1,600
D) 3,600
E) 4,000

Answer 20

E) 4,000

Question 21

21. Assume a model of the expenditure sector with no government or foreign sector. If the
    savings function is defined as S = - 300 + (0.1)Y and autonomous investment increases by
    200, by how much will consumption increase?
    A) 180
    B) 200
    C) 1,800
    D) 2,000
    E) 2,100

Answer 21

C) 1,800

Question 22

22. The reason that an increase in autonomous spending leads to an even greater increase in equilibrium level of output is that
    A) as firms increase output to meet demand, income increases, and this induces more consumption spending
    B) the multiplier increases with an increase in autonomous spending
    C) prices rise with increased output and this raises nominal GDP
    D) people save less as their income increases
    E) there is unwanted inventory accumulation, leading firms to lower prices and encouraging increased consumer spending

Answer 22

A) as firms increase output to meet demand, income increases, and this induces more consumption spending

Question 23

23.	Assume a simple model with no government or foreign sector. If an increase in autonomous investment of 100 leads to an increase in consumption of 300, the size of the expenditure multiplier is  
A)	0.75
B)	1.33
C)	3.00
D)	4.00
E) 	5.00

Answer 23

D) 4.00

Question 24

24. Generally speaking, the effect on income resulting from a change in investment spending is greater if
    A) the average propensity to consume is smaller
    B) the marginal propensity to consume is smaller
    C) the marginal propensity to save is smaller
    D) the marginal propensity to save is larger
    E) the average propensity to save is larger

Answer 24

C) the marginal propensity to save is smaller

Question 25

25. The fluctuations in the income level that result from changes in investment spending
    A) tend to be larger with a larger mpc
    B. tend to be larger if the income tax rate (t) is larger
    C. tend to be larger with a larger mps
    D) tend to be smaller if the apc is smaller
    E) depend only on the magnitude of the changes in investment spending but not on the size of the mpc

Answer 25

A) tend to be larger with a larger mpc

Question 26

26. A decrease in the income tax rate would imply the following:
    A) a decrease in saving
    B) a decrease in government spending
    C) a decrease in government transfer payments
    D) an increase in the expenditure multiplier
    E) all of the above

Answer 26

D) an increase in the expenditure multiplier

Question 27

27.	Assume a model with no foreign sector, no income taxation, and a consumption function defined as C = 400 + (0.75)YD. If government transfer payments decrease by 200, then 
A) 	income will decrease by 600
B)  	income will decrease by 800
C)  income will increase by 800
D) 		income will increase by 200
E)  income will increase by 150

Answer 27

A) income will decrease by 600

Question 28

28. Which of the following will NOT happen if the income tax rate (t) is increased?
    A) the expenditure multiplier and consumption will both decrease
    B) disposable income, saving, and consumption will all decrease
    C) consumption and income both will decrease, but saving will increase
    D) the full-employment budget surplus will increase
    E) autonomous spending will stay the same but national income will decrease

Answer 28

C) consumption and income both will decrease, but saving will increase

Question 29

29. An increase in government spending will
    A) not affect aggregate demand unless it is debt-financed
    B) not affect aggregate demand if it is financed by a tax increase of equal magnitude
    C) decrease aggregate demand if it is financed by a tax increase of equal magnitude
    D) stimulate aggregate demand by less than a tax decrease of equal magnitude
    E) none of the above

Answer 29

E) none of the above

Question 30

30. 	If total autonomous spending is Ao = 800, the marginal propensity to save is mps = 0.2, and the marginal tax rate is t = 0.25, what is the level of equilibrium income? 
A)  	800
B)  	1,000
C)  	2,000
D)  	3,200
E)  	4,000

Answer 30

C) 2,000

Question 31

31. 	If the consumption function is defined as C = 800 + (0.75)YD, the marginal income tax rate is t = 0.5, and autonomous investment decreases by 50, then the budget surplus will
A)  	remain unaffected
B)  	decrease by 100
C)  	decrease by 80
D)  	decrease by 40
E)  	decrease by 10

Answer 31

D) decrease by 40

Question 32

32. 	If the savings function is S = - 400 + (0.25)YD, the marginal income tax rate is t = 0.2, and the equilibrium level of income increases by 1,000, by how much will consumption change?
A)  	250
B)  	400
C)  	600
D)  	750
E)  	800

Answer 32

C) 600

Question 33

33.	33.	Assume the consumption function is of the form C = 200 + (0.75)YD and the income tax rate is t = 0.2. What would be the effect of an increase in government transfers of 200 ?
A)  	an increase in income of 800
B)  	an increase in income of 500
C)  	an increase in income of 375
D)  	an increase in income of 300
E)  	an increase in income of 125

Answer 33

C) an increase in income of 375

Question 34

34.	In a model with income taxes, an increase in autonomous imports will
A)  	increase the budget deficit
B)  	increase aggregate demand
C)  	not affect saving 
D)  	increase consumption
E)  	decrease the trade deficit

Answer 34

A) increase the budget deficit

Question 35

35. 	Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3. What change in government purchases would lead to an increase in national income of 500?
A) 		50
B)	100
C)	200
D)	300
E) 	500

