CH-9a Aggregate Expenditure and Aggregate Demand – Macroeconomics: A Contemporary Introduction : Exam Guide

Chapter 9a—Aggregate Expenditure and Aggregate Demand 1. The most important determinant of a household's consumption spending is A. its disposable income B. its total wealth C. the number of persons in the household D. its net wealth E. the ratio of wage to nonwage income the household earns 2. The primary determinant of saving is the interest rate. A. True B. False 3. The primary determinant of saving is income. A. True B. False 4. The primary determinant of consumption spending is the price level. A. True B. False 5. Historically, consumption spending in the United States has A. increased as a percentage of income B. remained approximately constant as a percentage of income C. decreased as a percentage of income D. remained constant over time E. increased more than income 6. As disposable income increases, consumption spending A. increases by the same amount B. decreases by the same amount C. increases by less than the increase in disposable income D. decreases by less than the increase in disposable income E. does not change at all 7. Autonomous consumption expenditures are A. identical to induced consumption B. determined primarily by transfer payments C. not influenced by disposable income D. increasing at a decreasing rate E. increasing at an increasing rate 8. The difference between consumption spending and disposable income A. decreases as income increases B. stays proportionally the same as income increases C. decreases if the interest rate increases D. equals the amount of taxes paid E. equals saving 9. Saving in our simple model A. varies inversely with income B. is determined primarily by the interest rate C. is positive when a person spends less than her income D. can never be negative because it is a stock E. can never be negative because it is a flow 10. Out of disposable income, households A. consume and save B. consume and invest C. save and invest D. consume, save, and pay taxes E. consume, save, pay taxes, and make transfer payments 11. Which is true of disposable income? A. it excludes transfer payments B. the portion of income is used solely for consumption C. it is that part of aggregate income that is taken in taxes by government D. all of disposable income contributes directly to aggregate expenditure E. disposable income equals consumption expenditures plus saving 12. Disposable income is equal to consumption A. plus investment B. plus taxes C. plus saving D. minus taxes E. minus saving 13. Disposable income is A. the major determinant of consumption spending B. total salary and wage income minus taxes and transfer payments C. the income households earn before taxes D. aggregate income plus taxes minus transfer payments E. a measure of income that is equivalent to GDP 14. If consumption is greater than income, saving must be negative. A. True B. False 15. Exhibit 9-1 Given the data in Exhibit 9-1, the level of saving at a disposable income of $1,200 is A. $80 B. $240 C. $950 D. $1,200 E. $1,300 16. Exhibit 9-1 Given the data in Exhibit 9-1, the level of saving decreases as disposable income increases. A. True B. False 17. Which must be true when consumption exceeds income? A. the consumption function shifts upward B. the consumption function shifts downward C. aggregate expenditures equal real GDP D. saving must be negative E. aggregate expenditures will fall 18. Sarah moves from Upperland, which has no taxes or transfer payments, to Lowerland, where she is hit with taxes of $2,000 and receives transfer payments of $3,000. She earns the same wage in both countries, but in Lowerland her disposable income is A. $1,000 higher B. $1,000 lower C. $5,000 higher D. $2,000 lower E. $3,000 higher 19. An increase in the interest rate would shift the consumption function upward. A. True B. False 20. If disposable income decreases, there is typically a decrease in consumption spending. A. True B. False 21. If disposable income increases, consumption spending increases and saving decreases. A. True B. False 22. As disposable income increases, saving decreases. A. True B. False 23. Induced consumption spending A. represents consumption that is independent of income B. plus saving equals total consumption spending C. is positively related to disposable income D. is equal to autonomous consumption spending in equilibrium E. is the difference between autonomous consumption spending and disposable income 24. Induced saving A. is that part of saving that is inversely related to the interest rate B. plus autonomous saving equals disposable income C. is that portion of saving that is directly related to income D. is less than disposable income at every level of income E. equals autonomous saving at every income level 25. As disposable income increases, A. consumption and saving both increase B. consumption increases and saving decreases C. consumption and saving both decrease D. consumption decreases but saving increases E. saving increases, but we cannot predict what happens to consumption 26. The consumption function assumes that A. only disposable income affects consumption B. only the price level affects consumption C. many factors other than disposable income affect consumption, and each is allowed to vary along the consumption function D. factors other than disposable income affect consumption, but