Deck 9: Aggregate Expenditure and Output in the Short Run

Question 1

'Consumption spending' refers to ________ spending on goods and services.

A)household
B)business
C)government
D)foreign

Answer 1

household

Question 2

'Actual investment' spending includes spending by consumers on:

A)durable goods.
B)non-durable goods.
C)new houses.
D)services.

Answer 2

new houses.

Question 3

Which of the following is not one of the four main categories of spending identified by John Maynard Keynes?

A)consumption
B)planned investment
C)government purchases
D)transfer payments

Answer 3

transfer payments

Question 4

At macroeconomic equilibrium, total ________ equals total ________.

A)spending; production
B)investment; inventories
C)consumption; production
D)taxes; transfer payments

Question 5

Consumption spending is $6 million, planned investment spending is $8 million, unplanned investment spending is -$2 million, government purchases are $10 million, and net export spending is $2 million. What is the GDP?

A)$15 million
B)$22 million
C)$25 million
D)$27 million

Question 6

Household spending on goods and services is known as:

A)consumption spending.
B)planned investment spending.
C)government purchases.
D)net exports.

Question 7

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by:

A)investment spending.
B)export spending.
C)government spending.
D)the level of aggregate expenditure.

Question 8

'Investment spending' does not include:

A)spending on consumer durable goods.
B)spending on new capital equipment.
C)family purchases of new houses.
D)changes in inventories.

Question 9

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.

A)total production; total income; real GDP
B)total spending; real GDP; total income
C)total spending; real GDP; the price level
D)total income; real GDP; the price level

Question 10

Macroeconomic equilibrium occurs when:

A)aggregate expenditure = GDP.
B)aggregate expenditure = C + I + G + NX.
C)real GDP = potential GDP.
D)aggregate income = planned inventories.

Question 11

Consumption spending is $6 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is the aggregate expenditure?

A)$15 million
B)$23 million
C)$25 million
D)$26 million

Question 12

If firms find that consumers are purchasing more than expected, which of the following would you expect?

A)Aggregate expenditure will likely be greater than GDP.
B)Aggregate expenditure will likely be less than GDP.
C)The economy will adjust to macroeconomic equilibrium as inventories rise and production and employment rise.
D)The economy will adjust to macroeconomic equilibrium as inventories fall and production and employment rise.

Question 13

Which of the following is not a component of aggregate expenditure?

A)consumption spending
B)planned investment spending
C)actual investment spending
D)government spending

Question 14

When aggregate expenditure is more than GDP, which of the following is true?

A)There was an unplanned decrease in inventories.
B)Firms spent less on capital goods than they anticipated.
C)Households bought fewer new homes than they anticipated.
D)All of the above must be true when aggregate expenditure is more than GDP.

Question 15

Aggregate expenditure includes spending on:

A)C + I + G.
B)C + I + G - NX.
C)C + I + G + NX.
D)C + I + depreciation - NX.

Question 16

Goods that have been produced but not yet sold are referred to as:

A)understocks.
B)inventories.
C)pre-sold goods.
D)capital goods.

Question 17

During the Great Depression, economists first began studying the relationship between:

A)changes in GDP and changes in interest rates.
B)changes in aggregate expenditure and changes in GDP.
C)changes in nominal GDP and changes in real GDP.
D)changes in share prices and changes in price controls.

Question 18

When there is an unplanned decrease in inventories________.

A)actual inventory investment equals planned inventory investment.
B)actual inventory investment is less than planned inventory investment.
C)actual inventory investment is greater than planned inventory investment.
D)a firm experiences much higher sales than expected.

Question 19

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?

A)Inventories will decline and GDP and employment will decline.
B)Inventories will rise and GDP and employment will decline.
C)Inventories will decline and GDP and employment will rise.
D)Inventories will rise and GDP and employment will rise.

Question 20

Consumption is $6 million, planned investment spending is $7 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $24 million, what unplanned changes in inventories occurred?

A)There was an unplanned decrease in inventories equal to $3 million.
B)There was no unplanned change in inventories.
C)There was an unplanned increase in inventories equal to $3 million.
D)There was an unplanned decrease in inventories equal to $19 million.

Question 21

Why do economists care about aggregate expenditure?
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Question 22

A stock market crash which causes share prices to fall should cause:

A)a decrease in consumption spending.
B)an increase in consumption spending.
C)an increase in wealth.
D)no change in consumption spending.

Question 23

An increase in the real interest rate will:

A)cause consumers to spend more and save less.
B)most likely lower consumer purchases of durable goods.
C)most likely lower the reward to savings.
D)most likely lower the cost of borrowing.

Question 24

When aggregate expenditure is more than real GDP, inventories will increase.

