Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The change in consumption divided by the change in income is equal to
A) MPC + MPS.
B) 1 - MPC.
C) the MPC.

D) the MPS.

1)

Answer: C
2) The change in saving divided by the change in income is equal to
A) MPC + MPS.
B) the MPC.
C) 1 - MPS.

D) the MPS.

2)

Answer: D
3) [Yd - C] equals
A) spending.

3)
B) saving.

C) the MPS.

D) the MPC.

Answer: B
4) If the MPS is 0.10, MPC is
A) 1.10.

B) 1.00.

C) 0.90.

D) 0.80.

4)

Answer: C
5) If you earn an additional $200 in disposable income one week for feeding your neighbors ferret,
A) your consumption will increase by more than $200, even if your MPS is 0.1.
B) the total of your consumption and saving will increase by less than $200.
C) the total of your consumption and saving will increase by $200.
D) the total of your consumption and saving will increase by more than $200.

5)

Answer: C
6) If Earl received an $800 bonus and his MPS is 0.25, his consumption rises by $________ and his
saving rises by $________.
A) 600; 200
B) 400; 250
C) 800; 250
D) 825; 125

6)

Answer: A
7) Savings is
A) the part of income that a household does not consume in a given period.
B) the same as saving.
C) the current stock of accumulated saving.
D) all of the above

7)

Answer: C
8) Uncertainty about the future is likely to
A) either increase or decrease current spending.
B) increase current spending.
C) have no impact on current spending.
D) decrease current spending.

8)

Answer: D

9) Lower interest rates are likely to

A) have no effect on consumer spending or saving.
B) decrease consumer spending and increase consumer saving.
C) increase consumer spending and decrease consumer saving.
D) decrease both consumer spending and consumer saving.

9)

Answer: C
10) Consumption is ________ related to household income and wealth and households' expectations
about the future, and ________ related to interest rates.
A) negatively; positively
B) positively; positively
C) positively; is not
D) positively; negatively

10)

Answer: D
11) In a closed economy with no government, ________ is consumption plus investment.
A) real spending
B) saving
C) aggregate expenditures
D) national income

11)

Answer: C
12) If Corinne's income is reduced to zero after she loses her job, her ________ will be greater than zero
and her ________ will be less than zero.
A) consumption; expenses
B) consumption; saving
C) saving; investment
D) taxes; consumption

12)

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

Figure 8.1

13) Refer to Figure 8.1. The ________ for this household is 0.5 and the ________ is also 0.5.
A) MPC; MPS
B) consumption function; saving function
C) MPS; saving function
D) MPC; consumption function

13)

Answer: A
14) Refer to Figure 8.1. [-500 + 0.5Y] is this household's
A) MPS.
C) consumption.

B) saving function.
D) MPC.

14)

Answer: B
15) Refer to Figure 8.1. At income level ________, this household's saving is greater than zero and this
household's consumption is greater than zero.
A) -$200
B) $800
C) $1,000
D) $1,500
Answer: D

15)

16) Refer to Figure 8.1. [500 + 0.5Y] is this household's

A) MPS.
C) saving function.

16)

B) MPC.
D) consumption function.

Answer: D
17) Refer to Figure 8.1. This household saves ________ at an income level of $400.
A) -$300
B) -$250
C) $0

D) $250

17)

Answer: A
18) Refer to Figure 8.1. This household consumes ________ at an income level of $3,000.
A) $1,000
B) $1,450
C) $2,000
D) $3,500

18)

Answer: C
19) Refer to Figure 8.1. A(n) ________ in the amount of ________ this household makes when this
household's income is zero shifts the saving function downward.
A) decrease; spending
B) increase; consumption
C) increase; saving
D) decrease; consumption

19)

Answer: B
20) Refer to Figure 8.1. A decrease in the MPS
A) shifts the consumption function upward.
C) shifts the saving function downward.

B) makes the consumption function flatter.

D) makes the saving function flatter.

20)

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

Figure 8.2

21) Refer to Figure 8.2. The line segment ________ represents Jerry's consumption when income equals
zero.
A) DA
B) BA
C) BD
D) BC

21)

Answer: C
22) Refer to Figure 8.2. Jerry's ________ equals his ________ at Point A.
A) consumption; income
B) consumption; saving
C) saving; income
D) all of the above
Answer: A
3

22)

23) Refer to Figure 8.2. Jerry's ________ equals ________ at income level Y1.
A) saving; zero
C) consumption; investment

23)

B) consumption; zero
D) consumption; saving

Answer: A
24) Refer to Figure 8.2. Jerry's saving is positive along the line segment
A) BD.
B) AC.
C) BA.

D) DA.

