Macroeconomics Principles and Policy 12th Edition Baumol Test Bank

Macroeconomics Principles and Policy
12th Edition Baumol Test Bank

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Chapter 8—Aggregate Demand and the Powerful Consumer
TRUE/FALSE
1. Both President Bush and President Obama wanted tax cuts to stimulate consumer spending during the
2007-2009 recession.
ANS: T PTS: 1 DIF: Easy NAT: Analytic

LOC: Aggregate demand and aggregate supply
TOP: Issue: Demand management and the Ornery Consumer
2. The tax cuts of 2008 and 2009 reduced the disposable income of U.S. consumers.
ANS: F PTS: 1 DIF: Easy NAT: Analytic

3. Aggregate demand is the sum of total domestic spending by the private sector.
ANS: F PTS: 1 DIF: Moderate NAT: Analytic

TOP: Aggregate Demand, Domestic Product, and National Income
4. Aggregate demand is the total demand for the final goods and services produced in an economy.

5. Consumer spending is an injection in the circular flow of income and spending.
ANS: T PTS: 1 DIF: Moderate NAT: Analytic

TOP: The Circular Flow of Spending, Production, and Income
6. Government spending is a leakage out of the circular flow of income and spending.

7. Taxes add to and transfers subtract from the flow of income and spending.

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or posted to a publicly accessible website, in whole or in part.
8. The consumption function shows an indirect relationship between consumer spending and disposable
income.

TOP: Consumer Spending and Income: The Important Relationship
9. Tax reductions should also reduce the amount of consumer expenditures.

10. Scatter diagrams are a useful way to depict the relationship between two variables.
ANS: T PTS: 1 DIF: Easy NAT: Reflective

11. A scatter diagram could help a policy maker decide on the size of a tax cut necessary to increase
consumer expenditures by a certain amount.
ANS: T PTS: 1 DIF: Moderate NAT: Reflective

12. The marginal propensity to consume is calculated by dividing the change in consumer spending by the
change in disposable income.

TOP: The Consumption Function and The Marginal Propensity to Consume
13. The relationship between consumption and disposable income is very unreliable and unpredictable.

14. The typical value for the MPC is less than 1.0.

15. If consumers receive an increase in income of $1,000, their spending will increase by a smaller amount.

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16. The MPC can be used to predict the effect of a tax increase.

17. The slope of the consumption function is equal to the marginal propensity to save.

18. A decrease in disposable income causes a shift in the consumption function.

TOP: Factors that Shift the Consumption Function
19. A change in the value of consumer's stock market holdings will cause a shift in the consumption
function.
ANS: T PTS: 1 DIF: Difficult NAT: Analytic

20. If U.S. consumers become more optimistic about their future income and wealth, the consumption
function will shift upward.
ANS: T PTS: 1 DIF: Difficult NAT: Analytic

21. A savings account is an example of consumer income.

22. If households decrease the amount of bank account withdrawals, the consumption function may shift
upward.
ANS: F PTS: 1 DIF: Difficult NAT: Analytic

23. When the price level falls, consumers may feel wealthier and the consumption function will shift
upward.
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24. Changes in the price level affect household wealth more than household income.

25. Bank accounts and bonds are examples of money-fixed assets.

26. A $500 government bond is a money-fixed asset.

27. The tax cuts of 2008 and 2009 were effective because consumers believed that they were temporary.

28. Consumers increased consumption by a relatively small amount in 2008 and 2009 because they believed
the tax cuts were temporary.

TOP: Issue Revisited: Why Temporary Tax Cuts Have Only Modest Effects on Spending
29. To economists, investment means buying stocks and bonds.

TOP: The Extreme Variability of Investment
30. An example of investment is the purchase of machinery by a manufacturing company.

31. National income minus personal taxes net of transfer payments equals disposable income.
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TOP: Appendix: National Income Accounting
32. Government transfer payments are income earned by individuals who work for the federal government.

33. Government purchases are included in national product.

34. Financial investments, such as mutual fund purchases, are included in the national income component.

35. Capital goods are counted the same as consumer goods in the national product accounts.

36. The value of both exports and imports are added to the value of national product.

37. U.S. imports rise when income in the United States increases.
ANS: T PTS: 1 DIF: Moderate NAT: Reflective

38. If inflation rises more quickly in the United States than in France, U.S. exports to France should rise.

39. The purchase of a new house is included in government spending.
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40. An economic boom in one country usually causes a recession in other countries.

