Spring, 2013 Study Guide 5, Chapters 9, 10, 11

Name ______

Date______

Spring, 2013 Study Guide 5, Chapters 9, 10, 11

Essay Questions:

1.Define and discuss: The consumption function, marginal propensity to consume and marginal propensity to save.

2. Define and explain how the simple spending multiplier accounts for changes in spending plans.

3. Define and discuss: Expansionary Gap and Recessionary Gap.

Chapter 9 Aggregate Expenditure

___1. The most important determinant of a household's consumption spending is

a. / its disposable income
b. / its total wealth
c. / the number of persons in the household
d. / its net wealth
e. / the ratio of wage to nonwage income the household earns

___2.The primary determinant of saving is income.

a. / True
b. / False

___3.As disposable income increases, consumption spending

a. / increases by the same amount
b. / decreases by the same amount
c. / increases by less than the increase in disposable income
d. / decreases by less than the increase in disposable income
e. / does not change at all

___4.The difference between consumption spending and disposable income

a. / decreases as income increases
b. / stays proportionally the same as income increases
c. / decreases if the interest rate increases
d. / equals the amount of taxes paid
e. / equals saving

___5.If consumption spending is $400 and the disposable income is $550, then:

a. / Savings are $950
b. / Savings are $150
c. / Investment is $950
d. / Investment is $150
e. / Taxes are $150

___6.Out of disposable income, households

a. / consume and save
b. / consume and invest
c. / save and invest
d. / consume, save, and pay taxes
e. / consume, save, pay taxes, and make transfer payments

___7.If consumption is greater than income, saving must be negative.

a. / True
b. / False

Exhibit 9-1

Disposable
income / Consumption
$1,000 / $800
1,100 / 880
1,200 / 960
1,300 / 1,040
1,400 / 1,120

Study Guide 5, Page 2

___8.Given the data in Exhibit 9-1, the level of saving at a disposable income of $1,200 is

a. / $80
b. / $240
c. / $950
d. / $1,200
e. / $1,300

___9.Induced consumption spending

a. / represents consumption that is independent of income
b. / plus saving equals total consumption spending
c. / is positively related to disposable income
d. / is equal to autonomous consumption spending in equilibrium
e. / is the difference between autonomous consumption spending and disposable income

___10. The marginal propensity to consume is defined as the

a. / fraction of consumption that is spent on goods, both durable and nondurable
b. / fraction of a change in income that is spent on consumption
c. / fraction of a change in income that is spent on investment
d. / average amount of consumption at different levels of income
e. / average amount of consumption at a given level of income

___11.The consumption function relates consumption spending to

a. / the price level
b. / interest rates
c. / disposable income
d. / expectations about the price level
e. / household wealth

___12.The marginal propensity to save is the fraction of a change in income that is saved.

a. / True
b. / False

___13.If the MPC < 1 and a household's disposable income increases by $2,000, the household's consumption will

a. / increase by less than $2,000
b. / increase by $2,000
c. / decrease if the family was wealthy before the income change
d. / remain the same unless the change in income significantly affects the household's wealth
e. / remain the same

___14.When a household’s disposable income increases by $4,000, the savings increase by $1,000. The marginal propensity to save is:

a. / 0
b. / 0.25
c. / 0.50
d. / 0.75
e. / 1

___15.The MPC is a relationship between

a. / a change in consumption and a change in income
b. / a change in consumption and a change in saving
c. / changes in consumption and changes in saving
d. / the ratio of income to consumption at any given level of income
e. / the total level of consumption and the total level of saving

Study Guide 5, Page 3

___16.If a household's income rises from $46,000 to $46,700 and its consumption spending rises from $35,800 to $36,400, then its

a. / marginal propensity to consume is 0.86
b. / marginal propensity to consume is 0.99
c. / marginal propensity to consume is 0.98
d. / marginal propensity to save is 0.01
e. / marginal propensity to save is 0.86