24)

Answer: B
25) Refer to Figure 8.2. Jerry's saving is negative along the line segment
A) AY1 .
B) CY2 .
C) AC.

D) AB.

25)

Answer: D
26) Refer to Figure 8.2. Negative saving is represented by the area
A) DBCY2.
B) DBAY1 .
C) ACY2 Y1.

D) DBAD.

26)

Answer: D
27) Refer to Figure 8.2. A decrease in Jerry's income is represented by
A) an upward shift in Jerry's consumption function.
B) a movement from Point C to A.
C) a movement from Point B to A.
D) a decrease in the slope of Jerry's consumption function.

27)

Answer: B
28) Refer to Figure 8.2. Suppose Jerry's MPC decreases. At income Y 1, Jerry's
A) saving will be zero.
B) consumption will be greater than his income.
C) consumption will be less than his income.
D) all of the above

28)

Answer: C
29) The marginal propensity to consume is
A) the amount of consumption at a specific level of income.
B) a change in saving divided by a change in consumption.
C) the fraction of a change in income that is consumed or spent.
D) consumption times income.

29)

Answer: C
30) If you save $20 when you experience a $80 rise in your income
A) your MPS is 0.4.
B) your MPC is 0.8.
C) your MPS is 0.8.
D) your MPC is 0.75.

30)

Answer: D
31) If consumption is $60,000 when income is $80,000, and consumption increases to $68,000 when
income increases to $90,000, the MPC is
A) 0.2.
B) 0.4.
C) 0.6.
D) 0.8.
Answer: D

31)

32) If consumption is $13,000 when income is $12,000, and consumption increases to $15,000 when
income increases to $15,000, the MPS is
A) -0.15.
B) 0.
C) 0.33.
D) 0.40.

32)

Answer: C
33) Suppose consumption is $20,000 when income is $32,000 and the MPC equals 0.8. When income
increases to $40,000, consumption is
A) $26.400.
B) $28,000.
C) $32,000.
D) $72,000.

33)

Answer: A
34) Suppose saving is $1,000 when income is $10,000 and the MPC equals 0.9. When income increases
to $15,000, saving is
A) $1,500.
B) $1,400.
C) $900.
D) $500.

34)

Answer: A
35) Suppose consumption is $7,500 when income is $4,000 and the MPS equals 0.4. When income
increases to $6,000, consumption is
A) $8,050.
B) $8,300.
C) $8,700.
D) $9,500.

35)

Answer: C
36) If the MPS is 0.3, the MPC is
A) -0.3.
B) 0.7.

C) 1.

D) 1.3.

C) 0.80.

D) 1.20.

36)

Answer: B
37) If the MPS is 0.20, the MPC is
A) -0.20.
B) 0.40.

37)

Answer: C
38) If the consumption function is of the form [C = 60 + 0.9Y], the MPS equals
A) -0.9.
B) 0.1.
C) 0.6.

D) 0.9.

38)

Answer: B
39) If the saving function is of the form [S = -15 + 0.4Y], consumption at an income level of 200 is
A) 80.
B) 105.
C) 135.
D) 185.

39)

Answer: C
40) If Teena's consumption function is of the form [C = 200 + 0.75Y], her saving equals zero at an
income level of
A) 150.
B) 675.
C) 800.
D) 1,500.

40)

Answer: C
41) If Zach's saving function is of the form [S = -300 + 0.2Y], his consumption equals his income at an
income level of
A) 300.
B) 600.
C) 1,040.
D) 1,500.
Answer: D

41)

Refer to the information provided in Table 8.1 below to answer the questions that follow.
Table 8.1
Aggregate Income ($ billion)
Aggregate Consumption ($billion)
0
200
400
500
800
800
1,200
1,100
1,600
1,400

42) Refer to Table 8.1. The equation for the aggregate consumption function is
A) C = 200 + 0.8Y.
B) C = -200 + 0.2Y.
C) C = 200 + 0.75Y.
D) C = 200 + 0.3Y.

42)

Answer: C
43) Refer to Table 8.1. Society's MPC is
A) 0.2.
B) 0.3.

C) 0.75.

D) 0.8.

43)

Answer: C
44) Refer to Table 8.1. Society's MPS is
A) 0.2.
B) 0.25.

C) 0.7.

D) 0.8.

44)

Answer: B
45) Refer to Table 8.1. At an aggregate income level of $300, aggregate saving would be
A) -$125.
B) $100.
C) $125.
D) $175.

45)

Answer: A
46) Refer to Table 8.1. Assuming society's MPC is constant at an aggregate of income of $2,000,
aggregate consumption would be
A) $1,500.
B) $1,600.
C) $1,700.
D) $1,800.

