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Test Bank for Macroeconomics, 13th Edition

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    1 Macroeconomics, 13e (Parkin) Chapter 11 Expenditure Multipliers 1 Fixed Prices and Expenditure Plans 1) In the Keynesian model of aggregate expenditure, real GDP is determined by the A) price level. B) level of aggregate demand. C) level of aggregate supply. D) level of taxes. Answer: B Topic: Keynesian Model Skill: Recognition Status: Old AACSB: Reflective thinking 2) The Keynesian model of aggregate expenditure describes the economy in A) the short run. B) the long run. C) both the short run and the long run. D) only a strong expansion. Answer: A Topic: Keynesian Model Skill: Recognition Status: Old AACSB: Reflective thinking 3) The Keynesian model of aggregate expenditure assumes that A) individual firms' prices are flexible but the price level is fixed. B) both individual firms' prices and the price level are flexible. C) both individual firms' prices and the price level are fixed. D) individual firms' prices are fixed but the price level is flexible. Answer: C Topic: Keynesian Model Skill: Recognition Status: Old AACSB: Reflective thinking 4) In the Keynesian model of aggregate expenditure, we assume that firms will A) not change prices. B) change prices only when inventory levels rise. C) raise prices when inventory levels fall. D) change prices immediately after a fluctuation in aggregate demand, to maintain profits. Answer: A Topic: Keynesian Model Skill: Recognition Status: Old AACSB: Reflective thinking

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    2 5) According to the Keynesian theory, the typical firm A) changes its prices frequently in response to fluctuations in aggregate demand. B) lowers its prices when inventories are decreasing. C) does not change its prices immediately when aggregate demand fluctuates. D) lowers its prices if sales exceed production. Answer: C Topic: Aggregate Implications of Fixed Prices Skill: Recognition Status: Old AACSB: Reflective thinking 6) If firms set prices and then keep them fixed for a period of time, their fixed prices imply that A) the aggregate price level is fixed and that aggregate demand determines the quantity of goods and services sold. B) prices are set by aggregate demand and supply. C) the aggregate price level adjusts continuously. D) the aggregate price level is fixed and that aggregate supply determines the quantity of goods and services sold. Answer: A Topic: Aggregate Implications of Fixed Prices Skill: Conceptual Status: Old AACSB: Reflective thinking 7) In the very short term, in the Keynesian model, which of the following is fixed and does not change when GDP changes? A) planned investment B) planned consumption C) planned imports D) All of the above answers are correct. Answer: A Topic: Expenditure Plans Skill: Recognition Status: Old AACSB: Reflective thinking 8) In the very short term, planned investment ________ when GDP changes and planned consumption expenditure ________ when GDP changes. A) changes; changes. B) changes; does not change C) does not change; changes D) does not change; does not change Answer: C Topic: Expenditure Plans Skill: Recognition Status: Old AACSB: Reflective thinking

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    3 9) The components of aggregate expenditure include I. imports. II. consumption. III. government transfer payments. A) I and II B) II only C) II and III D) I, II and III Answer: A Topic: Expenditure Plans Skill: Recognition Status: Old AACSB: Reflective thinking 10) In the very short run, the components of aggregate planned expenditure that depend on the level of real GDP are A) planned consumption expenditure and planned imports. B) planned investment and planned imports. C) planned investment and planned exports. D) planned government expenditure on goods and services and planned imports. Answer: A Topic: Expenditure Plans Skill: Recognition Status: Old AACSB: Reflective thinking 11) An increase in real GDP leads to A) a decrease in aggregate planned expenditure. B) no change in aggregate planned expenditure. C) an increase in aggregate planned expenditure. D) a change in aggregate planned expenditure but whether the change is an increase or a decrease depends on whether nominal GDP increases or decreases. Answer: C Topic: Expenditure Plans Skill: Recognition Status: Revised AACSB: Reflective thinking 12) Disposable income is A) income minus saving. B) income minus taxes plus transfer payments. C) income plus transfer payments minus consumption expenditure. D) total income divided by the price level. Answer: B Topic: Consumption Function Basics Skill: Recognition Status: Old AACSB: Reflective thinking