___17.If a household's income rises from $20,000 to $22,000 and its consumption spending rises from $19,000 to $20,500, then its

a. / marginal propensity to save is 0.70
b. / marginal propensity to save is 0.02
c. / marginal propensity to consume is 0.93
d. / marginal propensity to consume is 0.95
e. / marginal propensity to consume is 0.75

Exhibit 9-2

Income=
output
(Y) / C / Planned
investment / Aggregate
expenditure / Unintended
inventory
adjustment / Actual
investment
$1,200 / $1,240 / $200 / $1,440 / -$240 / -$40
1,400 / 1,380 / 200 / 1,580 / -180 / -20
1,600 / 1,520 / 200 / 1,720 / -120 / 80
1,800 / 1,660 / 200 / 1,860 / -60 / 140
2,000 / 1,800 / 200 / 2,000 / 0 / 200
2,200 / 1,940 / 200 / 2,140 / 60 / 260
2,400 / 2,080 / 200 / 2,280 / 120 / 320

___18.In Exhibit 9-2, the marginal propensity to consume equals

a. / 140
b. / 1.00
c. / 1.43
d. / 0.43
e. / 0.70

___19.In Exhibit 9-2, the marginal propensity to save equals

a. / 60
b. / 0
c. / 0.43
d. / 0.57
e. / 0.30

___20.If the marginal propensity to consume is equal to 0.70 and income rises by $20 billion, then consumption spending will rise by

a. / $ 6 billion
b. / $14 billion
c. / $20 billion
d. / $28 billion
e. / $67 billion

___21.If every time disposable income increases by $5 billion, consumption increases by $4 billion and saving increases by $1 billion, the MPC and MPS are, respectively,

a. / 1/4, 1/2
b. / 1/2, 1/2
c. / 1, 0
d. / 4/5, 1/5
e. / the answer is indeterminate from the information given

Study Guide 5, Page 4

___22.If income increases by $100 and the MPC is 3/4 (0.75), then consumption increases by

a. / $25
b. / $66.66
c. / $50
d. / $33.33
e. / $75

___23. If the marginal propensity to consume is 0.75 and the savings are increasing by $2,000 then, the consumption spending is increasing by:

a. / $4,000
b. / $6,000
c. / $8,000
d. / $10,000
e. / $12,000

___24.Along the aggregate consumption function, an increase in income will

a. / cause autonomous consumption to rise
b. / shift the consumption function upward
c. / cause a corresponding downward shift of the saving function
d. / cause movement along the given consumption function
e. / shift the consumption function downward

___25.A drop in stock prices will ______net wealth and ______consumption.

a. / reduce; increase
b. / reduce; decrease
c. / reduce; not change
d. / increase; increase
e. / increase; decrease

Chapter 10, Aggregate Expenditure and Aggregate Demand

___26. Consumption plus saving equals disposable income at every level of real GDP demanded.

a. / True
b. / False

___27. Aggregate expenditure means total or combined spending.

a. / True
b. / False

___28.For a balanced government budget:

a. / Government purchases = Taxes
b. / Government purchases = Savings + Consumption spending
c. / Government purchases = Transfer payments
d. / Government purchases = Consumption spending
e. / Government purchases = Net taxes

___29.The components of planned aggregate spending are:

a. / Consumption spending, savings, investment, and net taxes
b. / Consumption spending, savings, investment, and net exports
c. / Consumption spending, savings, government purchases, and net exports
d. / Consumption spending, investment, government purchases, and net taxes
e. / Consumption spending, investment, government purchases, and net exports

