Add, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Settings to establish which default options, such as feedback and images, are available for question creation. TEST BANK > CONTROL PANEL > POOL MANAGER > POOL CANVAS Pool Canvas Add Calculated Formula Creation Settings Name Test Bank Chapter 11: Income and Expenditure Description Question pool for Chapter 11: Income and Expenditure Instructions Modify Add Question Here Question 1 Multiple Choice 0 points Modify Remove Question The changes in the economy of Ft. Myers, Florida, between 2003 and 2008 provides an example of: Answer the risk associated with an agricultural economy. positive and negative multiplier effects. how public assistance programs can stimulate the economy. the benefits of government budget surpluses. Add Question Here Question 2 Multiple Choice 0 points Modify Remove Question The real estate market in Ft. Myers, Florida, collapsed by 2008 because: Answer houses were over-priced. most Floridians prefer to rent apartments rather than buy houses. hurricanes damaged so much property. climate change has made much of the retiree population leave Florida. Add Question Here Question 3 Multiple Choice 0 points Modify Remove Question The marginal propensity to consume is: Answer increasing if the marginal propensity to save is increasing. the proportion of total disposable income that the average family consumes. the change in consumer spending divided by the change in aggregate disposable income. the change in consumer spending less the change in aggregate disposable income. Add Question Here Question 4 Multiple Choice 0 points Modify Remove Question The marginal propensity to consume is equal to: Answer the proportion of consumer spending as a function of aggregate disposable income. the change in saving divided by the change in aggregate disposable income. the change in consumer spending divided by the change in aggregate disposable income. the change in saving divided by the change in consumer spending. Add Question Here Question 5 Multiple Choice 0 points Modify Remove Question The MPS plus the MPC must equal: Answer zero. one. income. saving. Add Question Here Question 6 Multiple Choice 0 points Modify Remove Question If the MPS = .1, then the value of the multiplier equals: Answer 1. 5. 9. 10. Add Question Here Question 7 Multiple Choice 0 points Modify Remove Question If the multiplier equals 4, then the marginal propensity to save must be equal to: Answer 1/4. 1/2. 3/4. the marginal propensity to consume. Add Question Here Page 1 of 48
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Add, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Settings to establish which default options, such as feedback and images, are available for question creation.
TEST BANK > CONTROL PANEL > POOL MANAGER > POOL CANVAS
Pool Canvas
Add Calculated Formula Creation Settings
Name Test Bank Chapter 11: Income and Expenditure
Description Question pool for Chapter 11: Income and Expenditure
Instructions Modify
Add Question Here
Question 1 Multiple Choice 0 points Modify Remove
QuestionThe changes in the economy of Ft. Myers, Florida, between 2003 and 2008 provides an example of:
Answer the risk associated with an agricultural economy.
positive and negative multiplier effects.
how public assistance programs can stimulate the economy.
the benefits of government budget surpluses.
Add Question Here
Question 2 Multiple Choice 0 points Modify Remove
QuestionThe real estate market in Ft. Myers, Florida, collapsed by 2008 because:
Answer houses were over-priced.
most Floridians prefer to rent apartments rather than buy houses.
hurricanes damaged so much property.
climate change has made much of the retiree population leave Florida.
Add Question Here
Question 3 Multiple Choice 0 points Modify Remove
QuestionThe marginal propensity to consume is:
Answer increasing if the marginal propensity to save is increasing.
the proportion of total disposable income that the average family consumes.
the change in consumer spending divided by the change in aggregate disposable income.
the change in consumer spending less the change in aggregate disposable income.
Add Question Here
Question 4 Multiple Choice 0 points Modify Remove
QuestionThe marginal propensity to consume is equal to:
Answer the proportion of consumer spending as a function of aggregate disposable income.
the change in saving divided by the change in aggregate disposable income.
the change in consumer spending divided by the change in aggregate disposable income.
the change in saving divided by the change in consumer spending.
