Review Questions Chapter 12

1) The Jackson Tool Company manufactures only tools. In 2012 Jackson Tools manufactured 20,000 tools, but sold 21,000

tools. In 2012 Jackson Tools' change in inventory was

A) -2,000 tools. B) -1,000 tools. C) 1,000 tools. D) 3,000 tools.

2) Which of the following is NOT considered investment?

A) the construction of a new factory B) the purchase of government bonds

C) the increase in planned inventories D) the acquisition of capital goods

3) Which of the following is an investment?

A) the purchase of a share of stock by a household

B) the purchase of a corporate bond by a household

C) a leveraged buyout of one corporation by another

D) the purchase of a new printing press by a business

4) If unplanned business investment is $20 million and planned investment is $20 million, then actual investment is

A) -$20 million. B) $20 million. C) $40 million. D) $200 million.

5) In 2012 Happyland's planned investment was $90 billion and its actual investment was $140 billion. In 2012

Happyland's unplanned inventory change was

A) -$115 billion. B) -$50 billion. C) $50 billion. D) $230 billion.

6) If planned investment exceeds actual investment,

A) there will be a decline in inventories. B) there will be an accumulation of inventories.

C) there will be no change in inventories. D) none of the above

7) If Inventory investment is higher than firms planned,

A) actual investment is less than planned investment.

B) actual investment must be negative.

C) actual investment is greater than planned investment.

D) actual and planned investment are equal.

8) Without the government or the foreign sector in the income-expenditure model, planned aggregate expenditure equals

A) consumption plus actual investment. B) consumption plus inventory adjustment.

C) consumption plus planned investment. D) consumption minus planned investment.

9) The MPC is

A) consumption divided by income.

B) the change in consumption divided by the change in income.

C) the change in consumption divided by the change in saving.

D) the change in saving divided by the change in income.

10) The MPS is

A) 1 + MPC.

B) total saving divided by total income.

C) the change in saving divided by the change in income.

D) income divided by saving.

11) Saving equals

A) inventory changes. B) Y - C. C) Y - actual I. D) Y - planned I.

12) If the MPS is 0.60, MPC

A) is 1.60. B) is 0.40.

C) is 0.30. D) cannot be determined by the given information.

13) If you earn additional $500 in disposable income one week for painting your neighbors house,

A) the total of your consumption and saving will increase by less than $500.

B) the total of your consumption and saving will increase by $500.

C) your consumption will increase by more than $500, even if your MPS is 0.1.

D) the total of your consumption and saving will increase by more than $500.

14) Higher interest rates are likely to

A) have no effect on consumer spending or saving.

B) increase consumer spending and decrease consumer saving.

C) decrease both consumer spending and consumer saving.

D) decrease consumer spending and increase consumer saving.

15) Consumption is

A) determined only by income.

B) positively related to household income and wealth, interest rates, and households' expectations about the future.

C) positively related to household income and wealth and households' expectations about the future, but negatively

related to interest rates.

D) negatively related to household income and wealth, interest rates, and households' expectations about the future.

16) If Wanda's income is reduced to zero after she loses her job, her consumption will be ________ and her saving will be

________.

A) less than zero; greater than zero B) greater than zero; greater than zero

C) less than zero; less than zero D) greater than zero; less than zero

Refer to the information provided in Figure 8.1 below to answer the questions that follow.

Figure 8.1

17) Refer to Figure 8.1. At income level $1,500, this household's saving is ________ than (to) zero and this household's

consumption is ________ zero.

A) greater than; greater than B) equal to; equal to

C) greater than; less than D) less than; greater than

18) Refer to Figure 8.1. This household consumes $2,000 at an income level of

A) $3,000. B) $2,275. C) $2,000. D) $1,840.

19) Refer to Figure 8.1. An increase in the amount of consumption this household makes when this household's income is

zero

A) shifts the saving function downward. B) makes the saving function flatter.

C) makes the consumption function steeper. D) shifts the consumption function downward.

Refer to the information provided in Figure 8.2 below to answer the questions that follow.

Figure 8.2

20) Refer to Figure 8.2. Jerry's consumption equals his income at Point

A) A. B) B. C) C. D) D.

21) The fraction of a change in income that is consumed or spent is called

A) average consumption. B) the marginal propensity of income.

C) the marginal propensity to save. D) the marginal propensity to consume.

22) If consumption is $10,000 when income is $10,000, and consumption increases to $11,000 when income increases to

$12,000, the MPS is

A) 0.10. B) 0.25. C) 0.50. D) 0.90.

23) Suppose saving is $1,400 when income is $10,000 and the MPC equals 0.8. When income increases to $12,000, saving is

A) $1,680. B) $1,800. C) $2,200. D) $3,000.

Refer to the information provided in Table 8.2 below to answer the questions that follow.

Table 8.2

24) Refer to Table 8.2. The equation for the aggregate saving function is

A) S = -100 + 0.1Y. B) S = -150 + 0.2Y. C) S = -150 + 0.85Y. D) S = -100 + 0.15Y.

25) Refer to Table 8.2. Assuming society's MPC is constant, at an aggregate income level of $900, aggregate consumption

would be

A) $665. B) $910. C) $1,200. D) $1,750.

26) In macroeconomics, equilibrium is defined as that point at which

A) planned aggregate expenditure equals consumption.

B) saving equals consumption.

C) planned aggregate expenditure equals aggregate output.

D) aggregate output equals consumption minus investment.

27) If aggregate output is greater than planned spending, then

A) unplanned inventory investment is negative. B) actual investment equals planned investment.

C) unplanned inventory investment is zero. D) unplanned inventory investment is positive.

