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Chapter 12
Consumption, Real GDP, and the Multiplier
12.1 Some Simplifying Assumptions in a Keynesian Model
1) Which of the following is NOT a simplifying assumption in the simple Keynesian model?
A) Net investment and gross investment are equal.
B) All profits are distributed to the business owners.
C) Real disposable income equals government purchases of goods and services.
D) There is no foreign trade.
2) Which of the following represents the relationship between disposable income (DI),
consumption (C), and saving (S)?
A) DI C S B) DI C S C) DI C * S D) DI C S
3) Which of the following is a simplifying assumption associated with the short run Keynesian
model of equilibrium real Gross Domestic Product (GDP) determination?
A) Gross private domestic investment exceeds net private domestic investment.
B) Most business profits are distributed to shareholders.
C) Businesses pay indirect taxes.
D) There is no depreciation.
4) Which of the following would NOT be considered a consumption good?
A) A new sweater
B) Tools used to cut metal on an auto production line
C) A jar of Skippy peanut butter
D) A bottle of Scotch whiskey
5) The terms saving and savings differ in that
A) saving is a stock, and savings are a flow.
B) saving always exceeds savings.
C) savings are a stock, and saving is a flow.
D) savings can be negative, but saving cannot.
6) When you purchase Nautica clothing and tickets to see the Eminem concert
A) you are buying consumption goods. B) you are buying capital goods.
C) you are consuming intermediate goods. D) you are buying physical capital.
7) The difference between saving and savings is that
A) saving is done by households and savings by businesses.
B) saving is undertaken as a precaution against unemployment and savings are undertaken
to increase investment spending.
C) savings are the result of past and current saving.
D) saving is placed in financial institutions such as banks, while savings are kept at home by
people.
8) Which of the following is NOT a flow variable?
A) Consumption B) Investment C) Savings D) Saving
9) At a level of real disposable income of $0, suppose consumption is $2,000. Given this
information, we know with certainty that saving equals
A) $0. B) $2,000. C) $2,000. D) $1,000.
10) Which of the following statements is FALSE?
A) Disposable income saving consumption
B) Consumption saving disposable income
C) Saving disposable income consumption
D) Consumption saving disposable income
11) Thinking as an economist would, which is true of investment?
A) It is the portion of disposable income that is not used for consumption or saving.
B) Investment represents spending on capital goods.
C) Investment is putting money into stocks and bonds.
D) Investment is a stock concept.
12) The income expenditure model of real GDP determination is due to the work of
A) Adam Smith. B)
J
. B. Say.
C)
J
ohn Maynard Keynes. D) Roger Miller.
13) Which of the following is considered investment?
A) Maina purchases a new car for commuting to and from work.
B)
J
ane purchases a new car for commuting to and from school.
C)
J
ohnny buys a new car for his wife as an anniversary gift.
D)
J
ames purchases a new car to replace an old car in his cab business.
14) Saving differs from savings in that
A) saving is a flow while savings is a stock.
B) saving is a stock while savings is a flow.
C) saving is both a flow and a stock while savings is a stock.
D) saving is a stock while savings is a flow.
15) Consumption expenditures include all of the following EXCEPT
A)
b
uying a pizza.
B) going to a concert.
C) having your house cleaned by Klean Maids.
D) purchasing a share of stock.
16) Consumption goods
A) include goods such as DVDs that firms hold in inventory.
B) are only the goods bought by households for immediate satisfaction.
C) include spending on machines and buildings so that goods can be produced in the future.
D) are goods that are used to make other goods.
17) Keynes thought that the key to determining the broader economic effects of investment
fluctuations
A) was to examine how businesses react to flexible prices and wages.
B) was to closely regulate the real interest rate.
C) was to understand the relationship between how much people earn and their willingness
to engage in personal consumption spending.
D) was to understand how changes in the money supply influences consumption decisions.
18) Saving is
A) the amount one does not consume in a given period of time while savings is the
accumulation of past periods of saving.
B) the accumulation of past periods of savings while savings is the amount of disposable
income that is not consumed in a given period of time.
C) the difference between real GDP and disposable income while savings is the difference
between disposable income and consumption spending.
D) the difference between disposable income and spending on goods and services while
savings is the difference between real GDP and disposable income.