those are held constant along the consumption function E. only consumer expectations affect consumption 27. The consumption function relates consumption spending to A. the price level B. interest rates C. disposable income D. expectations about the price level E. household wealth 28. Which of the following is true of the relationship between disposable income and consumption? A. Disposable income and consumption are both dependent variables. B. Disposable income and consumption are both independent variables. C. Disposable income is the dependent variable and consumption is the independent variable. D. Consumption is the dependent variable and disposable income is the independent variable. E. Neither is dependent nor independent since they are related by the equation DI = C + S. 29. A simple statement of the consumption behavior suggested in our model is that A. all income earned from wages is spent B. total income must be equal to wages plus profits C. social values and customs are the primary determinants of consumption spending D. spending increases by less than income E. people spend more and save more as their disposable income increases 30. Consumption spending depends mainly on the level of A. national income B. disposable income C. personal income D. personal income taxes E. imports 31. At the equilibrium level of real GDP, the MPC equals 1. A. True B. False 32. The marginal propensity to consume is the fraction of a change in income that is saved. A. True B. False 33. The marginal propensity to save is the fraction of a change in income that is saved. A. True B. False 34. If the MPC < 1 and a household's disposable income increases by $2,000, the household's consumption will A. increase by less than $2,000 B. increase by $2,000 C. decrease if the family was wealthy before the income change D. remain the same unless the change in income significantly affects the household's wealth E. remain the same 35. The MPC is a relationship between A. a change in consumption and a change in income B. a change in consumption and a change in saving C. changes in consumption and changes in saving D. the ratio of income to consumption at any given level of income E. the total level of consumption and the total level of saving 36. If a household's income rises from $46,000 to $46,700 and its consumption spending rises from $35,800 to $36,400, then its A. marginal propensity to consume is 0.86 B. marginal propensity to consume is 0.99 C. marginal propensity to consume is 0.98 D. marginal propensity to save is 0.01 E. marginal propensity to save is 0.86 37. If a household's income rises from $20,000 to $22,000 and its consumption spending rises from $19,000 to $20,500, then its A. marginal propensity to save is 0.70 B. marginal propensity to save is 0.02 C. marginal propensity to consume is 0.93 D. marginal propensity to consume is 0.95 E. marginal propensity to consume is 0.75 38. If a household's income falls from $20,000 to $17,000 and its consumption spending falls from $18,000 to $15,000, then its A. marginal propensity to consume is -0.67 B. marginal propensity to consume is 0.88 C. marginal propensity to consume is 0.20 D. marginal propensity to save is zero E. marginal propensity to save is 0.12 39. If a household's income falls from $26,000 to $24,000 and its consumption spending falls from $25,000 to $23,500, then its A. marginal propensity to consume is 0.98 B. marginal propensity to consume is 1.33 C. marginal propensity to consume is 0.94 D. marginal propensity to save is 0.02 E. marginal propensity to save is 0.25 40. If a household's income falls from $26,000 to $24,000 and its saving falls from $1,000 to $500, then its A. marginal propensity to consume is 0.98 B. marginal propensity to consume is 1.33 C. marginal propensity to consume is 0.75 D. marginal propensity to save is 0.02 E. marginal propensity to save is 0.4 41. Suppose that when disposable income rises from $3 trillion to $3.2 trillion, consumption rises from $2.5 trillion to $2.6 trillion. What is the marginal propensity to consume? A. 0.1 B. 0.2 C. 0.5 D. 0.8 E. 0.9 42. Suppose that when disposable income rises from $3 trillion to $3.2 trillion, consumption rises from $2.5 trillion to $2.6 trillion. What is the marginal propensity to save? A. 0.1 B. 0.2 C. 0.5 D. 0.8 E. 0.9 43. Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion, consumption rises from $5.0 trillion to $5.6 trillion. What is the marginal propensity to save? A. 0.25 B. 0.33 C. 0.75 D. 0.67 E. 0.07 44. Suppose that when disposable income rises from $5.2 trillion to $6.0 trillion, consumption rises from $5.0 trillion to $5.6 trillion. What is the marginal propensity to consume? A. 0.25 B. 0.33 C. 0.75 D. 0.67 E. 0.07 45. The marginal propensity to consume A. is the proportion of disposable income consumed B. is the reciprocal of the ratio of disposable income to saving C. is the change in consumption relative to a change in disposable income D. minus the marginal propensity to save must equal 1 E. is greater than 1 at all levels of income 46. Exhibit 9-2 In Exhibit 9-2, the marginal propensity to consume equals A. 140 B. 1.00 C. 1.43 D. 0.43 E. 0.70 47. Exhibit 9-2 In Exhibit 9-2, the marginal propensity to save equals A. 60 B. 0 C. 0.43 D. 0.57 E. 0.30 48. Exhibit 9-2 We can tell from the data in Exhibit 9-2 that planned investment is autonomous because A. actual