MULTIPLE CHOICE
1. When aggregate demand decreases rapidly, the economy is likely to experience

a. inflation.
b. an economic boom.
c. economic growth.
d. recession.
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
2. Governments can affect the level of aggregate demand in a direct way by changing
a. government spending.
b. exports.
c. taxes.
d. transfer payments.
ANS: A PTS: 1 DIF: Easy NAT: Analytic
3. The total amount spent on final goods and services in the U.S. in 2009 was approximately ten trillion
dollars. This total spending is referred to as
a. investment demand.
b. aggregate demand.
c. market demand.
d. consumption demand.
ANS: B PTS: 1 DIF: Easy NAT: Analytic
4. Consumer spending represents about what fraction of total spending in the economy?
a. one-fifth
b. two-thirds
c. one-third
d. two-fifths
e. three-fourths
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ANS: B PTS: 1 DIF: Moderate NAT: Analytic
5. In which of the following years was a tax cut ineffective in stimulating aggregate demand?
a. 1964
b. 1975
c. 1981
d. 1999
6. Aggregate demand is the total demand for

a. all intermediate and final goods.
b. all monetary investments.
c. real and financial investments.
d. all final goods and services.
ANS: D PTS: 1 DIF: Easy NAT: Analytic
7. If a U.S. citizen buys a car produced in Germany, this transaction will add to
a. U.S. aggregate demand.
b. U.S. aggregate supply.
c. German aggregate demand.
d. German imports.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
8. Melissa purchases shares in a government bond mutual fund. Is this included in the aggregate demand
component "Investment"?
a. Yes, if it is a domestic mutual fund.
b. Yes, if the purchase is made out of current income.
c. No, unless the funds are deposited in a domestic financial institution.
d. No, it would never be included.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective
9. The "investment" component of aggregate demand will include all of the following except
a. expenditures of business firms on new plants.
b. expenditures of business firms on new equipment.
c. resales of existing physical assets.
d. household spending on new homes.
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ANS: C PTS: 1 DIF: Moderate NAT: Reflective
10. Which of the following is considered to be an investment in economists' point of view?

a. Serena buys bonds issued by Citibank.
b. John purchases a new house.
c. Venus invests hundred thousand dollars in Bear Stearns stock.
d. Allen sells the old truck he used for transporting goods.
ANS: B PTS: 1 DIF: Moderate NAT: Reflective
11. The net export component of aggregate demand is defined as U.S.

a. imports minus U.S. exports.
b. imports plus U.S. exports.
c. exports minus U.S. imports.
d. exports minus taxes and customs duties.
ANS: C PTS: 1 DIF: Easy NAT: Analytic
12. Which of the following should be subtracted while calculating aggregate demand of the U.S.?
a. Pakistan's purchase of F-16s from the U.S.
b. Computers imported by China from the U.S.
c. Memorabilia purchases in the U.S. by a foreign tourist.
d. A U.S. firm's purchase of German machinery.
13. Aggregate demand is a ____ rather than a ____.

a. fixed number, concept
b. schedule, fixed number
c. set number, concept
d. government aggregate, private aggregate
14. Aggregate demand is the sum of

a. C + I + G + (X − IM).
b. C + I + X.
c. C + I + X − IM.
d. C + I + G.
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15. National income is

a. the sum of all wages and salaries, interest, rent, and profits in the economy.
b. equal to the money value of national output.
c. the before-tax income of all individuals in the economy.
d. All of the above are correct.
16. The difference between national income and disposable income is

a. residential investment.
b. federal deficits.
c. net exports.
d. financial investment.
e. the amount of taxes collected.
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
17. Aggregate demand is defined as the total spending

a. of all consumers, business firms, government agencies, and foreigners on final goods and
services produced in the United States.
b. by all consumers, business firms, government agencies, and foreigners in the United States.
c. consumers, businesses, government agencies, and foreigners wish to make in one year.
d. of consumers, businesses, and government agencies on final output.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
18. Which of the following would be counted as investment in the national income accounts?
a. the purchase of a newly issued stock
b. the purchase of a newly built apartment house
c. the purchase of a newly minted coin
d. the payment of tuition at a private college
19. The largest component of aggregate demand is

a. investment spending.
b. consumer spending.
c. government spending.
d. total imports.
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20. Which of the following would be added to U.S. national income?