46)

Answer: C
Refer to the information provided in Table 8.2 below to answer the questions that follow.
Table 8.2
Aggregate Income ($ billions)
Aggregate Saving ($ billion)
-200
0
200
-150
-100
400
600
-50
800
0

47) Refer to Table 8.2. The equation for the aggregate saving function is
A) S = -200 + 0.25Y.
B) S = -200 + 0.15Y.
C) S = -100 + 0.2Y.
D) S = -100 + 0.75Y.

47)

Answer: A
48) Refer to Table 8.2. Society's MPC is
A) 0.1.
B) 0.2.

C) 0.75.

Answer: C
6

D) 0.9.

48)

49) Refer to Table 8.2. Society's MPS is

A) 0.1.
B) 0.25.

C) 0.8.

D) 0.9.

49)

Answer: B
50) Refer to Table 8.2. Assuming society's MPC is constant, at an aggregate income level of $1,200,
aggregate consumption would be
A) $2,000.
B) $1,400.
C) $1,100.
D) $950.

50)

Answer: C
51) Refer to Table 8.2. Assuming society's MPC is constant, at an aggregate income of $1,000 aggregate
saving would be
A) $50.
B) $150.
C) $225.
D) $425.

51)

Answer: A
Refer to the information provided in Figure 8.3 below to answer the questions that follow.

Figure 8.3

52) Refer to Figure 8.3. [60 + 0.7Y] is this society's

A) MPC.
C) MPS.

B) saving function.
D) consumption function.

52)

Answer: D
53) Refer to Figure 8.3. [-60 + 0.3Y] is this society's
A) MPS.
C) MPC.

B) saving function.
D) consumption function.

53)

Answer: B
54) Refer to Figure 8.3. In this economy, if income is $200 aggregate saving will be
A) $0.
B) $130.
C) $200.
D) $270.

54)

Answer: A
55) Refer to Figure 8.3. For this society, aggregate saving is ________ if aggregate income is above $200.
A) equal to aggregate consumption
B) negative
C) zero
D) positive
Answer: D

55)

56) Refer to Figure 8.3. Aggregate saving is $240 if aggregate income is

A) $300.
B) $500.
C) $800.

D) $1,000.

56)

Answer: D
57) Refer to Figure 8.3. Which of the following statements is TRUE?
A) Saving is negative at all income levels below $200.
B) For all aggregate income levels above $200, aggregate consumption is greater than aggregate
income.
C) Aggregate saving is negative for all income levels below $400.
D) If consumption is the only expenditure, this economy would be in equilibrium at an
aggregate income level of $300.

57)

Answer: A
Refer to the information provided in Figure 8.4 below to answer the questions that follow.

Figure 8.4

58) Refer to Figure 8.4. The aggregate consumption functions C2 and C3

A) differ in terms of the amount of consumption when income is zero.
B) have the same MPC.
C) imply the same MPS.
D) all of the above

58)

Answer: A
59) Refer to Figure 8.4. Which consumption function implies the smallest MPS?
A) C1
B) C2
C) C3
D) cannot be determined from the figure

59)

Answer: C
60) Refer to Figure 8.4. Suppose the consumption function for C1 is [C 1 = 20 + 0.75Y]. The consumption
function that best fits C2 is
A) C2 = 10 + 0.5Y.
B) C2 = 10 + 0.4Y.
C) C2 = 20 + 0.25Y.
D) C2 = 40 + 0.75Y.
Answer: D

60)

61) Refer to Figure 8.4. Suppose the consumption function for C1 is [C 1 = 15 + 0.4Y]. The consumption
function that best fits C3 is
A) C3 = 20 + 0.8Y.
B) C3 = 15 + 0.75Y.
C) C3 = 30 + 0.25Y.
D) C3 = 20 + 0.4Y.

61)

Answer: B
62) Refer to Figure 8.4. If income is Y1 , aggregate consumption is the smallest when the aggregate
consumption function is
A) C3 .
B) C2 .
C) C1 .
D) cannot be determined from the figure

62)

Answer: C
63) Refer to Figure 8.4. The society's consumption is equal along C2 and C3 if
A) saving is positive.
B) saving is negative.
C) income is Y2 .
D) income is Y1 .

63)

Answer: C
64) If the consumption function is above the 45-degree line
A) consumption exceeds income and saving is positive.
B) consumption exceeds income and saving is negative.
C) consumption is less than income and saving is negative.
D) consumption is less than income and saving is positive.

64)

Answer: B
Refer to the information provided in Figure 8.5 below to answer the questions that follow.

