CHAPTER 9 Macroeconomic Relationships Topic

Question numbers:

Consumption function/APC/MPC 1-39

Saving function/APS/MPS 40-53
Shifts in consumption and saving functions 54-69
Graphs/tables: mixed consumption and saving 70-106
Investment demand 107-145
Multiplier effect 146-181
Consider This 182-183
Last Word 184-185
True-False 186-200
Multiple Choice Questions Consumption function/APC/MPC

Type: A Topic: 1 E: 152 MA: 152 .
The most important determinant of consumer spending is:

A)the level of household debt.
B)the stock of wealth.
C)consumer expectations.
D)the level of income.

Answer: D
Type: D Topic: 1 E: 152 MA: 152
2. The most important determinant of consumption and saving is the:

A)level of bank credit.
B) level of income.
C) interest rate.
D) price level.

Answer: B
Type: A Topic: 1 E: 156 MA: 156
3. If Smith’s disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to:

A)save is three-fifths.
C)consume is three-fifths.
B)consume is one-half.
D)consume is one-sixth.

Answer: C
Type: A Topic: 1 E: 156 MA: 156
4. With an MPS of . 4, the MPC will be:

A)1. 0 minus . 4.
B) . 4 minus 1. 0.
C) the reciprocal of the MPS.
D) . 4.

Answer: A
Type: D Topic: 1 E: 156 MA: 156
5. The MPC can be defined as that fraction of a:

A)change in income that is not spent.
C)given total income that is not consumed.
B)change in income that is spent.
D)given total income that is consumed.

Answer: B
Type: A Topic: 1 E: 154 MA: 154
6. The 45-degree line on a graph relating consumption and income shows:

A)all points where the MPC is constant.
B)all points at which saving and income are equal.
C)all the points at which consumption and income are equal.
D)the amounts households will plan to save at each possible level of income.

Answer: C
Type: A Topic: 1 E: 154 MA: 154
7. As disposable income goes up the:

A)APC falls.
C)volume of consumption declines absolutely.
B)APS falls.
D)volume of investment diminishes.

Answer: A
Type: D Topic: 1 E: 153 MA: 153
8. The consumption schedule shows:

A)that the MPC increases in proportion to GDP.
B)that households consume more when interest rates are low.
C)that consumption depends primarily on the level of business investment.
D)the amounts households plan or intend to consume at various possible levels of aggregate income.

Answer: D
Type: D Topic: 1 E: 153 MA: 153
9. The consumption schedule relates:

A)consumption to the level of disposable income.
C)disposable income to domestic income.
B)saving to the level of disposable income.
D)consumption to saving.

Answer: A
Type: A Topic: 1 E: 153 MA: 153
10. A decline in disposable income:

A)increases consumption by moving upward along a specific consumption schedule.
B)decreases consumption because it shifts the consumption schedule downward.
C)decreases consumption by moving downward along a specific consumption schedule.
D)increases consumption because it shifts the consumption schedule upward.

Answer: C
Type: D Topic: 1 E: 154 MA: 154
11. The APC is calculated as:

A)change in consumption / change in income
C)change in income / change in consumption
B)consumption / income
D)income / consumption

Answer: B
Type: A Topic: 1 E: 153 MA: 153
12. The consumption schedule shows:

A)a direct relationship between aggregate consumption and accumulated wealth.
B)a direct relationship between aggregate consumption and aggregate income.
C)an inverse relationship between aggregate consumption and accumulated financial wealth.
D)an inverse relationship between aggregate consumption and aggregate income.

Answer: B
Type: D Topic: 1 E: 153 MA: 153
13. The APC can be defined as the fraction of a:

A)change in income that is not spent.
B)change in income that is spent.
C)specific level of total income that is not consumed.
D)specific level of total income that is consumed.

Answer: D
Type: G Topic: 1 E: 154-155 MA: 154-155
14. The consumption schedule in the above diagram indicates that:

A)consumers will maximize their satisfaction where the consumption schedule and 45° line intersect.
B)up to a point consumption exceeds income, but then falls below income.
C)the MPC falls as income increases.
D)households consume as much as they earn.

Answer: B
Type: A Topic: 1 E: 154 MA: 154
15. The consumption schedule is drawn on the assumption that as income increases consumption will:

A)be unaffected.
B)increase absolutely, but remain constant as a percentage of income.
C)increase absolutely, but decline as a percentage of income.
D)increase both absolutely and as a percentage of income.

Answer: C
Type: A Topic: 1 E: 154 MA: 154
16. Which of the following is correct?

A)APC + APS = 1.
B) APC + MPS = 1.
C) APS + MPC = 1.
D) APS + MPS = 1.

Answer: A
Type: A Topic: 1 E: 154-156 MA: 161
17. The consumption schedule is such that:

A)both the APC and the MPC increase as income rises.
B)the APC is constant and the MPC declines as income rises.
C)the MPC is constant and the APC declines as income rises.
D)the MPC and APC must be equal at all levels of income.

Answer: C
Type: A Topic: 1 E: 154 MA: 154
18. For all levels of income to the left of the intersection of the 45-degree line and the consumption schedule, the APC is:

A)greater than 100 percent.
B) less than the APS.
C) equal to the MPC.
D) equal to 100 percent.

Answer: A
Type: A Topic: 1 E: 156 MA: 156
19. The consumption and saving schedules reveal that the:

A)MPC is greater than zero, but less than one.
B)MPC and APC are equal at the point where the consumption schedule intersects the 45-degree line.
C)APS is positive at all income levels.
D)MPC is equal to or greater than one at all income levels.

Answer: A
Type: A Topic: 1 E: 156 MA: 156
20. The size of the MPC is assumed to be:

A)less than zero.
B) greater than one.
C) greater than zero, but less than one.
D) two or more.

Answer: C
Type: A Topic: 1 E: 153-154 MA: 153-154
21. As disposable income increases, consumption:

A)and saving both increase.
C)decreases and saving increases.
B)and saving both decrease.
D)increases and saving decreases.

Answer: A
Type: D Topic: 1 E: 154 MA: 154
22. The average propensity to consume indicates the:

A)amount by which income exceeds consumption.
B)relationship between a change in saving and the consequent change in consumption.
C)percentage of total income that will be consumed.
D)percentage of a change in income that will be consumed.

Answer: C
Type: A Topic: 1 E: 153 MA: 153
23. The relationship between consumption and disposable income is such that:

A)an inverse and stable relationship exists between consumption and income.
B)a direct, but very volatile, relationship exists between consumption and income.
C)a direct and relatively stable relationship exists between consumption and income.
D)the two are always equal.