19) Spending on new goods and services out of a household s current income is
A) consumption. B) the capital consumption allowance.
C) savings. D) investment.
20) Consumption goods are
A) a form of investment.
B) goods purchased from savings.
C) a form of capital goods.
D) goods purchased by households to be used immediately.
21) The difference between a stock and a flow is
A) a stock is something measured at one point in time while a flow is something that is
expressed per unit of time.
B) a stock is something measured at one point in time while a flow is something that is fixed.
C) a stock is expressed per unit of time while a flow is measured at one point in time.
D) a stock refers to the solid inventory firms have on hand while a flow refers to the liquid
inventory firms have on hand.
22) The difference between savings and saving
A) is nonexistent.
B) is that savings occurs when consumption does not and saving is used to purchase
consumption goods.
C) is that savings is a stock concept and saving is a flow concept.
D) is that savings is measured in real terms while saving is measured in nominal terms.
23) Which of the following is a flow variable?
A) Savings B) Wealth C) Consumption D) Population
24) All of the following are flow variables EXCEPT
A) consumption. B) saving. C) investment. D) capital goods.
25) Which of the following statements is true?
A) consumption saving disposable income
B) consumption saving personal income
C) consumption investment disposable income
D) consumption saving personal income
26) Which of the following statements is true?
A) investment disposable income consumption
B) saving personal income consumption
C) saving disposable income consumption
D) saving personal income consumption
27) Investment is
A) the purchasing of stocks and mutual funds.
B) goods bought by households.
C) spending by businesses on things which can be used to produce goods and services in the
future.
D) the production of goods for immediate satisfaction.
28) Spending by businesses on things such as machines and buildings which can be used to
produce goods and services in the future is
A) investment. B) consumption.
C) consumption goods. D) savings.
29) Expenditures by firms on new machines and buildings that are expected to yield a future stream
of income is known as
A) consumer durable. B) consumption goods.
C) fixed investment. D) inventory investment.
30) Changes in business inventories are known as
A) consumer durable. B) consumption goods.
C) fixed investment. D) inventory investment.
31) Fixed investment is
A) when a firm adds to its inventories of goods.
B) when a firm accumulates profits.
C) dissavings.
D) an expenditure by firms on new machines that are expected to produce income in the
future.
32) Investment is
A) a flow concept and is made up of fixed investment and inventory investment.
B) a flow concept and is made up of fixed investment.
C) a stock concept and is made up of fixed investment and inventory investment.
D) a stock concept and is made up of fixed investment.
33) Nonconsumable goods that firms use to make other goods are
A) consumption goods. B) capital goods.
C) dissaving. D) the MPC.
34) How is investment defined as an economic concept?
A) Investment is primarily the market value of all shares of stock held by the public.
B) Investment is primarily the market value of all equipment, buildings, and inventories held
by corporations, partnerships, and proprietorships.
C) Investment is primarily the sum of expenditures by businesses on new capital goods that
will yield a future stream of income.
D) Investment is primarily the portion of your savings held in an interest earning account.
35) Savings are an example of
A) a flow concept. B) a stock concept.
C) a depreciation concept. D) an investment concept.
36) Saving is an example of
A) a flow concept. B) a stock concept.
C) a depreciation concept. D) an investment concept.
37) By definition, disposable income is equal to
A) consumption plus saving. B) consumption plus investment.
C) investment plus saving. D) consumption minus saving.
38) Investment includes spending on
A) capital goods, buildings, and consumer durable goods.
B) capital goods, buildings, and changes in business inventories.
C) capital goods, consumer durable goods, and changes in business inventories.
D) capital goods, buildings, and changes in business savings.
39) Which formula is correct?
A) S YdC B) YdS C C) 2(Yd) S C D) YdC S
40) Your real disposable income is your real income after you have paid
A) rent and food expenses. B) net taxes.
C) medical expenses. D) consumption expenses.
41) Distinguish between saving and savings. How does investment relate to this distinction, if at
all?
12.2 Determinants of Planned Consumption and Planned Saving
1) Keynesian theory is based on the hypothesis that
A) saving and consumption are influenced primarily by real current disposable income.
B) saving is influenced primarily by the interest rate.
