Economics 252 - Revised Review Questions Chapter 9

Basic Macroeconomic Relationships

(1)        The consumption schedule shows:

(a)        that the Marginal Propensity to Consume (MPC) increases as Disposable Income increases.

            (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 disposable income.

 

(2)        The Marginal Propensity to Consume (MPC) for an economy is:

            (a)        the slope of the consumption schedule or line.

            (b)        the slope of the savings schedule or line.

(c)        the additional amount of investment generated as disposable income increases.

(d)       the incremental amount of consumption for an economy generated by a change in the interest rate.

 

Answer Questions (3) and (4) using the following consumption schedule:

C = 20 + 0.9 Y, where C is consumption and Y is disposable income.

 

(3)        Referring to the consumption schedule, the MPC is:

            (a)  0.45           (b)  0.20                       (c)  0.50           (d)       0.90

 

(4)        Referring to the consumption schedule, at an $800 level of disposable income, the level of saving is:

            (a)  $180          (b)        $740                (c)        $60      (d)       $18

 

(5)        Which of the following will cause a movement down along an economy’s consumption schedule?

            (a)        an increase in wealth due to rise in the stock market.

            (b)        a decrease in wealth due to a fall in the stock market.

            (c)        an increase in consumer indebtedness.

            (d)       a decrease in disposable income.

 

(6)        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.

            (b)        consumption spending will be $15,000.

            (c)        consumption spending will be $13,000.

            (d)       saving will be $2,500.

 

(7)        If the equation for the consumption schedule is C = 20 + 0.8 Y, where C is consumption and Y is disposable income, then the average propensity to consume is 1.0 when disposable income is:

            (a)        $80      (b)        $100    (c)        $120    (d)       $160

           

(8)        If the equation for the consumption schedule id C = 35 + 0.75 Y, where C is consumption and Y is disposable income, shows that:

(a)        household 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 if their disposable income is zero, and will consume three-fourths of any increase in disposable income they receive.

 

(9)        Dissaving means:

            (a)        the same thing as depreciation.

            (b)        that households are spending more than their current incomes.

            (c)        that saving and investment are equal.

            (d)       that disposable income is less that zero.,

 

(10)      At the point where the consumption schedule intersects the 45-degree line:

            (a)        the MPC equals 1.

            (b)        the APC is zero.

            (c)        savings equals disposable income.

            (d)       savings are zero.

 

(11)      If the MPC is 0.9, then the Marginal Propensity to Save (MPS) is:

            (a)        1.0       (b)        0.1       (c)        1.1       (d)       0.9

 

Utilize Table 1 to answer Questions (12) and (13).

Table 1

            Disposable

            Income                        Consumption

            $200                $205

            $225                $225

            $250                $245

            $275                $265

            $300                $285

 

(12)      In Table 1, the MPC is:

            (a)        0.25     (b)        0.75     (c)        0.20     (d)       0.80

 

(13)      In Table 1, at the $200 level of disposable income:

            (a)        the MPS is 1.0

            (b)        dis-saving is $5

            (c)        the average propensity to save (APS) is 0.20

            (d)       the average propensity to consume (APC) is 0.80.

 

Utilize Figure 1 to answer Questions (14), (15), and (16).     Figure 1

Disposable Income

 

 

(14)      In Figure 1, a movement from b to a along C(1) 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.

 

(15)      In Figure 1, a shift of the consumption schedule from C(1) to C(2) might be caused by:

            (a)        recession.

            (b)        wealth effect of an increase in stock market prices.

            (c)        increase in income tax rates.

            (d)       increase in saving.

 

(16)      In Figure 1, a shift of the consumption schedule from C(2) to C(1) might be caused by:

            (a)        an increase in real GDP.

            (b)        a wealth effect resulting from a decrease in stock market prices.

            (c)        a decrease in income tax rates.

            (d)       a decrease in saving.

 

(17)      The investment demand curve slopes downward to the right because lower real interest rates:

            (a)        enable more investment projects to be undertaken profitably.

            (b)        create tax incentives by government to expand output.

            (c)        increase the cost of doing business, and reduce the level of investment.

            (d)       increases consumer saving, and slower economic growth.

Utilize Figure 2 to answer Questions (18), (19), and (20).

Figure 2

0

 

Disposable Income

 

F

 

E

 

H

 

(18)      In Figure 2, the average propensity to consume (APC) is 1 at point:

            (a)        F          (b)        A         (c)        D         (d)       B

 

(19)      In Figure 2, the MPC is equal to:

            (a)        AE/OE                        (b)        CF/CD                        (c)        CB/AB            (d)  CD/CF

 

(20)      In Figure 2, at disposable income level F, the volume of saving is:

            (a)        BD      (b)        AB      (c)        CF-BF             (d)       CD

 

Utilize Table 2 to answer Question (21).

                                                Table 2

Disposable Income (Y)                       Consumption (C)       

            $0                                            $40

            $100                                        $100

            $200                                        $160

            $300                                        $220

            $400                                        $280

 

(21)      Which of the following equations correctly represents the data in Table 2?

            (a)        Y = 40 + 0.6 C

            (b)        C = 60 + 0.4 Y           

            (c)        C = 40 + 0.6 Y

            (d)       C = 0.6 Y.

 

 

 

(22)      The investment demand schedule 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 interest rate.

 

(23)      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.

 

Utilize Figure 3 to answer Question (24).

Figure 3

 

0

 

Investment

 

(24)      In Figure 3, which of the following would shift the investment demand curve from ID(1) to ID(2)?

            (a)        A lower interest rate.

            (b)        Lower expected rates of return on investment.

            (c)        A higher interest rate.

            (d)       Higher expected rates of return on investment.

 

(25)      The multiplier is:

            (a)        1/MPC

            (b)        1/(1+MPC)

            (c)        1/MPS

            (d)       1/(1-MPS)

 

 

 

(26)      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.

 

(27)      If the MPC is 0.70 and gross investment increases by $3 billion, the equilibrium GDP will:

            (a)        increase by $10 billion.

            (b)        increase by $2.10 billion.

            (c)        decrease by $4.29 billion.

            (d)       increase by $4.29 billion.

 

Utilize Table 3 to answer Questions (28), (29), and (30).

Table 3

                                    Change in                    Change in        Change in

                                    Disposable Income      Consumption   Saving

Assumed increase

in Investment                          $20                  _______                $4

 

Second Round

Impacts                                   ___                  $12.80             ______

 

All other Rounds

Impacts                                   ___                  $51.20             ______

 

Totals                                      ____                ______              $20

 

 

(28)      In Table 3, the MPC is:

            (a)        0.5       (b)        0.75     (c)        0.8       (d)       0.9

 

(29)      In Table 3, the change in disposable income in round two will be:

            (a)        $4        (b)        $16      (c)        $20      (d)       $24

 

(30)      In Table 3, the total change in disposable income resulting from the initial change in investment will be:

            (a)        $100    (b)        $20      (c)        $80      (d)       $200