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Question 5 Multiple Choice 0 points Modify Remove
QuestionThe MPS plus the MPC must equal:
Answer zero.
one.
income.
saving.
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Question 6 Multiple Choice 0 points Modify Remove
QuestionIf the MPS = .1, then the value of the multiplier equals:
Answer 1.
5.
9.
10.
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Question 7 Multiple Choice 0 points Modify Remove
QuestionIf the multiplier equals 4, then the marginal propensity to save must be equal to:
Answer 1/4.
1/2.
3/4.
the marginal propensity to consume.
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Page 1 of 48
Question 8 Multiple Choice 0 points Modify Remove
QuestionSuppose that the marginal propensity to consume is 0.8, and investment spending increases by $100 billion. The increase in aggregate demand is:
Answer $100 billion, the amount of investment spending.
$125 billion, composed of $100 billion in investment spending and $25 billion in consumption.
$80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion.
$500 billion, composed of $100 billion in investment spending and $400 billion in consumption.
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Question 9 Multiple Choice 0 points Modify Remove
QuestionIf the marginal propensity to save is 0.3, the size of the multiplier is:
QuestionSuppose the marginal propensity to consume is equal to 0.90 and investment spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change?
QuestionSuppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80. Assuming no taxes and no trade, by how much will real GDP change?
QuestionSuppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The investment multiplier is:
QuestionSuppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The value of the MPC is:
QuestionAccording to the National Bureau of Economic Research, the U.S. economy is going through a severe recession. Most households are trying to save more of their income than before. This increase in private spending will lead to:
Answer an increase in aggregate income as more saving means more funds for business investment.
a fall in aggregate income as more saving means people will spend less.
no change in aggregate income because there is no saving multiplier.
an increase in aggregate income as an increase in saving will make people wealthier.
QuestionYou and a co-worker have been trying to develop a linear equation that describes the local household consumption function. Your co-worker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + .75(YD). Your job is to explain this result to your supervisor. According to this consumption function, what is the marginal propensity to consume?
QuestionYou and a co-worker have been trying to develop a linear equation that describes the local household consumption function. Your co-worker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + .75(YD). Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would
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occur if a household had disposable income of $1000?
QuestionWhen David has no income, he spends $500. If his income increases to $2,000, he spends $1,900. Which of the following represents his consumption function?
QuestionThe following is an algebraic representation of the consumption function: C = A + MPC × YD. Which of the following represents the slope of the function?
QuestionIf the marginal propensity to consume is 0.5, individual autonomous consumption is $10,000, and disposable income is $40,000, then individual consumption spending is:
QuestionThe following is an algebraic representation of the consumption function: C = A + MPC × YD. Which of the following represents autonomous consumption?
QuestionAssume that currently the marginal propensity to consume is 0.5, aggregate autonomous consumption is $10,000, and aggregate disposable income is $40,000. If disposable income were expected to increase in the future, the aggregate consumption function might take the form of:
QuestionConsider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by: C = 500 + .80Y, where Y is income. The autonomous consumer spending in this economy is:
QuestionConsider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by: C = 500 + .80Y, where Y is income. The marginal propensity to consume in Behr is:
QuestionThe Federal Reserve, the central bank of the U.S., has been cutting the interest rate in order to stimulate the recessionary economy. Fed's interest cuts are supposed to:
Answer lower savings rate in the economy and stop the leakages.
increase government spending on the economic infrastructure and thus increase GDP through the multiplier process.
increase the cash holding by the general public thus lowering their dependence on credit.
increase the investment spending and thus increase GDP via the multiplier.