a. an American consumer buying French wine
b. an American business selling aircraft to British Airways
c. a Swedish firm selling mobile phones to Americans
d. a French firm buying a Swedish cellular phone
21. The circular flow diagram is best described as a(n)

a. abstraction of little value in macroeconomics.
b. exact representation of the cause and effect relationship between spending and employment.
c. model that clarifies the relationship between spending and income.
d. model to explain the relationship between the federal deficit and tax revenues.
22. Saving is a leakage in the sense that

a. saving is lost to the economy and ultimately leads to stagnation.
b. the financial system often makes negative profits.
c. it often accompanies a trade deficit.
d. consumers spend less than their total income.
23. In economic analysis, which of the following is considered an injection?

a. saving
b. taxes
c. imports
d. exports
24. Government spending is an injection in the sense that it

a. increases the amount of total spending.
b. increases the size of the federal deficit.
c. decreases the amount of household saving.
d. decreases the amount of taxes paid.
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25. Which of the following is the injection into the circular flow model?
a. Money deposited in a savings account.
b. Income earned through exports.
c. Goods imported from abroad.
d. Taxes paid by the individuals.
26. Why is it true that domestic product and national income must be equal?
a. The IRS national accounting system assures that taxes equal total income.
b. The total amount of spending must equal total national sales.
c. The value of final product must equal the sum of resource income that produced it.
d. The total amount of income earned is eventually spent.
27. Disposable income can be defined as national product

a. minus federal and state taxes.
b. minus taxes plus transfers.
c. minus indirect taxes.
d. plus taxes plus transfers.
28. In the circular flow model, which of the following is considered a leakage?
a. investment spending
b. business spending
c. household saving
d. total exports
29. Which of the following is a transfer payment?

a. Work-study students receive wages transferred from the university budget.
b. A company pays the moving expenses for a transferred employee.
c. A student transfers to another college and receives a tuition rebate.
d. A student receives a tuition grant from the federal government.
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30. When saving leaks out of the circular flow of income and spending,
a. total income necessarily falls.
b. it leaks out of the financial system.
c. it flows to borrowers.
d. it increases the size of the spending flow.
ANS: C PTS: 1 DIF: Difficult NAT: Analytic
31. In the circular flow model, which of the following is an injection?

a. investment spending
b. government taxes
c. total exports
d. imports
32. To get a complete measure of the total spending on U.S.-produced final goods and services, one must
adjust aggregate demand by
a. adding imports and subtracting exports.
b. adding imports that are purchased by U.S. consumers.
c. adding exports and subtracting imports.
d. subtracting exports sold to foreigners.
33. Imports are a leakage in the sense that

a. the international financial system is unstable.
b. consumers buy foreign output of goods and services.
c. foreigners earn less than U.S. workers.
d. a trade deficit increases aggregate demand.
34. The relationship between consumption and disposable income is such that as
a. consumption rises, disposable income falls.
b. disposable income rises, consumption rises.
c. disposable income rises, consumption falls.
d. disposable income rises, saving falls.
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35. Historical data representing consumption and disposable income reveals that
a. during the 1930s, U.S. saving was at a high level.
b. U.S. citizens increased saving during World War II.
c. there is no systematic relationship between the two.
d. consumption rises faster than disposable income during recessions.
36. If you produce a graph with consumption spending on the vertical axis and disposable income on the
horizontal axis, the relation between consumption and income will
a. be inverse.
b. be transcendental.
c. shift unpredictably.
d. be direct.
37. On a graph with consumption on the vertical axis and disposable income on the horizontal axis, the slope
of the line is
a. greater than one.
b. equal to one.
c. less than one.
d. undefined.
ANS: C PTS: 1 DIF: Difficult NAT: Reflective
38. The difference between disposable income and consumption spending is

