4) ________ in taxes will decrease consumption spending, and ________ in transfer payments will
increase consumption spending.
A) An increase; an increase
B) A decrease; an increase
C) An increase; a decrease
D) A decrease; a decrease
5) A decrease in Social Security payments will
A) decrease consumption spending.
B) decrease investment spending.
C) decrease government spending.
D) decrease export spending.
6) ________ is defined as the value of a household’s assets minus the value of its liabilities.
A) Household income
B) Household wealth
C) Personal household consumption
D) Planned household investment
7) Examples of assets that are included in household wealth would be
A) stocks, bonds, and savings accounts.
B) stocks, loans owed, and savings accounts.
C) stocks, bonds, and mortgages.
D) stocks, credit cards, and savings accounts.
8) A stock market boom which causes stock prices to rise should cause
A) a decrease in consumption spending.
B) an increase in consumption spending.
C) a decrease in wealth.
D) a decrease in net export spending.
9) The Apple iPhone is sold in a box labeled “Made in China,” but a study by economists at the Asian
Development Bank found that the actual percentage of the price of the iPhone accounted for by the only
work done in China, which is assembly, is
A) 4 percent.
B) 12 percent.
C) 25 percent.
D) 65 percent.
10) The Apple iPhone is sold in a box labeled “Made in China.” A study by economists at the Asian
Development Bank found the value of the iPhone components China ________ U.S. firms is ________
the value of assembling the iPhones in Chinese factories.
A) exports to; equal to
B) exports to; greater than
C) imports from; less than
D) imports from; greater than
11) An increase in the real interest rate will
A) cause consumers to spend more and save less.
B) most likely lower consumers’ purchases of durable goods.
C) most likely lower the reward to savings.
D) most likely lower the cost of borrowing.
12) Decreases in the price level will
A) lower consumption because goods and services are less affordable.
B) raise consumption because goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.
13) Which of the following will raise consumer expenditures?
A) an increase in interest rates
B) a general decline in housing prices
C) an increase in expected future income
D) an increase in the price level
14) ________ describes the relationship between consumption spending and disposable income.
A) Household wealth
B) The liquidity trap
C) The consumption function
D) The paradox of thrift
15) The slope of the consumption function is equal to
A) the change in consumption divided by the change in disposable income.
B) the change in consumption divided by the change in personal income.
C) the change in disposable income divided by the change in consumption.
D) the change in national income divided by the change in consumption.
24
16) The marginal propensity to save is defined as
A) saving divided by disposable income.
B) disposable income divided by saving.
C) the change in saving divided by the change in disposable income.
D) the change in disposable income divided by the change in saving.
17) If disposable income increases by $100 million, and consumption increases by $90 million, then the
marginal propensity to consume is
A) 0.9.
B) 0.8.
C) 0.75.
D) 0.6.
18) If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the
consumption function is
A) 1.20.
B) 0.80.
C) 0.70.
D) 0.10.
19) Disposable income is defined as
A) national income – transfers + taxes.
B) national income + transfers + taxes.
C) national income – transfers – taxes.
D) national income + transfers – taxes.
Table 12-3
Consumption
(dollars)
Disposable Income
(dollars)
$1,200
$3,000
2,100
4,000
3,000
5,000
20) Refer to Table 12-3. Given the consumption schedule in the table above, the marginal propensity to
consume is
A) 0.1.
B) 0.3.
C) 0.6.
D) 0.9.
21) Refer to Table 12-3. Given the consumption schedule in the table above, the marginal propensity to
save is
A) 0.1.
B) 0.4.
C) 0.7.
D) 0.9.
22) If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by
A) $2 million.
B) $5 million.
C) $15 million
D) $50 million.
26
23) If national income increases by $20 million and consumption increases by $5 million, the marginal
propensity to consume is
A) 4.
B) 0.75.
C) 0.5.
D) 0.25.
24) When we graph consumption as a function of ________ rather than as a function of disposable
income, the slope of this consumption function is ________.
A) national income; the MPC
B) personal income; (MPC – MPS)
C) national income; the MPS
D) personal income; the MPS
25) If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will
A) increase consumption by $7,500.
B) increase consumption by $2,500.
C) decrease consumption by $7,500.
D) decrease consumption by $2,500.
26) MPC + MPS =
A) 0.
B) 0.5.
C) 1.
D) 100.
27) If the marginal propensity to consume is 0.75, the marginal propensity to save is
A) 0.25.
B) 0.5.
C) 1.
D) 3.
28) National income =
A) Consumption + Saving – Taxes
B) Consumption – Saving – Taxes
C) Consumption – Saving +Taxes
D) Consumption + Saving + Taxes
29) Investment spending ________ during a recession, and ________ during an expansion.
A) declines; increases
B) increases; declines
C) increases; increases
D) declines; declines
30) Consumer spending ________ and investment spending ________.