Figure 8.5

65) Refer to Figure 8.5. In this graph, 0.25 represents this society's
A) consumption function.
B) saving function.
C) MPC.
D) MPS.
Answer: D

65)

66) Refer to Figure 8.5. Aggregate saving is -100 billion when aggregate income is ________ billion.
A) -$50
B) $400
C) $800
D) $900

66)

Answer: B
67) Refer to Figure 8.5. Aggregate consumption is $875 billion when aggregate income is ________
billion.
A) < $800
B) $800
C) $900
D) > $900

67)

Answer: C
68) Refer to Figure 8.5. If aggregate consumption is the only expenditure in this society, at an income
level of $800 billion
A) the economy is in equilibrium.
B) consumption equals income.
C) saving is zero.
D) all of the above

68)

Answer: D
Refer to the information provided in Figure 8.6 below to answer the questions that follow.

Figure 8.6

69) Refer to Figure 8.6. On this graph, 0.1 represents this society's
A) MPS.
B) consumption function.
C) saving function.
D) MPC.

69)

Answer: A
70) Refer to Figure 8.6. Aggregate saving is 20 when aggregate income is
A) $600.
B) $660.
C) $800.

D) $850.

70)

Answer: C
71) Refer to Figure 8.6. Aggregate consumption is 960 when aggregate income is
A) $800.
B) $950.
C) $1,000.

D) $1,125.

71)

Answer: C
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
72) As interest rates rise, spending decreases.
Answer:

True

72)

False

10

73) Uncertainty about the future is likely to decrease current spending.

Answer:

True

False

74) The marginal propensity to consume is the change in consumption per change in saving.
Answer:

True

True

74)

False

75) If the marginal propensity to consume is 0.5, the marginal propensity to save is 0.5.
Answer:

73)

75)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
76) The Bob & Weave Company manufactures only hair extensions. In 2010 Bob & Weave
manufactured 50,000 hair extensions, but sold only 32,000 hair extensions. In 2010 Bob & Weave's
change in inventory was ________ hair extensions.
A) 16,000
B) 18,000
C) 32,000
D) 82,000

76)

Answer: B
77) The Slippery Slope Company manufactures only snow skis. In 2010 Slippery Slope manufactured
10,000 snow skis, but sold 12,000 snow skis. In 2010 Slippery Slope's change in inventory was
________ snow skis.
A) -8,000
B) -2,000
C) 2,000
D) 22,000

77)

Answer: B
78) Which of the following is considered investment?
A) the purchase of government bonds
C) the sale of foreign currency

B) the purchase of IBM stock

D) the acquisition of capital goods

78)

Answer: D
79) Which of the following is NOT an investment?
A) the purchase of a delivery van by a florist
B) the purchase of a share of stock by a household
C) the purchase of a new computer system by a law firm
D) all of the above

79)

Answer: B
80) A change in inventory is equal to
A) sales production.
C) production - sales.

B) sales - production.
D) production + sales.

80)

Answer: C
81) Assume that in Narnia, planned investment is $80 billion but actual investment is $50 billion.
Unplanned inventory investment is
A) -$150 billion.
B) -$30 billion.
C) $65 billion.
D) $150 billion.

81)

Answer: B
82) Assume that in Splendora, planned investment is $50 billion, but actual investment is $85 billion.
Unplanned inventory investment is
A) $67.5 billion.
B) $35 billion.
C) $5 billion.
D) -$135 billion.
Answer: B

11

82)

83) If unplanned business investment is $45 million and planned investment is $45 million, then actual
investment is
A) $90 million.
B) $45 million.
C) zero.
D) -$45 million.

83)

Answer: A
84) In 2010, the Isle of Lucy's planned investment was $130 billion and its actual investment was $145
billion. In 2010, the Isle of Lucy's unplanned inventory change was
A) $15 billion.
B) $30 billion.
C) $45 billion.
D) $275 billion.

84)

Answer: A
85) If actual investment exceeds planned investment
A) there will be an accumulation of inventories.
B) there will be a decline in inventories.
C) there will be no change in inventories.
D) none of the above

85)

Answer: A
86) If Inventory investment is lower than firms planned
A) actual and planned investment are equal.
B) actual investment is greater than planned investment.
C) actual investment is less than planned investment.
D) actual investment must be negative.
Answer: C

12

86)

Refer to the information provided in Figure 8.7 below to answer the questions that follow.