C) planned savings equal planned investment only at full employment.
D) full employment is automatically attained in any economy.
2) Suppose that when disposable income increases by $1,000, consumption spending increases by
$750. Given this information, we know that the marginal propensity to consume (MPC) is
A) .25. B) .75.
C) $1,000/$750 1.33. D) 1/.25 4.
3) Suppose that when disposable income decreases by $2,000, consumption spending increases by
$1500. Given this information, we know that the marginal propensity to consume (MPC) is
A) .25. B) .75.
C) $1,000/$750 1.33. D) 1/.25 4.
4) Which of the following is true?
A) MPC MPS 1 B) MPC MPS 1
C) MPC * MPS 1 D) MPC / MPS 1
5) According to Keynesian theory, the most important determinant of saving and consumption is
A) the level of real disposable income.
B) the stock of liquid assets.
C) the stock of durable goods in the consumer s possession.
D) the level of consumer indebtedness.
6) The Keynesian model is based on the idea that
A) saving depends only on the interest rate.
B)
b
oth consumption and saving are directly related to disposable income.
C) consumption is unrelated to the level of real Gross Domestic Product (GDP).
D)
b
oth consumption and saving are unrelated to the level of real Gross Domestic Product
(GDP).
7) The consumption function shows
A) a positive relationship between an individual s stock of wealth and his level of planned
consumption.
B) a positive relationship between disposable income and planned consumption.
C) a negative relationship between planned consumption and aggregate saving.
D) a negative relationship between disposable income and planned consumption.
8) The relationship between households planned consumption expenditures and households level
of disposable real income is called
A) the consumption function.
B) the savings function.
C) the investment function.
D) the household aggregate demand function.
9) According to Keynes, planned consumption
A) decreases as disposable income increases.
B) is unstable and fluctuates widely with changes in disposable income.
C) is positively related to real disposable income.
D) is indirectly related to the interest rate.
10) The consumption function shows the relationship
A)
b
etween households disposable income and their consumption spending.
B)
b
etween investment and rate of return.
C)
b
etween consumption spending and capital gains.
D)
b
etween government spending and tax collection.
11) When an individual spends more than her/his disposable income, this person is
A) saving. B) investing. C) dissaving. D) unemployed.
12) Along a linear consumption function,
A) the average propensity to consume falls with an increase in income.
B) the marginal propensity to consume rises with an increase in income.
C) the average propensity to consume rises with income, but the marginal propensity to
consume falls with an increase in income.
D)
b
oth the average propensity to consume and the marginal propensity to consume rise with
an increase in income.
13) Dissaving occurs when
A) disposable income exceeds consumption.
B) disposable income is less than consumption.
C) the marginal propensity to save is less than .5.
D) the marginal propensity to consume is less than .5.
14) Saving equals
A) disposable income minus taxes.
B) disposable income minus consumption spending.
C) disposable income minus savings.
D) consumption spending minus savings.
15) According to Keynes, the primary determinant of a person s saving is NOT
A) the person s level of income but the desired real income of the person.
B) the person s level of savings but the expected interest rate in the near future.
C) the interest rate but the level of savings the person has.
D) the interest rate but the level of the person s real disposable income.
16) According to Keynes, an individual s level of saving is primarily determined by
A) the interest rate.
B) the individual s current level of disposable real income.
C) the individual s assessment of the future direction of the stock market.
D) real Gross Domestic Product (GDP) for the economy.
17) The consumption function shows how much
A) households plan to consume per year at each level of real disposable income.
B) households plan to consume per year at each possible interest rate.
C) real disposable income people will earn at each income tax bracket.
D) households plan to consume per year at each level of savings.
18) According to Keynes,
A) consumption is positively related to the interest rate.
B) consumption is directly related to income but saving is inversely related to income.
C)
b
oth consumption and saving are positively related to real disposable income.
D) consumption is directly related to income but saving has no relationship with income.
19) When consumption spending is greater than disposable income, we know with certainty that
we have
A) dissaving. B) excess thrift.
C) positive savings. D) negative net investment.
20) Suppose real disposable income increases by $1,000. Given this information, we know that
A) consumption will generally increase by exactly $1,000.
