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Chapter 12 Consumption, Real GDP, and the Multiplier 495

8) In the Keynesian model, planned investment is inversely related to

A) the interest rate. B) the level of income.

C) the wage rate. D) the tax rate.

9) If business executives become more optimistic about the future, we would expect that

A) the investment curve would shift outward to the right.

B) the saving function would shift up.

C) the consumption curve would shift up.

D) investment spending would decrease.

10) The investment function would shift inward to the left if

A) real disposable income decreased.

B) interest rates increased.

C) there was an increase in business taxes.

D) there was a positive change in productive technology.

11) An increase in the interest rate results in

A) a smaller opportunity cost of investment and so planned investment spending increases.

B) a smaller opportunity cost of investment and so planned investment spending decreases.

C) a greater opportunity cost of investment and so planned investment spending decreases.

D) a greater opportunity cost of investment and so planned investment spending increases.

12) All of the following will cause an outward shift of the investment function EXCEPT

A) innovation that improves production efficiency at every level of output.

B) a reduction in business taxes.

C)

b

usiness people becoming optimistic about the future.

D) a decrease in the interest rate.

13) The planned investment function will shift downward if

A) real disposable income increases.

B) the interest rate falls.

C)

b

usiness expectations become more pessimistic.

D) the existing stock of capital decreases.

14) Technological progress should lead to

A) an outward (rightward) shift in the investment function.

B) a downward movement of the investment function.

C) an unchanged investment function.

D) less saving.

15) Which of the following would cause a leftward shift in the investment function?

A) Technological progress

B) A reduction in the rate of interest

C) Optimistic expectations about business conditions

D) An increase in business taxes

16) For an investment to be considered autonomous, it must

A)

b

e negatively related to the interest rate.

B) increase as the level of income increases.

C) include fixed components.

D)

b

e independent of the level of real disposable income.

17) In Keynesian analysis, if investment remains constant when income changes, the investment is

called

A) planned. B) autonomous. C) unplanned. D) discretionary.

18) Of the relationships below, which is the least stable?

A) Consumption B) Saving C) Investment D) Net exports

19) A firm will invest in a project if

A) the interest rate exceeds the opportunity cost of the project.

B) the firm s level of capital is at the desired level.

C) the firm s level of capital is higher than the desired level.

D) the rate of return of the project is greater than the opportunity cost of the investment.

20) Investment spending is

A) directly related to the interest rate.

B) inversely related to the interest rate.

C) directly related to real disposable income.

D) inversely related to real disposable income.

21) Which of the following is a true statement relative to retained earnings and investment?

A) Lower interest rates stimulate borrowing for investment, but have no effect on the use of

retained earnings for investment spending.

B) Lower interest rates stimulate borrowing for investment, but discourage the use of

retained earnings for investment.

C) Lower interest rates reduce the opportunity cost of retained earnings, stimulating the use

of these funds in investment.

D) Lower interest rates have no effect on investment spending at all because investment

spending is autonomous.

22) The investment function will shift when there is a change in

A) the interest rate.

B) firms profit expectations.

C) the cost of borrowing.

D) the opportunity cost of retained earnings.

23) Which of the following will NOT lead to a shift in the investment function?

A) A firm downgrades its future profitability.

B) A new discovery leads to a technological advancement.

C) The government just lowered business taxes.

D) The cost of borrowing has just decreased.

24) Which one of the following statements is true?

A) Over the years, real consumption spending has been more volatile than real investment

spending.

B) Over the years, real investment spending has been more volatile than real consumption

spending.

C) Domestic real investment in the United States was highest during the Great Depression.

D) In the Keynesian model, changes in the volume of real investment spending are fully

explained by changes in the real interest rate.

25) Changes in real planned investment spending have

A) a direct relationship to changes in interest rates.

B) an inverse relationship to changes in the interest rate.

C) no identifiable relationship to changes in the interest rate.

D) a direct relationship to changes in the level of household savings.

26) When the investment is graphed as a function of real GDP,

A) it graphs as a vertical straight line.

B) it graphs as a 45 degree line starting at the indicated level of investment.

C) it graphs as a negatively sloped line indicating the inverse relationship between interest

rates and investment.

D) it graphs as a horizontal straight line at the level of investment.

