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In-Class Pracitce Test #2: Consumption, Investment, Multiplier, Philips Curve
Multiple Choice Identify the letter of the choice that best answers the question.
1.If the Federal Government raised income taxes on the wealthy what would happen to the consumption function and savings function of those workers.
a. / They both would increaseb. / They both would decrease
c. / consumption would increase and savings would decrease
d. / consumption would decrease and savings would increase
e. / None listed
2.What is disposable income (DI)
a. / total income earned / d. / income left afterall savingsb. / income left after paying taxes / e. / None listed
c. / income before paying any taxes
1-A Information: Suppose that in a closed economy GDP (Y) is $50 trillion, consumption (C) is $40 trillion, Government Spending (G) is 9 trillion and taxes (T) are $8 trillion.
3.Using the information in 1-A, What are national savings:
a. / $6 trillion / b. / $4 trillion / c. / $3 trillion / d. / $2 trillion / e. / $1 trillion4.Using the information in 1-A, What are public savings:
a. / $3 trillion / b. / $2 trillion / c. / $1 trillion / d. / $0 trillion / e. / -$1 trillion5.Using the information in 1-A, What are private savings:
a. / $3 trillion / b. / $2 trillion / c. / $1 trillion / d. / $0 trillion / e. / -$1 trillion6.Assuming MPC = .90, then an increase of income taxes of 5 billion and an increase of Government spending by 5 billion should increase Real GDP by $_____ billion.
a. / $100 / b. / $50 / c. / $40 / d. / $5 / e. / $07.If the marginal propensity to consume (MPC) is .95, a $20 billion increase in federal government expenditures would increase real GDP by
a. / $200 billion, but the effect would be larger if state gov’t spending fellb. / $200 billion, but the effect would be smaller if state gov’t spending fell
c. / $400 billion, but the effect would be larger if state gov’t spending fell
d. / $400 billion, but the effect would be smaller if state gov’t spending fell
e. / none listed are correct
8.Which are true about automatic stabilizers when the economy falls into a recession::
a. / they increase problems of time lags of expansionary fiscal policy as a stabilization toolb. / they increase aggregate demand helping to stabilize a recessionary economy
c. / they are changes in taxes/government spending that policy makers quickly agree to during a recession
d. / All listed are true
9.If the government lowered taxes on interest income then you should expect what to occur in the market for Loanable Funds:
a. / Supply to increase / d. / Both B & Cb. / Demand to increase / e. / Both A & C
c. / Quantity demanded to increase
10.Expansionary Fiscal Policy would be more effective when
a. / policy lag is very short / d. / the multiplier effect is largeb. / state and local taxes are rising / e. / Both A & D
c. / prices and wages are flexible
11.Which of the following is downward sloping?
a. / both the long-run Phillips curve and the short-run Phillips curveb. / neither the long-run Phillips curve nor the short-run Phillips curve
c. / the long-run Phillips curve, but not the short-run Phillips curve
d. / the short-run Phillips curve, but not the long-run Phillips curve
12.If the economy is in a recessionary gap, which statements are true.
a. / The expected price level is lower than the actual price levelb. / If the Gov’t does nothing SRAS will eventually shift left
c. / If the Gov’t does nothing SRAS will eventually shift right
d. / Both A & B are true
e. / Both A & C are true
13.Which of the following, according to economic theory is FALSE?
a. / When a country saves more => it leads to more investment (think capital goods)b. / Lower real interest rates encourages more capital investment
c. / people who buy bonds are savers
d. / people who borrow money are investors
e. / None listed are False statements
14.If the MPC is 0.75 and there are no crowding-out effects, then an initial increase in government spending of $100 billion and a tax decrease of $100 billion will eventually increase real GDP by
a. / $800 billion. / b. / $700 billion. / c. / $600 billion. / d. / $500 billion. / e. / $400 billion15.Suppose the economy is in long-run equilibrium. In a short span of time, there is an income tax decrease and decrease in input prices. In the short run we should expect:
a. / the price level and real GDP both to rise.b. / the price level and real GDP both to fall.