a. transfer payments.
b. personal taxes.
c. net exports.
d. personal investment.
e. personal saving.
ANS: E PTS: 1 DIF: Easy NAT: Analytic
39. Historical data depicted on a scatter diagram show that consumer spending and disposable income
a. converge as income grows.
b. generally move together.
c. diverge as income grows.
d. show no clear relationship.
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40. The federal government's principal tool in altering consumer spending is changing
a. corporate income taxes.
b. federal sales taxes.
c. unemployment insurance benefits.
d. personal income tax rates.
41. If real disposable income is $300 billion and real consumer expenditures are $250 billion, it can be
assumed that
a. the government is spending the difference.
b. the difference is being invested.
c. households are saving the difference.
d. transfer payments make up the difference.
42. "Men are disposed, as a rule, and on the average, to increase their consumption as their income increases,
but not by as much as the increase in their incomes." Which of the following is consistent with this
statement by J.M. Keynes?
a. The slope of the consumption function is positive and less than one.
b. The slope of the consumption function is greater than that of the 45-degree line.
c. The slope of the consumption function is negative.
d. The slope of the consumption function is equal to one.
ANS: A PTS: 1 DIF: Difficult NAT: Reflective
43. If an economist wants to make a prediction about the effects of a change in disposable income on the
change in consumption spending based on historical data, she must assume that
a. the future will closely resemble the past.
b. consumption and disposable income will be negatively related.
c. the consumption function will have a downward slope.
d. as disposable income increases, consumer spending will remain constant.
44. The slope of the scatter diagram representing the relationship between consumption and disposable
income in the United States is approximately
a. 1.10.
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b. 0.30
c. 0.50
d. 0.90
ANS: D PTS: 1 DIF: Easy NAT: Reflective
45. If personal taxes are increased by $10 billion, we can expect that consumers will reduce
a. spending by $10 billion.
b. spending by more than $10 billion.
c. spending by less than $10 billion.
d. saving by $10 billion.
e. saving by more than $10 billion.
46. The relationship between consumer spending and disposable income is called the
a. conjunction function.
b. consumption function.
c. aggregate demand function.
d. marginal spending function.
ANS: B PTS: 1 DIF: Easy NAT: Reflective
47. Economists expect the relationship between consumption and disposable income to be
a. unpredictable.
b. transitory.
c. fixed.
d. inverse
e. stable.
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
48. The Marginal Propensity to Consume (MPC) is defined as the change in

a. C over the change in DI.
b. income over the change in disposable income.
c. DI over the change in C.
d. total income over the change in net income.
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49. The nation's disposable income increases by $400 billion and, as a result, consumer spending increases
by $320 billion. Therefore, the MPC equals
a. 0.16.
b. 0.20.
c. 0.60.
d. 0.80.
e. 0.96.
50. If DI falls by $100 billion, and C falls by $90 billion, the slope of the consumption is
a. −0.45.
b. 0.45.
c. −0.90.
d. 0.90.
e. 0.50.
51. The numerical value of the MPC is typically

a. less than 1.
b. equal to 1.
c. greater than 1.
d. unpredictable.
52. The marginal propensity to consume (MPC) is calculated by which formula?

a. MPC = change in DI divided by change in C
b. MPC = change in GDP divided by change in DI
c. MPC = change in C divided by change in DI
d. MPC = change in C divided by change in GDP
53. If disposable income increases by $400 billion and consumption increases by $300 billion, the MPC
equals
a. 0.75
b. 0.60
c. 0.80
d. 0.68
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54. The marginal propensity to consume is