A) is very volatile and subject to fluctuations; follows a smooth trend
B) follows a smooth trend; is more volatile and subject to fluctuations
C) follows a smooth trend; is the most stable component of aggregate expenditure
D) is very erratic; is also erratic, but less erratic than consumer spending
31) If firms are more optimistic that future profits will rise and remain strong for the next few years,
then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
32) In the United States, spending on residential construction
A) rose slowly in the period just before the recession of 2007-2009, declined slowly during the recession,
and recovered slowly thereafter.
B) rose rapidly in the period just before the recession of 2007-2009, declined dramatically during the
recession, and recovered rapidly thereafter.
C) rose rapidly in the period just before the recession of 2007-2009, declined dramatically during the
recession, and continued to decline slowly thereafter.
D) rose rapidly in the period just before the recession of 2007-2009, declined dramatically during the
recession, and recovered only slowly thereafter.
33) Investment spending will increase when
A) the interest rate rises.
B) the corporate income tax increases.
C) business cash flow increases.
D) firms become more pessimistic about earning future profits.
34) During a(n) ________ many firms experience increased profits, which increases ________ and
investment spending.
A) expansion; government spending
B) recession; cash flow
C) expansion; cash flow
D) recession; business confidence
35) From 1983-2015, net exports for the United States
A) grew and then declined.
B) were negative.
C) were positive.
D) increased as exports rose above imports.
36) The difference between GDP and net taxes is
A) personal income.
B) actual investment spending.
C) disposable income.
D) unplanned investment spending.
37) U.S. net export spending rises when
A) the price level in the United States rises relative to the price level in other countries.
B) the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.
C) the value of the U.S. dollar increases relative to other currencies.
D) the inflation rate is higher in the United States relative to other countries.
38) ________ usually increase(s) when the U.S. economy is in a recession and decrease(s) when the U.S.
economy is expanding.
A) Consumer spending
B) Planned investment
C) Net Exports
D) Unplanned investment
39) If inflation in the United States is higher than inflation in other countries, what will be the effect on
net exports for the United States?
A) Net exports will rise as U.S. exports increase.
B) Net exports will rise as U.S. imports decrease.
C) Net exports will decrease as U.S. exports decrease.
D) Net exports will decrease as U.S. imports decrease.
40) Which of the following will decrease aggregate expenditure in the United States?
A) a decrease in the value of the dollar
B) a decrease in the price level
C) a decrease in interest rates
D) a decrease in government purchases
41) Which is the smallest component of aggregate expenditure?
A) planned investment expenditures
B) consumption expenditures
C) government expenditures
D) net export expenditures
42) Consumption spending will ________ when disposable income ________.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) change unpredictably; decreases
43) The five most important variables that determine the level of ________ are disposable income,
wealth, expected future income, price level, and interest rate.
A) consumption
B) government purchases
C) planned investment
D) net exports
44) An increase in taxes will ________ consumption spending, and a decrease in transfer payments will
________ consumption spending.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
45) An increase in Social Security payments will
A) increase consumption spending.
B) increase investment spending.
C) increase government spending.
D) increase export spending.
46) Household wealth is defined as the value of a household’s
A) assets minus the value of its liabilities.
B) assets plus the value of its liabilities.
C) assets.
D) liabilities.
47) An example of assets that are included in ________ would be stocks, bonds, and savings accounts.
A) household wealth
B) household income
C) planned investment
D) consumer purchases
48) A stock market crash which causes stock prices to fall should cause
A) a decrease in consumption spending.
B) an increase in consumption spending.
C) an increase in wealth.
D) no change in consumption spending.
Article Summary
Gains in consumer spending and construction gave GDP a bigger boost than was forecast in the
second quarter of 2015, growing at an annualized rate of 3.9 percent. Declining energy prices, rising
home prices, and increased employment are being credited for much of the gain in consumer
spending, which grew at an annualized rate of 3.6 percent. Increases in commercial and residential
construction boosted business investment spending, which grew at an annual rate of 5.2 percent.
Government spending also grew at an annual rate of 2.6 percent for the quarter. Economists cited the
primary obstacle for continuing this growth pace in the third quarter is the need to reduce excess
inventories.
Source: Shobhana Chandra, “Economy in U.S. Picked Up on Consumer Spending, Construction,”
bloomberg.com, September 25, 2015.
49) Refer to the Article Summary. The increase in consumer spending discussed in the article summary
was due in part to increases in employment and lower energy prices, which lead to an increase in
disposable income. The increase in consumption resulting from the increase in disposable income will
cause a(n) ________ the aggregate expenditure curve.
A) movement up along
B) movement down along
C) downward shift of
D) upward shift of
50) A decrease in the real interest rate will
A) cause consumers to spend less and save more.
B) most likely increase consumer’s purchases of durable goods.
C) most likely increase the reward to savings.
D) most likely increase the cost of borrowing.
51) Increases in the price level will
A) lower consumption because goods and services are less affordable.
B) raise consumption because some goods and services are more affordable.