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    4 13) Which of the following statements is FALSE? A) Disposable income - saving = consumption expenditure. B) Consumption expenditure + saving = disposable income. C) Saving = disposable income - consumption expenditure. D) Consumption expenditure = saving - disposable income. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Old AACSB: Reflective thinking 14) Disposable income is equal to A) consumption expenditure minus taxes plus transfer payments. B) aggregate income minus taxes plus government expenditures on goods and services. C) aggregate income minus taxes plus transfer payments. D) aggregate income plus transfer payments. Answer: C Topic: Consumption Function Basics Skill: Recognition Status: Old AACSB: Reflective thinking 15) Real GDP A) is always greater than aggregate income. B) is always less than aggregate income. C) might be less than or more than aggregate income depending on consumption. D) is equal to aggregate income. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Revised AACSB: Reflective thinking 16) Consumers divide disposable income into A) consumption and taxes. B) saving and taxes. C) consumption, saving, and taxes. D) consumption and saving. Answer: D Topic: Consumption Function Basics Skill: Recognition Status: Revised AACSB: Reflective thinking

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    5 17) Saving equals A) disposable income minus taxes. B) disposable income minus consumption expenditure. C) disposable income plus consumption expenditure. D) consumption expenditure minus disposable income. Answer: B Topic: Consumption Function Basics Skill: Recognition Status: Old AACSB: Reflective thinking 18) A consumption function shows a A) negative (inverse) relationship between consumption expenditure and saving. B) positive (direct) relationship between consumption expenditure and the price level. C) negative (inverse) relationship between consumption expenditure and disposable income. D) positive (direct) relationship between consumption expenditure and disposable income. Answer: D Topic: Consumption Function Skill: Recognition Status: Old AACSB: Reflective thinking 19) The consumption function relates consumption expenditure to A) the interest rate. B) disposable income. C) saving. D) the price level. Answer: B Topic: Consumption Function Skill: Recognition Status: Old AACSB: Reflective thinking 20) The consumption function relates the consumption expenditure decisions of households to A) the level of disposable income. B) investment decisions of firms. C) saving decisions of households. D) the nominal interest rate. Answer: A Topic: Consumption Function Skill: Recognition Status: Old AACSB: Reflective thinking

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    6 21) The graph of the consumption function has consumption expenditure on the vertical axis and A) the interest rate on the horizontal axis. B) time on the horizontal axis. C) disposable income on the horizontal axis. D) the Consumer Price Index on the horizontal axis. Answer: C Topic: Consumption Function Skill: Recognition Status: Old AACSB: Reflective thinking 22) The consumption function shows how much A) all households plan to consume at each level of real disposable income. B) all households plan to consume at each possible real interest rate. C) real disposable income people will earn at each income tax bracket. D) all households plan to consume at each level of savings. Answer: A Topic: Consumption Function Skill: Recognition Status: Old AACSB: Reflective thinking 23) The slope of the consumption function is A) less than 1. B) 1. C) greater than 1. D) negative. Answer: A Topic: Consumption Function Skill: Recognition Status: Old AACSB: Reflective thinking 24) The slope of the consumption function is A) less than the slope of the 45-degree line but not equal to zero. B) greater than the slope of the 45-degree line. C) equal to the slope of the 45-degree line. D) equal to zero. Answer: A Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Old AACSB: Reflective thinking