QuestionIf a CD store has 10,000 CDs at the start of the period and it has 15,000 CDs at the end of the period, then during the period its inventory investment was:
QuestionIn 2005, Airbus Co. purchased raw materials worth $400 million in order to manufacture airplanes for a total value of $900 million. In that year, Airbus Co. sold airplanes for a total value of $800 million. During 2005, Airbus Co. registered inventory investment of:
QuestionBecause in an economy with no international trade, government expenditure, transfers, or taxes, disposable income is equal to GDP, it follows that:
Answer as GDP increases, planned aggregate spending decreases.
consumption is equal to investment spending.
as GDP decreases, planned aggregate spending decreases.
investment spending is equal to the disposable income.
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.
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Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) What is the consumption function?
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) How much is consumption?
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) How much is planned aggregate spending?
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) How much is unplanned inventory investment?
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) Given this situation, firms will tend to:
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) If GDP is $3,000, planned aggregate spending is:
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) If GDP is $3,000, how much is unplanned inventory investment?
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) Income-expenditure equilibrium is achieved when GDP is:
QuestionUse this scenario to answer questions 155–163.Scenario: Income-Expenditure EquilibriumGDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8.Reference: Ref 11-07
(Scenario: Income-Expenditure Equilibrium) The multiplier is:
QuestionWhenever GDP exceeds planned aggregate expenditure, unplanned investment is _______; whenever GDP falls short of planned aggregate expenditure, unplanned investment is _________.
(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned). At what level of real GDP will the economy find its income-expenditure equilibrium?
(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned). If real GDP is $2500, what is the level of unplanned inventory investment?
(Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (Yd). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned). The income-expenditure equilibrium real GDP is found at _____ and if planned investment fell to $300, the new
income-expenditure equilibrium real GDP would fall to _____.
QuestionFigure: Aggregate Expenditures and Real GDP
Reference: Ref 11-12
(Figure: Aggregate Expenditures and Real GDP) If the level of real GDP equals $9,000 billion, and if there are no changes in the consumption function or in planned investment, then we expect that, in the next period, real GDP will:
Answer rise.
remain unchanged.
fall.
fall, but only if there is an offsetting change in autonomous consumption.
(Figure: Aggregate Expenditures Curve I) Suppose that the consumption function in this economy rises by $100. The result would be an increase in the equilibrium level of real GDP in the aggregate expenditures model shown here of:
(Figure: Aggregate Expenditures Curve II) Suppose that the consumption function in this figure rises by $100. In the aggregate expenditures model shown here, the result would be an increase in the equilibrium level of real GDP of:
(Figure: Aggregate Expenditures Curve II) Suppose that the consumption function in this economy rises by $200. The result would be an increase in equilibrium real GDP of:
(Figure: Aggregate Expenditures Curve III) Suppose that the consumption function in this figure rises by $100. The result would be a shift in the aggregate expenditures curve upward by:
(Figure: Aggregate Expenditures Curve III) Suppose that the consumption function shifts upward by $100. In the aggregate expenditures model shown here, the result would be an increase in the equilibrium level of real GDP of:
QuestionIn an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $250 billion, planned investment spending is $100 billion, and the marginal propensity to consume is 0.6. What is the expression for planned aggregate spending?
QuestionIn an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $750 billion, planned investment spending is $300 billion, and the marginal propensity to consume is 0.75. What is the expression for planned aggregate spending?
QuestionWhen the economy is in income-expenditure equilibrium:
Answer exports equal imports.
saving is less than investment spending.
taxes equal transfer payments.
real GDP equals planned aggregate spending.
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Question 233 True/False 0 points Modify Remove
QuestionIf the consumption function is C = $100,000,000 + .8 × YD, then the MPC is $100 million.
Answer True
False
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Question 234 True/False 0 points Modify Remove
QuestionThe marginal propensity to consume is consumption divided by disposable income.
Answer True
False
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Question 235 True/False 0 points Modify Remove
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QuestionIf you expect to get a substantial raise six months from now, this will not affect your current consumption because you haven't received the money yet.
Answer True
False
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Question 236 True/False 0 points Modify Remove
QuestionThe aggregate consumption function can shift, due to changes in expected future disposable income and changes in aggregate wealth.