Figure 8.7

87) Refer to Figure 8.7. In Spiceland, income does not vary with planned investment. Spiceland's
planned investment function is represented by
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

87)

Answer: C
88) Refer to Figure 8.7. In Ichabodia, planned investment varies directly with income. Ichabodia's
planned investment function is represented by
A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

88)

Answer: A
89) Without the government or the foreign sector in the income-expenditure model, consumption
equals
A) planned aggregate expenditures minus inventory adjustment.
B) planned aggregate expenditures minus planned investment.
C) planned aggregate expenditures plus planned investment.
D) planned aggregate expenditures plus actual investment.
Answer: B

13

89)

90) Related to the Economics in Practice on p. 464: A recent study by economists at Yale University and
the University of Chicago suggests that changing retirement plan enrollment options from a(n)
________ system to a(n) ________ system increased pension plan enrollment after three months of
work from 65 percent of workers to 98 percent of workers.
A) voluntary; mandatory
B) "opt-out"; "opt-in"
C) "opt-in"; "opt-out"
D) mandatory; voluntary

90)

Answer: C
91) Related to the Economics in Practice on p. 464: Under the Save More Tomorrow retirement plans,
employees can pre-commit to save more
A) when the opt out of the social security system.
B) when income tax rates increase.
C) at the beginning of each fiscal year.
D) whenever they get a pay raise.

91)

Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
92) If actual investment is greater than planned investment, unplanned inventories increase.
Answer:

True

False

93) Firms react to an unplanned inventory investment by decreasing output.

Answer:

True

True

True

True

95)

False

96) If planned investment decreases, equilibrium will be restored only when saving has decreased by
exactly the amount of the initial decrease in planned investment, assuming there is no government
or foreign sector.
Answer:

94)

False

95) If planned saving is less than planned investment, injections are greater than leakages.
Answer:

93)

False

94) Firms react to positive inventory investment by increasing output.

Answer:

92)

96)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
97) In macroeconomics, the point at which planned aggregate expenditures equals aggregate output
A) is the equilibrium point.
B) is only achieved if net exports are zero.
C) is where saving is negative.
D) only occurs when the MPC is equal to the MPS.

97)

Answer: A
98) Planned investment must equal actual investment for
A) consumption to equal saving.
B) the economy to be in equilibrium.
C) the MPC to equal the MPS.
D) saving to equal income.
Answer: B

14

98)

99) If aggregate output is less than planned spending, then

A) unplanned inventory investment is zero.
B) unplanned inventory investment is positive.
C) actual investment equals planned investment.
D) unplanned inventory investment is negative.

99)

Answer: D
100) If unplanned inventory investment is negative, then
A) planned investment must be zero.
B) planned aggregate spending must be less than aggregate output.
C) planned aggregate spending must equal aggregate output.
D) planned aggregate spending must be greater than aggregate output.

100)

Answer: D
101) If unplanned inventory investment is zero
A) aggregate output is greater than planned aggregate expenditures.
B) aggregate output is less than planned aggregate expenditures.
C) aggregate output equals planned aggregate expenditures.
D) aggregate output is positive when planned aggregate expenditures are positive.

101)

Answer: C
Refer to the information provided in Table 8.3 below to answer the questions that follow.
Table 8.3

102) Refer to Table 8.3. At an aggregate output level of $200 billion, planned expenditure equals
A) $160 billion.
B) $220 billion.
C) $260 billion.
D) $410 billion.

102)

Answer: C
103) Refer to Table 8.3. At an aggregate output level of $400 billion, aggregate saving
A) equals -$20 billion.
B) equals $0.
C) equals $20 billion.
D) cannot be determined from this information.

103)

Answer: A
104) Refer to Table 8.3. At an aggregate output level of $100 billion, the unplanned inventory change is
A) -$80 billion.
B) -$30 billion.
C) -$20 billion.
D) $120 billion.
Answer: A

15

104)

105) Refer to Table 8.3. At an aggregate output level of $300 billion, the unplanned inventory change is
A) -$40 billion.
B) -$10 billion.
C) $0.
D) $10 billion.

105)

Answer: A
106) Refer to Table 8.3. If aggregate output equals ________, there will be a $20 billion unplanned
decrease in inventories.
A) $100 billion
B) $200 billion
C) $300 billion
D) $400 billion

106)

Answer: D
107) Refer to Table 8.3. The equilibrium level of aggregate output is
A) $200 billion.
B) $300 billion.
C) $400 billion.

D) $500 billion.

107)

Answer: D
108) Refer to Table 8.3. Which of the following statements is FALSE?
A) At output levels greater than $400 billion, there is a positive unplanned inventory change.
B) At an output level of $200 billion, there is a $60 billion unplanned inventory decrease.
C) If aggregate output equals $500 billion, then aggregate saving equals $0.
D) The MPC for this economy is 0.8.

108)

Answer: A
109) Refer to Table 8.3. Planned saving equals planned investment at an aggregate output level of
A) $500 billion.
B) $400 billion.
C) $300 billion.
D) $200 billion.