27) Which one of the following statements is true?

A) The investment function is positively sloped to reflect the fact that higher interest rates

cause more people to invest their funds.

B) The investment function is positively sloped to reflect the fact that lower interest rates

cause more firms to expand their operations.

C) Along a given investment function, higher interest rates result in more investment projects

being undertaken.

D) Along a given investment function, higher interest rates result in fewer investment projects

being undertaken.

28) Aging baby

b

oomers, predisposed to hearing loss because of years of listening to loud music,

are now approaching the age range in which hearing loss starts to become apparent. What effect

does this have on investment spending within the hearing aid industry?

A) There will no longer be an opportunity cost associated with investment spending.

B) There will be no change in real investment spending, because hearing aid manufacturers

will look only at the interest rate in determining whether to expand production.

C) The investment function relating planned real investment spending to the interest rate can

be expected to shift rightward.

D) The investment function relating planned real investment spending to the interest rate can

be expected to shift leftward.

29) The investment function tells us, at any given interest rate,

A) how many funds people will invest in the stock market.

B) how many funds people will earn on their stock market investments.

C) how profitable it will be for firms to expand.

D) how much businesses will spend on adding to the capital stock.

30) Based on historical data, which of the following tended to be most variable over time?

A) real consumption spending B) real saving

C) real investment spending D) the average propensity to consume

31) One of the primary determinants of planned real investment spending is the

A) expectation of future profits. B) rate of real consumption spending.

C) rate of real government spending. D) rate of real saving.

32) What would happen to the planned investment function if business taxes were increased?

A) It would shift to the right. B) It would shift to the left.

C) It would shift upward. D) There would be no change.

33) Which would increase real planned investment demand?

A) a decrease in new technologies available

B) a decline in profit expectations

C) a decrease in business taxes

D) an increase in nominal interest rates

34) A decrease in interest rates will

A) shift the investment function relating planned investment to the interest rate to the right.

B) shift the investment function relating planned investment to the interest rate to the left.

C)

b

e a movement along the investment function relating planned investment to the interest

rate.

D) have no impact on the investment function relating planned investment to the interest rate.

35) All of the following would cause the investment function relating investment to the interest rate

to shift EXCEPT

A) a change in the real interest rate.

B) a change in producer expectations of future profit.

C) a change in planned capital goods expenditure.

D) a change in productive technology.

36) If businesses expect the economic activity to expand,

A) the planned investment function relating investment to the interest rate will shift to the

left.

B) the planned investment function relating investment to the interest rate will remain

unchanged, but will move downward along the curve.

C) the planned investment function relating investment to the interest rate will steepen.

D) the planned investment function relating investment to the interest rate will shift to the

right.

37) Real planned investment spending is inversely related to

A) real disposable income. B) wealth.

C) the interest rate. D) producer expectations of future profit.

38) The relationship between planned real investment spending and the interest rate is

A) inverse. B) direct. C) constant. D) highly volatile.

39) If we observe that interest rates rise but real investment spending still increases, what must have

happened to the function relating investment to the interest rate?

A) It shifted to the right.

B) It shifted to the left.

C) There was a movement up the function relating investment to the interest rate.

D) There was a movement down the function relating investment to the interest rate.

40) The investment schedule is downward sloping and the saving schedule is upward sloping with

respect to the interest rate. Suppose the equilibrium real investment per year at the market rate

of interest is $1 trillion. How is this represented when real national income per year is on the

horizontal axis? How is this incorporated into the consumption function graph?

41) What determines investment in the Keynesian framework? How is investment related to real

Gross Domestic Product (GDP)?

12.4 Determining Equilibrium Real GDP

1) If firms unplanned inventories are increasing, then in a closed, private economy,

A) the level of real national income will rise.

B) the level of real national income will not change in the foreseeable future.

C) actual consumption is greater than planned consumption.

D) consumers are saving more than businesses anticipated.

2) Ignoring the government and foreign sectors, equilibrium real Gross Domestic Product (GDP) is

determined by

A) the intersection of the planned saving and planned investment schedules.

B) the intersection of the planned saving and planned consumption schedules.

C) the intersection of the consumption function with the 45 degree line.

D) finding the real Gross Domestic Product (GDP) for which real savings are zero.