investment is constant at each level of income B. it does not vary as consumption changes C. it does not vary as income changes D. it does not vary as the actual investment changes E. it does not vary as the price level changes 49. If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion, then consumption spending will rise by A. $ 6 billion B. $14 billion C. $20 billion D. $28 billion E. $67 billion 50. If every time disposable income increases by $5 billion, consumption increases by $4 billion and saving increases by $1 billion, the MPC and MPS are, respectively, A. 1/4, 1/2 B. 1/2, 1/2 C. 1, 0 D. 4/5, 1/5 E. the answer is indeterminate from the information given 51. If autonomous net taxes increase by $10 trillion and the marginal propensity to consume is 0.8, consumption initially will A. increase by $50 trillion B. decrease by $10 trillion C. decrease by $8 trillion D. increase by $10 trillion E. decrease by $50 trillion 52. The marginal propensity to consume is defined as the A. fraction of consumption that is spent on goods, both durable and nondurable B. fraction of a change in income that is spent on consumption C. fraction of a change in income that is spent on investment D. average amount of consumption at different levels of income E. average amount of consumption at a given level of income 53. The slope of the consumption function equals the marginal propensity to consume. A. True B. False 54. The inverse of the slope of the consumption function equals the marginal propensity to save. A. True B. False 55. The marginal propensity to consume measures the change in consumption divided by the change in income. A. True B. False 56. An increase in the MPC will cause the consumption function to become steeper (rotate upwards). A. True B. False 57. The fraction of an increase in income that is saved is referred to as the A. marginal propensity to save B. average propensity to save C. marginal propensity to consume D. average propensity to consume E. saving-consumption ratio (i.e., saving divided by consumption spending) 58. The slope of the consumption function equals the A. MPC B. MPS C. APC D. APS E. ratio of the APC to the APS (i.e., APC divided by APS) 59. If income increases by $100 and the MPC is 3/4 (0.75), then consumption increases by A. $25 B. $66.66 C. $50 D. $33.33 E. $75 60. If income increases by $100 and $75 of the increase is spent (consumed), the MPS equals A. 1/4 B. 1/2 C. 3/4 D. 4/5 E. 1 61. If income increases by $100 and the MPS is 1/4, then the additional amount saved equals A. $50 B. $75 C. $25 D. $100 E. $33.33 62. If income increases by $100 and consumption increases by $75, the slope of the consumption function equals A. 1/4 B. 1/5 C. 1/2 D. 3/4 E. 3/5 63. The MPC plus the MPS equals A. 0.5 B. the multiplier C. the slope of the consumption function D. 1.0 E. the slope of the saving function 64. The slope of the consumption function shows how A. consumption changes over time B. consumption changes as household size changes C. consumption changes as the price level changes D. income changes as the level of consumption changes E. consumption changes as the level of income changes 65. If income rises from $6.0 trillion to $6.4 trillion, consumption rises from $5.5 trillion to $5.8 trillion. What is the slope of the aggregate expenditure line? (Assume there is neither international trade nor any government.) A. 0.25 B. 0.33 C. 0.67 D. 0.75 E. 1.33 66. Exhibit 9-3 In Exhibit 9-3, the MPC is equal to A. 0.25 B. 0.33 C. 0.67 D. 0.75 E. 1.33 67. Exhibit 9-3 In Exhibit 9-3, the MPS is equal to A. 0.25 B. 0.33 C. 0.67 D. 0.75 E. 1.33 68. Exhibit 9-3 In Exhibit 9-3, when real disposable income is equal to $6 billion, saving is equal to A. 0 B. $1 billion C. $2 billion D. $3 billion E. $4 billion 69. Exhibit 9-3 In Exhibit 9-3, when real disposable income is equal to $3 billion, saving is equal to A. $-2 billion B. $-1 billion C. 0 D. $1 billion E. $2 billion 70. Exhibit 9-3 In Exhibit 9-3, the slope of the consumption function is equal to A. .33 B. .5 C. .67 D. .7 E. .9 71. Changes in the price level will not shift the consumption function. A. True B. False 72. An increase in the interest rate will increase consumption spending. A. True B. False 73. A decrease in the price level decreases net wealth and increases consumption spending. A. True B. False 74. Expectations that the price level will rise in the future cause consumption to rise today. A. True B. False 75. Along the aggregate consumption function, an increase in income will A. cause autonomous consumption to rise B. shift the consumption function upward C. cause a corresponding downward shift of the saving function D. cause movement along the given consumption function E. shift the consumption function downward 76. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when there is an increase in real disposable income. This would produce a movement from A to A. B B. D C. E D. F E. H 77. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when there is a decrease in real disposable income. This would produce a movement from A to A. B B. D C. E D. F E. H 78. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when the stock market crashes and the value of people’s portfolios plummets. This would produce a movement from A to A. B B. D C. E D. F E. H 79. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when the housing market takes off increasing housing values. This would produce a movement from A to A. B B. D C. F D. G E. H 80. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when the price level rises. This would produce a movement from A to A. B B. C C. D D. F E. H 81. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when interest rates go up. This would produce a movement from A to A. B B. C C. D D. F E. H 82. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when interest rates go up. This would produce a movement from A to A. B B. D C. E D. F E. H 83. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when interest rates go down. This would produce a movement from A to A. B B. D C. F D. H E. I 84. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when people’s expectations about the future become increasingly optimistic. This would produce a movement from A to A. B B. D C. F D. H E. I 85. Exhibit 9-4 Consider an economy with a consumption function like C1 in Exhibit 9-4. The economy is currently operating at A when people’s expectations about the future become increasingly pessimistic. This would produce a movement from A to A. B B. C C. D D. F E. H 86. An upward shift of the consumption function might be caused by A. an increase in disposable income B. a decrease in disposable income C. a decrease in the price level D. a decrease in household wealth E. an increase in the interest rate 87. Which of the following would not shift the consumption function? A. a change in household wealth B. a change in the price level C. a change in household disposable income D. a change in the level of unemployment E. a change in the rate of interest 88. A change in which of the following is least likely to cause a shift of the consumption function? A. the saving rate B. consumer expectations about future prices C. household wealth D. investment spending E. the interest rate 89. What is the effect on the consumption function of a decrease in disposable income? A. The consumption function shifts upward. B. The consumption function shifts downward. C. There is movement upward along the consumption function. D. There is movement downward along the consumption function. E. The consumption function becomes flatter. 90. What is the effect on the consumption function of an increase in disposable income? A. The consumption function shifts upward. B. The consumption function shifts downward. C. There is movement upward along the consumption function. D. There is movement downward along the consumption function. E. The consumption function becomes steeper. 91. An increase in wealth will A. increase consumption and saving at each level of income B. increase saving and decrease consumption at each level of income C. decrease consumption and saving at each level of income D. increase consumption and decrease saving at each level of income E. have no effect on consumption, since consumption is a function of income 92. A decrease in net wealth will A. increase consumption and saving at each level of income B. increase saving and decrease consumption at each level of income C. decrease consumption and saving at each level of income D. increase consumption and decrease saving at each level of income E. have no effect on consumption, since consumption is a function of income 93. An increase in wealth will A. shift the consumption function upward B. make the consumption function steeper C. cause a movement upward along the consumption function D. cause a movement downward along the consumption function E. make the consumption function flatter 94. A decrease in wealth will A. shift the consumption function downward B. make the consumption function steeper C. cause a movement upward along the consumption function D. cause a movement downward along the consumption function E. make the consumption function flatter 95. An increase in the price level will A. increase consumption because goods are more expensive B. make the consumption function steeper C. increase consumption because wages will increase D. decrease consumption because falling interest rates make it cheaper to borrow E. decrease consumption because the value of net wealth has decreased 96. A decrease in the price level will A. decrease consumption because the price of goods is lower B. make the consumption function flatter C. increase consumption because prices are wages, so people have more income D. increase consumption because the value of wealth has increased E. decrease consumption because rising interest rates make it more expensive to borrow 97. An increase in the price level will A. make the consumption function steeper B. shift the consumption function downward C. result in a movement upward along the consumption function D. result in a movement downward along the consumption function E. make the consumption function flatter 98. A decrease in the price level will A. shift the consumption function upward B. make the consumption function steeper C. result in a movement upward along the consumption function D. result in a movement downward along the consumption function E. have no effect on the consumption function 99. Expectations that the price level will increase in the future will A. shift the current consumption function upward B. make the current consumption function steeper C. make the current consumption function flatter D. result in a movement downward along the current consumption