Question 25

Household wealth is defined as the value of a household's:

A)assets minus the value of its liabilities.
B)assets plus the value of its liabilities.
C)assets, including money in bank accounts.
D)liabilities.

Question 26

An example of assets that are included in the measure of household wealth would be:

A)shares, bonds and savings accounts.
B)shares, loans owed and savings accounts.
C)shares, bonds and mortgages.
D)shares, credit cards and savings accounts.

Question 27

Aggregate spending in an economy is the sum of consumption spending, investment spending, government purchases and spending on imports.

Question 28

Which is the smallest component of 'aggregate expenditure' in Australia?

A)planned investment expenditures
B)consumption expenditures
C)government expenditures
D)net export expenditures

Question 29

If aggregate expenditure is less than GDP, then inventories rise and real GDP falls.

Question 30

If economists forecast an increase in aggregate expenditure, real GDP will rise.

Question 31

Using the following table, compute aggregate expenditure and identify the macroeconomic equilibrium. The numbers in the table are in billions of dollars.

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Question 32

Are savings and spending on imports included in aggregate expenditure?
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Question 33

Which is the largest component of aggregate expenditure in Australia?

A)planned investment expenditures
B)consumption expenditures
C)government expenditures
D)net export expenditures

Question 34

What is the main reason for changes in GDP in the short run?
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Question 35

What does the aggregate expenditure model depict?
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Question 36

Consumption spending will ________ when disposable income ________ and increase when disposable income increases.

A)increase; increases
B)increase; decreases
C)decrease; decreases
D)remain the same; increases

Question 37

What are inventories? What usually happens to inventories at the beginning of a 'contraction' and what usually happens to inventories at the beginning of an 'expansion'?
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Question 38

An increase in social security payments will increase:

A)consumption spending.
B)investment spending.
C)government spending.
D)export spending.

Question 39

Explain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending is less than production.
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Question 40

An increase in taxes will ________ consumption spending and a decrease in transfer payments will ________ consumption spending.

A)increase; increase
B)decrease; increase
C)increase; decrease
D)decrease; decrease

Question 41

If disposable income increases by $100 million and consumption increases by $80 million, then the marginal propensity to consume is:

A)0)9.
B)0)8.
C)0)75.
D)1)1.

Question 42

If the MPC is 0.95, then a $12 million increase in disposable income will:

A)increase saving by $11.4 million.
B)increase saving by $0.6 million.
C)increase consumption by $6 million.
D)increase consumption by $950 million.

Question 43

Which of the following is true?

A)National income = Consumption + Savings - Taxes
B)National income = Consumption - Savings - Taxes
C)National income = Consumption + Savings + Taxes
D)National income = Consumption - Savings + Taxes

Question 44

The marginal propensity to consume is defined as:

A)consumption divided by disposable income multiplied by 100.
B)disposable income divided by consumption multiplied by 100.
C)the change in consumption divided by the change in disposable income.
D)the change in disposable income divided by the change in consumption.

Question 45

If firms are less optimistic that future profits will rise and remain strong for the next few years, then:

A)investment spending will fall.
B)investment spending will rise.
C)investment spending will remain unaffected.
D)investment spending will rise at first, then fall.

Question 46

Refer to Table 9.1 for the following questions.
Table 9.1

Refer to Table 9.1. The marginal propensity to consume is:

A)0)5.
B)0)6.
C)0)75.
D)0)8.

Question 47

The slope of the consumption function is equal to the change in:

A)consumption divided by the change in disposable income.
B)consumption divided by the change in personal income.
C)disposable income divided by the change in consumption.
D)national income divided by the change in consumption.

Question 48

If the marginal propensity to consume is 0.80, the marginal propensity to save is:

A)0)20.
B)0)15.
C)1)0.
D)1)18.

Question 49

If national income increases by $80 million and consumption increases by $20 million, the marginal propensity to consume is:

A)5)
B)0)25.
C)0)75.
D)0)15.

Question 50

Investment spending ________ during a recession and ________ during an expansion.

A)declines; increases
B)increases; declines
C)increases; increases
D)declines; declines

Question 51

Increases in the price level will:

A)lower consumption because goods and services are less affordable.
B)raise consumption because some goods and services are more affordable.
C)raise consumption because real wealth increases.
D)lower consumption because real wealth decreases.

Question 52

Investment spending will increase when the:

A)interest rate rises.
B)company income tax increases.
C)business cash flow increases.
D)firms become more pessimistic about earning future profits.

Question 53

During a(n)________ many firms experience reduced profits, which reduces ________ and investment spending.

A)expansion; business confidence
B)recession; cash flow
C)expansion; cash flow
D)recession; inventories

Question 54

Which of the following will raise consumer expenditure?