3) Ignoring the government and foreign sectors, if planned investment spending is $500 billion,

planned saving is $800 billion, and real Gross Domestic Product (GDP) is $13 trillion, then

unplanned inventories will

A) decrease $300 billion. B) increase $300 billion.

C) increase $800 billion. D) not change.

4) Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of

$200 billion at the current level of real national income of $12 trillion. From this information, we

know that

A) saving equals $200 billion.

B) consumption expenditures equal $12 trillion less saving less $200 billion.

C) planned investment is $200 billion more than planned saving.

D) planned investment is $200 billion less than planned saving.

5) A permanent increase in autonomous investment causes

A) a more than proportional increase in real Gross Domestic Product (GDP).

B) a proportional increase in real Gross Domestic Product (GDP).

C) a less than proportional increase in real Gross Domestic Product (GDP).

D) an offsetting change in saving that leaves real Gross Domestic Product (GDP) at the same

level.

6) Using real GDP on the horizontal axis instead of real disposable income implies that a marginal

propensity to consume 0.75 generates for every additional $100 of real GDP

A) $75 of additional real disposable income.

B) $25 of additional saving.

C) $56.25 of additional consumption spending.

D) $25 of additional saving and taxes.

7) The 45 degree reference line indicates all points at which

A) planned real consumption expenditures and planned real saving are equal.

B) planned real saving and planned real investment are equal.

C) planned real consumption expenditures and real GDP are equal.

D) planned real saving and planned real saving are equal.

8) Investment is

A) a positive function of real GDP. B) a negative function of real GDP.

C) autonomous with respect to real GDP. D) a positive function of interest rates.

9) The investment function intersects the saving schedule at an interest rate of 8 percent and a level

of investment of $1.2 trillion a year. If the consumption curve intersects the 45 degree reference

line at $3 trillion, then

A) the C I curve will intersect the 45 degree reference line at $1.2 trillion.

B) the C I curve will intersect the 45 degree line at $1.8 trillion.

C) the equilibrium level of real GDP is $1.8 trillion.

D) the equilibrium level of real GDP is $4.2 trillion.

10) Refer to the above figure. Which variable is autonomous with respect to real GDP?

A) Real saving

B) Real investment spending

C) Real consumption spending

D) The sum of real consumption and real saving

11) Refer to the above figure. If real GDP is $4 trillion, then

A) consumption expenditures are too low.

B) unplanned inventories will decrease.

C) unplanned inventories will increase.

D) actual investment spending equals $1 trillion as planned investment spending plus

unplanned inventory increases equal $1 trillion.

12) Refer to the above figure. At real GDP of $1 trillion, actual investment equals

A) planned investment of $1 trillion.

B) planned saving of $1 trillion.

C) actual saving of 0.

D) unanticipated inventory adjustments of $1 trillion.

13) For a closed economy with no government, we know that at every level of GDP actual

investment equals

A) planned investment.

B) planned saving.

C) the difference between planned saving and actual saving.

D) the difference between planned investment and actual saving.

14) Supposed actual investment is greater than planned investment at the current level of output in

2010. Given this information, we know that

A) GDP will tend to increase over time.

B) firms stock of inventories must have increased unexpectedly in 2010.

C) saving must be less than planned investment.

D) saving must be equal to planned investment.

15) In the Keynesian model, whenever planned investment is greater than planned saving,

A) the amount of planned investment will decrease, and real GDP will decrease.

B) the amount of planned investment will decrease, and real GDP will remain unchanged.

C) there will be an unplanned inventory decrease, and GDP will eventually increase.

D) there will be an unplanned inventory increase, and GDP will eventually decrease.

16) In the Keynesian model, whenever planned investment is less than planned saving,

A) the amount of planned investment will decrease, and real GDP will decrease.

B) the amount of planned investment will decrease, and real GDP will remain unchanged.

C) there will be an unplanned inventory decrease, and real GDP will eventually increase.

D) there will be an unplanned inventory increase, and real GDP will eventually decrease.

17) In the Keynesian model, whenever planned saving exceeds planned investment,

A) there will be unplanned inventory accumulation.

B) there will be unplanned inventory depletion.

C) real GDP will not be influenced.

D) the interest rate will remain unchanged.