a. disposable income divided by consumption.
b. the change in consumption divided by the change in disposable income.
c. consumption divided by disposable income.
d. the change in disposable income divided by the change in consumption.
Figure 8-1
55. Given the scatter diagram in Figure 8-1, what is the MPC (your best estimate)?
a. 1/2
b. 1/3
c. 2/3
d. 1
56. Based on the scatter diagram in Figure 8-1, approximately how much will consumption increase after a
permanent tax cut of $400 billion?
a. $100 billion
b. $150 billion
c. $250 billion
d. $350 billion
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57. Given the scatter diagram in Figure 8-1, how much will consumption decrease if the price level rises by
5 percent?
a. $50 billion
b. $100 billion
c. $200 billion
d. cannot be determined
ANS: D PTS: 1 DIF: Difficult NAT: Reflective
58. Based on the scatter diagram in Figure 8-1, if real disposable income is $800 billion, the consumption
spending would be approximately
a. $800 billion.
b. $650 billion.
c. $540 billion.
d. $420 billion.
59. If you fit a line through a scatter diagram of points that represent coordinates of consumer spending and
disposable income, the slope of this line will equal the
a. propensity to consume
b. variable propensity to consume.
c. marginal propensity to consume.
d. average propensity to consume.
60. In 1963, government economists assumed that the MPC for the United States was approximately 0.90. If
taxes were cut by $9 billion, then consumer expenditures would initially be expected to
a. decrease by $9.0 billion.
b. increase by $9.0 billion.
c. decrease by $8.1 billion.
d. increase by $8.1 billion.
ANS: D PTS: 1 DIF: Difficult NAT: Analytic
61. Assume that consumption in the United States is $9,000 billion in 2009. If the MPC is 0.8 and disposable
income increases by $1,000 billion in 2010, then the level of consumption in 2010 will be
a. $10,000 billion.
b. $9,800 billion.
c. $9,000 billion.
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d. $7,200 billion.
62. If the MPC increases in value, what will happen to the slope of the consumption function?
a. The slope will decrease and the consumption function will become flatter.
b. The slope will decrease and the consumption function will become steeper.
c. The slope will increase and the consumption function will become steeper.
d. The slope will increase and the consumption function will become flatter.
63. Do economists know the value of the MPC for most economies?
a. Yes, with a high level of precision.
b. Yes, with a certainty level of four decimal places.
c. No, it is impossible to determine a national MPC.
d. Yes, but with some level of uncertainty.
64. If the MPC is .80, then a change in disposable income of $60 billion will lead to an initial change in
consumption of
a. $30 billion.
b. $42 billion.
c. $48 billion.
d. $60 billion.
e. $70 billion.
65. In Macronesia, the MPC is approximately .80. If disposable income changes from 1,000 billion pukas to
1,500 billion pukas, then consumption will change by a(n)
a. decrease of 500 billion pukas.
b. increase of 500 billion pukas.
c. increase of 400 billion pukas.
d. increase of 800 billion pukas.
66. For each $1 of a tax cut, economists expect consumption to

a. decrease by $1.
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b. decrease by less than $1.
c. increase by less than $1.
d. increase by $1.
67. If income in Austria decreases by 30 million euros and consumption decreases by 24 euros, then the
MPC equals
a. 0.90.
b. 0.80.
c. 0.60
d. −0.60.
68. To predict the effects of a tax cut on consumption spending, economists must have some estimate of the
a. income effect.
b. substitution effect.
c. relative price effect.
d. marginal propensity to consume.
69. According to the relationship represented by the consumption function, governments can indirectly
decrease consumption spending by
a. increasing taxes.
b. decreasing transfers.
c. decreasing taxes.
d. decreasing government spending.
70. A decrease in disposable income will

a. lead to an upward movement along the consumption function.
b. lead to a downward movement along the consumption function.
c. shift the consumption function upward.
d. shift the consumption function downward.
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71. A movement from one point to an another point on the same consumption function could be caused due
to
a. changes in wealth.
b. an increase in the general price level.
c. decrease in the real interest rates.
d. changes in disposable income.
72. A movement upward along the consumption function can be caused only by a(n)
a. increase in disposable income.
b. decrease in disposable income.
c. decrease in the price level.
d. increase in the price level.
73. One of the effects of a change in disposable income could not be a(n)
a. movement up along the consumption function.
b. movement down along the consumption function.
c. change in the amount of consumption expenditures.
d. upward shift of the consumption function.
74. Because of recent corporate downsizing, Chuck loses his job. The most likely effect on his consumption
function is a(n)
a. movement downward along the function.
b. shift upward of the function.
c. shift downward of the function.
d. increase in consumption expenditures.
ANS: A PTS: 1 DIF: Difficult NAT: Analytic
Figure 8-2
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75. In Figure 8-2, which of the following moves can be explained by a decrease in disposable income?
a. E to B
b. A to C
c. A to D
d. B to E
ANS: A PTS: 1 DIF: Moderate NAT: Reflective
76. In Figure 8-2, which of the following moves can be explained by a decrease in the price level?
a. A to B
b. A to C
c. A to D
d. A to E
77. In Figure 8-2, which of the following moves can be explained by a decrease in the prices of stock on the
NASDAQ?
a. A to B
b. A to C
c. A to D
d. A to E
78. In Figure 8-2, which of the following moves can be explained by a tax cut?
a. A to B
b. A to C
c. A to D
d. A to E
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79. In Figure 8-2, which of the following moves can be explained by an increase in government transfer
payments?
a. A to B
b. A to C
c. A to D
d. A to E
80. After years of hard work in the field of macroeconomics, you win the Nobel Prize in economics
(currently about $1.5 million). What is the most likely effect of this prize on your consumption function?
a. It will shift downward temporarily.
b. It will shift upward temporarily.
c. It will shift downward permanently.
d. It will shift upward permanently.
e. none of the above
81. Which of the following is an example of wealth?

