Question 1

If Tanner believes that his income will soon rise, he will be more inclined to purchase something he wants and go into debt.

Accepted Answer

If Tanner believes his income will rise, he may feel more confident in his ability to repay the debt and may prioritize the present satisfaction of purchasing something he wants over the potential future financial consequences.

Question 2

(Table: Consumption and Savings) Based on the table, the marginal propensity to consume is _____ and the average propensity to consume _____. 
A) 0.5; varies with the level of income
B) $5,000; is $5,000
C) $10,000; is $35,000
D) 2; varies with the level of income

Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption divided by the change in income. From the table, the increase in consumption from an increase in income of $10,000 is $5,000, therefore the MPC is 0.5. The average propensity to consume (APC) is total consumption divided by total income. From the table, the total consumption is $35,000 and the total income is $50,000, therefore the APC is 0.7. However, the question asks specifically for the APC at a given income level, which varies and cannot be determined solely from the table.

Question 3

According to the simple Keynesian model, which statement is NOT correct?
A) MPC + MPS = 1
B) APC + MPS = 1
C) APC + APS = 1
D) Y = C + S

Accepted Answer

According to the simple Keynesian model, the correct equation is APC + APS = 1, not APC + MPS = 1. APC stands for average propensity to consume and APS stands for average propensity to save.

Question 4

Activities that remove spending from the economy are called
A) negative spending.
B) withdrawals.
C) injections.
D) reverse spending.

Accepted Answer

Activities that remove spending from the economy are known as withdrawals, as they withdraw money from the circular flow of income and expenditure. Examples of withdrawals include savings, taxes, and imports. Injections, on the other hand, add spending to the economy, and include government spending, investment, and exports. Negative spending and reverse spending are not commonly used terms to refer to the concept of withdrawals.

Question 5

The reason business investment is sensitive to interest rates is that
A) interest rates are a lagging indicator, so they signal to firms the state of the economy.
B) most funds used for investment are borrowed, so firms incur an interest charge.
C) interest rates indicate how aggressive government policy is about fighting recessions.
D) firms charge interest on any investment they make.

Accepted Answer

Business investment typically involves borrowing funds, which means firms must pay interest charges on these loans. Therefore, when interest rates are high, it becomes more expensive for businesses to borrow money for investment, and this can impact their investment decisions. Conversely, when interest rates are low, borrowing becomes cheaper, and firms may be more likely to invest in additional production capacity or other projects.

Question 6

Equilibrium in the full Keynesian model requires that
A) all injections (I + G + X) must equal all withdrawals (S + T + M).
B) income exceed expenditures.
C) expenditures exceed income.
D) the government budget be balanced.

Accepted Answer

Equilibrium in the full Keynesian model requires that total injections (I + G + X) equal total withdrawals (S + T + M) in order for there to be no excess demand or supply in the economy. This is known as the Keynesian Cross model, and it is a simplified representation of the full Keynesian model. Option B and C describe a situation where the economy is either in surplus or deficit, which would cause imbalances and adjustments in the economy. Option D is not necessarily relevant to the equilibrium condition in the Keynesian model.

Question 7

Suppose the government is mandated by law to have a balanced budget. The marginal propensity to consume is 0.9. The government raises both taxes and spending by $10 billion. According to the notion of the balanced budget multiplier
A) income falls by $10 billion, because taxes reduce spending by $100 billion and government spending raises total spending by $90 billion.
B) income rises by $10 billion, because taxes reduce spending by $90 billion and government spending raises total spending by $100 billion.
C) there is no effect on the economy, because the tax and spending increases cancel each other out.
D) income rises by $.9 billion, because taxes reduce spending by $8.1 billion and government spending raises total spending by $9 billion.

Accepted Answer

The balanced budget multiplier suggests that if the government increases taxes and spending by the same amount, total income will increase by that amount. This is because the multiplier effect of government spending is larger than the reduction in consumption due to the tax increase, given the marginal propensity to consume is less than 1.

Question 8

Between 1929 and 1933, government spending _____ and net exports _____.
A) declined; stayed the same
B) declined; declined
C) stayed the same; declined
D) stayed the same; stayed the same

Accepted Answer

The answer of Between 1929 and 1933, government spending _____...

Question 9

Changes in technology are a determinant of investment.

Accepted Answer

Changes in technology often create new investment opportunities and make existing investments obsolete, which affects the decisions of investors. Therefore, technology is a determinant of investment.

Question 10

John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income.
A) aggregate spending
B) investment
C) interest rates
D) property rights

Accepted Answer

Keynes believed that aggregate spending was the primary driver of short-term economic fluctuations and that government intervention was necessary to stabilize the economy. He argued that if aggregate spending was insufficient to support full employment, then government policies such as fiscal stimulus or monetary policy could be employed to boost demand and output.

Question 11

In the Keynesian model, the principal determinant of saving is
A) interest rates.
B) income.
C) tax rates.
D) investment.

Accepted Answer

In the Keynesian model, the principal determinant of saving is income. As income increases, people are able to save more since they have more disposable income. Conversely, when income decreases, people save less. Interest rates, tax rates, and investment all play a role in determining saving behavior in the Keynesian model, but they are not the primary determinant.