Answer: C
Type: A Topic: 1 E: 156 MA: 156
24. If the MPC is . 8 and disposable income is $200, then

A)consumption and saving cannot be determined from the information given.
B)saving will be $20.
C)personal consumption expenditures will be $80.
D)saving will be $40.

Answer: A
Type: A Topic: 1 E: 156 MA: 156
25. The MPC for an economy is:

A)the slope of the consumption schedule or line.
B)the slope of the savings schedule or line.
C)1 divided by the slope of the consumption schedule or line.
D)1 divided by the slope of the savings schedule or line.

Answer: A
Type: F Topic: 1 E: 158 MA: 158
26. In contrast to investment, consumption is:

A)relatively stable.
B) relatively unstable.
C) measurable.
D) unmeasurable.

Answer: A
Use the following to answer questions 27-28: Advanced analysis) Answer the next question(s) on the basis of the following consumption schedule: C = 20 + . 9Y , where C is consumption and Y is disposable income.
Type: E Topic: 1 E: 156 MA: 156
27. Refer to the above data. The MPC is:

A). 45.
B) . 20.
C) . 50.
D) . 90.

Answer: D
Type: E Topic: 1 E: 156 MA: 156
28. Refer to the above data. At an $800 level of disposable income, the level of saving is:

A)$180.
B) $740.
C) $60.
D) $18.

Answer: C
Type: A Topic: 1 E: 156 MA: 156
29. Which one of the following will cause a movement down along an economy’s consumption schedule?

A)an increase in stock prices
C)an increase in consumer indebtedness
B)a decrease in stock prices
D)a decrease in disposable income

Answer: D
Type: G Topic: 1 E: 156 MA: 156
30. The above diagram shows consumption schedules for economies A and B. We can say that the:

A)MPC is greater in B than in A.
B)APC at any given income level is greater in B than in A.
C)MPS is smaller in B than in A.
D)MPC is greater in A than in B.

Answer: D
Type: A Topic: 1 E: 154 MA: 154
31. At the point where the consumption schedule intersects the 45-degree line:

A)the MPC is 1. 00.
C)saving is equal to consumption.
B)the APC is 1. 0.
D)the economy is in equilibrium.

Answer: B
Type: C Topic: 1 E: 156 MA: 156
32. Holly’s break-even level of income is $10,000 and her MPC is 0. 75. If her actual disposable income is $16,000, her level of:

A)consumption spending will be $14,500.
C)consumption spending will be $13,000.
B)consumption spending will be $15,500.
D)saving will be $2,500.

Answer: A
Type: A Topic: 1 E: 156 MA: 156
33. If Ben’s MPC is . 80, this means that he will:

A)spend eight-tenths of any increase in his disposable income.
B)spend eight-tenths of any level of disposable income.
C)break even when his disposable income is $8,000.
D)save two-tenths of any level of disposable income.

Answer: A
Type: A Topic: 1 E: 154 MA: 154
34. Suppose a family’s consumption exceeds its disposable income. This means that its:

A)MPC is greater than 1.
B) MPS is negative.
C) APC is greater than 1.
D) APS is positive.

Answer: C
Type: E Topic: 1 E: 154 MA: 154
35. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0. 8Y , where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is:

A)$80.
B) $100.
C) $120.
D) $160.

Answer: B
Type: E Topic: 1 E: 156 MA: 156
36. (Advanced analysis) The equation C = 35 + . 75Y , where C is consumption and Y is disposable income, shows that:

A)households will consume three-fourths of whatever level of disposable income they receive.
B)households will consume $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.
C)there is an inverse relationship between disposable income and consumption.
D)households will save $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.

Answer: B
Type: E Topic: 1 E: 156 MA: 156
37. Advanced analysis) If the equation C = 20 + . 6Y , where C is consumption and Y is disposable income, were graphed:

A)the vertical intercept would be +. 6 and the slope would be +20.
B)it would reveal an inverse relationship between consumption and disposable income.
C)the vertical intercept would be negative, but consumption would increase as disposable income rises.
D)the vertical intercept would be +20 and the slope would be +. 6.

Answer: D
Type: A Topic: 1 E: 154 MA: 154
38. One can determine the amount of any level of total income that is consumed by:

A)multiplying total income by the slope of the consumption schedule.
B)multiplying total income by the APC.
C)subtracting the MPS from total income.
D)multiplying total income by the MPC.

Answer: B
Type: C Topic: 1 E: 154, 156 MA: 154, 156
39. Which of the following is correct?

A)MPC + MPS = APC + APS
C)APC + MPC = APS + MPS
B)APC + MPS = APS + MPC
D)APC – APS = MPC – MPS

Answer: A Saving function/APS/MPS
Type: A Topic: 2 E: 154 MA: 154
40. The consumption and saving schedules reveal that:

A)consumption rises, but saving declines, as disposable income rises.
B)saving varies inversely with the profitability of investment.
C)saving varies directly with the level of disposable income.
D)saving is inversely related to the rate of interest.

Answer: C
Type: D Topic: 2 E: 154 MA: 154
41. Dissaving means:

A)the same thing as disinvesting.
B)that households are spending more than their current incomes.
C)that saving and investment are equal.
D)that disposable income is less than zero.

Answer: B
Type: D Topic: 2 E: 154 MA: 154
42. Dissaving occurs where:

A)income exceeds consumption.
C)consumption exceeds income.
B)saving exceeds consumption.
D)saving exceeds income.

Answer: C
Type: A Topic: 2 E: 156 MA: 156
43. Which of the following relations is not correct?

A)1 – MPC = MPS
B) APS + APC = 1
C) MPS = MPC + 1
D) MPC + MPS = 1

Answer: C
Type: A Topic: 2 E: 154 MA: 154
44. The saving schedule is drawn on the assumption that as income increases:

A)saving will decline absolutely and as a percentage of income.
B)saving will increase absolutely, but remain constant as a percentage of income.
C)saving will increase absolutely, but decline as a percentage of income.
D)saving will increase absolutely and as a percentage of income.

Answer: D
Type: A Topic: 2 E: 154 MA: 154
45. At the point where the consumption schedule intersects the 45-degree line:

A)the MPC equals 1.
B) the APC is zero.
C) saving equals income.
D) saving is zero.

Answer: D
Type: A Topic: 2 E: 154 MA: 154
46. The saving schedule is such that as aggregate income increases by a certain amount saving:

A)increases by the same amount as the increase in income.
B)does not change.
C)increases, but by a smaller amount.
D)increases by an even larger amount.