a. a yearly salary of $40,000
b. a mutual fund balance of $1,000
c. rental payments of $3,000 per month
d. stock dividends of $500 per quarter
ANS: B PTS: 1 DIF: Easy NAT: Reflective
82. If Kobe, an NBA star athlete, earns $10 million per year but has no money in the bank, he has a
a. high income and high wealth.
b. low income and high wealth.
c. high income and low wealth.
d. low income and low wealth.
83. Households can finance their consumer spending from current

a. income.
b. wealth.
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c. debt.
d. income and current wealth.
84. Which of the following would be most likely to shift the consumption function downward?
a. a stock market crash
b. a price level decrease
c. increased corporate profits
d. a stock market boom
ANS: A PTS: 1 DIF: Moderate NAT: Reflective
85. Price level changes have their greatest effect on consumers'

a. income.
b. wealth.
c. debt.
d. expectations.
86. If the price level increases, we would expect consumers to

a. raise their consumption functions.
b. move downward along their consumption functions.
c. lower their consumption functions.
d. move upward along their consumption functions.
87. Consumption functions would shift downward if

a. disposable incomes fall.
b. disposable incomes rise.
c. price levels fall.
d. price levels rise.
88. Pat Robertson, a TV evangelist and former Republican Party candidate for president, once said that
"debt is an affront to God," so good Christians should not spend beyond their incomes. Indeed,
Robertson wants Christians to save more. If more Americans, Christians as well as others, took his
message seriously, how would we represent the result using a Keynesian macroeconomic model?
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a. a downward movement along the consumption function
b. an upward movement along the consumption function
c. a downward shift of the consumption function
d. an upward shift of the consumption function
89. Which of the following would cause an upward shift in the consumption function?
a. a stock market crash
b. an increase in the price level
c. a decrease in disposable income
d. a decrease in the price level
90. Which of the following would lead you to predict an upward shift in the consumption function?
a. a decrease in the value of real wealth
b. a decrease in disposable income
c. an increase in the value of real wealth
d. an increase in the price level
91. If the stock market falls by 25 percent next year and remains down, what is most likely to happen to the
consumption function?
a. It will shift upward.
b. It will shift downward.
c. It will not shift, but people will move downward along the consumption function.
d. It will not shift, but people will move upward along the consumption function.
92. Which of the following will most likely have the greatest effect on an individual's consumption
function?
a. winning a small amount in the lottery
b. a one-time tuition grant
c. a week of high overtime pay
d. an inheritance paying a modest annual dividend
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93. Which of the following will most likely cause movement along the consumption function?
a. a change in disposable income
b. a change in interest rates
c. a change in tastes
d. a change in consumers' expectations
94. Which of the following will most likely cause a shift in the consumption function?
a. a change in consumer confidence
b. a change in national output
c. a change in real GDP
d. a change in disposable income
95. A decrease in the price level will most likely have what effect on the consumption function?
a. It will shift upward.
b. It will shift downward.
c. It will cause movement downward along the function.
d. It will cause movement upward along the function.
96. A once-and-for-all jump in the price level would initially cause a(n)
a. upward shift in the consumption function.
b. upward movement along the consumption function.
c. downward shift in the consumption function.
d. downward movement along the consumption function.
97. A sudden decrease in consumers' wealth-resulting, for example, from a stock market crash-would
initially cause a(n)
a. downward movement along the consumption function.
b. downward shift of the consumption function.
c. upward movement along the consumption function.
d. upward shift of the consumption function.
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98. Suppose the stock market rises, causing a rapid increase in consumers' wealth. This would lead to
a. a downward movement along the consumption function.
b. a downward shift of the consumption function.
c. an upward movement along the consumption function.
d. an upward shift of the consumption function.
99. Most older persons regularly spend more than their current disposable income. How is this possible?
a. They receive government transfer payments.
b. They work to supplement their retirement income.
c. They borrow and increase their debt levels.
d. They withdraw funds from accumulated wealth.
100. Why does an increase in the price level tend to cause the consumption function to shift downward?
a. An increase in the price level decreases disposable income.
b. An increase in the price level increases the demand for fixed money assets.
c. An increase in the price level decreases the value of fixed money assets.
d. An increase in the price level decreases saving and increases debt.
ANS: C PTS: 1 DIF: Difficult NAT: Analytic
101. According to economists, how does an increase in the inflation rate affect the consumption function?
a. It shifts the function upward.
b. It shifts the function downward.
c. It causes movement upward along the function.
d. It causes movement downward along the function.
e. It has no predictable effect on the function.
ANS: B PTS: 1 DIF: Difficult NAT: Analytic
102. Most statistical studies on the relationship between real interest rates and saving conclude that higher
real interest rates
a. increase saving.
b. tend to decrease saving.
c. tend to decrease both consumption and saving.
d. have no effect on saving.
336
103. If real interest rates decrease, we generally expect
a. saving to increase.
b. saving to decrease.
c. consumption spending to decrease.
d. no significant change in saving.
104. Lower real interest rates