Answer True
False
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Question 237 True/False 0 points Modify Remove
QuestionAccording to the life-cycle hypothesis, consumers plan their spending based on their current disposable income when they are very young.
Answer True
False
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Question 238 True/False 0 points Modify Remove
QuestionPeople use wealth to smooth consumption over their life-cycle.
Answer True
False
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Question 239 True/False 0 points Modify Remove
QuestionThe demand for loanable funds is inversely related to the interest rate, because fewer projects are profitable at higher interest rates.
Answer True
False
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Question 240 True/False 0 points Modify Remove
QuestionIf expected future GDP increases, then planned current investment will increase.
Answer True
False
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Question 241 True/False 0 points Modify Remove
QuestionThe higher current production capacity is, the higher current planned investment will be.
Answer True
False
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Question 242 True/False 0 points Modify Remove
QuestionPlanned investment spending and actual investment spending are NOT always equal.
Answer True
False
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Question 243 True/False 0 points Modify Remove
QuestionIf planned investment is $50 billion and unplanned inventory investment is $10 billion, then actual investment is $40 billion.
Answer True
False
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Question 244 True/False 0 points Modify Remove
QuestionInventories are investment because inventories are a source of future sales.
Answer True
False
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Question 245 True/False 0 points Modify Remove
QuestionIf GDP is greater than planned expenditure, unplanned inventory investment is negative.
Answer True
False
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Add Question Here
Question 246 True/False 0 points Modify Remove
QuestionChanges in unplanned inventory investment cause the economy to move toward the income-expenditure equilibrium.
Answer True
False
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Question 247 True/False 0 points Modify Remove
QuestionDecreases in investment spending are usually offset by increases in consumption through the multiplier process.
Answer True
False
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Question 248 True/False 0 points Modify Remove
QuestionIf planned aggregate spending rises by $10 billion and the MPC is .8, then the income-expenditure equilibrium increases by 50 billion.
Answer True
False
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Question 249 True/False 0 points Modify Remove
QuestionIf planned aggregate spending rises by $20 billion, and the MPC is .9, then the income-expenditure equilibrium increases by $18 billion.
Answer True
False
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Question 250 Essay 0 points Modify Remove
QuestionHow does a nation's saving rate, as measured by the marginal propensity to save, affect the size of the spending multiplier? Explain with both intuition and the formula for the multiplier.
Answer The multiplier process relies upon spending at every step. If disposable income rises, consumers increase spending at every stage of the process, by an amount equal to the marginal propensity to consume multiplied by the increase in disposable income. If the MPC is large, the MPS is small, and more total spending is multiplied throughout the economy. However, if consumers decide to increase savings at each stage of the process, the MPS increases, and disposable income “leaks” out of the spending multiplier.The multiplier M=1/(1-MPC). If the MPS increases, the MPC decreases, so (1-MPC) increases. If (1-MPC) increases, 1/(1-MPC) decreases and the multiplier M falls.
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Question 251 Essay 0 points Modify Remove
QuestionTable: Disposable Income and Spending
Reference: Ref 11-17
(Table: Disposable Income and Spending) Using the accompanying table, calculate the marginal propensity to consume (MPC). Use this MPC to compute the spending multiplier.
Answer The MPC = (change in consumer spending)/(change in disposable income) = $40/$50 = .80. The multiplier = 1/(1-MPC) = 1/.2 = 5.
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Question 252 Essay 0 points Modify Remove
QuestionTable: Disposable Income and Spending
Reference: Ref 11-17
(Table: Disposable Income and Spending) Use the data in the accompanying table to develop a linear equation of the consumption function. Use this consumption function to forecast the amount of consumption spending that would occur if disposable income were equal to $500.
Answer The general equation of the consumption function is: C = A + MPC*(YD). The letter A stands for autonomous consumption, the level of consumption that occurs when disposable income YD is zero. From the table, A=$10. The MPC is the slope of the line, MPC=$40/$50 = .80. So C = 10 + .80*(YD). If YD=$500, C = $410.