Answer: C
Type: A Topic: 2 E: 156 MA: 156
47. If the consumption schedule is linear, then the:

A)saving schedule will also be linear.
C)MPC will decline as income rises.
B)MPS will decline as income rises.
D)APC will be constant at all levels of income.

Answer: A
Type: A Topic: 2 E: 153 MA: 153
48. Given the consumption schedule, it is possible to graph the relevant saving schedule by:

A)subtracting the MPC from 1 at each level of income.
B)subtracting investment from consumption at each level of GDP.
C)plotting the horizontal differences between the consumption schedule and the 45-degree line.
D)plotting the vertical differences between the consumption schedule and the 45-degree line.

Answer: D
Type: A Topic: 2 E: 154 MA: 154
49. As aggregate income decreases, the APC:

A)and APS will both increase.
C)will increase, but the APS will decrease.
B)will decrease, but the APS will increase.
D)and APS will both decrease.

Answer: C
Type: A Topic: 2 E: 156 MA: 156
50. If the marginal propensity to consume is . 9, then the marginal propensity to save must be:

A)1.
B) . 1.
C) 1. 1.
D) . 9.

Answer: B
Type: A Topic: 2 E: 156 MA: 156
51. The greater is the marginal propensity to consume, the:

A)smaller is the marginal propensity to save.
C)lower is the average propensity to consume.
B)higher is the interest rate.
D)lower is the price level.

Answer: A
Type: A Topic: 2 E: 156 MA: 156
52. If the saving schedule is a straight line, the:

A)MPS must be constant.
C)APC must be constant.
B)APS must be constant.
D)MPC must be rising.

Answer: A
Type: A Topic: 2 E: 154 MA: 154
53. Which one of the following will cause a movement up along an economy’s saving schedule?

A)an increase in household debt outstanding
C)an increase in stock prices
B)an increase in disposable income
D)an increase in interest rates

Answer: B Shifts in consumption and saving functions
Type: D Topic: 3 E: 156-157 MA: 156-157
54. In the late 1990s the U. S. stock market boomed, causing U. S. consumption to rise. Economists refer to this outcome as the:

A)Keynes effect.
B) interest-rate effect.
C) wealth effect.
D) multiplier effect.

Answer: C
Type: A Topic: 3 E: 157 MA: 157
55. The wealth effect is shown graphically as a:

A)shift of the consumption schedule.
B)movement along an existing consumption schedule.
C)shift of the investment schedule.
D)movement along an existing investment schedule.

Answer: A
Use the following to answer questions 56-59:
Type: G Topic: 3 E: 157 MA: 157
56. Refer to the above graph. A movement from b to a along C1 might be caused by a:

A)recession.
B)wealth effect of an increase in stock market prices.
C)decrease in income tax rates.
D)increase in saving.

Answer: A
Type: G Topic: 3 E: 157 MA: 157
57. Refer to the above graph. A shift of the consumption schedule from C1 to C2 might be caused by a:

A)recession.
B)wealth effect of an increase in stock market prices.
C)increase in income tax rates.
D)increase in saving.

Answer: B
Type: G Topic: 3 E: 157 MA: 157
58. Refer to the above graph. A movement from a to b along C1 might be caused by a:

A)recession.
B)wealth effect of an increase in stock market prices.
C)increase in income tax rates.
D)increase in real GDP.

Answer: D
Type: G Topic: 3 E: 157 MA: 157
59. Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be caused by a:

A)increase in real GDP.
B)reverse wealth effect, caused by a decrease in stock market prices.
C)decrease in income tax rates.
D)decrease in saving.

Answer: B
Type: C Topic: 3 E: 157 MA: 157
60. An upward shift of the saving schedule suggests:

A)nothing with respect to changes in the APC and APS.
B)that the APC and APS have both decreased at each GDP level.
C)that the APC and APS have both increased at each GDP level.
D)that the APC has decreased and the APS has increased at each GDP level.

Answer: D
Type: A Topic: 3 E: 157 MA: 157
61. Which of the following will not tend to shift the consumption schedule upward?

A)a currently small stock of durable goods in the possession of consumers
B)the expectation of a future decline in the consumer price index
C)a currently low level of household debt.
D)the expectation of future shortages of essential consumer goods.

Answer: B
Type: A Topic: 3 E: 157 MA: 157
62. If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule:

A)will not shift.
C)will shift downward.
B)may shift either upward or downward.
D)will also shift upward.

Answer: C
Type: A Topic: 3 E: 156 MA: 156
63. Which of the following will not cause the consumption schedule to shift?

A)a sharp increase in the amount of wealth held by households
B)a change in consumer incomes
C)the expectation of a recession
D)a growing expectation that consumer durables will be in short supply

Answer: B
Type: A Topic: 3 E: 157 MA: 157
64. An increase in personal taxes will shift:

A)both the consumption and saving schedules downward.
B)both the consumption and saving schedules upward.
C)the consumption schedule upward and the saving schedule downward.
D)the consumption schedule downward and the saving schedule upward.

Answer: A
Type: A Topic: 3 E: 157 MA: 157
65. If for some reason households become increasingly thrifty, we could show this by:

A)a downshift of the saving schedule.
C)an upshift of the saving schedule.
B)an upshift of the consumption schedule.
D)an increase in the equilibrium GDP.

Answer: C
Type: G Topic: 3 E: 156 MA: 156
66. Suppose the economy’s saving schedule shifts from S1 to S 2 as shown in the above diagram. We can say that its:

A)MPC has increased.
B)MPS has increased.
C)APS has increased at all levels of disposable income.
D)APS has decreased at all levels of disposable income.

Answer: B
Type: C Topic: 3 E: 154 MA: 154
67. If a consumption schedule shifts upward, this necessarily means that the:

A)MPC has increased.
B)MPS has decreased.
C)APC is now higher at each level of disposable income.
D)APC is now lower at each level of disposable income.

Answer: C
Type: A Topic: 3 E: 158 MA: 158
68. Assume the economy’s consumption and saving schedules simultaneously shift downward. This must be the result of:

A)an increase in disposable income.
C)an increase in personal taxes.
B)an increase in household wealth.
D)the expectation of a recession.

Answer: C
Type: G Topic: 3 E: 154 MA: 154
69. Suppose an economy’s consumption schedule shifts from C1 to C2 as shown in the above diagram. We can say that its:

A)MPC has increased but its APC at each income level is unchanged.
B)APC at each income level is increased but its MPC is unchanged.
C)MPC and APC at each income level have both increased.
D)MPC and APC at each income level have both decreased.