Study Guide 5, Page 5

Exhibit 10-1

Schedule for Real GDP
With Net Taxes and Government Purchases
(Trillions of Dollars)
Real
GDP
(Y) / Net
Taxes
(NT) / Dispos
-able
Income
(Y-NT) / Con-
sumption
(C) / Saving
(S) / Planned
Invest-
ment
(I) / Net
Exports
(NX) / Govern-
ment
Purchases
(G) / Planned
Aggregate
Expenditure
(C+I+NX+G)
3.0 / 0.9 / 2.1 / 2.0 / 0.1 / 0.5 / -0.2 / 0.9 / 3.2
3.6 / 0.9 / 2.7 / 2.4 / 0.3 / 0.5 / -0.2 / 0.9 / 3.5
4.2 / 0.9 / 3.3 / 2.8 / 0.5 / 0.5 / -0.2 / 0.9 / 4.0
4.8 / 0.9 / 3.9 / 3.2 / 0.7 / 0.5 / -0.2 / 0.9 / 4.4
5.4 / 0.9 / 4.5 / 3.6 / 0.9 / 0.5 / -0.2 / 0.9 / 4.8

___30.In Exhibit 10-1, the government's budget is

a. / in surplus
b. / in deficit
c. / in balance
d. / indeterminate from the information given
e. / $0.5 trillion

___31.In Exhibit 10-1, which of the variables are autonomous?

a. / saving and consumption only
b. / net taxes and government purchases only
c. / net exports and government purchases only
d. / consumption, investment, and net exports only
e. / investment, net exports, net taxes, and government purchases

___32.In Exhibit 10-1, the marginal propensity to consume equals

a. / 5/6
b. / 4/5
c. / 3/4
d. / 1/2
e. / 2/3

___33.In Exhibit 10-1, the equilibrium level of income is

a. / $5.4 trillion
b. / where real GDP = total planned expenditures
c. / where disposable income = total planned expenditures
d. / $4.8 trillion
e. / where the government has a balanced budget, which is at each level of income in this example

___34.Which of the following is not a part of planned aggregate spending?

a. / consumption
b. / investment
c. / government expenditures
d. / net exports
e. / saving

___35.Movement along the aggregate expenditure curve is caused by a change in the level of income.

a. / True
b. / False

Study Guide 5, Page 6

___36.The equilibrium quantity of aggregate output occurs when

a. / the economy reaches the full employment of labor
b. / planned aggregate expenditure equals income generated from production
c. / actual aggregate expenditures equal real GDP
d. / inventories of goods and services are increasing
e. / inventories of goods and services are decreasing

___37.Which of the following best describes aggregate expenditure?

a. / C + I + G + (X - M)
b. / C + S + G + (X - M)
c. / C + I + G + (X + M)
d. / C + I + T + (X - M)
e. / C + I + T + (X + M)

Exhibit 10-2

(Trillions of Dollars)
Real
GDP
(Y) / Net
Taxes
(NT) / Dispos
-able
Income
(Y-NT) / Con-
sumption
(C) / Saving
(S) / Planned
Invest-
ment
(I) / Govern-
ment
Purchases
(G) / Net
Exports
(X-M) / Planned
Aggregate
Expenditures
(C+I+G+(X-M)
5.0 / 1.0 / 4.0 / 3.9 / 0.1 / 1.0 / 1.0 / -0.7 / 5.2
5.5 / 1.0 / 4.5 / 4.3 / 0.2 / 1.0 / 1.0 / -0.7 / 5.6
6.0 / 1.0 / 5.0 / 4.7 / 0.3 / 1.0 / 1.0 / -0.7 / 6.0
6.5 / 1.0 / 5.5 / 5.1 / 0.4 / 1.0 / 1.0 / -0.7 / 6.4
7.0 / 1.0 / 6.0 / 5.5 / 0.5 / 1.0 / 1.0 / -0.7 / 6.8

____38.In Exhibit 10-2, the equilibrium level of GDP is

a. / $5.0 trillion
b. / $5.5 trillion
c. / $6.0 trillion
d. / $6.5 trillion
e. / $7.0 trillion

___39.At the equilibrium level of GDP in Exhibit 10-2, injections equal

a. / $1.0 trillion
b. / $1.5 trillion
c. / $1.4 trillion
d. / $1.2 trillion
e. / $1.3 trillion