a. tend to shift the consumption function upward.
b. have no significant effect on consumption.
c. tend to shift the consumption function downward.
d. tend to move the consumer upward along the consumption function.
105. If consumers' expectations about future income are very optimistic, then we should expect
a. the consumption function to shift downward.
b. consumers to move up along the consumption function.
c. the consumption function to shift upward.
d. consumers to move down along the consumption function.
106. We should expect the consumption function to shift downward if

a. real interest rates rise.
b. price levels fall.
c. consumers become more optimistic about future incomes.
d. consumers become more pessimistic about future incomes.
107. If the consumption function shifts downward, which of the following is the most likely cause?
a. Consumers become more optimistic.
b. The price level increased.
c. Consumers' incomes increase.
d. Real interest rates decrease.
337
108. A major employer in a small town announces upcoming major layoffs of employees. What should we
expect to happen to the consumption functions of the affected employees?
a. the consumption functions will shift upward.
b. most employees will move upward along their consumption functions
c. the consumption functions will shift downward
d. most employees will move downward along their consumption functions
109. Most people base their current consumption spending at least partially on
a. short-run debt.
b. long-run debt.
c. long-run real interest rates.
d. long-run income.
110. The main reason that the 1975, 2008, and 2009 tax cuts did not have a large effect on GDP is that they
were
a. temporary surcharges rather than permanent surcharges.
b. permanent surcharges rather than temporary surcharges.
c. temporary tax cuts rather than a permanent tax cuts.
d. permanent tax cuts rather than a temporary tax cuts.
111. The tax cut of 2009 had little significant effect on consumer spending because it
a. was not large enough.
b. was perceived as temporary.
c. came too early in the year.
d. was subtracted from 2008 taxes due.
112. If personal taxes are cut temporarily, the resulting

a. increase in personal saving would be larger than if they were cut permanently.
b. decrease in personal saving would be larger than if they were cut permanently.
c. decrease in personal saving would be smaller than if they were cut permanently.
d. increase in personal saving would be smaller than if they were cut permanently.
338
113. The U.S. experience with tax cuts and tax increases since 1975 suggests that
a. tax cuts always stimulate consumption spending.
b. tax changes have a stable and predictable effect on consumption spending.
c. temporary tax changes are less effective than permanent changes.
d. tax changes have no effect on consumption spending.
114. Why do permanent tax cuts have a greater impact on consumption than temporary tax cuts?
a. Permanent tax cuts have a greater effect on expected long-run inflation.
b. Permanent tax cuts are perceived as minor while temporary tax cuts are larger and more
effective.
c. Permanent tax cuts cause movement along the consumption function, while temporary tax
cuts shift the consumption function.
d. Permanent tax cuts affect expectations of long-run income more than temporary tax cuts.
115. The most volatile component of aggregate demand is

a. consumption spending.
b. government spending.
c. investment spending.
d. net exports.
116. Which of the following is not a factor that influences investment spending?
a. transfer payment policy
b. business confidence
c. business expectations
d. technical change
117. Suppose the federal government wants to encourage businesses to increase investment spending. Which
policy may be the most effective?
a. an increase in corporate income taxes
b. an increase in real interest rates
c. an increase in warnings of a coming recession
d. an increase in tax deductions for investment spending
339
118. U.S. imports are most likely to increase when