Answer: C
Graphs/tables: mixed consumption and saving Use the following to answer questions 70-72:
Type: T Topic: 4 E: 156 MA: 156
70. Refer to the above data. The marginal propensity to consume is:

A). 25.
B) . 75.
C) . 20.
D) . 80.

Answer: D
Type: T Topic: 4 E: 154 MA: 154
71. Refer to the above data. At the $200 level of disposable income:

A)the marginal propensity to save is 2? percent.
C)the average propensity to save is . 20.
B)dissaving is $5.
D)the average propensity to consume is . 80.

Answer: B
Type: T Topic: 4 E: 156 MA: 156
72. Refer to the above data. If disposable income was $325, we would expect consumption to be:

A)$315.
B) $305.
C) $20.
D) $290.

Answer: B
Use the following to answer questions 73-78:
Type: G Topic: 4 E: 154 MA: 154
73. Refer to the above diagram. The average propensity to consume is 1 at point:

A)F.
B) A.
C) D.
D) B.

Answer: B
Type: G Topic: 4 E: 156 MA: 156
74. Refer to the above diagram. The marginal propensity to consume is equal to:

A)AE/0E.
B) CF/CD.
C) CB/AB.
D) CD/CF.

Answer: C
Type: G Topic: 4 E: 154-155 MA: 154-155
75. Refer to the above diagram. At income level F the volume of saving is:

A)BD.
B) AB.
C) CF-BF.
D) CD.

Answer: D
Type: G Topic: 4 E: 154 MA: 154
76. Refer to the above diagram. Consumption will be equal to income at:

A)an income of E.
B) an income of F.
C) point C.
D) point D.

Answer: A
Type: G Topic: 4 E: 154-155 MA: 154-155
77. Refer to the above diagram. The economy is dissaving:

A)in the amount CD.
C)at income level H.
B)at all income levels greater than E.
D)at income level E.

Answer: C
Type: G Topic: 4 E: 156 MA: 156
78. Refer to the above diagram. The marginal propensity to save is:

A)CD/EF.
B) CB/CF.
C) CB/AF.
D) EF/CB.

Answer: A
Use the following to answer questions 79-80:
Type: A Topic: 4 E: 153 MA: 153
79. The above figure suggests that:

A)consumption would be $60 billion even if income were zero.
B)saving is zero at the $120 billion income level.
C)as income increases, consumption decreases as a percentage of income.
D)as income increases, consumption decreases absolutely.

Answer: C
Type: A Topic: 4 E: 154-155 MA: 154-155
80. Refer to the above figure. If the relevant saving schedule were constructed:

A)saving would be minus $20 billion at the zero level of income.
B)aggregate saving would be $60 at the $60 billion level of income.
C)its slope would be 1/2.
D)it would slope downward and to the right

Answer: A
Use the following to answer questions 81-83:
Answer the next question(s) on the basis of the following data for a hypothetical economy.
Type: T Topic: 4 E: 156 MA: 156
81. Refer to the above data. The marginal propensity to consume is:

A). 80.
B) . 75.
C) . 20.
D) . 25.

Answer: A
Type: T Topic: 4 E: 154 MA: 154
82. Refer to the above data. At the $100 level of income, the average propensity to save is:

A). 10.
B) . 20.
C) . 25.
D) . 90.

Answer: A
Type: T Topic: 4 E: 156 MA: 156
83. Refer to the above data. If plotted on a graph, the slope of the saving schedule would be:

A). 80.
B) . 10.
C) . 20.
D) . 15.

Answer: C
Use the following to answer questions 84-88:
Type: G Topic: 4 E: 156 MA: 156
84. Refer to the above diagram. The marginal propensity to save is equal to:

A)CD/0D.
B) 0B/0A.
C) 0D/0D.
D) CD/BD.

Answer: D
Type: G Topic: 4 E: 154 MA: 154
85. Refer to the above diagram. At disposable income level D, the average propensity to save is equal to:

A)CD/BD.
B) CD/D.
C) D/CD.
D) A/B.

Answer: B
Type: G Topic: 4 E: 154-155 MA: 154-155
86. Refer to the above diagram. At disposable income level D, consumption is:

A)equal to CD.
B) equal to D minus CD.
C) equal to CD/D.
D) equal to CD plus BD.

Answer: B
Type: G Topic: 4 E: 154-155 MA: 154-155
87. Refer to the above diagram. Consumption equals disposable income when:

A)disposable income is B.
B) disposable income is D.
C) CD equals A.
D) B equals CD.

Answer: A
Type: A Topic: 4 E: 156-157 MA: 156-157
88. The saving schedule shown in the above diagram would shift downward if, all else equal:

A)the average propensity to save increased at each income level.
B)the marginal propensity to save rose at each income level.
C)consumer wealth rose rapidly because of a significant increase in stock market prices.
D)the real interest rate fell.

Answer: C
Use the following to answer questions 89-96:
Answer the next question(s) on the basis of the following consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars.
Type: T Topic: 4 E: 156 MA: 156
89. Refer to the above data. The marginal propensity to consume in economy (1) is:

A). 5.
B) . 3.
C) . 8.
D) . 7.

Answer: D
Type: T Topic: 4 E: 156 MA: 156
90. Refer to the above data. The marginal propensity to consume:

A)is highest in economy (1).
C)is highest in economy (3).
B)is highest in economy (2).
D)cannot be calculated from the data given.

Answer: C
Type: T Topic: 4 E: 156 MA: 156
91. Refer to the above data. The marginal propensity to save:

A)is highest in economy (1).
C)is highest in economy (3).
B)is highest in economy (2).
D)cannot be determined from the data given.

Answer: A
Type: T Topic: 4 E: 154 MA: 154
92. Refer to the above data. At an income level of $40 billion, the average propensity to consume:

A)is highest in economy (1).
C)is highest in economy (3).
B)is highest in economy (2).
D)cannot be determined from the data given.

Answer: B
Type: T Topic: 4 E: 154 MA: 154
93. Refer to the above data. At an income level of $400 billion, the average propensity to save in economy (2) is:

A). 9125.
B) . 0725.
C) . 0875.
D) . 9305.

Answer: C
Type: T Topic: 4 E: 156 MA: 156
94. (Advanced analysis) Refer to the above data. When plotted on a graph, the vertical intercept of the consumption schedule in economy (3) is _____ and the slope is _____.