B) consumption will generally increase by less than $1,000.
C) consumption will generally increase by more than $1,000.
D) saving will generally increase by exactly $1,000.
21) Suppose when real disposable income is $5000, planned real consumption is $4000. When real
disposable income increases to $6000, planned real saving increases by $500. The new planned
real consumption expenditures is
A) $5,000. B) $4,500. C) $6,000. D) $3,500.
Planned Planned Planned Real
Consumption Saving Investment GDP
$6,000 $1,000 $1,000 $5,000
10,000 0 10,000
14,000 1,000 15,000
18,000 2,000 20,000
22,000 25,000
26,000 30,000
22) According to the above table, if real Gross Domestic Product (GDP) is $30,000, planned saving
equals
A) $2,000. B) $3,000. C) $4,000. D) $5,000.
23) According to the above table, the marginal propensity to consume is
A) 0.6. B) 0.5. C) 0.75. D) 0.8.
24) According to the above table, if real Gross Domestic Product (GDP) equals $30,000, what is the
average propensity to consume?
A) 0.67 B) 0.75 C) 0.8 D) 0.87
25) The break even point on the consumption function represents the point where
A) consumption equals spending.
B) income equals consumption plus spending.
C) consumption is zero.
D) consumption equals income.
26) In the graph for the consumption function, the 45 degree line
A) contains only a consumption component.
B) represents both planned consumption and planned investment.
C) shows various combinations where planned consumption equals real disposable income.
D) reflects a decreasing APC as real disposable income rises.
27) When a family s income is low and it is spending more on consumption than it is receiving in
income,
A) the APC must be increasing.
B) the APC must be equal to the ratio of planned consumption expenditure to total saving.
C) the MPC must be zero.
D) some segment of the consumption function curve lies above the 45 degree line, indicating
dissaving.
28) At the break even point for the consumption function
A) saving is positive.
B) saving is negative.
C) saving is zero.
D) the marginal propensity to consume equals l.
29) If saving equals $200 when real disposable income equals $1,000, the break even income is
A) less than $1,000. B) greater than $1,000.
C) equal to $1,000. D) equal to $1,200.
30) According to the above figure, planned consumption and income are equal at an income level of
A) Y2. B) Y3. C) Y1. D) Y0.
31) According to the above figure, at an income level of Y1
,
A) the economy saves an amount equal to BD.
B) the marginal propensity to save is falling.
C) the average propensity to save is greater than one.
D) the economy dissaves an amount equal to BD.
32) According to the above figure, the average propensity to save (APS) is zero at point
A) D. B) F. C) I. D)
J
.
33) In the above figure, when disposable income is greater than 600,
A) saving is negative. B) the MPC is greater than 1.
C) saving is positive. D) the MPS is negative.
34) In the above figure, the marginal propensity to consume (MPC) equals
A) 0.8. B) 0.9. C) 0.75. D) 0.85.
35) In the above figure, a change in autonomous consumption to 100 would cause the consumption
function to
A)
b
ecome steeper. B)
b
ecome flatter.
C) shift down. D) shift up.
36) In the above figure, saving will equal zero when real disposable income equals
A) 0. B) 60. C) 600. D) 500.
37) In the above figure, when real disposable income equals 600
A) there is dissaving.
B) consumption is less than disposable income.
C) real disposable income exceeds consumption.
D) consumption equals real disposable income.
38) In the above figure, when real disposable income is less than 600, then
A) consumption is less than disposable income.
B) consumption is more than disposable income.
C) consumption is the same as disposable income.
D) the MPC will fall.
39) Along the portion of the consumption function that lies above the 45 degree line, saving is
A) positive. B) negative.
C) equal to zero. D) equal to consumption
40) Refer to the above figure. If the MPC is unchanged and level of autonomous consumption
increases, what occurs?
A) Line EBD will shift up. B) Line ABC will drop down.
C) Line ABC shifts up. D) Line EBD rotates and becomes steeper.
41) Refer to the above figure. Line ABC is called
A) the 45 degree line. B) the consumption function.
C) the saving function. D) aggregate supply.
42) Refer to the above figure. Line EBD is called
A) the 45 degree line. B) the consumption function.
C) the saving function. D) aggregate demand.