function E. have no effect on the current consumption function 100. Expectations that the price level will decrease in the future will A. make the current consumption function flatter B. shift the current consumption function downward C. result in a movement upward along the current consumption function D. result in a movement downward along the current consumption function E. make the current consumption function steeper 101. Expectations that disposable income will increase in the future will A. shift the current consumption function up B. shift the current consumption function down C. result in a movement upward along the current consumption function D. make the current consumption function flatter E. make the current consumption function steeper 102. Expectations that disposable income will decrease in the future will A. shift the current consumption function upward B. shift the current consumption function downward C. make the current consumption function flatter D. result in a movement downward along the current consumption function E. have no effect on the current consumption function 103. Which of the following would shift the consumption function upward? A. a decrease in disposable income B. an increase in disposable income C. an increase in the interest rate D. expectations of lower future prices E. an increase in net wealth 104. Which of the following would not shift the consumption function? A. a change in net wealth B. a change in interest rates C. a change in the price level D. a change in expectations E. a change in disposable income 105. A drop in stock prices will __________ net wealth and __________ consumption. A. reduce; increase B. reduce; decrease C. reduce; not change D. increase; increase E. increase; decrease 106. An rise in stock prices will __________ net wealth and __________ consumption. A. reduce; increase B. reduce; decrease C. reduce; not change D. increase; increase E. increase; decrease 107. Which of the following would shift the consumption function downward? A. a decrease in stock prices B. a lower interest rate C. a lower price level D. lower disposable income E. expectations of higher future prices 108. Which of the following will not shift the consumption function upward? A. a drop in the price level B. an increase in net wealth C. a drop in the interest rate D. expectations of lower future income E. expectations of higher prices in the future 109. Which of the following would not increase the Gallego family's real net wealth? A. an increase in the value of their home B. an increase in the value of Mrs. Gallego's pension fund C. an increase in the amount that the Gallegos have saved in the bank D. a rise in the price level E. a decrease in the size of the mortgage payments on the Gallego's home 110. A household that expects a decrease in disposable income in the future will A. increase its current consumption spending B. decrease its current consumption spending C. maintain its current consumption spending D. increase its current consumption spending, then increase spending when income falls E. decrease its current consumption spending, then increase spending when income falls 111. The non-income determinants of consumption include all of the following except one. Which is the exception? A. net wealth B. the profitability of new investment C. the price level D. expectations E. the interest rate 112. Which of the following would not shift the consumption function downward? A. a decline in business profits B. a decline in wealth C. an increase in the price level D. an increase in the interest rate E. a more pessimistic outlook about the future 113. Which of the following would not shift the consumption function upwards? A. an increase in wealth B. an increase in disposable income C. a decrease in the price level D. a decline in the interest rate E. a more optimistic outlook about the future 114. Purchases of existing commodities, such as gold and precious gems, are considered investment spending by economists. A. True B. False 115. Which of the following is not investment spending? A. an increase in business inventories B. the extensive renovation of an old factory building C. the purchase of stock in Potomac Electric Company D. the construction of a new apartment building E. the purchase of a new silo for a farm 116. If a new pizza oven costs $50,000 and is expected to generate $10,000 in revenue next year, its expected rate of return is 20 percent. A. True B. False 117. The opportunity cost of investing in capital is the interest rate. A. True B. False 118. Economists assume that the fundamental motive of investors is A. to maximize profit B. to maximize income C. to maximize the firm's growth D. to promote economic growth for the economy as a whole E. the desire to save 119. A grocery store manager must decide whether to buy a rug cleaner to rent to customers. The cleaner costs $800. It is expected to yield $200 in income per year. What is the expected annual rate of return from the cleaner? A. $600 B. $200 C. 400 percent D. 75 percent E. 25 percent 120. A grocery store manager must decide whether to buy four rug cleaners to rent to customers. The manager estimates that the first would yield $200 a year, the second $150, the third $75, and the fourth $20. If the interest rate is 12 percent and each rug cleaner costs $500, how many should the manager buy? A. none B. one C. two D. three E. four 121. A grocery store manager has $600 in cash with which to buy a rug cleaner. Rental income from the cleaner would be about $75 per year. The interest rate is 11 percent. Should the manager buy the machine? A. Yes, since the rate of return is greater than the rate of interest. B. Yes, since the manager does not have to borrow the money the interest rate is irrelevant. C. No, since the yield of $75 is less than the interest cost of 11 percent. D. No, since the rate of return is less than the interest rate. E. Yes, since the return of $75 is greater than 11 percent. 