Question 1

The nominal rate of interest is 8.5 percent and the real rate is 5 percent. The expected rate of return on an investment is 8 percent. The firm should:

Accepted Answer

A)   Not undertake the investment because the expected rate of return of 8 percent is less than the nominal interest rate
B)   Not undertake the investment because the expected rate of return of 8 percent is less than the nominal plus the real interest rate
C)   Undertake the investment because the expected rate of return of 8 percent is greater than the difference between the nominal and real interest rates
D)   Undertake the investment because the expected rate of return of 8 percent is greater than the real rate of interest

Question 2

Saving equals disposable income plus consumption.

Accepted Answer

A) True 
 B)False

Question 3

An increase in disposable income:

Accepted Answer

A)   Increases consumption because it shifts the consumption schedule upward
B)   Decreases consumption because it shifts the consumption schedule downward
C)   Increases consumption by moving upward along a given consumption schedule
D)   Decreases consumption by moving downward along a given consumption schedule

Question 4

The saving schedule shows the relationship of saving of households to the level of:

Accepted Answer

A)   Consumption
B)   Investment
C)   Disposable income
D)   The average propensity to save

Question 5

Refer to the consumption schedule above. The marginal propensity to consume is:

Accepted Answer

A)   .60
B)   .75
C)   .80
D)   .20

Question 6

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:

Accepted Answer

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

Question 7

Which of the following would shift the consumption schedule downward?

Accepted Answer

A)   A decrease in real interest rates
B)   An increase in the value of financial assets
C)   An increase in the probability of a recession
D)   A decrease in disposable income

Question 8

If households consume less at each level of disposable income, they are:

Accepted Answer

A)   Saving more
B)   Saving less
C)   Spending more
D)   Working less

Question 9

An investment demand curve shows the varying amounts of investment that would be undertaken at various levels of:

Accepted Answer

A)   The average price in the economy
B)   Consumer spending
C)   Personal saving
D)   The real interest rate

Question 10

Dissaving occurs when:

Accepted Answer

A)   Income is greater than saving
B)   Income is less than consumption
C)   Saving is greater than consumption
D)   Saving is greater than the interest rate

Question 11

The so-called Paradox of Thrift that became quite obvious in the Great Recession of 2007-2009 refers to all of the following, except:

Accepted Answer

A)   Saving may be virtuous for the individual, but it could be bad for the economy as a whole
B)   Consumers becoming thriftier may help long-term growth, but ironically reduces current output
C)   In trying to spend less now, consumers will end up spending more later on
D)   As individuals try to save more, the whole group may end up saving less as total income declines

Question 12

Art Buchwald's article in the Last Word section of the chapter, "Squaring the Economic Circle," is a humorous description of:

Accepted Answer

A)   The multiplier effect
B)   A recessionary gap
C)   An inflationary gap
D)   The marginal propensity to save

Question 13

Refer to the consumption schedule above. As income falls from level 3 to level 2, the amount of:

Accepted Answer

A)   Consumption increases and the amount of dissaving increases
B)   Consumption decreases and the amount of dissaving decreases
C)   Consumption decreases and the amount of saving decreases
D)   Consumption decreases and the amount of saving increases

Question 14

The Great Recession of 2007-2009 altered the prior behavior of consumers in the economy by:

Accepted Answer

A)   Shifting the consumption schedule up
B)   Shifting the consumption schedule down
C)   Shifting the saving schedule down
D)   Moving the economy down along a stable consumption schedule

Question 15

The so-called wealth effect will result in households:

Accepted Answer

A)   Spending more and saving less
B)   Spending less and saving more
C)   Spending less and saving less
D)   Spending more and saving more

Question 16

The disposable income (DI)  and consumption (C)  schedules are for a private, closed economy. All figures are in billions of dollars.  Refer to the data above. If consumption increases by $10 billion at each level of disposable income, the marginal propensity to consume will:

Accepted Answer

A)   Change, but the average propensity to consume will not change
B)   Change, and the average propensity to consume will change
C)   Not change, but the average propensity to consume will change
D)   Not change, and the average propensity to consume will not change

Question 17

Assume that MPS is 0.4. If spending increases by $8 billion, then real GDP will increase by:

Accepted Answer

A)   $8 billion
B)   $13.3 billion
C)   $15 billion
D)   $20 billion

Question 18

Refer to the consumption schedule above. The marginal propensity to consume is represented by:

Accepted Answer

A)   GF/BE
B)   EF/BE
C)   GE/AB
D)   DE/AB

Question 19

Given the expected rate of return on all possible investment opportunities in the economy, a(n) :

Accepted Answer

A)   Increase in the real rate of interest will tend to increase the level of investment
B)   Decrease in the real rate of interest will tend to increase the level of investment
C)   Decrease in the real rate of interest will tend to decrease the level of investment
D)   Change in the real interest rate will have no impact on the level of investment

Question 20

Refer to the saving schedule above. The break-even income would be level:

Accepted Answer

A)   0
B)   1
C)   2
D)   3

Exam 10: Basic Macroeconomic Relationships

Saving equals disposable income plus consumption.

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Given the expected rate of return on all possible investment opportunities in the economy, a(n) :

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Refer to the saving schedule above. The break-even income would be level:

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An increase in disposable income:

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Refer to the consumption schedule above. The marginal propensity to consume is:

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The nominal rate of interest is 8.5 percent and the real rate is 5 percent. The expected rate of return on an investment is 8 percent. The firm should:

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If households consume less at each level of disposable income, they are:

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Dissaving occurs when:

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The saving schedule shows the relationship of saving of households to the level of:

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The so-called Paradox of Thrift that became quite obvious in the Great Recession of 2007-2009 refers to all of the following, except:

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The Great Recession of 2007-2009 altered the prior behavior of consumers in the economy by:

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Refer to the consumption schedule above. The marginal propensity to consume is represented by:

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Art Buchwald's article in the Last Word section of the chapter, "Squaring the Economic Circle," is a humorous description of:

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Which of the following would shift the consumption schedule downward?

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Refer to the consumption schedule above. As income falls from level 3 to level 2, the amount of:

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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:

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An investment demand curve shows the varying amounts of investment that would be undertaken at various levels of:

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The disposable income (DI) and consumption (C) schedules are for a private, closed economy. All figures are in billions of dollars. Refer to the data above. If consumption increases by $10 billion at each level of disposable income, the marginal propensity to consume will:

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Assume that MPS is 0.4. If spending increases by $8 billion, then real GDP will increase by:

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The so-called wealth effect will result in households:

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