___40.At the equilibrium level of GDP in Exhibit 10-2, leakages equal

a. / $1.4 trillion
b. / $1.3 trillion
c. / $1.5 trillion
d. / $1.0 trillion
e. / $1.1 trillion

___41.At the equilibrium level of GDP in Exhibit 10-2, saving equals

a. / $0.4 trillion
b. / $0.6 trillion
c. / $0.5 trillion
d. / $0.2 trillion
e. / $0.3 trillion

Study Guide 5, Page 7

___42. In equilibrium in Exhibit 10-2, S + NT = I + G + (X - M) and is equal to

a. / $1.1 trillion
b. / $1.2 trillion
c. / $1.3 trillion
d. / $1.4 trillion
e. / $1.5 trillion

___43. The marginal propensity to consume (MPC) in Exhibit 10-2 equals

a. / 0.20 or 1/5
b. / 0.40 or 2/5
c. / 0.80 or 4/5
d. / 0.90 or 9/10
e. / 0.60 or 3/5

___44.The marginal propensity to save (MPS) in Exhibit 10-2 equals

a. / 0.80 or 4/5
b. / 0.60 or 3/5
c. / 0.40 or 2/5
d. / 0.10 or 1/10
e. / 0.20 or 1/5

___45. In Exhibit 10-2, which group of the following is considered autonomous with respect to income?

a. / C, I, (X - M)
b. / S, I, G, (X - M)
c. / NT, C, G, (X - M)
d. / NT, S, I, (X - M)
e. / I, G, X

___46. Suppose that at a particular level of real GDP, the unintended change in inventories is zero. Which of the following is true?

a. / That level of real GDP is less than the equilibrium level of real GDP demanded.
b. / That level of real GDP is greater than the equilibrium level of real GDP demanded.
c. / That level of real GDP is the equilibrium level of real GDP demanded.
d. / At that level of real GDP, there is no inflation.
e. / At that level of real GDP, there is no saving.

___47. In the income-expenditure framework, if planned aggregate expenditures are greater than real GDP,

a. / the price level will fall
b. / consumption must fall
c. / inventories will increase
d. / inventories will decrease
e. / consumption will decrease

Study Guide 5, Page 8

Exhibit 10-3

Real
GDP / Consumption / Planned
Investment
$0 / $140 / $100
100 / 220 / 100
200 / 300 / 100
300 / 380 / 100
400 / 460 / 100
500 / 540 / 100
600 / 620 / 100
700 / 700 / 100
800 / 780 / 100
900 / 860 / 100
1,000 / 940 / 100
1,100 / 1,020 / 100
1,200 / 1,100 / 100
1,300 / 1,180 / 100

___48.The MPC in the economy represented in Exhibit 10-3 is

a. / 0
b. / 0.2
c. / 0.8
d. / 0.9
e. / 80

___49.The MPS in the economy represented in Exhibit 10-3 is

a. / 0
b. / 0.1
c. / 0.2
d. / 0.8
e. / 20

___50.If the mps is 0.25, the simple multiplier is

a. / 25
b. / 75
c. / 5
d. / 3/4
e. / 4

___51.If investment increases by $100 and, as a result, GDP ultimately increases by $200, the multiplier equals

a. / 1
b. / 2
c. / 3
d. / 4
e. / 5

___52.The larger the MPC, the greater the multiplier effect.

a. / True
b. / False

Study Guide 5, Page 9

Chapter 11, Aggregate Supply

___53.Aggregate supply reflects billions of production decisions made by

a. / consumers when they decide which products to purchase
b. / households and firms, because they each demand goods and services
c. / the largest firms and largest households
d. / households, which demand resources, and firms, which supply resources
e. / resource suppliers and firms

___54.Which of the following is true of the short-run aggregate supply curve?

a. / It shows the relation between the inflation rate and the quantity of aggregate output firms supply, other things constant.
b. / It shows the relation between the price of labor and the aggregate quantity of labor workers supply, other things constant.
c. / It shows the relation between the interest rate and the quantity of capital goods firms supply, other things constant.
d. / It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.
e. / It displays an inverse relationship between the price level and real GDP.

