1. The most important determinant of consumer spending is:
A) the level of household debt.
B) consumer expectations.
C) the stock of wealth.
D) the level of income.
2. The MPC can be defined as that fraction of a:
A) change in income that is not spent.
B) change in income that is spent.
C) given total income that is not consumed.
D) given total income that is consumed.
3. The consumption schedule is such that:
A) both the APC and the MPC increase as income rises.
B) the APC is constant and the MPC declines as income rises.
C) the MPC is constant and the APC declines as income rises.
D) the MPC and APC must be equal at all levels of income.
4. In contrast to investment, consumption is:
A) relatively unstable.
B) relatively stable.
5. The investment demand curve will shift to the right as a result of:
A) an increase in the excess production capacity available in industry.
B) an increase in business taxes.
C) technological progress.
D) an increase in the acquisition and maintenance cost of capital goods.
6. When we draw an investment demand curve we hold constant all of the following except:
A) the expected rate of return on the investment.
B) business taxes.
C) the interest rate.
D) the present stock of capital goods.
7. Which of the following would increase investment, while leaving an existing investment demand curve, say, ID2, in place?
A) a lower interest rate
B) a higher interest rate
C) lower expected returns on investment
D) higher expected returns on investment
8. Investment spending in the United States tends to be unstable because:
A) expected profits are highly variable.
B) capital goods are durable.
C) innovation occurs at an irregular pace.
D) all of the above contribute to the instability.
9. The practical significance of the multiplier is that it:
A) equates the real interest rate and the expected rate of return on investment.
B) magnifies initial changes in spending into larger changes in GDP.
C) keeps inflation within tolerable limits.
D) helps to stabilize the economy.
10. If an unintended increase in business inventories occurs at some level of GDP, then GDP:
A) entails a rate of aggregate expenditures in excess of the rate of aggregate production.
B) may be either above or below the equilibrium output.
C) is too low for equilibrium.
D) is too high for equilibrium.
11. The equilibrium level of GDP is associated with:
A) an excess of planned investment over saving.
B) no unintended changes in inventories.
C) an unintended decrease in business inventories.
D) an unintended increase in business inventories.
12. At equilibrium real GDP in a private closed economy:
A) the MPC must equal the APC.
B) the slope of the aggregate expenditures schedule equals the MPS.
C) aggregate expenditures and real GDP are equal.
D) planned saving and consumption are equal.
13. Saving is always equal to:
A) planned investment less unintended increases in inventories.
B) actual investment.
C) planned investment.
D) unintended changes in inventories.
14. Unintended changes in inventories:
A) cause the economy to move away from the equilibrium GDP.
B) are treated as components of consumption.
C) bring actual investment and saving into equality only at the equilibrium level of GDP.
D) bring actual investment and saving into equality at all levels of GDP.
15. Investment and saving are, respectively:
A) income and wealth.
B) stocks and flows.
C) injections and leakages.
D) leakages and injections.
16. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would decrease by:
A) $100 billion.
B) $90 billion.
C) $40 billion.
D) $50 billion.
17. Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to:
A) decrease by $50 billion.
B) decrease by $150 billion.
C) remain unchanged since spending on military goods is unproductive and usually wasteful.
D) decrease by $25 billion.
18. Which of the following would increase GDP by the greatest amount?
A) a $20 billion reduction in taxes
B) $20 billion increases in both government spending and taxes
C) $20 billion decreases in both government spending and taxes
D) a $20 billion increase in government spending
19. An inflationary expenditure gap is the amount by which:
A) equilibrium GDP falls short of the full-employment GDP.
B) aggregate expenditures exceed any given level of GDP.
C) saving exceeds investment at the full-employment GDP.
D) aggregate expenditures exceed the full-employment level of GDP.
20. The aggregate demand curve is:
A) vertical if full employment exists.
B) horizontal when there is considerable unemployment in the economy.
C) downsloping because of the interest-rate, real-balances, and foreign purchases effects.
D) downsloping because production costs decrease as real output rises.
21. The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:
A) real-balances, interest-rate, and foreign purchases effects.
B) determinants of aggregate supply.
C) determinants of aggregate demand.
D) sole determinants of the equilibrium price level and the equilibrium real output.
22. Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.:
A) aggregate demand curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) aggregate supply curve would shift to the right.
D) aggregate demand curve would shift to the left.
23. If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:
A) leftward by $40 billion at each price level.
B) rightward by $20 billion at each price level.
C) rightward by $40 billion at each price level.
D) leftward by $20 billion at each price level.
24. The determinants of aggregate supply:
A) are consumption, investment, government, and net export spending.
B) explain why real domestic output and the price level are directly related.
C) explain the three distinct ranges of the aggregate supply curve.
D) include resource prices and resource productivity.
25. Monopoly or market power is the ability of a firm to:
A) shift its demand curve to the right.
B) shift its demand curve to the left.
C) set its price.
D) achieve economies of scale.
26. Other things equal, an improvement in productivity will:
A) increase the equilibrium price level.
B) shift the aggregate supply curve to the left.
C) shift the aggregate supply curve to the right.
D) shift the aggregate demand curve to the left.
27. Graphically, demand-pull inflation is shown as a:
A) rightward shift of the AD curve along an upsloping AS curve.
B) leftward shift of the AS curve along a downsloping AD curve.
C) leftward shift of AS curve along an upsloping AD curve.
D) rightward shift of the AD curve along a downsloping AS curve.
28. If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity supplied, we would expect:
A) inflation to occur.
B) the aggregate demand curve to shift rightward.
C) the aggregate demand curve to shift leftward.
D) the aggregate supply curve to shift leftward.
29. If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:
A) increasing government spending by $25 billion.
B) increasing government spending by $80 billion.
C) decreasing taxes by $25 billion.
D) decreasing taxes by $100 billion.
30. Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?
A) an increase in Federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new school buildings
D) an increase in soil conservation subsidies to farmers
31. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:
A) increase tax rates and/or reduce government spending.
B) discourage personal saving by reducing the interest rate on government bonds.
C) increase government expenditures.
D) encourage private investment by reducing corporate income taxes.
32. Suppose the price level is fixed, the MPC is .8, the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should:
A) increase government expenditures by $200 billion.
B) reduce taxes by $200 billion.
C) increase government expenditures by $40 billion.
D) reduce taxes by $160 billion.
33. Which of the following best describes the built-in stabilizers as they function in the United States?
A) The size of the balanced-budget multiplier varies inversely with the level of GDP.
B) Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
C) Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
D) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
34. The true size of Federal budget deficits may be understated because:
A) a portion of government spending is public investment.
B) inflation reduces the real value of the public debt.
C) Social Security surpluses are included as government tax revenues in measuring the budget deficit.
D) foreign holdings of the debt have recently increased.
35. The public debt is held as:
A) U.S. securities, corporate bonds, and common stock.
B) Federal Reserve Notes.
C) U.S. gold certificates.
D) Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.