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4) Investment decreases by $300 billion, government expenditure is unchanged, and
exports increase by $500 billion. As a result, autonomous expenditure ________, the total
expenditure ________, and equilibrium real GDP ________.
A) decreases by $300 billion; decreases; decreases by more than $300 billion
B) increases by $500 billion; is unchanged; increases by more than $500 billion
C) is unchanged; is unchanged; is unchanged
D) increases by $800 billion; increases; increases by more than $800 billion
E) increases by $200 billion; increases; increases by more than $200 billion
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
5) Exports decrease by $500 billion, investment increases by $300 billion, and government
expenditure increases by $200 billion. As a result, autonomous expenditures ________ , total
expenditures ________ , and equilibrium real GDP ________.
A) decreases by $300 billion; decreases; decreases by more than $300 billion
B) is unchanged; is unchanged; is unchanged
C) decreases by $200 billion; decreases; decreases by more than $200 billion
D) increases by $500 billion; increases; increases by more than $500 billion
E) increases by $3500 billion; increases; increases by more than $300 billion
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) A ________ in the real interest rate ________ consumption expenditure and shifts the
consumption function ________.
A) fall; increases; upward
B) fall, decreases; upward
C) rise; decreases; upward
D) rise, increases; downward
E) fall; increases; downward
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Relective thinking
91
7) When irms reduce their target level of inventories, planned investment ________, and
equilibrium expenditure and real GDP ________.
A) falls; decrease
B) falls; increase
C) rises; decrease
D) rises; increase
E) falls; remains the same
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Relective thinking
8) When a(n) ________ in investment increases consumption and real GDP, part of the
increase in expenditure is on ________, not ________ goods and services.
A) increase; imports; foreign-produced
B) decrease; imports; U.S.-produced
C) decrease; exports ; U.S.-produced
D) increase; imports; U.S.-produced
E) increase; exports; U.S.-produced
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
9) When an expansion is triggered by a(n) ________ in autonomous expenditure, the
economy turns the corner into ________, and aggregate planned expenditure exceeds real
GDP. Firms' inventories ________.
A) increase; expansion; increase
B) increase; recession; increase
C) increase; recession; decrease
D) decrease; expansion; decrease
E) increase; expansion; decrease
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
92
10) When a recession is triggered by a(n) ________ in autonomous expenditure, and as the
economy turns the corner into ________, real GDP exceeds aggregate planned expenditure
and unplanned inventories ________.
A) decrease; recession; decrease
B) decrease; recession; increase
C) decrease; expansion; increase
D) decrease; expansion; decrease
E) increase; recession; increase
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
11) To cut inventories, irms produce ________ and real GDP ________, which ________
people's incomes.
A) more; rises; raises
B) more; falls; lowers
C) less; falls; lowers
D) less; rises; lowers
E) less; rises; raises
Skill: Level 4: Applying models
Section: Integrative
Status: New
AACSB: Analytical thinking
12) The consumption function shifted upward from 1960 to 2013 because as economic
growth brought ________ expected future income and ________ wealth, people chose to
________ their consumption expenditure from a given level of income.
A) higher; less; increase
B) higher; less; decrease
C) lower; greater; increase
D) higher; greater; increase
E) higher; greater; decrease
Skill: Level 5: Critical thinking
Section: Integrative
Status: New
AACSB: Analytical thinking
93
13) During the recession of 2009, the consumption function temporarily shifted ________ as
a fall in house prices ________ wealth and encouraged people to ________ more.
A) downward; lowered; spend
B) downward; raised; save
C) downward; raised; spend
D) upward; lowered; save
E) downward; lowered; save
Skill: Level 5: Critical thinking
Section: Integrative
Status: New
AACSB: Analytical thinking
14.7 Essay: Expenditure Plans and Real GDP
1) Deine autonomous consumption and explain how it is represented on a consumption
function graph.
Skill: Level 2: Using deinitions
Section: Checkpoint 14.1
Status: Old
AACSB: Relective thinking
2) What is the consumption function? What factor leads to a movement along the
consumption function?