___55.Aggregate supply expresses the relationship between

a. / the price level in the economy and the aggregate output firms will produce, other things constant
b. / the price level and the aggregate amount people will buy at that price level
c. / the price level and the potential amount of output that could be produced
d. / the quantity of output that will be produced and sold in one year
e. / the actual output and the potential output of the economy

___56. Compensation is usually negotiated in terms of the nominal wage because wage agreements are based on expected price levels.

a. / True
b. / False

___57. A nominal wage is

a. / not above the legal minimum
b. / always above the legal minimum
c. / measured in terms of goods and services it can buy
d. / measured in current dollars rather than in constant dollars
e. / measured in constant dollars rather than in current dollars

___58. A real wage is measured in current dollars rather than in constant dollars.

a. / True
b. / False

___59. Which of the following is true about real and nominal wages?

a. / The nominal wage will be constant only if the inflation rate is constant.
b. / The real wage will be constant only if the inflation rate is constant.
c. / Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant.
d. / The real wage will be constant only if the price level is constant.
e. / The real wage will be constant only if the nominal wage is constant.

___60. The expected price level is significant because

a. / it is the equilibrium price level in the short run
b. / it determines the actual price level in the short run
c. / it determines the actual price level in the long run
d. / firms and resource owners make long-term agreements based on the expected price level
e. / the difference between the expected and actual price levels is equal to the actual inflation rate

Study Guide 5, Page 10

___61. Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage was $20 in year 1 and $18 in year 2. What is true about the price level?

a. / It rose by 20 percent.
b. / It rose by 25 percent.
c. / It remained unchanged.
d. / It fell by 10 percent.
e. / It fell by 20 percent.

___62. Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage increased from $20 to $24. What is true about the price level?

a. / It rose by 20 percent.
b. / It rose by 25 percent.
c. / It remained unchanged.
d. / It fell by 10 percent.
e. / It fell by 20 percent.

___63. If the price level rises by 5 percent and the nominal wage rises 3 percent, the real wage

a. / falls by 2 percent
b. / falls by 8 percent
c. / rises by 2 percent
d. / rises by 8 percent
e. / remains constant

___64.The potential output of an economy is the level of output produced when the

a. / real wage equals the nominal wage
b. / price level is constant
c. / expected real wage equals the inflation rate
d. / expected price level equals the unemployment rate
e. / expected price level equals the actual price level

___65. Which of the following types of unemployment can exist in an economy that is at its potential output level?

a. / cyclical unemployment only
b. / structural unemployment only
c. / frictional, cyclical, and seasonal unemployment only
d. / frictional, seasonal, and structural unemployment only
e. / there will be no unemployment in an economy that is at the potential output level

___66.If the nominal wage increased by 5% and the price level increased by 6%, then the real wage:

a. / Increased by 5%
b. / Increased by 11%
c. / Decreased by 5%
d. / Increased by 1%
e. / Decreased by 1%

___67. In the long run, but not in the short run,

a. / output is fixed
b. / prices can change but the level of output is fixed
c. / some resource prices are fixed
d. / prices are fixed but the output level can change
e. / both prices and output are fixed

___68. In the short run, but not in the long run,

a. / actual output can equal potential output
b. / cyclical unemployment can exist
c. / structural unemployment can exist
d. / frictional unemployment can exist
e. / real and nominal GDP can differ

Study Guide 5, Page 11

Study Guide 5, Page 11

___69. In the long run, but not in the short run,

a. / cyclical unemployment can exist
b. / structural unemployment can exist
c. / frictional unemployment can exist
d. / the actual rate of unemployment equals the natural rate of unemployment
e. / actual output can exceed potential output