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    7 25) A movement along the consumption function is the result of changes in A) the real interest rate. B) disposable income. C) expected future income. D) the price level Answer: B Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 26) There is a movement along the consumption function if there is A) an increase in autonomous consumption. B) a decrease in the real interest rate. C) an increase in the expected future income. D) an increase in disposable income. Answer: D Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 27) A movement along the consumption function to higher levels of consumption expenditure arises because A) the level of disposable income decreases. B) household wealth rises. C) the level of disposable income increases. D) the level of desired saving rises. Answer: C Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 28) If disposable income increases A) the consumption function shifts upward. B) there is a movement upward along the consumption function. C) the consumption function shifts downward. D) there is movement downward along the consumption function. Answer: B Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking

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    8 29) The positive slope of the consumption function indicates that A) consumers spend less out of each extra dollar of income. B) the amount of household wealth is subject to change. C) when prices fall consumers spend more. D) consumers increase their total consumption expenditure when disposable income increases. Answer: D Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 30) As disposable income increases, consumption expenditures A) increase by the same amount. B) increase by a smaller amount. C) increase by a larger amount. D) remain constant. Answer: B Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 31) If real disposable income increases by $1,500, consumption expenditures will A) stay constant. B) decrease by less than $1,500. C) increase by less than $1,500. D) increase by more than $1,500. Answer: C Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 32) Between 2013 and 2014 the government estimates that disposable income in the United States decreased. Consequently, as a result of this change, consumption expenditure A) remained constant. B) decreased. C) increased. D) More information is needed about how taxes changed between 2013 and 2014. Answer: B Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking

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    9 33) Which of the following will NOT shift the consumption function upward? A) an increase in disposable income B) a fall in the real interest rate C) an increase in wealth D) an increase in price Answer: A Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 34) An increase in expected future income A) decreases consumption expenditure. B) increases saving. C) shifts the consumption function upward. D) shifts the saving function upward. Answer: C Topic: Consumption Function Skill: Conceptual Status: Old AACSB: Reflective thinking 35) Autonomous consumption is that portion of consumption expenditure that is not influenced by A) income. B) preferences. C) prices. D) the legal authorities. Answer: A Topic: Autonomous Consumption Skill: Recognition Status: Old AACSB: Reflective thinking 36) Autonomous consumption A) increases with income. B) is independent of income. C) is independent of income and must be equal to zero. D) decreases with income. Answer: B Topic: Autonomous Consumption Skill: Recognition Status: Old AACSB: Reflective thinking

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    10 37) ________ consumption is consumption that will occur ________ the level of GDP and disposable income. A) Autonomous; independent of B) Autonomous; depending on C) Induced; independent of D) None of the above answers is correct. Answer: A Topic: Autonomous Consumption Skill: Recognition Status: Old AACSB: Reflective thinking 38) Autonomous consumption is equal to A) saving when consumption equals disposable income. B) consumption when disposable income is zero. C) consumption caused by an increase in disposable income. D) dissaving when disposable income is greater than zero. Answer: B Topic: Autonomous Consumption Skill: Recognition Status: Old AACSB: Reflective thinking

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    11 39) In the above figure, consumption and disposable income are equal at A) any point along the consumption function. B) a saving level of $1 trillion and disposable income level of $4 trillion. C) a disposable income level of $0. D) a disposable income level of $2 trillion. Answer: D Topic: Consumption Function Skill: Analytical Status: Old AACSB: Analytical thinking 40) In the above figure, at a disposable income level of $2 trillion, saving equals A) disposable income. B) zero. C) $4 trillion. D) consumption expenditure. Answer: B Topic: Saving Function Skill: Analytical Status: Revised AACSB: Analytical thinking 41) In the above figure, the line AB is called A) the saving function. B) the consumption function. C) the 45-degree line. D) the expenditure function. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Analytical Status: Old AACSB: Analytical thinking