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Question 253 Essay 0 points Modify Remove
QuestionHow can autonomous consumption be greater than zero when disposable income is equal to zero?
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Answer When YD=0, consumption can still be positive if the consumer spends savings, liquidates some other asset (like selling stock or property), or by borrowing.
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Question 254 Essay 0 points Modify Remove
QuestionSuppose you have estimated the consumption function as: C = 250 + .90*YD. Knowing this, what is the equation for the corresponding savings function?
Answer If disposable income is zero, autonomous consumption will be 250. Since C + S = YD, autonomous savings must be –250. Looking at the consumption function, it is clear that the MPC=.90, which is the slope of the function. Because MPC+MPS=1, the MPS=.10, the slope of the savings function. So the equation of the savings function is: S= –250 + .10*YD.
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Question 255 Essay 0 points Modify Remove
QuestionTable: Consumption for Four Consumers
Reference: Ref 11-18
(Table: Consumption for Four Consumers) The accompanying table shows the consumption spending of four different consumers, Brandy, Mandy, Sandy, and Candi, at several levels of disposable income. Use this data to construct the aggregate consumption function.
Answer Autonomous consumption when disposable income is zero is $3500. When each person has disposable income of $1000, total income is $4000 and total consumption spending is $6300. When each person has $2000 of disposable income, total income rises to $8000 and total consumption spending rises to $9100. So collectively the MPC = (9100–6300)/(8000–4000) = 2800/4000 = .70.So the aggregate consumption function is: C = 3500 + .70*YD.
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Question 256 Essay 0 points Modify Remove
QuestionSuppose the economy is currently in income-expenditure equilibrium. How will each of the following affect planned investment and unplanned inventory investment.a. The Federal Reserve decreases interest rates.b. Major economic indicators decrease business optimism about future growth in real GDP.
Answer a. A lower interest rate will increase planned investment and aggregate spending. This will increase planned aggregate spending above real GDP and inventories will fall. Thus unplanned inventory investment will be negative.b. Pessimism about the growth rate of the economy will decrease planned investment. This will decrease planned aggregate spending so that it is less than real GDP and inventories will accumulate. Thus unplanned inventory investment will be positive.
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Question 257 Essay 0 points Modify Remove
QuestionIn a simple economy with no government and no foreign sector, autonomous consumer spending is $100 and planned investment spending is $300. The marginal propensity to consume is .75.a. Solve for the equilibrium level of real GDP.b. If real GDP is $2000, what is unplanned inventory investment?
Answer a. Given this information, AEplanned = 400 + .75*YD. In equilibrium, AEplanned = GDP = YD. So we can rewrite YD = 400
+ .75*YD, or .25*YD = 400, and equilibrium YD=GDP = $1600.b. If GDP = $2000, AEplanned = 400 + .75*(2000) = $1900 so output exceeds spending and so unplanned inventory investment
is $100.
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Question 258 Essay 0 points Modify Remove
QuestionTable: Real GDP
Reference: Ref 11-19
(Table: Real GDP) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the accompanying table shows consumption spending (C) and planned investment (Iplanned).
a. What is the MPC in this economy?b. At what level of real GDP will the economy find its income-expenditure equilibrium?
Answer a. As YD increases by $1000, C increases by $900, so the MPC = 900/1000 = .90.b. If you create a new column for AEplanned = C + Iplanned, you will see that real GDP = AEplanned at $7000.
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Question 259 Essay 0 points Modify Remove
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QuestionIn a simple economy with no government and no foreign sector, autonomous consumer spending is $250 and planned investment spending is $500. The marginal propensity to consume is 0.80.a. Solve for the equilibrium level of real GDP.b. Suppose that interest rates fall and planned investment increases by $100. What is the new level of equilibrium real GDP?
