Practice Exam 3 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. The primary determinant of consumption spending is the price level. a. True b. False ____ 2. Given the data in Exhibit 0029, the level of saving at a disposable income of $1,200 is a. $80 b. $240 c. $950 d. $1,200 e. $1,300 ____ 3. On the consumption function graph, consumption is on the vertical axis and disposable income is on the horizontal axis, since a. economic variables other than disposable income that affect consumption are held constant b. consumption is the only economic variable that affects income c. consumption is the dependent variable d. consumption is an autonomous variable e. consumption and disposable income are independent ____ 4. 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 ____ 5. The slope of the consumption function equals the marginal propensity to consume. a. True b. False ____ 6. The slope of the consumption function equals the a. MPC b. MPS c. APC d. APS e. ratio of the APC to the APS (i.e., APC divided by APS)
____ 7. Expectations that disposable income will increase in the future will a. shift the current consumption function up b. shift the current consumption function down c. result in a movement upward along the current consumption function d. make the current consumption function flatter e. make the current consumption function steeper ____ 8. An rise in stock prices will __________ net wealth and __________ consumption. a. reduce; increase b. reduce; decrease c. reduce; not change d. increase; increase e. increase; decrease ____ 9. According to the life-cycle model, a. richer economies save about the same fraction of disposable income as do poor countries b. people spend much of their income when young, and borrow to finance retirement when they are older c. rich countries save a higher fraction of disposable income than do poor countries d. richer economies save less than do poor economies e. the saving rate in all nations increases over time ____ 10. According to the life-cycle model, people a. save when they are young in order to finance education and home purchases in middle age b. save when they are young in order to finance home purchases during their retirement years c. save when they are young and pay off debts when they are old d. borrow when they are young and save when they are older e. save when they are young and borrow when they are older ____ 11. A firm's level of investment is tied to the interest rate a. only when the firm has to borrow funds to buy capital b. only when the firm has to borrow funds to buy stocks c. only when the firm already has the funds and could lend them d. because the interest rate represents the opportunity cost of investing in capital
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