Skill: Level 1: Deinition
Section: Checkpoint 14.1
Status: Old
AACSB: Written and oral communication
94
3) List and explain factors that inluence consumption expenditure.
Skill: Level 2: Using deinitions
Section: Checkpoint 14.1
Status: Old
AACSB: Written and oral communication
4) How is it possible for consumption expenditure to be positive even when disposable
income is zero?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.1
Status: Old
AACSB: Written and oral communication
5) What is the marginal propensity to consume? Can the marginal propensity to consume
be greater than 1?
Skill: Level 1: Deinition
Section: Checkpoint 14.1
Status: Old
AACSB: Written and oral communication
6) What does the marginal propensity to consume measure and how is it related to the
consumption function?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.1
Status: Old
AACSB: Written and oral communication
95
7) What is the relationship between U.S. real GDP and U.S. imports?
Skill: Level 1: Deinition
Section: Checkpoint 14.1
Status: Old
AACSB: Relective thinking
8) Discuss the link between real GDP and imports.
Skill: Level 1: Deinition
Section: Checkpoint 14.1
Status: Old
AACSB: Written and oral communication
9) The above table has data on the consumption function in the nation of Mojo.
a. What is the amount of autonomous consumption expenditure?
b. What is the marginal propensity to consume?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.1
Status: Old
AACSB: Analytical thinking
96
10) When disposal income is $5.0 trillion, consumption expenditure is $4.5 trillion. When
disposal income is $6.0 trillion, consumption expenditure is $5.0 trillion. What is the
marginal propensity to consume?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Status: Old
AACSB: Analytical thinking
11) At $10,000 of disposable income, Audrey's consumption expenditure was $11,000. At
$20,000 of disposable income, Audrey's consumption expenditure was $19,000. What is
Audrey's marginal propensity to consume?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Status: Old
AACSB: Analytical thinking
14.8 Essay: Equilibrium Expenditure
1) What is the diference between induced and autonomous expenditure? Which
components of aggregate expenditure fall under which category?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
97
2) Deine induced expenditure and autonomous expenditure. Which expenditure items are
induced expenditure and which are autonomous expenditure?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
3) List the components of aggregate expenditure and describe how each of them changes
as real GDP increases.
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
4) "Similar to imports, U.S. exports depend on the level of U.S. real GDP so that if real GDP
increases, U.S. exports increase." Explain whether the previous sentence is correct or
incorrect.
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
5) "Aggregate planned expenditure is the sum of planned consumption expenditure,
investment, government expenditures on goods and services, and exports minus imports."
Is the previous statement correct or incorrect?
Skill: Level 1: Deinition
Section: Checkpoint 14.2
Status: Old
AACSB: Relective thinking
98
6) What is unplanned investment? How does it occur?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
7) If unplanned inventory changes are positive, what is the relationship between aggregate
planned expenditure and real GDP?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Relective thinking
8) Explain the relationship between real GDP and aggregate planned expenditure, AE.
What change to inventories takes place when the two are not equal?
Skill: Level 3: Using models
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
9) If real GDP exceeds aggregate planned expenditure, what happens to a irm's unplanned
inventories?
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
10) At the equilibrium level of aggregate expenditure, what does aggregate expenditure
equal? What happens at other levels of real GDP to bring about an equilibrium?
their production, so output increases and real GDP increases. At levels of real GDP where
aggregate expenditure is less than real GDP, business inventories are greater than their
target levels. In this situation, businesses decrease their production, so output decreases
and real GDP decreases.
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
11) "If aggregate planned expenditure exceeds real GDP, then aggregate expenditure and
real GDP will increase." Explain whether the previous sentence is correct or incorrect.
Skill: Level 2: Using deinitions
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
12) Suppose that irms ind that their inventories are less than planned. In this case, what
is the initial relationship between aggregate planned expenditure and real GDP? Using the
aggregate expenditure model, what adjustments, if any, take place?
Skill: Level 3: Using models
Section: Checkpoint 14.2
Status: Old
AACSB: Written and oral communication
100
