Question 1

________ is defined as national income + transfers - taxes.
A)Gross private domestic investment
B)GDP
C)Personal income
D)Disposable income

Accepted Answer

Disposable income is defined as national income (which includes GDP) plus transfers (such as social security benefits) minus taxes. Gross private domestic investment and personal income are not included in this definition.

Question 2

If the marginal propensity to consume is 0.6,the marginal propensity to save is
A)0.4.
B)0.6.
C)1.
D)1.5.

Accepted Answer

The marginal propensity to consume (MPC) and marginal propensity to save (MPS) always add up to 1, since all income is either consumed or saved. Thus, if MPC is 0.6, then MPS must be 0.4 (1 - 0.6 = 0.4). Therefore, the correct answer is A.

Question 3

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

Accepted Answer

When we graph consumption as a function of national income rather than as a function of disposable income, the slope of this consumption function is the MPC (marginal propensity to consume). Disposable income is equal to national income minus taxes, so using disposable income as the independent variable in the consumption function would include the effect of taxes on consumption decisions. Therefore, when we use national income as the independent variable, we get the MPC as the slope of the consumption function.

Question 4

Table 12-4
 
-Refer to Table 12-4.Given the consumption schedule in the table above,the marginal propensity to consume is
A)0.5.
B)0.6.
C)0.75.
D)0.8.

Accepted Answer

Marginal propensity to consume (MPC) is the change in consumer spending that occurs when disposable income changes. In this case, the MPC can be calculated as the change in consumption divided by the change in disposable income. Looking at the table, a $100 increase in disposable income leads to a $60 increase in consumption. Therefore, MPC = 60/100 = 0.6.

Question 5

If firms are more pessimistic and believe that future profits will fall and remain weak 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 and then fall.

Accepted Answer

If firms are pessimistic about future profits, they will likely cut back on investment spending as a way to preserve their cash flow and profitability in the short term. This reduction in investment spending can also contribute to a slowing of economic growth as businesses reduce their spending on capital goods and equipment.

Question 6

________ 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;consumer

Accepted Answer

Consumer spending tends to follow a more predictable trend because it is driven largely by everyday household needs and preferences, whereas investment spending is influenced by a variety of factors, including economic conditions, market trends, and investor sentiments. This makes investment spending more subject to fluctuations and uncertainty over time. Meanwhile, government spending is typically driven by policy decisions and other macroeconomic factors, which may also be subject to volatility in response to unpredictable events and changes in political leadership.

Question 7

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

Accepted Answer

National income is the sum of all the incomes earned in a country during a given period of time. It includes consumption expenditures, savings, and taxes. Therefore, the formula for national income is National income = Consumption + Savings + Taxes.

Question 8

If the MPC is 0.95,then a $10 million increase in disposable income will
A)increase consumption by $200 million.
B)increase consumption by $9.5 million.
C)decrease consumption by $105 million.
D)increase consumption by $950 million.

Accepted Answer

The MPC (marginal propensity to consume) is the fraction of additional disposable income that is consumed. In this case, the MPC is 0.95, so for every additional dollar of disposable income, 95 cents will be consumed. Therefore, for a $10 million increase in disposable income, consumption will increase by $9.5 million (0.95 x $10 million).

Question 9

If disposable income increases by $500 million,and consumption increases by $400 million,then the marginal propensity to consume is
A)1.25.
B)0.8.
C)0.6.
D)0.4.

Accepted Answer

Marginal Propensity to Consume (MPC) = Change in Consumption / Change in Disposable Income
MPC = 400/500 = 0.8

Question 10

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.

Accepted Answer

The consumption function is typically defined as C = a + bYd, where C is consumption spending, a is autonomous spending, b is the marginal propensity to consume out of disposable income, and Yd is disposable income. Therefore, the consumption function describes the relationship between consumption spending and disposable income.

Question 11

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;government spending

Accepted Answer

During a recession, many firms experience reduced profits, which in turn reduces their cash flow and investment spending. This is because consumers tend to cut back on their spending during a recession, leading to decreased demand for goods and services, and ultimately resulting in reduced profits for firms. This reduction in profits can also make it harder for firms to obtain financing, further limiting investment spending.

Question 12

Table 12-4
 
-Refer to Table 12-4.Given the consumption schedule in the table above,the marginal propensity to save is
A)0.3.
B)0.4.
C)0.5.
D)0.6.