c. / the effect on price level is uncertain but real GDP must increase
d. / the price level falls but the effect on real GDP is uncertain
e. / No change in either real GDP or price level
16.Which of the following would an economist consider investment
a. / a person buys Apple stock / d. / A firm buys new machinesb. / a person buys a 10-year Gov’t bond / e. / All listed are investment (A, B, C & D)
c. / a person buys a 10-year IBM bond
17.In the short run, economists consider ______leakage from GDP?
a. / Imports / b. / Taxes / c. / Savings / d. / All listed / e. / Only B & C18.After the recession of 2008 began, what has happened to the consumption function & savings function graphed above
a. / consumption rose => shifted to the leftb. / consumption fell => shifted to the right
c. / savings rose => shifted to the left
d. / Both B & C are true
e. / Both A & C are true
19.Assume Angus is a rational consumer. If Angus becomes suddenly more confident about his future he will:
a. / save less / b. / his MPS will fall / c. / his MPC will rise / d. / All listed are true (a,b,c)20.Which of the following is FALSE? (Assuming a closed economy)
a. / Savings = Investmentb. / As MPC rises, the size of the multiplier rises
c. / Consumption increases as income taxes are reduced
d. / Savings decreases as income taxes are reduced
e. / All listed are FALSE statements
21.Suppose the economy is in a long run equilibrium. The government suddenly increases spending. Which of the following is true:
a. / AD would shift leftb. / workers would initially earn less in nominal dollars
c. / workers would initially earn less in real dollars
d. / The quantity supplied in the overall economy would decrease
e. / None listed are true
22.If the MPC is 0.80 and there are no offsetting effects, then an initial increase in government income taxes of $100 billion will eventually decrease real GDP by
a. / -$800 billion. / b. / -$700 billion. / c. / -$600 billion. / d. / -$500 billion. / e. / -$400 billion23.Keynes called the fact that people tend to save more in a recession---even if they keep their job!--the ______
a. / Paradox of Savings / b. / Paradox of Thrift / c. / Paradox of Recessions / d. / Paradox of MPS24.Assume the economy is currently at full employment equilibrium. The Government suddenly lowers income taxes. Holding other factors constant, which would be the effect of this change:
a. / Real GDP would increase in short run and long runb. / Real GDP would increase in short run but not in long run
c. / Real GDP would fall in short run and long run
d. / Real GDP would fall in short run but not in long run
e. / Real GDP would be unchanged in short run and long run
25.Suppose the economy is in long-run equilibrium. In a short span of time, there is decrease in the size of the labor force and the Government reduces income taxes. In the short run, we would expect
a. / the price level to rise and real GDP to fall.b. / the price level to fall and real GDP to rise.
c. / the price level to rise and real GDP to be uncertain
d. / the price level change to be uncertain and real GDP to rise
e. / the price level change to be uncertain and real GDP to fall
26.If the economy was in recessionary gap, which statement is true:
a. / Classical economists would argue the economy will naturally self regulateb. / Supply Side economists would argue that new Gov’t incentives for business are needed
c. / Keynesian economists would argue for a tax decrease to stimulate aggregate demand
d. / All listed are true (a,b,c)
e. / Only A & C are true
27.If the economy was in recessionary gap, which statement is true if the Gov’t takes no action:
a. / expected price level will eventually fall => SRAS shifts right => reach full potential GDPb. / expected price level will eventually fall => SRAS shifts left => reach full potential GDP
c. / expected price level will eventually rise => SRAS shifts right => reach full potential GDP
d. / expected price level will eventually rise=> SRAS shifts left => reach full potential GDP
28.Which of the following would an economist consider investment
a. / a person buys stocksb. / a person buys a 10-year Gov’t bond
c. / a person buys a 10-year bond from IBM
d. / a business sells bonds to raise money for capital goods
e. / None listed are considered investment by an economist
In-Class Pracitce Test #2: Consumption, Investment, Multiplier, Philips Curve
Answer Section
MULTIPLE CHOICE
1.B
2.B
3.E
4.E
5.B
6.D
7.D
8.B
9.E
10.E
11.D
12.C
13.E
14.B
15.C
16.D
17.D
18.D
19.D
20.D
21.C
22.E
23.B
24.B
25.C
26.D
27.A
28.D