Chapter 27

C

1. Personal saving is equal to: A. Disposable income plus consumption B. Consumption minus disposable income C. Disposable income minus consumption D. Consumption times disposable income

B

2. The amount of consumption in an economy correlates: A. Inversely with the level of disposable income B. Directly with the level of disposable income C. Directly with the level of saving D. Directly with the rate of interest

C

3. The consumption schedule shows the relationship of household consumption to the level of: A. Saving B. Investment C. Disposable income D. The marginal propensity to consume

B

4. As disposable income decreases, consumption: A. And saving both increase B. And saving both decrease C. Increases and saving decreases D. Decreases and saving increases

A

5. As disposable income decreases, the: A. Average propensity to consume increases B. Average propensity to consume decreases C. Level of consumption increases D. Level of saving increases

A

6. The MPC can be defined as the: A. Change in consumption divided by the change in income B. Change in income divided by the change in consumption C. Ratio of income to saving D. Ratio of saving to consumption

B

7. If a family’s MPC is .7, it means that the family is: A. Operating at the break-even point B. Spending seven-tenths of any increment to its income C. Necessarily dissaving D. Spending 70 percent of its disposable income

C

8. The relationship between the MPS and the MPC is such that: A. MPC – MPS = 1 B. MPS/MPC = 1 C. 1 – MPC = MPS D. MPC – 1 = MPS

C

9. The saving schedule shows the relationship of saving of households to the level of: A. Consumption B. Investment C. Disposable income D. The average propensity to save

B

10. Refer to the saving schedule above. Dissaving occurs when disposable income is: A. Equal to level 2 B. Less than level 2 C. Greater than level 2 D. Equal to level 3

C

11. Refer to the saving schedule above. The break-even income would be level: A. 0 B. 1 C. 2 D. 3

C

12. Refer to the saving schedule above. As income falls from level 3 to level 2, the amount of: A. Dissaving decreases B. Dissaving increases C. Saving decreases D. Saving increases

B

13. In an economy, for every $10 million increase in disposable income, saving increases by $2 million. It can be concluded that the: A. Slope of the saving schedule is 2 B. Slope of the consumption schedule is .8 C. Marginal propensity to consume is .2 D. Average propensity to save is 0.2

A

14. With an MPS of .3, the MPC will be: A. 1 – .3 B. .3 – 1 C. 1/.3 D. .3

C

15. If the consumption schedule shifts downward, and the shift was not caused by a tax change, then the saving schedule: A. May shift either upward or downward B. Will shift downward C. Will shift upward D. Will not shift

D

16. The saving schedule would be shifted upward by: A. An increase in the value real and financial assets B. A falling level of consumer debt C. Expectations of rising prices of products D. A decrease in taxes

C

17. A lower real interest rate typically induces consumers to: A. Save more B. Buy fewer imported goods C. Purchase more goods that are bought using credit D. Purchase fewer goods that are bought without using credit

D

18. Refer to the consumption schedule above. If disposable income is $42,000, then saving is: A. $0 B. $2,000 C. $4,000 D. $6,000

B

19. Refer to the consumption schedule above. The marginal propensity to consume is: A. .60 B. .75 C. .80 D. .20

D

20. Refer to the consumption schedule above. If disposable income were $34,000, then the average propensity to save would be about: A. .75 B. .88 C. .25 D. .12

B

21. Two basic determinants of investment spending are: A. Consumer spending and government spending B. Expected returns and real interest rate C. General price level and the level of output D. Domestic trade and international trade

C

22. Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is: A. 11 percent B. 20 percent C. 25 percent D. 80 percent

D

23. A firm invests in a new machine that costs $5,000 a year but which is expected to produce an increase in total revenue of $5,200 a year. The current real rate of interest is 7 percent. The firm should: A. Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest B. Undertake the investment because the expected rate of return of 8 percent is greater than the real rate of interest C. Not undertake the investment because the expected rate of return of 6 percent is less than the real rate of interest D. Not undertake the investment because the expected rate of return of 4 percent is less than the real rate of interest

C

24. According to the cumulative investment table above: A. $150 billion worth of investments have expected rates of return exactly equal to 20% B. $150 billion worth of investments have expected rates of return of 20% or lower C. $40 billion worth of investments have expected rates of return between 20% and 22% D. $260 billion worth of investments have expected rates of return higher than 20%

C

25. According to the cumulative investment table above, if the real interest rate is 20%, then: A. $330 billion of investments will be undertaken B. $260 billion of investments will be undertaken C. $150 billion of investments will be undertaken D. $40 billion of investments will be undertaken

B

26. Which of the following factors would decrease investment demand? A. A decrease in business taxes B. An increase in the cost of acquiring capital goods C. An increase in the rate of technological change D. A decrease in the stock of capital goods on hand

D

27. The multiplier effect relates: A. Changes in the price level to changes in real GDP B. Changes in the interest rate to changes in investment C. Changes in disposable income to changes in consumption D. Changes in spending to changes in real GDP

D

28. If the MPC is .75, the multiplier will be: A. 2 B. 3 C. 3.5 D. 4

A

29. Assume the marginal propensity to consume is 0.8. If consumer spending increases by $20 billion, then real GDP will: A. Increase by $100 billion B. Decrease by $100 billion C. Increase by $16 billion D. Will not change

D

30. Assume that MPS is 0.4. If spending increases by $8 billion, then real GDP will increase by: A. $8 billion B. $13.3 billion C. $15 billion D. $20 billion

C

31. An increase in spending of $25 billion increases real GDP from $600 billion to $700 billion. The marginal propensity to consume must be: A. 0.25 and the multiplier is 4 B. 0.50 and the multiplier is 2 C. 0.75 and the multiplier is 4 D. 0.80 and the multiplier is 5

D

32. The value of the multiplier is likely to fall if there is a fall in: A. Consumption B. Income C. Total spending D. The marginal propensity to consume

b

33. If households in the economy save more of any extra income that they earn, then the multiplier effect will: A. Increase B. Decrease C. Be unaffected D. Become less than 1.0