A)minus $2; . 9.
B) $2; . 18.
C) $100; . 5.
D) $2; . 9.

Answer: D
Type: T Topic: 4 E: 158 MA: 158
95. Refer to the above data. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the:

A)marginal propensity to consume will remain unchanged in each of the three countries.
B)marginal propensity to consume will decline in each of the three countries.
C)average propensity to save will fall at each level of DI in each of the three countries.
D)marginal propensity to save will rise in each of the three countries.

Answer: A
Type: T Topic: 4 E: 157 MA: 157
96. Refer to the above data. A $2 billion increase in consumption at each level of DI could be caused by:

A)a decrease in consumer wealth.
C)an increase in taxation.
B)new expectations of higher future income.
D)an increase in saving.

Answer: B
Use the following to answer questions 97-100:
Type: G Topic: 4 E: 154 MA: 154
97. Refer to the above diagram. The break-even level of disposable income:

A)is zero.
B) is minus $10.
C) is $100.
D) cannot be determined from the information given.

Answer: C
Type: G Topic: 4 E: 156 MA: 156
98. Refer to the above diagram. The marginal propensity to consume is:

A). 2.
B) . 8.
C) . 4.
D) . 3.

Answer: B
Type: G Topic: 4 E: 156 MA: 156
99. (Advanced analysis) The equation for the above saving schedule is:

A)Yd = -20 + . 8S.
B) Yd = 20 + . 2S.
C) S = -20 + . 2Yd.
D) S = 20 + . 8Yd.

Answer: C
Type: G Topic: 4 E: 154-155 MA: 154-155
100. Refer to the above diagram. The average propensity to consume:

A)is greater than 1 at all levels of disposable income above $100.
B)is greater than 1 at all levels of disposable income below $100.
C)is equal to the average propensity to save.
D)cannot be determined from the information given.

Answer: B
Use the following to answer questions 101-104:
Type: G Topic: 4 E: 154 MA: 154
101. Refer to the above diagram. The break-even level of income is:

A)zero.
B) $150.
C) $60.
D) $120.

Answer: B
Type: G Topic: 4 E: 154 MA: 154
102. Refer to the above diagram. The average propensity to consume is:

A)greater than 1 at all levels of income above $150.
B)greater than 1 at all levels of income below $150.
C)zero.
D). 6.

Answer: B
Type: G Topic: 4 E: 156 MA: 156
103. Refer to the above diagram. The marginal propensity to consume is:

A). 4.
B) . 6.
C) . 5.
D) . 8.

Answer: B
Type: G Topic: 4 E: 156 MA: 156
104. (Advanced analysis) Refer to the above diagram. The equation for the consumption schedule is:

A)C = . 6Y .
B) Y = 60 + . C.
C) C = 60 + . 6Y .
D) C = 60 + . 4Y .

Answer: C
Use the following to answer questions 105-106: (Advanced analysis) Answer the next question(s) on the basis of the following data:
Type: T Topic: 4 E: 156 MA: 156
105. Which of the following equations correctly represents the above data?

A)Yd = 40 + . 6C
B) C = 60 + . 4Yd
C) C = 40 + . 6Yd
D) C = . 6Yd

Answer: C
Type: T Topic: 4 E: 156 MA: 156
106. Which of the following equations represents the saving schedule implicit in the above data?

A)S = C – Yd
B) S = 40 + . 4Yd
C) S = 40 + . 6Yd
D) S = -40 + . Yd

Answer: D
Investment demand
Type: F Topic: 5 E: 160 MA: 160 Status: New
107. The investment demand curve portrays an inverse (negative) relationship between:

A)investment and real GDP.
C)the nominal interest rate and investment.
B)the real interest rate and investment.
D)the price level and investment.

Answer: B
Type: F Topic: 5 E: 160 MA: 160 Status: New
108. The investment demand slopes downward and to the right because lower real interest rates:

A)expand consumer borrowing, making investments more profitable.
B)boost expected rates of returns on investment.
C)enable more investment projects to be undertaken profitably.
D)create tax incentives to invest.

Answer: C
Type: A
Topic: 5 E: 159 MA: 159 Status: New
109. Other things equal, a decrease in the real interest rate will:

A)shift the investment demand curve to the right.
B)shift the investment demand curve to the left.
C)move the economy upward along its existing investment demand curve.
D)move the economy downward along its existing investment demand curve.

Answer: D
Type: A Topic: 5 E: 159 MA: 159
110. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is:

A)80 percent.
B) 8 percent.
C) 2 percent.
D) 20 percent.

Answer: D
Type: A Topic: 5 E: 159 MA: 159
111. Assume a machine which has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is:

A)7. 5 percent.
B) 10 percent.
C) 15 percent.
D) 20 percent.

Answer: C
Type: A Topic: 5 E: 159 MA: 159
112. If the firm in the previous question finds it can borrow funds at an interest rate of 10 percent the firm should:

A)not purchase the machine because the expected rate of return exceeds the interest rate.
B)not purchase the machine because the interest rate exceeds the expected rate of return.
C)purchase the machine because the expected rate of return exceeds the interest rate.
D)purchase the machine because the interest rate exceeds the expected rate of return.

Answer: C
Type: D Topic: 5 E: 159-160 MA: 159-160
113. The relationship between the real interest rate and investment is shown by the:

A)investment demand schedule.
C)saving schedule.
B)consumption of fixed capital schedule.
D)aggregate supply curve.

Answer: A
Type: A Topic: 5 E: 159-160 MA: 159-160
114. Given the expected rate of return on all possible investment opportunities in the economy:

A)an increase in the real rate of interest will reduce the level of investment.
B)a decrease in the real rate of interest will reduce the level of investment.
C)a change in the real interest rate will have no impact on the level of investment.
D)an increase in the real interest rate will increase the level of investment.

Answer: A
Type: A Topic: 5 E: 159-160 MA: 159-160
115. A decline in the real interest rate will:

A)increase the amount of investment spending.
C)shift the investment demand curve to the right.
B)shift the investment schedule downward.
D)shift the investment demand curve to the left.

Answer: A
Type: A Topic: 5 E: 159-160 MA: 159-160
116. The immediate determinants of investment spending are the:

A)expected rate of return on capital goods and the real interest rate.
B)level of saving and the real interest rate.
C)marginal propensity to consume and the real interest rate.
D)interest rate and the expected price level.