109)

Answer: A
110) Refer to Table 8.3. Planned investment equals actual investment at
A) $500 billion.
B) all income levels below $300 billion.
C) all income levels above $300 billion.
D) all income levels.

110)

Answer: A
Refer to the information provided in Table 8.4 below to answer the questions that follow.
Table 8.4
Aggregate Output Aggregate Consumption Planned Investment
($ million)
($ million)
($ million)
2,000
1,500
700
2,400
1,800
700
2,800
2,100
700
3,200
2,400
700
3,600
2,700
700

111) Refer to Table 8.4. At an aggregate output level of $2,000 million, planned expenditure equals
A) $2,200.
B) $2,500.
C) $2,700.
D) $4,700.

111)

Answer: A
112) Refer to Table 8.4. The MPC in this economy is
A) 0.5.
B) 0.6.

C) 0.75.

Answer: C

16

D) 0.8.

112)

113) Refer to Table 8.4. At an aggregate output level of $3,200 million, the unplanned inventory change
is
A) -$1,100 million.
B) -$100 million.
C) $100 million.
D) $700 million.

113)

Answer: C
114) Refer to Table 8.4. At an aggregate output level of $2,000 million, the unplanned inventory change
is
A) -$800 million.
B) -$200 million.
C) $700 million.
D) $800 million.

114)

Answer: B
115) Refer to Table 8.4. If aggregate output equals ________, there will be a $100 million unplanned
decrease in inventories.
A) $2,400 million
B) $2,800 million
C) $3,200 million
D) $3,600 million

115)

Answer: A
116) Refer to Table 8.4. The equilibrium level of aggregate output equals
A) $2,400 million.
B) $2,800 million.
C) $3,200 million.

D) $3,600 million.

116)

Answer: B
117) Refer to Table 8.4. Which of the following statements is FALSE?
A) At an output level of $3,600 million, there is a $200 million unplanned inventory increase.
B) The MPC for this economy is 0.75.
C) At an output level $2,000, there is a $200 million unplanned inventory decrease.
D) If aggregate output equals $2,000 million, then aggregate saving equals $700 million.

117)

Answer: D
118) Refer to Table 8.4. Planned saving equals planned investment at an aggregate output level of
A) $2,000 million.
B) $2,400 million.
C) $2,800 million.
D) $3,200 million.

118)

Answer: C
119) Refer to Table 8.4. Planned investment equals actual investment at
A) all income levels above $2,800 million.
B) an income level of $2,800 million.
C) all income levels.
D) all income levels below $2,800 million

119)

Answer: B
120) If C = 200 + 0.5Y and I = 100, then the equilibrium level of income is
A) 175.
B) 300.
C) 400.

D) 600.

120)

Answer: D
121) If C = 300 + 0.75Y and I = 200, then the equilibrium level of income is
A) 750.
B) 1,000.
C) 1,800.

D) 2,000.

121)

Answer: D
122) If S = -50 + 0.4Y and I = 70, then the equilibrium level of income is
A) 180.
B) 300.
C) 420.
Answer: B

17

D) 450.

122)

123) If C = 1,200 + 0.8Y and I = 600, then planned saving equals planned investment at aggregate output
level of
A) 6,800.
B) 7,200.
C) 9,000
D) 10,200.

123)

Answer: C
Refer to the information provided in Figure 8.8 below to answer the questions that follow.

Figure 8.8

124) Refer to Figure 8.8. [150 + 0.25Y] is the

A) MPS.
C) saving function.

B) MPC.
D) aggregate expenditures function.

124)

Answer: D
125) Refer to Figure 8.8. $200 million is
A) the break even income.
B) where saving equals aggregate expenditures.
C) the equilibrium income.
D) where saving equals consumption.

125)

Answer: C
126) Refer to Figure 8.8. There is a $75 million increase in unplanned inventories at an aggregate output
level of
A) $100 million.
B) $200 million.
C) $300 million.
D) > $300 million.

126)

Answer: C
127) Refer to Figure 8.8. There is a $75 million decrease in unplanned inventories at an aggregate output
level of
A) < $100 million.
B) $100 million.
C) $200 million.
D) $300 million.

127)

Answer: B
128) Refer to Figure 8.8. As a result of a decrease in investment by $20 million, aggregate expenditures
shifts ________, ________ equilibrium output and equilibrium expenditure.
A) down; not changing
B) down; increasing
C) up; increasing
D) down; decreasing
Answer: D

18

128)

129) Refer to Figure 8.8. At an aggregate output level of $300 million

A) leakages are less than injections.
B) leakages and injections are both negative.
C) leakages are equal to injections.
D) leakages are greater than injections.