C) raise consumption because real wealth increases.
D) lower consumption because real wealth decreases.
52) Which of the following will reduce consumer expenditures?
A) a decrease in interest rates
B) a general increase in housing prices
C) a decrease in expected future income
D) a decrease in the price level
53) The consumption function describes the relationship between
A) consumption spending and national income.
B) consumption spending and aggregate income.
C) consumption spending and disposable income.
D) consumption spending and personal income.
54) The change in consumption divided by the change in disposable income is equal to
A) the slope of the consumption function.
B) aggregate expenditure.
C) household saving.
D) real GDP.
55) The marginal propensity to consume is defined as
A) consumption divided by disposable income.
B) disposable income divided by consumption.
C) the change in consumption divided by the change in disposable income.
D) the change in disposable income divided by the change in consumption.
35
56) If disposable income increases by $500 million, and consumption increases by $400 million, then the
marginal propensity to consume is
A) 1.25.
B) 0.8.
C) 0.6.
D) 0.4.
57) If disposable income falls by $40 billion and consumption falls by $30 billion, then the slope of the
consumption function is
A) 1.33.
B) 0.75.
C) 0.4.
D) 0.3.
58) ________ is defined as national income + transfers – taxes.
A) Gross private domestic investment
B) GDP
C) Personal income
D) Disposable income
Table 12-4
Consumption
(dollars)
Disposable Income
(dollars)
$600
$1,000
900
1,500
1,200
2,000
59) Refer to Table 12-4. Given the consumption schedule in the table above, the marginal propensity to
consume is
A) 0.5.
B) 0.6.
C) 0.75.
D) 0.8.
60) Refer to Table 12-4. Given the consumption schedule in the table above, the marginal propensity to
save is
A) 0.3.
B) 0.4.
C) 0.5.
D) 0.6.
61) If the MPC is 0.95, then a $10 million increase in disposable income will
A) increase consumption by $200 million.
B) increase consumption by $9.5 million.
C) decrease consumption by $105 million.
D) increase consumption by $950 million.
62) If national income increases by $75 million and consumption increases by $15 million, the marginal
propensity to consume is
A) 5.
B) 0.75.
C) 0.20.
D) 0.15.
63) When we graph consumption as a function of national income rather than as a function of ________,
the slope of this consumption function is the ________.
A) disposable income; MPC
B) personal income; MPC
C) disposable income; MPS
D) personal income; MPS
64) If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will
A) increase consumption by $9 million.
B) increase consumption by $1 million.
C) decrease consumption by $9 million.
D) decrease consumption by $1 million.
65) The sum of the marginal propensity to consume and the marginal propensity to save is always equal
to
A) zero.
B) 0.5.
C) 1.
D) 100.
66) If the marginal propensity to consume is 0.6, the marginal propensity to save is
A) 0.4.
B) 0.6.
C) 1.
D) 1.5.
67) Which of the following is true?
A) National income = Consumption + Savings – Taxes
B) National income = Consumption – Savings – Taxes
C) National income = Consumption + Savings + Taxes
D) National income = Consumption – Savings + Taxes
68) Investment spending increases during ________, and decreases during ________.
A) an expansion; a recession
B) a recession; an expansion
C) a recession; a depression
D) a deflation; an inflation
69) ________ spending follows a smooth trend whereas, ________ spending is more volatile and subject
to fluctuations.
A) Consumer; government
B) Consumer; investment
C) Investment; consumer
D) Government; consumer
70) If firms are more pessimistic and believe that future profits will fall and remain weak for the next
few years, then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
71) Investment spending will decrease when
A) the interest rate falls.
B) the corporate income tax decreases.
C) business cash flow decreases.
D) firms become more optimistic about earning future profits.
72) During a(n) ________ many firms experience reduced profits, which reduces ________ and
investment spending.
A) expansion; business confidence
B) recession; cash flow
C) expansion; cash flow
D) recession; government spending
73) If the marginal propensity to save is 0.4, then a $2 million increase in disposable income will
A) increase consumption by $5 million.
B) increase consumption by $1.2 million.
C) decrease consumption by $5 million.
D) decrease consumption by $1.2 million.
74) The difference between GDP and disposable income is
A) national income.
B) actual investment spending.
C) net taxes.
D) unplanned investment spending.
75) U.S. net export spending falls when
A) the price level in the United States falls relative to the price level in other countries.
B) the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.
C) the value of the U.S. dollar decreases relative to other currencies.
D) the inflation rate is lower in the United States relative to other countries.
76) Net exports usually ________ when the U.S. economy is in a recession and ________ when the U.S.
economy is expanding.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
77) If inflation in the United States is lower than inflation in other countries, what will be the effect on
net exports for the United States?
A) Net exports will rise as U.S. exports increase.
B) Net exports will rise as U.S. imports increase.
C) Net exports will decrease as U.S. exports decrease.
D) Net exports will decrease as U.S. imports decrease.