18) In the Keynesian model, whenever planned saving is less than planned investment,

A) there will be unplanned inventory accumulation.

B) there will be unplanned inventory depletion.

C) real GDP will not be influenced.

D) the interest rate will remain unchanged.

19) Along the 45 degree reference line,

A) total planned real expenditures real GDP.

B) total planned real expenditures planned nominal expenditures.

C) total planned nominal expenditures consumption.

D) total planned investment spending planned real expenditures.

20) In the above figure, what is autonomous consumption?

A) $0.0 trillion B) $1.0 trillion C) $2.0 trillion D) $3.0 trillion

21) In the above figure, what is the equilibrium level of real consumption spending?

A) $0.0 trillion B) $1.0 trillion C) $2.0 trillion D) $3.0 trillion

22) When graphing the consumption function, we include a 45 degree reference line. What is true

at the points at which the consumption function crosses this line?

A) Planned real saving is zero.

B) Planned real consumption spending is zero.

C) Real disposable income is zero.

D) Real GDP is zero.

23) Suppose that there is no government and no international trade. When C I is less than the level

of real GDP,

A) unplanned inventories decrease, and real GDP expands.

B) unplanned inventories increase, and real GDP contracts.

C) unplanned inventories equal zero, and there is no change in the level of real GDP.

D) real planned investment spending equals real planned saving.

24) Autonomous real investment spending is

A) the level of investment expenditure required to keep the economy expanding at its current

growth rate.

B) the level of investment expenditure that is independent of real GDP.

C) the level of investment expenditure required to replace capital lost to depreciation.

D) the level of investment expenditure that would prevail if interest rates were zero.

25) When real GDP is in equilibrium with no government and no international trade,

A) real planned investment spending equals real planned saving.

B) real planned investment equals real planned consumption spending.

C) unplanned inventories are increasing.

D) unplanned inventories are decreasing.

26) In the above figure, point E represents the level of real GDP at which planned saving equals

planned investment. At point A,

A) unplanned inventories increase.

B) changes in inventories cannot be determined.

C) unused industrial capacity exists in the economy.

D) unplanned inventories decrease.

27) In the above figure, point E represents the level of real GDP at which planned saving equals

planned investment. At point C,

A) unplanned inventories increase.

B) changes in inventories cannot be determined.

C) unused industrial capacity exists in the economy.

D) unplanned inventories decrease.

28) When real planned saving is greater than real planned investment spending,

A) the interest rate will increase. B) the interest rate will decrease.

C) real GDP will increase. D) real GDP will decrease.

29) What is the result when real planned saving exceeds real planned investment spending?

A) The economy is in equilibrium.

B) There is unplanned accumulation of business inventories.

C) There is unplanned depletion of business inventories.

D) Employment expands.

30) Consider a closed economy without a government and without international trade. What will be

true when this economy is in equilibrium?

A) Total planned real investment spending will exceed total planned real expenditures.

B) Planned real investment spending will exceed real planned saving.

C) Planned real consumption spending equals real GDP.

D) Planned real consumption spending plus planned real investment spending equals real

GDP.

31) Real consumption is a function of real disposable income, but the simple Keynesian model uses

real GDP instead of real disposable income. This is appropriate since

A) real disposable income tends to move proportionately with real GDP.

B) real disposable income is a fixed percentage of real GDP.

C) real GDP is a fixed percentage of real disposable income.

D) we cannot measure either exactly and the purpose of the exercise is theoretical only.

32) In a closed economy, equilibrium real Gross Domestic Product (GDP) occurs where

A) the C I G line crosses the 45 degree line.

B) planned expenditures exceed national income.

C) saving exceeds planned investment.

D) all of these.

33) If real Gross Domestic Product (GDP) is at an equilibrium level in a closed economy,

A) C I G real GDP.

B) saving will be less than planned investment.

C) unplanned inventory accumulation will equal planned inventory accumulation.

D) C T G real GDP.

34) In the simple Keynesian model, why does actual investment spending have to equal saving in

the absence of the government and foreign sectors? Is this true only for the equilibrium?

Explain.

35) The above figure shows a consumption function and a 45 degree line. Real consumption is a

function of disposable income. Why is real GDP used here instead? What is measured along the

vertical axis? What is measured by point B? Explain the significance of point A.

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