___70. Potential output depends on all of the following exceptone. Which is the exception?

a. / the supply of labor
b. / labor productivity
c. / household choices regarding labor and leisure
d. / the technology in current use
e. / the number of consumers in the market

___71. The long-run equilibrium price level is the price level the economy is expected to reach when the

a. / economy produces its potential output
b. / Fed has stabilized interest rates
c. / federal budget is balanced
d. / discount rate equals the prime rate
e. / inflation rate is zero

___72. In constructing the short-run aggregate supply curve, we define the short run as the period in which

a. / the price level is constant
b. / output is fixed
c. / profit is constant
d. / the costs of some resources are fixed
e. / the economic growth rate is less than 4 percent

___73. Between 1994 and 2004, Jack's salary increased from $100,000 to $200,000 per year and the price index increased from 100 to 300 during the same period. Which of the following statements best describes Jack's situation?

a. / his real income and money income have both increased
b. / his real income increased and money income decreased
c. / his real income and money income both decreased
d. / his real income decreased and money income increased
e. / his real income and money income remained unchanged

Exhibit 11-1

Quantity of
Aggregate Output
Demanded / Price
Level / Quantity of
Aggregate Output Supplied
#1 / #2 / #3
$7.0 / 110 / $5.0 / $6.0 / $4.0
6.5 / 120 / 5.5 / 6.5 / 4.5
6.0 / 130 / 6.0 / 7.0 / 5.0
5.5 / 140 / 6.5 / 7.5 / 5.5
5.0 / 150 / 7.0 / 8.0 / 6.0

___74. Given aggregate demand and aggregate supply schedule #2 in Exhibit 11-1, the equilibrium output level and price level are

a. / output $7.0, price level 110
b. / output $6.5, price level 120
c. / output $6.0, price level 130
d. / output $5.5, price level 140
e. / output $5.0, price level 150

Study Guide 5, Page 12

___75. Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1, the equilibrium price level is

a. / 110
b. / 120
c. / 130
d. / 140
e. / 150

ANS:C

Exhibit 11-3

___76. Consider Exhibit 11-3. In this situation, long-run equilibrium would be established by a(n)

a. / increase of short-run aggregate supply to close the expansionary gap
b. / decrease of short-run aggregate supply to close the expansionary gap
c. / decrease of short-run aggregate supply to close the contractionary gap
d. / increase of short-run aggregate supply to close the contractionary gap
e. / rightward shift of the aggregate demand curve

___77.In Exhibit 11-3, the distance between Y1 and Y2 is called

a. / an expansionary gap
b. / a contractionary gap
c. / an increase in potential output
d. / the natural rate of unemployment
e. / a decrease in potential output

____78.In Exhibit 11-3, at income level Y2

a. / potential output is greater than actual output
b. / there is a contractionary gap
c. / the price level will fall
d. / the actual unemployment rate equals the natural rate of unemployment
e. / aggregate supply will increase to restore equilibrium

___79. If the economy is experiencing an expansionary gap, which of the following will occur in the long run?

a. / Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.
b. / Workers will negotiate nominal wage increases that will shift the SRAS curve to the right.
c. / Employers will negotiate lower nominal wages (relative to prices) that will shift the SRAS curve to the right.
d. / Employers will negotiate lower nominal wages (relative to prices) that will shift the SRAS curve to the left.
e. / Aggregate demand will fall because workers' incomes are rising.

Study Guide 5, Page 13

Exhibit 11-6

___80. In Exhibit 11-6, the distance between Y1 and Y2 is called

a. / an expansionary gap
b. / a contractionary gap
c. / an increase in potential output
d. / a decrease in potential output
e. / the natural rate of unemployment

___81. In Exhibit 11-6, at income level Y1

a. / potential output is less than actual output
b. / there is an expansionary gap
c. / the price level will rise
d. / aggregate supply will fall to restore equilibrium
e. / the actual unemployment rate is greater than the natural rate of unemployment