122. Dennis spends $400 on a snowblower, expecting to earn $80 per year for each of the next five years clearing out his neighbors' driveways. The rate of return he expects on this investment is A. 500 percent per year B. 100 percent per year C. 80 percent per year D. 25 percent per year E. 20 percent per year 123. The partners in the Wonderwords word processing firm spend $12,000 on computers, hoping to earn an additional $1,000 per year with them. If the partners could earn 7 percent interest on a bank deposit they should A. put the $12,000 in the bank B. put $6,000 in the bank and spend only $6,000 on computers C. buy the computers because the rate of return on the computers is positive D. buy the computers only if they do not have to borrow the funds to buy the computers E. buy the computers because the rate of return on the computers exceeds 7 percent 124. The owners of the Morning Glory Coffee Shop are considering spending $3,000 on a new cappuccino machine. They expect to increase revenues by $200 per year if they do. The current interest rate is 8 percent. Which of the following is true? A. The rate of return on their investment is $200. B. The rate of return on their investment is 5 percent. C. The owners should not buy the machine. D. The owners should buy the cappuccino machine if they have the $3,000 in cash, but not if they have to borrow the money. E. The owners should buy the cappuccino machine regardless of whether they have the $3,000 in cash or not. 125. A firm's level of investment is tied to the interest rate A. only when the firm has to borrow funds to buy capital B. only when the firm has to borrow funds to buy stocks C. only when the firm already has the funds and could lend them D. because the interest rate represents the opportunity cost of investing in capital E. because investments are always made with borrowed funds 126. The interest rate is important to the investment decision A. only when funds must be borrowed B. only when firms have the money on hand C. regardless of whether funds must be borrowed or firms have the funds on hand D. only when the firm has funds on hand and is ready to lend them E. only when the firm is purchasing new equipment rather than a new building 127. An increase in the interest rate, other things equal, would A. have no effect on investment B. increase the amount invested since the rate of return would be lower C. increase the amount invested because income would rise D. reduce the amount invested because the opportunity costs of investing would be higher E. increase the amount invested because the rate of return would be higher 128. Which of the following best represents the opportunity cost of investing in capital? A. the actual revenue stream generated by the investment B. the expected revenue stream generated by the investment C. the profit that investment is expected to generate D. the market interest rate E. the purchase price of the plant and equipment 129. Mr. Green is considering four possible investment opportunities, each of which would cost him $5,000. He expects annual returns on these investments of $600, $500, $400, and $300. If the interest rate is 7 percent, how many of these opportunities should Mr. Green undertake? A. one B. two C. three D. four E. none 130. Which of the following would be most likely to cause a rightward shift of the investment demand curve? A. an increase in income B. a decline in the market interest rate C. an improvement in business expectations D. an increase in the market rate of interest E. a decrease in income 131. New investment will be undertaken up to the point where the expected rate of return equals A. zero B. 10 percent C. 5 percent D. the market interest rate E. the inflation rate 132. If the market interest rate equals 8 percent, the opportunity cost of the last new investment project undertaken would be approximately equal to A. zero percent B. 4 percent C. infinity D. 8 percent E. 16 percent 133. Which of the following would tend to shift the investment function upward? A. higher interest rates B. gloomy sales expectations C. a cut in corporate taxes that raises after-tax profits D. a decrease in the marginal propensity to consume E. an increase in aggregate income 134. Less of society's resources will be channeled into capital when A. interest rates are high B. households decide to save more of their income C. businesspeople have optimistic expectations about the future D. aggregate income increases E. the nation is running a trade deficit 135. More of society's resources will be channeled into capital when A. interest rates are high B. households decide to save less of their income C. businesspeople have optimistic expectations about the future D. corporate income taxes increase E. aggregate income decreases 