129)

Answer: D
Refer to the information provided in Figure 8.9 below to answer the questions that follow.

Figure 8.9

130) Refer to Figure 8.9. [200 + 0.8Y] represents the

A) MPS.
C) MPC.

B) aggregate income function.

D) aggregate expenditures function.

130)

Answer: D
131) Refer to Figure 8.9. There is a $100 million unplanned decrease in inventories at an aggregate
output level of
A) $500 million.
B) $1,000 million.
C) $1,200 million.
D) > $1,200 million.

131)

Answer: A
132) Refer to Figure 8.9. Unplanned inventories increase and output decreases when aggregate output is
A) $0.
B) $500 million.
C) $1,000 million.
D) > $1,000 million.

132)

Answer: D
133) Refer to Figure 8.9. Unplanned inventories decrease and output increases when aggregate output is
A) < $1,000 million.
B) $1,000 million.
C) $1,160 million.
D) $1,200 million.

133)

Answer: A
134) Refer to Figure 8.9. Leakages are greater than injections when aggregate output is
A) $0.
B) $500 million.
C) $1,000 million.
D) > $1,000 million.
Answer: D
19

134)

135) Refer to Figure 8.9. Leakages are less than injections when aggregate output is
A) < $1,000 million.
B) $1,000 million.
C) $1,160 million.
D) $1,200 million.

135)

Answer: A
136) Using the saving/investment approach, when C + I = C + S
A) the market is in equilibrium.
B) saving = income.
C) income = consumption.
D) saving = zero.

136)

Answer: A
137) Firms react to unplanned inventory accumulations by
A) reducing planned investment.
B) increasing output.
C) increasing consumption.
D) reducing output.

137)

Answer: D
138) Firms would reduce output as a reaction to
A) unplanned inventory reductions.
C) unplanned inventory increases.

B) decreases in costs of resources.

D) increased demand for output.

138)

Answer: C
139) Aggregate output will decrease if there is a(n)
A) increase in saving.
C) decrease in consumption.

B) unplanned rise in inventories.

D) unplanned fall in inventories.

139)

Answer: B
140) An increase in planned investment causes
A) output to increase.
B) output to decrease by an amount equal to the decrease in investment.
C) output to decrease, but by a larger amount than the decrease in investment.
D) output to decrease, but by a smaller amount than the decrease in investment.

140)

Answer: A
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
141) When aggregate expenditure is less than aggregate output, there will be an unplanned build up of
inventories.
Answer:

True

False

142) When there is an unplanned draw down of inventories, firms will decrease production.
Answer:

True

True

True

True

144)

False

145) If aggregate expenditure increases, then equilibrium output decreases.

Answer:

143)

False

144) When the economy is in equilibrium, savings equals unplanned investment.

Answer:

142)

False

143) Planned investment equals actual investment plus unplanned changes in inventories.
Answer:

141)

False

20

145)

146) Assuming there is no government or foreign sector, the economy will be in equilibrium if, and only
if, planned investment is greater than actual investment.
Answer:

True

146)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
147) The multiplier is the ratio of the change in ________ to a change in ________.
A) autonomous consumption; induced consumption
B) the equilibrium level of output; some autonomous variable
C) the level of saving; the level of consumption
D) the MPC; the MPS

147)

Answer: B
Refer to the information provided in Figure 8.10 below to answer the questions that follow.

Figure 8.10

148) Refer to Figure 8.10. [50 + 0.75Y] represents the

A) aggregate expenditures function.
C) autonomous consumption function.

B) MPS.
D) MPC.

148)

Answer: A
149) Refer to Figure 8.10. On this graph, 4 represents the
A) MPC.
C) break even income level.

B) multiplier.
D) MPS.

149)

Answer: B
150) Refer to Figure 8.10. A ________ increase in investment changes equilibrium output to $240 million.
A) $5 million
B) $10 million
C) $20 million
D) $50 million
Answer: B

21

150)

151) Refer to Figure 8.10. A $10 million decrease in autonomous consumption

A) changes equilibrium output to $120 million.
B) increases the MPC.
C) increases the MPS.
D) changes equilibrium expenditure to $160 million.

151)

Answer: D
152) Refer to Figure 8.10. Equilibrium aggregate output will increase to $250 million if the
A) MPS increases to 0.8.
B) multiplier increases to 8.
C) MPC increases to 0.8.
D) all of the above

152)

Answer: C
153) Assuming no government or foreign sector, if the MPC is 0.5, the multiplier is
A) 0.2.
B) 0.5.
C) 2.

D) 5.