Answer a. Given this information, AEplanned = 750 + .80*YD. In equilibrium, AEplanned = GDP = YD. So we can rewrite YD = 750 +
0.80*YD, or 0.20*YD = 750, and equilibrium YD=GDP = $3750.b. With the MPC = 0.80, the multiplier M = 5. So an increase of $100 of new planned investment will increase real GDP by $500. So the new equilibrium real GDP is $4250.
QuestionUse this scenario to answer questions 265–266.Scenario: Aggregate Consumption FunctionUse the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1,000 + 0.75YD where C stands for consumption and YD stands for disposable income.Reference: Ref 11-20
(Scenario: Aggregate Consumption Function) Suppose disposable income increases by $100, this means aggregate consumption will increase by _________ and autonomous consumption _______________.
QuestionUse this scenario to answer questions 265–266.Scenario: Aggregate Consumption FunctionUse the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1,000 + 0.75YD where C stands for consumption and YD stands for disposable income.Reference: Ref 11-20
(Scenario: Aggregate Consumption Function) If aggregate disposable income equals $1000, then aggregate consumption equals:
QuestionWhen Julie Ann's disposable income is $10,000, she spends $10,000 and when her disposable income is $15,000, her spending is $12,500. Julie Ann's autonomous consumption is ________ and her ___________.
QuestionVanessa tells people she is consuming more now and probably will continue to do so for some time, but she believes her consumption will smooth out over her lifetime. Vanessa's consumption pattern mirrors:
QuestionUse this table to answer questions 281–285.Scenario: A Country's Consumption FunctionA country is currently closed with no government sector and aggregate price levels and interest rate levels fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Furthermore, assume that planned investment equals 75.Reference: Ref 11-21
(Scenario: A Country's Consumption Function) Given this consumption function, if this country experienced an increase in income of $10,000, we know consumption would increase by:
QuestionUse this table to answer questions 281–285.Scenario: A Country's Consumption Function
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A country is currently closed with no government sector and aggregate price levels and interest rate levels fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Furthermore, assume that planned investment equals 75.Reference: Ref 11-21
(Scenario: A Country's Consumption Function) When real GDP equals 900:
QuestionUse this table to answer questions 281–285.Scenario: A Country's Consumption FunctionA country is currently closed with no government sector and aggregate price levels and interest rate levels fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Furthermore, assume that planned investment equals 75.Reference: Ref 11-21
(Scenario: A Country's Consumption Function) What is the income-expenditure equilibrium for this country?
QuestionUse this table to answer questions 281–285.Scenario: A Country's Consumption FunctionA country is currently closed with no government sector and aggregate price levels and interest rate levels fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Furthermore, assume that planned investment equals 75.Reference: Ref 11-21
(Scenario: A Country's Consumption Function) Holding everything else constant, what would happen if aggregate wealth decreases by $100?
Answer The AE curve shifts downward.
The income-expenditure equilibrium real GDP increases by more than $100.
The multiplier effect on real GDP does not occur since there is a drop in aggregate wealth.
QuestionUse this table to answer questions 281–285.Scenario: A Country's Consumption FunctionA country is currently closed with no government sector and aggregate price levels and interest rate levels fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Furthermore, assume that planned investment equals 75.Reference: Ref 11-21
(Scenario: A Country's Consumption Function) If real GDP is 1100, then:
QuestionIf the MPC equals 0.75, then based on the simple model presented in this chapter, one would expect a $100 decrease in investment spending to lead to:
Answer an increase in spending which will total $100 by the end of all the rounds.
an increase in spending which will total $400 by the end of all the rounds.
a decrease in spending which will total $100 by the end of all the rounds.
a decrease in spending which will total $400 by the end of all the rounds.
QuestionSuppose the level of planned aggregate expenditure in an economy is $1000 while the real GDP is $800. According to the simple model developed in this chapter, where the aggregate price level is assumed to be constant, we can expect:
Answer inventories will stay the same since this is part of planned investment.