Question 12

If income is $35,000 and the average propensity to save is 0.46, what is consumption?
A) $15,500
B) $16,100
C) $18,900
D) $19,500

Accepted Answer

The average propensity to save (APS) is the fraction of total income that is saved. If the APS is 0.46 on an income of $35,000, then savings amount to $35,000 * 0.46 = $16,100. Consumption is the remainder of income after savings, so it's $35,000 - $16,100 = $18,900.

Question 13

Assume the economy is currently experiencing aggregate expenditures greater than aggregate income. The economy will move toward equilibrium as businesses begin to produce _____, leading to _____ employment and _____ income.
A) more; less; less
B) less; less; less
C) less; more; more
D) more; more; more

Accepted Answer

When aggregate expenditures are greater than aggregate income, businesses will increase production to meet the higher demand, leading to more employment and higher income, moving the economy toward equilibrium.

Question 14

The formula for the simple spending multiplier is
A) 1/(1 - MPC).
B) MPC + MPS.
C) 1/MPC.
D) 1/(MPC + MPS).

Accepted Answer

The simple spending multiplier is calculated as 1/(1 - MPC), where MPC stands for the marginal propensity to consume. This formula is used to estimate the total impact on the economy of a change in spending.

Question 15

When the consumption schedule lies above the 45-degree reference line, consumption spending is _____ than income and saving is _____.
A) greater; positive
B) less; positive
C) greater; negative
D) less; negative

Accepted Answer

When the consumption schedule lies above the 45-degree reference line, it means that consumption spending is higher than income, which results in negative saving. Option A and B both have positive saving, which is not the case when consumption is higher than income. Option D has the correct direction for saving, but it implies that consumption is less than income, which is the opposite of what is being described in the question.

Question 16

Decreases in government spending _____ equilibrium income, and increases in taxes _____ equilibrium income.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

Decreases in government spending will decrease aggregate demand, causing a decrease in equilibrium income. Increases in taxes will decrease disposable income and consumer spending, also leading to a decrease in equilibrium income.

Question 17

During the Y2K scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?
A) $0
B) $1,000
C) $4,000
D) It increased by $4,000.

Accepted Answer

Rufus reducing his spending by $1,000 means that he is saving that $1,000, which he buried in his backyard. The marginal propensity to consume is the proportion of an increase in income that is spent on consumption. If Rufus has a marginal propensity to consume of 0.75, this means he will spend 75% of any additional income he receives.

In this case, by reducing his spending by $1,000, Rufus is reducing the total amount of consumption in the economy by $1,000. Given his marginal propensity to consume, this reduction in consumption will lead to a reduction in income of four times the initial reduction in spending. Therefore the reduction in national income is:

$1,000 x 4 = $4,000

Therefore, the correct answer is (C) $4,000.

Question 18

Investment is defined as spending by
A) investors in the stock market.
B) investors in the bond market.
C) business that adds to the productive capacity of the economy.
D) households on home maintenance.

Accepted Answer

Investment is the spending on business that adds to the productive capacity of the economy. The other options given (A, B, and D) may also involve investment, but they do not fully encompass the definition of investment.

Question 19

Firms decide how much to invest by comparing the rate of return on their projects with the
A) total profit.
B) productivity of the workers assigned to the projects.
C) interest rate.
D) before-tax rate of return.

Accepted Answer

Firms compare the rate of return on their projects with the interest rate to decide how much to invest, as they want to ensure that the return on their investment is greater than the cost of borrowing the funds to finance the project. A higher interest rate may discourage firms from investing, while a lower interest rate may encourage them to invest more.

Question 20

Tax cuts directed at younger people and people with lower incomes are designed to put money into the hands of those most likely to spend it, thus creating a positive ripple effect.

Accepted Answer

Tax cuts directed at younger people and people with lower incomes are designed to put money into the hands of those most likely to spend it, which can boost consumer spending and overall economic activity. This is often referred to as the "multiplier effect" because each dollar of additional spending has a ripple effect throughout the economy, creating jobs and generating more income for others.

Quiz 8: Aggregate Expenditures

If Tanner believes that his income will soon rise, he will be more inclined to purchase something he wants and go into debt.

(Table: Consumption and Savings) Based on the table, the marginal propensity to consume is _ and the average propensity to consume _.

According to the simple Keynesian model, which statement is NOT correct?

Activities that remove spending from the economy are called

The reason business investment is sensitive to interest rates is that

Equilibrium in the full Keynesian model requires that

Suppose the government is mandated by law to have a balanced budget. The marginal propensity to consume is 0.9. The government raises both taxes and spending by $10 billion. According to the notion of the balanced budget multiplier

Between 1929 and 1933, government spending _ and net exports _.

Changes in technology are a determinant of investment.

John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income.

In the Keynesian model, the principal determinant of saving is

If income is $35,000 and the average propensity to save is 0.46, what is consumption?

Assume the economy is currently experiencing aggregate expenditures greater than aggregate income. The economy will move toward equilibrium as businesses begin to produce ___, leading to _ employment and ___ income.

The formula for the simple spending multiplier is

When the consumption schedule lies above the 45-degree reference line, consumption spending is _ than income and saving is _.

Decreases in government spending _ equilibrium income, and increases in taxes _ equilibrium income.

During the Y2K scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?

Investment is defined as spending by

Firms decide how much to invest by comparing the rate of return on their projects with the

Tax cuts directed at younger people and people with lower incomes are designed to put money into the hands of those most likely to spend it, thus creating a positive ripple effect.