136. The main determinants of investment are the interest rate and expected profit. A. True B. False 137. When economists say investment is autonomous, they mean that investment is independent of the level of saving. A. True B. False 138. If investment is autonomous, an increase in income will shift the investment function upward. A. True B. False 139. The current level of investment depends on the current level of income. A. True B. False 140. Actual investment will be larger than planned investment if there is an unintended inventory accumulation. A. True B. False 141. On a graph showing investment along the vertical axis and income along the horizontal axis, A. the investment line slopes downward B. the investment line would shift upward if income increased C. the investment line would shift downward if the interest rate increased D. investment is the independent variable and income is the dependent variable E. the investment line would shift downward if income increased 142. If investment is autonomous, which of the following is least likely to have an effect on the level of investment? A. a change in the rate of interest B. a change in the level of income C. a change in the level of optimism or pessimism about the economy as a whole D. a change in the expected profitability of investment projects E. a change in the rate of inflation 143. When economists say investment is autonomous, they mean that A. investment is independent of the level of optimism about economic conditions B. the forces motivating investment are not economic C. investment is independent of the level of income D. investment is independent of the level of saving E. investment is independent of the rate of interest 144. Suppose that autonomous investment level is $100 billion per year. If income in the economy falls, A. the level of investment will increase B. the level of investment will decrease C. the quantity of investment demanded will increase D. the quantity of investment demanded will decrease E. investment spending will not change 145. If autonomous investment were measured on the vertical axis and disposable income were measured on the horizontal axis, what would the graph look like? A. a horizontal line B. a vertical line C. an upward-sloping line D. a downward-sloping line E. the line would first slope upward and then slope downward 146. Which of the following is true of the autonomous investment and saving functions? A. The autonomous investment function has a positive slope; the saving function is a horizontal line. B. The autonomous investment function has a negative slope; the saving function has a positive slope. C. The autonomous investment function is a horizontal line; the saving function has a positive slope. D. Both the autonomous investment function and the saving function slope upward. E. Both the autonomous investment function and the saving function slope downward. 147. An upward shift of the investment function (i.e., the one that relates investment spending to income) could be caused by A. an increase in income B. a decrease in the interest rate C. an increase in the interest rate D. more pessimistic business expectations E. an increase in business taxes 148. Consumption A. makes up about two-thirds of GDP in a typical year B. exceeds GDP in years when net exports are negative C. is much more volatile than investment, especially during recession years D. is much more volatile than investment, especially during expansion years E. has declined as a fraction of GDP over time 149. Investment A. is about as volatile as consumption, except during recession years B. has averaged about one-sixth of GDP over the past decade C. is about as volatile as GDP, except during recession years D. is the largest component of aggregate spending E. has averaged about two-thirds of GDP over the past decade 150. Fluctuations in consumption A. are noticeably smaller during recessions than during expansions B. are roughly similar to fluctuations in investment C. are roughly similar to fluctuations in GDP D. are closely followed by economic forecasters because those fluctuations often signal that a recession will occur E. account for most of the variability in GDP 151. During recession years, A. investment declines while consumption increases B. investment increases while consumption declines C. investment is constant while consumption declines D. investment declines much faster than GDP declines E. consumption declines much faster than GDP declines 152. Fluctuations in investment A. account for almost all of the variability in GDP during expansions B. account for almost all of the variability in GDP C. account for almost all of the variability in GDP during recessions D. are larger during expansions than during recessions E. account for more of the variability in GDP than consumption does 153. Which of the following is the most volatile component of GDP? A. investment (I) B. consumption (C) C. saving (S) D. government purchases (G) E. net exports (X - M) 154. All of the following, except one, are characteristics of the government purchase function. Which is the exception? A. government purchases are autonomous with respect to current income B. government purchases exclude transfer payments C. government purchases are directly related to government income D. government purchases are decided by public officials E. government purchases