Answer: A
Type: A Topic: 5 E: 160 MA: 160
117. The investment demand curve suggests:

A)that changes in the real interest rate will not affect the amount invested.
B)there is an inverse relationship between the real rate of interest and the level of investment spending.
C)that an increase in business taxes will tend to stimulate investment spending.
D)there is a direct relationship between the real rate of interest and the level of investment spending.

Answer: B
Type: T Topic: 5 E: 160 MA: 160
118. Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but that there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. The investment-demand curve for this economy is:
Answer: B
Type: T Topic: 5 E: 160 MA: 160
119. In view of your answer to the previous question, if the real interest rate is 15 percent in this economy, the aggregate amount of investment will be:

A)$25.
B) $20.
C) $15.
D) $10.

Answer: D
Type: C Topic: 5 E: 162 MA: 162
120. If business taxes are reduced and the real interest rate increases:

A)consumption and saving will necessarily increase.
B)the level of investment spending might either increase or decrease.
C)the level of investment spending will necessarily increase.
D)the level of investment spending will necessarily decrease.

Answer: B
Type: A Topic: 5 E: 162 MA: 162
121. Other things equal, a 10 percent decrease in corporate income taxes will:

A)decrease the market price of real capital goods.
B)have no effect on the location of the investment-demand curve.
C)shift the investment-demand curve to the right.
D)shift the investment-demand curve to the left.

Answer: C
Type: A Topic: 5 E: 162 MA: 162
122. The investment demand curve will shift to the right as the result of:

A)the availability of excess production capacity.
B)an increase in business taxes.
C)businesses becoming more optimistic about future business conditions.
D)an increase in the real interest rate.

Answer: C
Type: A Topic: 5 E: 159-160 MA: 159-160
123. Other things equal, the real interest rate and the level of investment are:

A)related only when saving equals planned investment.
B)unrelated.
C)inversely related.
D)directly related.

Answer: C
Use the following to answer questions 124-125:
Answer the next question(s) on the basis of the following table:
Type: T Topic: 5 E: 160 MA: 160
124. The above table reflects a(n):

A)interest rate schedule.
C)investment demand schedule.
B)demand-for-money schedule.
D)profit schedule.

Answer: C
Type: T Topic: 5 E: 160 MA: 160
125. The above schedule indicates that if the real interest rate is 8 percent, then:

A)we cannot tell what volume of investment will be profitable.
B)$30 billion will be both saved and invested.
C)$30 billion of investment will be undertaken.
D)$60 billion of investment will be undertaken.

Answer: C
Type: C Topic: 5 E: 162 MA: 162
126. Other things equal, if the real interest rate falls and business taxes rise:

A)investment will rise until it is equal to saving.
B)we will be uncertain as to the resulting change in investment.
C)we can be certain that investment will rise.
D)we can be certain that investment will fall.

Answer: B
Type: A Topic: 5 E: 162 MA: 162
127. The investment demand curve will shift to the right as a result of:

A)an increase in the excess production capacity available in industry.
B)an increase in business taxes.
C)technological progress.
D)an increase in the acquisition and maintenance cost of capital goods.

Answer: C
Type: A Topic: 5 E: 162 MA: 162
128. The investment demand curve will shift to the left as a result of:

A)an increase in the excess production capacity available in industry.
B)a decrease in business taxes.
C)increased business optimism with respect to future economic conditions.
D)a decrease in labor costs.

Answer: A
Type: A Topic: 5 E: 159 MA: 159
129. If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when:

A)r falls.
B) i is greater than r.
C) r is greater than i.
D) i rises.

Answer: C
Type: A Topic: 5 E: 162 MA: 162
130. A rightward shift of the investment demand curve might be caused by:

A)an increase in the price level.
B)a decline in the real interest rate.
C)an increase in the expected rate of return on investment.
D)an increase in business taxes.

Answer: C
Type: A Topic: 5 E: 159 MA: 159
131. The real interest rate is:

A)the percentage increase in money that the lender receives on a loan.
B)the percentage increase in purchasing power that the lender receives on a loan.
C)also called the after-tax interest rate.
D)usually higher than the nominal interest rate.

Answer: B
Type: A Topic: 5 E: 160 MA: 160
132. When we draw an investment demand curve we hold constant all of the following except:

A)the expected rate of return on the investment.
C)the interest rate.
B)business taxes.
D)the present stock of capital goods.

Answer: C
Type: A Topic: 5 E: 159 MA: 159
133. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:

A)18 percent.
B) 24 percent.
C) 12 percent.
D) 6 percent.

Answer: C
Type: A Topic: 5 E: 159-160 MA: 159-160
134. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:

A)2 percent.
B) zero percent.
C) 10 percent.
D) 22 percent.

Answer: D
Type: A Topic: 5 E: 160 MA: 160
135. A high rate of inflation is likely to cause a:

A)high nominal interest rate.
C)low rate of growth of nominal GDP.
B)low nominal interest rate.
D)decrease in nominal wages.

Answer: A
Type: A Topic: 5 E: 160 MA: 160
136. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

A)more investment will be forthcoming when i exceeds r.
B)less investment will be forthcoming when r rises.
C)r will fall as more investment is undertaken.
D)r will exceed i at all possible levels of investment.

Answer: C
Type: A Topic: 5 E: 159 MA: 159
137. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal:

A)investment will take place until i and r are equal.
B)investment will take place until r exceeds i by the greatest amount.
C)r will rise as more investment is undertaken.
D)i will fall as more investment is undertaken.

Answer: A
Type: G Topic: 5 E: 160 MA: 160
138. Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range. Which of the lines on the above diagram represents these data?

A)A
B) B
C) C
D) D

Answer: B
Use the following to answer questions 139-141:
Answer the next question(s) on the basis of the following information for a private closed economy. Assume that for the entire business sector of the economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.
Type: G Topic: 5 E: 159 MA: 159
139. Refer to the above information. If the real interest rate is 15 percent, what amount of investment will be undertaken?

A)$15
B) $30
C) $45
D) $60

Answer: B
Type: G Topic: 5 E: 159 MA: 159
140. Refer to the above information. If the real interest rate is 5 percent, what amount of investment will be undertaken?

A)$15
B) $30
C) $45
D) $60

Answer: D
Type: G Topic: 5 E: 160 MA: 160
141. Refer to the above information. The expected rate of return curve:

A)shows a direct relationship between the interest rate and investment.
B)is also the investment demand curve.
C)is indeterminant.
D)implies a direct (positive) relationship between the interest rate and the level of GDP.

Answer: B
Use the following to answer questions 142-144:
Type: G Topic: 5 E: 162 MA: 162 Status: New
142. Which of the following would shift the investment demand curve from ID1 to ID2?