153)

Answer: C
154) Assuming no government or foreign sector, [1 / MPS] represents
A) autonomous income.
B) the consumption function.
C) negative saving.
D) the multiplier.

154)

Answer: D
155) Assuming there is no government or foreign sector, [1 / 1-MPC] represents
A) the multiplier.
B) the saving function.
C) the consumption function.
D) break even income.

155)

Answer: A
156) Assuming there is no government or foreign sector, if the multiplier is 5, the MPC is
A) 0.4.
B) 0.5.
C) 0.8.
D) 5.

156)

Answer: C
157) Assume there is no government or foreign sector. If the MPS is 0.25, the multiplier is
A) 0.75.
B) 2.5.
C) 4.
D) 5.

157)

Answer: C
158) Assume there is no government or foreign sector. If the multiplier is 2, a $20 billion increase in
planned investment will cause aggregate output to increase by
A) $5 billion.
B) $10 billion.
C) $20 billion.
D) $40 billion.

158)

Answer: D
159) Assume there is no government or foreign sector. If the MPS is 0.10, a $20 billion decrease in
planned investment will cause aggregate output to decrease by
A) $20 billion.
B) $50 billion.
C) $100 billion.
D) $200 billion.

159)

Answer: D
160) Assume there is no government or foreign sector. If the multiplier is 5, a $4 billion increase in
investment will cause aggregate output to increase by
A) $125 billion.
B) $80 billion.
C) $50 billion.
D) $20 billion.
Answer: D

22

160)

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

Figure 8.11

161) Refer to Figure 8.11. [600 + 0.4Y] represents the

A) multiplier function.
C) saving function.

B) aggregate expenditures function.

D) equilibrium function.

161)

Answer: B
162) Refer to Figure 8.11. Suppose AE1 , AE2 and AE3 are parallel. What is the value of Point B?
A) $900 million
B) $800 million
C) $700 million
D) cannot be determined from the given information

162)

Answer: A
163) Refer to Figure 8.11. Suppose AE1 , AE2 and AE3 are parallel. What is the value of Point A?
A) $540 million
B) $510 million
C) $450 million
D) cannot be determined from the given information

163)

Answer: C
164) Refer to Figure 8.11. Suppose the economy's aggregate expenditure line is AE2 . A $10 million
increase in planned investment causes aggregate equilibrium output to increase to
A) $1,440.5 million.
B) $1,510 million.
C) $1,516.7 million.
D) $1,525 million.

164)

Answer: C
165) As the MPS increases, the multiplier will
A) decrease.
B) remain constant.
C) increase.
D) either increase or decrease depending on the size of the change in investment.
Answer: A

23

165)

166) Mudbug College in Louisiana is trying to convince Louisiana taxpayers that the tax dollars spent at
Mudbug College are well spent. One of the college's arguments is that for every $1 spent by
Mudbug College an additional $4 of expenditures are generated within Louisiana. Mudbug College
is arguing that the multiplier for their expenditures is
A) 0.25.
B) 1.
C) 4.
D) 25.

166)

Answer: C
167) If autonomous consumption decreases, the size of the multiplier would
A) remain constant.
B) increase.
C) decrease.
D) either increase or decrease depending on the size of the change in autonomous consumption.

167)

Answer: A
168) In practice, the actual size of the ________ is about 1.4.
A) saving function
B) multiplier
C) MPC

D) MPS

168)

Answer: B
169) Related to the Economics in Practice on p. 472: According to the "paradox of thrift," as individuals
decrease their saving
A) income in the economy will remain constant because the change in consumption equals the
change in saving.
B) income in the economy will rise because the increased consumption that results from
decreased saving causes the economy to expand.
C) income in the economy decreases because interest rates will rise and the economy will
contract.
D) income in the economy decreases because there is less money available for firms to invest.

169)

Answer: B
170) Related to the Economics in Practice on p. 472: According to the "paradox of thrift," decreased efforts
to save will cause a(n)
A) decrease in income but an increase in saving.
B) decrease in income and an overall decrease in saving.
C) increase in income but no overall change in saving.
D) increase in income and an increase in overall saving.

170)

Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
171) The larger the MPC, the smaller the MPS.
Answer:

True

171)

False

172) The smaller the MPS, the smaller the multiplier.

Answer:

True

172)

False

173) If the MPC is 0.75, then the multiplier is 25.

Answer:

True

173)

False

174) If the MPS is 0.1, then the multiplier is 9.

Answer:

True

174)

False

24

175) An increase in the MPC increases the multiplier.

Answer:

True

175)

False

176) Related to the Economics in Practice on p. 472. The paradox of thrift is that all people deciding to
save more will lead to them saving even more due to the multiplier effect.
Answer:

True

False

25

176)