28) If aggregate output equals planned aggregate expenditure, then

A) actual investment is greater than planned investment.

B) unplanned inventory adjustment is positive.

C) unplanned inventory adjustment is negative.

D) unplanned inventory investment is zero.

29) Firms react to unplanned increases in inventories by

A) increasing planned investment. B) increasing consumption.

C) reducing output. D) increasing output.

Refer to the information provided in Figure 8.11 below to answer the questions that follow.

Figure 8.11

30) Refer to Figure 8.11. The value of the multiplier is

A) 2. B) 2.5. C) 3. D) 4.

31) Refer to Figure 8.11. A $10 million increase in investment changes equilibrium output to

A) $240 million. B) $225 million. C) $175 million. D) $90 million.

32) Refer to Figure 8.11. If MPC increases to 0.8, equilibrium aggregate output

A) remains at $200 million.

B) increases to $400 million.

C) increases to $250 million.

D) cannot be determined from the given information.

Refer to the information provided in Figure 8.12 below to answer the questions that follow.

Figure 8.12

33) Refer to Figure 8.12. What is the equation for aggregate expenditure AE1?

A) AE1 = 400 + 0.4Y. B) AE1 = 600 + 0.4Y.

C) AE1 = 1,000 + 0.6Y. D) AE1 = 1,000 + 0.5Y.

34) Refer to Figure 8.12. Suppose AE1, AE2 and AE3 are parallel. What is the value of Point A?

A) $450 million

B) $510 million

C) $540 million

D) cannot be determined from the given information

35) Midwest State University in Nebraska is trying to convince Nebraska taxpayers that the tax dollars spent at Midwest

State University are well spent. One of the university's arguments is that for every $1 spent by Midwest State University

an additional $5 of expenditures are generated within Nebraska. Midwest State University is arguing that the multiplier

for their expenditures is

A) 0.2. B) 1. C) 4. D) 5.

36) If autonomous consumption increases, the size of the multiplier would

A) remain constant.

B) decrease.

C) either increase or decrease depending on the size of the change in autonomous consumption.

D) increase.

37) Related to the Economics in Practice on p. 472: According to the "paradox of thrift," as individuals increase their saving,

A) income in the economy increases because interest rates will fall and the economy will expand.

B) income in the economy will remain constant because the change in consumption equals the change in saving.

C) income in the economy will fall because the decreased consumption that results from increased saving causes the

economy to contract.

D) income in the economy increases because there is more money available for firms to invest.

Figure 12-1

38) Refer to Figure 12-1. According to the figure above, at what point is aggregate expenditure greater than GDP?

A) J B) K C) L D) none of the above

39) Refer to Figure 12-1. At point L in the figure above, which of the following is true?

A) Aggregate expenditure is greater than GDP.

B) The economy has achieved macroeconomic equilibrium.

C) GDP will be increasing.

D) Actual inventories are greater than planned inventories.

40) Refer to Figure 12-1. If the economy is at point L, what will happen?

A) Inventories have fallen below their desired level, and firms decrease production.

B) Inventories have risen above their desired level, and firms decrease production.

C) Inventories have fallen below their desired level, and firms increase production.

D) Inventories have risen above their desired level, and firms increase production.

41) Which of the following leads to an increase real GDP?

A) a decrease in interest rates

B) a decrease in the inflation rate in other countries, relative to the inflation in the United States

C) a decrease in government spending

D) households have increasingly pessimistic expectations about future income

42) If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

A) the economy is at full employment.

B) actual inventory investment will be less than planned inventory investment.

C) the economy is in a recession.

D) actual inventory investment will be greater than planned inventory investment.

43) Assume that inventories declined by more than analysts predicted. This implies that

A) planned aggregate expenditure was greater than real GDP.

B) planned aggregate expenditure was equal to real GDP.

C) planned aggregate expenditure is unrelated to real GDP.

D) planned aggregate expenditure was less than real GDP.

Figure 12-2

44) Refer to Figure 12-2. If the U.S. economy is currently at point N, which of the following could cause it to move to

point K?

A) Government expenditures increase. B) The firm's cash flow rises as profits rise.

C) Household wealth rises. D) Households expect future income to decline.

Figure 12-3

45) Refer to Figure 12-3. Suppose that government spending increases, shifting up the aggregate expenditure line. GDP

increases from GDP1 to GDP2, and this amount is $400 billion. If the MPC is 0.75, then what is the distance between N

and L or by how much did government spending change?

A) $10 billion B) $100 billion C) $200 billion D) $300 billion

46) The ratio of the increase in ________ to the increase in ________ is called the multiplier.

A) autonomous expenditure; equilibrium real GDP

B) equilibrium nominal GDP; autonomous expenditure

C) equilibrium real GDP; autonomous expenditure

D) induced expenditure; equilibrium real GDP

47) The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run,

assuming ________ is constant.

A) total production; total income; real GDP B) total spending; real GDP; total income

C) total income; real GDP; the price level D) total spending; real GDP; the price level

48) A decrease in consumer confidence can put your job at risk if

A) aggregate expenditures rise.

B) aggregate expenditures fall.

C) consumers expect their incomes to rise in the future.

D) consumers expect firms to increase investment in the future.

49) The aggregate expenditure model focuses on the ________ relationship between real spending and ________.

A) long-run; real GDP B) short-run; real GDP

C) short-run; inflation D) long-run; inflation

50) Inventories refer to

A) goods which have been presold before they are produced.

B) goods that have been produced and sold in the same year.

C) goods that have been planned but not yet produced.

D) goods that have been produced but not yet sold.