A)a lower interest rate
C)a higher interest rate
B)lower expected rates of return on investment
D)higher expected rates of return on investment

Answer: D
Type: G Topic: 5 E: 162 MA: 162 Status: New
143. Which of the following would shift the investment demand curve from ID1 to ID3?

A)a lower interest rate
C)a higher interest rate
B)lower expected rates of return on investment
D)higher expected rates of return on investment

Answer: B
Type: G Topic: 5 E: 160 MA: 160 Status: New
144. Which of the following would increase investment, while leaving an existing investment demand curve, say, ID2, in place?

A)a lower interest rate
C)lower expected returns on investment
B)a higher interest rate
D)higher expected returns on investment

Answer: A
Type: F Topic: 5 E: 162-163 MA: 162-163 Status: New
145. In annual percentage terms, investment spending in the United States is:

A)less variable than real GDP.
C)less variable than the price level.
B)less variable than consumption spending.
D)more variable than real GDP.

Answer: D
Multiplier effect
Type: A Topic: 6 E: 164 MA: 164
146. The multiplier effect means that:

A)consumption is typically several times as large as saving.
B)a change in consumption can cause a larger increase in investment.
C)an increase in investment can cause GDP to change by a larger amount.
D)a decline in the MPC can cause GDP to rise by several times that amount.

Answer: C
Type: E Topic: 6 E: 166 MA: 166
147. The multiplier is:

A)1/MPC.
B) 1/(1 + MPC).
C) 1/MPS.
D) 1/(1 – MPS).

Answer: C
Type: A Topic: 6 E: 164 MA: 164
148. The multiplier is useful in determining the:

A)full-employment unemployment rate.
B)level of business inventories.
C)rate of inflation.
D)change in GDP resulting from a change in spending.

Answer: D
Type: D Topic: 6 E: 164 MA: 164
149. The multiplier is defined as:

A)1 – MPS.
C)change in GDP/initial change in spending.
B)change in GDP ? initial change in spending.
D)change in GDP – initial change in spending.

Answer: C
Use the following to answer questions 150-151:
Type: G Topic: 6 E: 156 MA: 156
150. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the highest marginal propensity to consume?

A)1
B) 2
C) 3
D) 4

Answer: D
Type: G Topic: 6 E: 166 MA: 166
151. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier?

A)1
B) 2
C) 3
D) 4

Answer: D
Type: E Topic: 6 E: 166 MA: 166 1
52. If 100 percent of any change in income is spent, the multiplier will be:

A)equal to the MPC.
B) 1.
C) zero.
D) infinitely large.

Answer: D
Type: E Topic: 6 E: 166 MA: 166
153. The multiplier can be calculated as:

A)1/(MPS + MPC)
B) MPC/MPS
C) 1/(1 – MPC)
D) 1 – MPC = MPS

Answer: C
Type: D Topic: 6 E: 166 MA: 166
154. The multiplier:

A)occurs only in response to a change in the level of investment spending.
B)can be found by taking the reciprocal of the MPS.
C)occurs only when intended investment increases as GDP increases.
D)is measured by the slope of the saving schedule.

Answer: B
Type: A Topic: 6 E: 166 MA: 166
155. The size of the multiplier is equal to the:

A)slope of the consumption schedule.
B)reciprocal of the slope of the consumption schedule.
C)slope of the saving schedule.
D)reciprocal of the slope of the saving schedule.

Answer: D
Type: C Topic: 6 E: 166 MA: 166
156. If the MPS is only half as large as the MPC, the multiplier is:

A)2.
B) 3.
C) 4.
D) 5.

Answer: B
Type: A Topic: 6 E: 166 MA: 166
157. If the MPC is . 70 and gross investment increases by $3 billion, the equilibrium GDP will:

A)increase by $10 billion.
C)decrease by $4. 29 billion.
B)increase by $2. 10 billion.
D)increase by $4. 29 billion.

Answer: A
Type: A Topic: 6 E: 166 MA: 166
158. The numerical value of the multiplier will be smaller the:

A)larger the average propensity to consume.
C)larger the slope of the consumption schedule.
B)larger the slope of the saving schedule.
D)smaller the slope of the saving schedule.

Answer: B
Type: A Topic: 6 E: 165 MA: 165
159. The practical significance of the multiplier is that it:

A)equates the real interest rate and the expected rate of return on investment.
B)magnifies initial changes in spending into larger changes in GDP.
C)keeps inflation within tolerable limits.
D)helps to stabilize the economy.

Answer: B
Type: F Topic: 6 E: 166 MA: 166
160. The multiplier:

A)varies directly with the slope of the investment demand schedule.
B)is unrelated to the slope of the saving schedule.
C)will be greater, the smaller is the slope of the saving schedule.
D)will be greater, the steeper is the slope of the saving schedule.

Answer: C
Type: A Topic: 6 E: 166 MA: 166
161. The increase in income that results from an increase in investment spending would be greater the:

A)smaller the MPS.
B) smaller the APC.
C) larger the MPS.
D) smaller the MPC.

Answer: A
Type: A Topic: 6 E: 164 MA: 164
162. The multiplier effect:

A)reduces the MPC.
B)magnifies changes in spending into larger changes in output and income.
C)promotes stability of the general price level.
D)lessens upswings and downswings in business activity.

Answer: B
Type: E Topic: 6 E: 166 MA: 166
163. If the MPC is . 6, the multiplier will be:

A)4. 0.
B) 6. 0.
C) 2. 5.
D) 1. 67.

Answer: C
Type: C Topic: 6 E: 166 MA: 166
164. Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by:

A)$3 billion.
B) $2/3 billion.
C) $6 billion.
D) $2 billion.

Answer: C
Type: E Topic: 6 E: 166 MA: 166
165. The multiplier is:

A)1/APS.
B) 1/APC.
C) 1/MPC.
D) 1/MPS.

Answer: D
Type: A Topic: 6 E: 164 MA: 164 Status: New
166. The multiplier applies to:

A)investment but not to net exports or government spending.
B)investment, net exports, and government spending.
C)increases in spending but not to decreases in spending.
D)spending by the private sector but not by the public sector.

Answer: B
Type: A Topic: 6 E: 164 MA: 164
167. The multiplier effect indicates that:

A)a decline in the interest rate will cause a proportionately larger increase in investment.
B)a change in spending will change aggregate income by a larger amount.
C)a change in spending will increase aggregate income by the same amount.
D)an increase in total income will generate a larger change in aggregate expenditures.