Answer 35

C) 200

Question 36

36. Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3. If autonomous saving decreases by 300, which of the following is true?
    A) total consumption will increase by 300
    B) national income will increase by 500
    C) disposable income will increase by 750
    D) the budget surplus will increase by 250
    E) the budget surplus will be unaffected

Answer 36

D) the budget surplus will increase by 250

Question 37

37. Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3. If government transfer payments decrease by 200, which of the following is true?
    A) national income will decrease by 450
    B) income tax revenues will decrease by 150
    C) the budget surplus will increase by 50
    D) all of the above
    E) only A) and B)

Answer 37

D) all of the above

Question 38

38.	Assume that the savings function is of the form S = - 100 + (0.2)YD and the marginal income tax rate is t = 0.25. What would be the effect on the equilibrium level of output if autonomous consumption changes by Co = - 50?
A)  	a decrease in output of 400
B)  	a decrease in output of 250
C)  	a decrease in output of 200
D)  	a decrease in output of 125
E)  	a decrease in output of 100

Answer 38

D) a decrease in output of 125

Question 39

39.	If the savings function is of the form S = - 200 + (0.1)YD and the marginal income tax rate is t = 0.2, an increase in income of 200 will increase consumption by
A)	180
B) 	144
C) 	80
D)	72
E) 	20

Answer 39

B) 144

Question 40

40. Assume a model with an income tax rate of t = 0.25 and a marginal propensity to consume of c = 0.8. What could cause the level of equilibrium income to decrease by 1,000?
    A) a decrease in autonomous net exports of 400
    B) a decrease in autonomous saving of 200
    C) a decrease in government purchases of 250
    D) a decrease in government transfer payments of 500
    E) an increase in autonomous investment of 500

Answer 40

A) a decrease in autonomous net exports of 400

Question 41

41. A decrease in the income tax rate (t) will
    A) increase the full-employment budget surplus
    B) increase the size of the expenditure multiplier
    C) increase disposable income and autonomous spending
    D) increase consumption but decrease saving
    E) none of the above

Answer 41

B) increase the size of the expenditure multiplier

Question 42

42. 	Assume a model where marginal propensity to save is 0.2, the marginal propensity to import is 0.1 and the marginal income tax rate is 0.25. What is the size of the expenditure multiplier?
A)	10
B) 	5
C) 	4
D)	2.5
E)	2

Answer 42

E) 2

Question 43

43. Assume a model with income taxes in which imports increase proportionally to national income. Which of the following is FALSE?
    A) the expenditure multiplier will increase with an increase in the marginal propensity to import
    B. the expenditure multiplier will increase with a decrease in the marginal propensity to save
    C. the expenditure multiplier will decrease with an increase in the marginal propensity to save
    D) the expenditure multiplier will decrease with an increase in the marginal income tax rate
    E) the expenditure multiplier will decrease with an increase in the marginal propensity to import

Answer 43

A) the expenditure multiplier will increase with an increase in the marginal propensity to import

Question 44

44. In 2009, the U.S. federal budget deficit was
    A) about $540 billion or roughly 3 percent of GDP
    B) about $820 billion or roughly 4 percent of GDP
    C) about $1.1 trillion or roughly 8 percent of GDP
    D) about $1.4 trillion or roughly 10 percent of GDP
    E) about $12.5 trillion and only slightly lower than GDP

Answer 44

D) about $1.4 trillion or roughly 10 percent of GDP

Question 45

45. The full-employment budget surplus increases if
    A) government transfer payments decrease
    B) welfare spending increases
    C) defense spending increases
    D) the economy goes into a recession
    E) the economy goes into a boom

Answer 45

A) government transfer payments decrease

Question 46

46. Assume the savings function is defined as S = - 200 + (0.25)YD and the marginal income tax rate is t = 0.5. If autonomous investment increased by 50, then the full-employment budget surplus would
A)  	not be affected
B)  	increase by 10
C)  	increase by 40
D)  	increase by 80
E)  	increase by 100

Answer 46

A) not be affected

Question 47

47. 	A decrease in the full-employment budget surplus will
A)  	increase national income
B)  	increase saving
C)  	increase consumption
D)  	all of the above
E)  	none of the above

Answer 47

D) all of the above

Question 48

48. In a model with income taxes, if net exports decrease, which of the following is FALSE?
    A) the budget deficit will not be affected
    B) the budget deficit will increase
    C) disposable income will decrease
    D) saving will decrease
    E) income will decrease by more than net exports

Answer 48

A) the budget deficit will not be affected

Question 49

49. In a model with income taxes, assume that autonomous investment decreases. Which of the following will be TRUE?
    A) the full-employment budget surplus will decrease
    B) the actual budget surplus will decrease
    C) the cyclical component of the budget surplus will decrease
    D) the actual budget surplus will not be affected
    E) both B) and C)

Answer 49

E) both B) and C)

B) the actual budget surplus will decrease
C) the cyclical component of the budget surplus will decrease

Question 50

50. If the full-employment budget surplus is positive but the actual budget surplus is negative, what can we conclude?
    A) nothing
    B) that saving exceeds investment
    C) that the economy is in a boom
    D) that fiscal policy is too restrictive
    E) that fiscal policy is too expansionary

Answer 50

D) that fiscal policy is too restrictive