have increased over the past 40 years 155. A household's net wealth is the value of A. its current income minus the value of all its liabilities B. all its assets minus their tax liabilities C. all its assets minus the value of all its liabilities D. all its assets minus its income E. its current income minus its tax liabilities 156. Which of the following is true regarding net taxes? A. The level of net taxes varies directly with the level of transfer payments. B. The level of net taxes varies inversely with the level of taxes. C. Net taxes must always be less than zero. D. Net taxes increase when income tax rates are slashed. E. Net taxes rise when welfare benefits are cut. 157. Net taxes are A. taxes plus transfer payments B. taxes minus transfer payments C. an injection into the economic system D. consumption after taxes E. government spending minus taxes 158. Exports minus imports equal net exports. A. True B. False 159. An increase in real disposable income will A. shift the autonomous net export function upward B. shift the autonomous net export function downward C. cause a rightward movement along the autonomous net export function D. cause a leftward movement along the autonomous net export function E. show no movement along or shift of the autonomous net export function 160. A decrease in real disposable income will A. shift the autonomous net export function upward B. shift the autonomous net export function downward C. cause a rightward movement along the autonomous net export function D. cause a leftward movement along the autonomous net export function E. show no movement along or shift of the autonomous net export function 161. The amount of U.S. exports purchased by the rest of the world is primarily determined by A. real disposable income in the United States B. real disposable income in other nations C. the real interest rate in other nations D. the real interest rate in the United States E. the government budget deficits in other nations 162. Net exports are A. the value of goods produced in the domestic economy but sold in other countries B. the value of goods produced in other countries but purchased domestically C. the largest component of aggregate expenditure D. the value of imports minus the value of exports E. the value of exports minus the value of imports 163. Net exports A. increase as real domestic income increases B. decrease as real domestic income increases C. are independent of real domestic income D. are always positive E. are always negative 164. As domestic income rises, net exports A. fall, since exports remain the same but imports increase B. rise, since exports remain the same but imports fall C. fall, since exports are lower and imports remain the same D. rise, since exports are higher and imports remain the same E. may either rise or fall, since exports and imports change in opposite directions 165. If incomes in the United States increase, other things equal, then U.S. A. imports increase and exports remain constant B. exports increase and imports decrease C. imports decrease and exports decrease D. imports remain constant and exports increase E. net exports remain constant 166. An increase in incomes in other countries, other things equal, would cause U.S. A. exports to decrease and imports to increase B. exports to increase and imports to increase C. imports to decrease and exports to decrease D. imports to increase and exports would remain unchanged E. imports to remain unchanged and exports to increase 167. The relationship between consumption and income is A. negative and unstable B. positive and unstable C. negative and stable D. positive and stable E. impossible to describe without more data 168. Although consumer spending has averaged about 90 percent of disposable income, in recent years the percentage of disposable income claimed by consumption has A. risen to about 96 percent B. risen to 100 percent C. risen to 99 percent D. fallen to about 76 percent E. risen to about 98 percent 169. Net wealth is a __________ variable. Consumption and income are __________ variables. A. stock, flow B. stock, stock C. stock, flat D. flow, stock E. flow, flow 170. The economy’s investment demand curve shows the inverse relationship between the quantity of investment demanded and the market interest rate, other things held constant. A. True B. False 171. Imagine a macro investment demand curve that shows that, if the market interest rate is 4 percent, the quantity of investment demanded is $500 billion. Then, if the market rate rises to 5 percent, the most likely result is that the quantity of investment demanded A. does not change B. rises to $550 billion C. declines to $450 billion D. rises to $1 trillion E. It is not possible to answer without seeing the actual curve 172. Which of the following is not an example of a government purchase? A. schools and teacher salaries B. Chinese toys to be sold in discount department stores C. aircraft carriers D. interstate highway construction E. All the answers are correct 173. The United States, with only one __________ of the world’s population, accounts for about one __________ of the world’s imports and one __________ of the world’s exports. A. twentieth, sixth, ninth B. sixth, ninth, twentieth C. ninth, twentieth, sixth D. twentieth, ninth, sixth E. ninth, sixth, twentieth Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776