Answer: B
Use the following to answer questions 168-173:
Answer the next question(s) on the basis of the following table that illustrates the multiplier process.
Type: T Topic: 6 E: 156 MA: 156
168. Refer to the above table. The marginal propensity to consume is:

A). 5.
B) . 75.
C) . 8.
D) . 9.

Answer: C
Type: T Topic: 6 E: 156 MA: 156
169. Refer to the above table. The marginal propensity to save is:

A). 5.
B) . 25.
C) . 2.
D) . 1.

Answer: C
Type: T Topic: 6 E: 156 MA: 156
170. Refer to the above table. The change in income in round two will be:

A)$4.
B) $16.
C) $20.
D) $24.

Answer: B
Type: T Topic: 6 E: 164 MA: 164
171. Refer to the above table. The total change in income resulting from the initial change in investment will be:

A)$100.
B) $20.
C) $80.
D) $200.

Answer: A
Type: T Topic: 6 E: 165 MA: 165
172. Refer to the above table. The total change in consumption resulting from the initial change in investment will be:

A)$100.
B) $96.
C) $180.
D) $80.

Answer: D
Type: T Topic: 6 E: 166 MA: 166
173. Refer to the above table. The multiplier in this economy is:

A)2.
B) 4.
C) 5.
D) 10.

Answer: C
Type: C Topic: 6 E: 164 MA: 164
174. If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is:

A)4.
B) 5.
C) 3. 33.
D) 2. 5.

Answer: B
Type: C Topic: 6 E: 164 MA: 164
175. If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is:

A)2.
B) 3. 33.
C) 5.
D) 10.

Answer: A
Type: C Topic: 6 E: 165 MA: 165
176. If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by:

A)$200 billion.
B) $300 billion.
C) $400 billion.
D) $500 billion.

Answer: C
Type: C Topic: 6 E: 165 MA: 165
177. If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:

A)$2500 billion.
B) $3000 billion.
C) $4000 billion.
D) $5000 billion.

Answer: D
Type: C Topic: 6 E: 166 MA: 166
178. If the marginal propensity to save is 0. 2 in an economy, a $20 billion rise in investment spending will increase:

A)GDP by $120 billion.
C)saving by $25 billion.
B)GDP by $20 billion.
D)consumption by $80 billion.

Answer: D
Type: A Topic: 6 E: 166 MA: 166
179. A $1 billion increase in investment will cause a:

A)(1/MPS) billion increase in GDP.
C)(1 – MPC) billion increase in GDP.
B)(MPS) billion increase in GDP.
D)(MPC – MPS) billion increase in GDP.

Answer: A
Type: F Topic: 6 E: 166-167 MA: 166-167
180. The Council of Economic Advisers has estimated that the actual multiplier for the U. S. economy is approximately:

A)4.
B) 3. 5.
C) 3.
D) 2.

Answer: D
Type: F Topic: 6 E: 166-167 MA: 166-167 Status: New
181. The actual multiplier effect in the U. S. economy is less than the multiplier effect in the text examples because:

A)the real-world MPS is larger than the MPS in the examples.
B)in addition to saving, households use some of any increase in income to buy imported goods and to pay higher taxes.
C)the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts.
D)the MPC in the United States is greater than 1.

Answer: B
Consider This Questions
Type: F E: 159 MA: 159 Status: New
182. (Consider This) U. S. consumption increased between March 2000 and July 2002 even though stock values declined by $3. 7 trillion. One of the reasons was that:

A)lower interest rates allowed many households to reduce their monthly loan payments and increase their consumption spending.
B)deflation occurred, which increased purchasing power.
C)economic growth accelerated relative to the prior two years.
D)the unemployment rate dramatically declined.

Answer: A
Type: F E: 159 MA: 159 Status: New
183. (Consider This) Part of the wealth effect of a $3. 7 trillion decline in stock values between March 2000 and July 2002 was offset by rising:

A)tax rates.
B) interest rates.
C) house values.
D) expectations of future income.

Answer: C
Last Word Questions
Type: A E: 167 MA: 167
184. (Last Word) Art Buchwald’s article “Squaring the Economic Circle” is a humorous description of:

A)a negative GDP gap.
C)the marginal propensity to save.
B)a positive GDP gap.
D)the multiplier.

Answer: D
Type: A E: 167 MA: 167
185. Last Word) Art Buchwald’s article “Squaring the Economic Circle” humorously describes how:

A)a person’s decision not to buy an automobile eventually reduces many people’s incomes, including that of the person making the original decision.
B)a price increase on a single product eventually leads to rapid inflation.
C)an increase in imports eventually leads to a greater increase in exports.
D)a government tax rate increase eventually results in the government collecting less tax revenue than before the tax rate hike.

Answer: A
True/False Questions
Type: A E: 154 MA: 154
186. If DI is $275 billion and the APC is 0. 8, we can conclude that saving is $55 billion.
Answer: True
Type: A E: 156 MA: 156
187. If the MPC is constant at various levels of income, then the APC must also be constant at all of those income levels.
Answer: False
Type: A E: 154 MA: 154
188. The average propensity to consume is defined as income divided by consumption.
Answer: False
Type: D E: 156 MA: 156
189. 1 – MPC = MPS.
Answer: True
Type: A E: 159 MA: 159
190. A decline in the real interest rate will shift the investment demand curve to the right.
Answer: False
Type: A E: 156 MA: 156
191. If the Brown family’s marginal propensity to consume is 0. 70, then it will necessarily consume seven-tenths of its total income.
Answer: False
Type: A E: 156 MA: 156
192. 1 + MPS = MPC.
Answer: False
Type: A E: 156 MA: 156
193. The slope of the consumption schedule is measured by the MPC.
Answer: True
Type: A E: 159 MA: 159
194. A specific investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i.
Answer: True
Type: A E: 163-164 MA: 163-164
195. Investment is highly stable; it rarely changes.
Answer: False
Type: A E: 156 MA: 156
196. The greater the MPC, the greater the multiplier.
Answer: True
Type: A E: 166 MA: 166
197. If the MPS is 1, the multiplier will be 1.
Answer: True
Type: A E: 166 MA: 166
198. The multiplier is equal to the reciprocal of the MPC.
Answer: False
Type: F E: 164 MA: 164 Status: New
199. The multiplier shows the relationship between changes in a component of spending, say, investment, and the consequent changes in real income and output.
Answer: True
Type: F E: 167 MA: 167 Status: New
200. The estimate for the value of the real-world multiplier is 2.
Answer: True