Accepted Answer

The answer of Table 12-4
 
-Refer to Table 12-4.Given the...

Question 13

If national income increases by $75 million and consumption increases by $15 million,the marginal propensity to consume is
A)5.
B)0.75.
C)0.20.
D)0.15.

Accepted Answer

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income, which is $15 million / $75 million = 0.20.

Question 14

The change in consumption divided by the change in disposable income is equal to
A)the slope of the consumption function.
B)aggregate expenditure.
C)household saving.
D)real GDP.

Accepted Answer

The change in consumption divided by the change in disposable income is known as the marginal propensity to consume (MPC) and represents the slope of the consumption function.

Question 15

If the marginal propensity to save is 0.1,then a $10 million decrease in disposable income will
A)increase consumption by $9 million.
B)increase consumption by $1 million.
C)decrease consumption by $9 million.
D)decrease consumption by $1 million.

Accepted Answer

The answer of If the marginal propensity to save is...

Question 16

The marginal propensity to consume is defined as
A)consumption divided by disposable income.
B)disposable income divided by consumption.
C)the change in consumption divided by the change in disposable income.
D)the change in disposable income divided by the change in consumption.

Accepted Answer

The marginal propensity to consume (MPC) is defined as the change in consumption divided by the change in disposable income. It represents the fraction of each additional dollar of disposable income that is spent on consumption.

Question 17

Investment spending increases during ________,and decreases during ________.
A)an expansion;a recession
B)a recession;an expansion
C)a recession;a depression
D)a deflation;an inflation

Accepted Answer

During an expansion, businesses are more optimistic about future profits and are therefore more willing to invest in new projects and expansions. During a recession, businesses are more hesitant to invest due to uncertainty about the future and decreased demand for goods and services.

Question 18

The sum of the marginal propensity to consume and the marginal propensity to save is always equal to
A)zero.
B)0.5.
C)1.
D)100.

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that is spent on consumption, while the marginal propensity to save (MPS) is the fraction of additional income that is saved. Since income can either be consumed or saved, the sum of the MPC and MPS must equal 1 (or 100% in percentage terms). Therefore, C is the correct choice.

Question 19

Investment spending will decrease when
A)the interest rate falls.
B)the corporate income tax decreases.
C)business cash flow decreases.
D)firms become more optimistic about earning future profits.

Accepted Answer

Investment spending will decrease when business cash flow decreases. This is because firms are less able to invest in new projects or expand their operations when they have less cash on hand. The other choices are unlikely to decrease investment spending. A fall in interest rates makes it cheaper for firms to borrow money and invest, so it could actually increase investment spending. A decrease in the corporate income tax could increase after-tax profits, providing more funds for investment. If firms become more optimistic about earning future profits, they may be more likely to invest in new projects.

Question 20

If disposable income falls by $40 billion and consumption falls by $30 billion,then the slope of the consumption function is
A)1.33.
B)0.75.
C)0.4.
D)0.3.

Accepted Answer

The slope of the consumption function is given by the ratio of the change in consumption to the change in disposable income.

slope of consumption function = ΔC/ΔY

Given ΔY = -$40 billion and ΔC = -$30 billion,

slope of consumption function = -$30 billion / -$40 billion = 0.75

Quiz 12: Aggregate Expenditure and Output in the Short Run

________ is defined as national income + transfers - taxes.

If the marginal propensity to consume is 0.6,the marginal propensity to save is

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

Table 12-4 -Refer to Table 12-4.Given the consumption schedule in the table above,the marginal propensity to consume is

If firms are more pessimistic and believe that future profits will fall and remain weak for the next few years,then

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

Which of the following is true?

If the MPC is 0.95,then a $10 million increase in disposable income will

If disposable income increases by $500 million,and consumption increases by $400 million,then the marginal propensity to consume is

The consumption function describes the relationship between

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

Table 12-4 -Refer to Table 12-4.Given the consumption schedule in the table above,the marginal propensity to save is

If national income increases by $75 million and consumption increases by $15 million,the marginal propensity to consume is

The change in consumption divided by the change in disposable income is equal to

If the marginal propensity to save is 0.1,then a $10 million decrease in disposable income will

The marginal propensity to consume is defined as

Investment spending increases during ,and decreases during .

The sum of the marginal propensity to consume and the marginal propensity to save is always equal to

Investment spending will decrease when

If disposable income falls by $40 billion and consumption falls by $30 billion,then the slope of the consumption function is