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    12 42) Induced consumption is equal to A) saving when consumption equals disposable income. B) consumption when disposable income is zero. C) consumption caused by an increase in disposable income. D) dissaving when disposable income is greater than zero. Answer: C Topic: Induced Consumption Skill: Recognition Status: Old AACSB: Reflective thinking 43) In a diagram with the consumption function, the 45-degree line indicates all points where A) consumption expenditures and saving are equal. B) saving and investment are equal. C) consumption expenditures and disposable income are equal. D) saving and disposable income are equal. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Old AACSB: Reflective thinking 44) In a diagram with the consumption function, the ________ shows all points where disposable income equals consumption expenditure. A) consumption function B) aggregate demand curve C) 45-degree line D) saving function Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Revised AACSB: Reflective thinking 45) Consumption expenditures equal disposable income A) at every point on the consumption function. B) at every point on the saving function. C) at every point on the 45-degree line. D) when saving equals disposable income. Answer: C Topic: Consumption Function and the 45-Degree Line Skill: Recognition Status: Old AACSB: Reflective thinking

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    13 46) With consumption expenditure on the vertical axis and disposable income on the horizontal axis, the consumption function intersects the 45-degree line at $8 trillion. This result indicates that A) autonomous consumption spending is $8 trillion. B) consumption spending is $8 trillion when disposable income is $8 trillion. C) consumption spending is less than $8 trillion because taxes must be paid. D) consumption spending is more than $8 trillion because taxes have been paid. Answer: B Topic: Consumption Function and the 45-Degree Line Skill: Conceptual Status: Old AACSB: Analytical thinking 47) In the above figure, line ABC is called A) the 45-degree line. B) the consumption function. C) the saving function. D) aggregate supply. Answer: B Topic: Consumption Function Skill: Analytical Status: Old AACSB: Analytical thinking

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    14 48) In the above figure, autonomous consumption equals A) 0. B) $4 trillion. C) $12 trillion. D) -$4 trillion. Answer: B Topic: Autonomous Consumption Skill: Analytical Status: Old AACSB: Analytical thinking 49) In the above figure, when disposable income is $12 trillion , induced consumption equals A) $4 trillion. B) $8 trillion. C) $12 trillion. D) $16 trillion. Answer: B Topic: Autonomous Consumption Skill: Analytical Status: Old AACSB: Analytical thinking 50) When disposable income equals $800 billion, planned consumption expenditure equals $600 billion, and when disposable income equals $1,000 billion, planned consumption expenditure equals $640 billion. What is planned saving when disposable income is $800 billion? A) $200 billion B) $360 billion C) $560 billion D) $1,400 billion Answer: A Topic: Consumption and Saving Skill: Analytical Status: Old AACSB: Analytical thinking 51) As real disposable income increases, consumption expenditure ________ and saving ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Topic: Consumption Function and Saving Function Skill: Conceptual Status: Old AACSB: Reflective thinking

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    15 52) Planned saving equals A) disposable income minus planned consumption expenditure. B) planned consumption expenditure minus disposable income. C) zero when disposable income is less than planned consumption expenditure. D) planned consumption expenditure plus disposable income. Answer: A Topic: Saving Function Skill: Recognition Status: Old AACSB: Reflective thinking 53) "Dissaving" occurs when A) income exceeds consumption expenditure. B) saving is negative. C) the consumption function is below the 45-degree line drawn from the origin. D) saving is positive. Answer: B Topic: Saving Function Skill: Recognition Status: Old AACSB: Reflective thinking 54) Dissaving A) is equal to consumption expenditure when disposable income is greater than zero. B) is equal to the amount of saving when consumption is less than disposable income. C) is equal to taxation when disposable income is zero. D) occurs when consumption is greater than disposable income. Answer: D Topic: Saving Function Skill: Recognition Status: Old AACSB: Reflective thinking 55) ________ consumption expenditure is greater than disposable income. A) It is always the case that B) Saving is positive whenever C) Dissaving occurs whenever D) None of the above answers is correct because it is impossible for consumption expenditure to be greater than disposable income. Answer: C Topic: Saving Function Skill: Recognition Status: Old AACSB: Reflective thinking

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