A)an increase in interest rates
B)a general decline in housing prices
C)an increase in expected future income
D)an increase in the price level

Question 55

________ spending follows a smooth trend, whereas ________ spending is more volatile and subject to fluctuations.

A)Consumer; government
B)Consumer; investment
C)Investment; consumer
D)Government; investment

Question 56

The consumption function describes the relationship between:

A)consumption spending and national income.
B)consumption spending and aggregate income.
C)consumption spending and disposable income.
D)consumption spending and personal income.

Question 57

If disposable income falls by $60 billion and consumption falls by $30 billion, then the slope of the consumption function is:

A)1)33.
B)0)5.
C)0)3.
D)0)75.

Question 58

Refer to Table 9.1 for the following questions.
Table 9.1

Refer to Table 9.1. Given the consumption schedule in the table, the marginal propensity to save is:

A)0)3.
B)0)4.
C)0)5.
D)0)6.

Question 59

When we graph consumption as a function of national income rather than as a function of ________, the slope of this consumption function is the ________.

A)disposable income; MPC
B)personal income; MPC
C)disposable income; MPS
D)personal income; MPS

Question 60

'Disposable income' is defined as:

A)national income - transfer payments + taxes.
B)national income + transfer payments + taxes.
C)national income - transfer payments - taxes.
D)national income + transfer payments - taxes.

Question 61

What are the factors that determine consumption expenditure, and which of these factors is the most important?
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Question 62

Explain the relationship between the marginal propensity to consume (MPC)and the aggregate expenditure line.
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Question 63

Real investment tends to follow a smooth upward path over time; however, consumption spending tends to fluctuate significantly according to consumer income levels and spending patterns.

Question 64

Given the following table, fill in the values of the marginal propensity to save (MPS)and the marginal propensity to consume (MPC). Show that the MPC + MPS = 1. The numbers in the table are in billions of dollars.

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Question 65

You review a salesman's income over a five-year period. You note it fluctuates significantly from year-to-year. Yet his consumption of goods and services remains consistently at the same level, year after year. Does this mean that income is not a determinant of consumption, or could something else explain his behaviour?
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Question 66

How will the following affect Australian net exports?
a.Australia experiences a long period of inflation relative to other countries.
b.Australia experiences a recession.
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Question 67

Which of the following leads to a decrease in real GDP?

A)An increase in government spending.
B)An increase in the inflation rate in other countries, relative to the inflation in Australia.
C)An increase in interest rates.
D)Households have increasingly optimistic expectations about future income.

Question 68

What happened to government purchases between 1960 and 2016?

A)they generally fell
B)they generally grew
C)they grew steadily but declined during recessions
D)they fluctuated significantly

Question 69

Throughout most of the 2000s, including 2016, net exports in Australia:

A)grew and then declined.
B)were mostly positive.
C)were mostly negative.
D)increased, as exports rose above imports.

Question 70

An increase in the price level in Australia, ceteris paribus, will reduce imports and increase exports.

Question 71

Given the following table, fill in the values for savings. The numbers in the table are in billions of dollars. Assume there are no taxes.

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Question 72

Australian net export spending falls when the:

A)price level in Australia rises relative to the price level in other countries.
B)economic growth rate of Australian GDP is more rapid than the growth rate of GDP in other countries.
C)value of Australian dollar increases relative to other currencies.
D)inflation rate is higher in Australia relative to other countries.

Question 73

Net exports usually ________ when the Australian economy is in a recession and ________ when the Australian economy is expanding.

A)increase; increase
B)decrease; increase
C)increase; decrease
D)decrease; decrease

Question 74

What is the 'marginal propensity to consume'?
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Question 75

Explain how a stock market crash has the potential to lead to a recession in an economy.
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Question 76

The marginal propensity to consume is the ratio of consumption to disposable income.

Question 77

Which of the following leads to an increase in real GDP?

A)A decrease in government spending.
B)An increase in the inflation rate in other countries, relative to the inflation in Australia.
C)An increase in interest rates.
D)Households have increasingly pessimistic expectations about future income.

Question 78

On the 45° line diagram, the 45° line shows points such that:

A)real income equals real GDP.
B)real aggregate expenditure equals C + I.
C)real aggregate expenditure equals real GDP.
D)real aggregate output equals the quantity produced.

Question 79

If inflation in Australia is lower than inflation in other countries, what will be the effect on net exports for Australia, ceteris paribus?

A)Net exports will rise as Australian exports increase.
B)Net exports will rise as Australian imports decrease.
C)Net exports will decrease as Australian exports decrease.
D)Net exports will decrease as Australian imports decrease.

Question 80

High interest rates cause spending by all households to fall, which reduces aggregate expenditure in the economy.