a. U.S. GDP decreases.
b. U.S. unemployment rates fall.
c. U.S. prices fall.
d. foreign prices rise.
TOP: The Determinants Of Net Exports
119. If the Japanese economy is currently suffering from a recession we should expect U.S. exports to Japan
to
a. decrease.
b. increase.
c. remain the same.
d. increase only if the Japanese Yen depreciates.
TOP: The Determinants Of Net Exports
120. The book that is the basis for modern macroeconomic theory is
a. The Wealth of Nations.
b. Principles of Political Economy.
c. The General History of Money and Banking.
d. The General Theory of Employment, Interest, and Money.
121. The system of measurement for expressing macroeconomic data is called

a. national income accounting.
b. balance of payment accounting.
c. generally accepted accounting principles.
d. double entry bookkeeping.
122. When computing gross domestic product, government services are valued at the
a. price consumers pay for them.
b. value of the resources used to produce them.
c. value of comparable outputs from the private sector.
d. value of taxes collected from consumers.
340
123. One difficulty of computing the value of GDP is that there are no market prices for
a. exports and imports.
b. business investments.
c. government goods and services.
d. resource values.
124. The one category of goods that are not sold but are, nevertheless, included in GDP is
a. inventories.
b. imports.
c. consumer services.
d. exports.
125. Goods produced that go into inventories are

a. not counted in GDP.
b. only counted in GDP when they are ultimately sold.
c. counted in GDP even though they are not sold.
d. counted if they completely depreciate within the calendar year.
126. Which of the following observations concerning GDP calculations is true?

a. Goods and services produced by governments are valued at market price.
b. Inventories are treated as if they are yet to be sold.
c. Goods produced but not sold during the year are counted in that year's GDP.
d. Goods that firms add to their inventories do not count in the GDP.
127. Inventories are goods that can be considered as "purchased" by

a. the firms that produce them.
b. the consumers that ultimately buy them.
c. the government since they are tax deductible.
d. no one since they are not counted as part of GDP.
341
128. Investment goods are counted in GDP because they are

a. intermediate goods.
b. purchased in their final form.
c. usually exported as foreign investment.
d. deductible business expenses.
129. Gross private domestic investment in the United States consists of three components:
a. stocks, bonds, and mutual funds.
b. automobiles, trucks, and houses.
c. plant, equipment, & software, houses, and inventories.
d. plant, equipment, & software, houses, and net exports.
130. Which of the following is not part of the investment component of GDP?
a. residential construction
b. plant, equipment, and software
c. net imports
d. business structures
131. Residential construction (new houses and apartments) are included in which component of GDP?
a. government purchases
b. retail spending
c. investment spending
d. net exports
132. The purchase of stocks and bonds is included in which component of GDP?
a. saving
b. investment
c. consumer spending
d. They are not included in GDP.
342
133. Among the following, which would not be considered part of the investment component of GDP?
a. manufacturers' equipment
b. buying corporate stock
c. new houses
d. business structures
134. In the national income accounts, the symbol G represents the

a. government production of goods and services.
b. volume of goods and services purchased by the federal government.
c. value of goods and services purchased by the federal government.
d. value of goods and services purchased by all levels of government.
135. GDP can be calculated as the final demand for goods and services by consumers, businesses,
a. and governments.
b. and foreigners.
c. governments, and foreigners.
d. governments, and financial institutions.
136. The equation representing the final demand approach to calculating GDP is
a. Y = C + I + X + IM.
b. Y = C + I + G.
c. Y = G + I + X − IM.
d. Y = C+ I + G + (X − IM).
137. In calculating the nation's total output, net exports

a. represent exports of goods and services minus imports of goods and services.
b. have been a negative number in the last several years.
c. would include purchases of U.S.-made automobiles by foreigners minus purchase of
foreign-made automobiles by U.S. residents.
d. All of the above are correct.
343
138. The government component (G) of total output includes goods and services purchased by
a. the federal government plus transfer payments.
b. all government institutions plus transfer payments.
c. all government institutions.
d. all government institutions plus tax revenues.
139. The majority of payments made by the federal government are for
a. transfer payments.
b. administrative expenses.
c. foreign aid.
d. defense purchases
140. The accounting identity for the economy's factor payments can be written as ____.
a. GDP = wages + interest + rents + profits
b. GDP = consumption + investment + government + intermediate goods + net exports
c. GDP = wages + interest + rents + net exports
d. GDP = wages + interest + rents + saving + investment
141. Adding depreciation to net national product yields

a. disposable income (DI).
b. personal income (PI).
c. net national product (NNP).
d. gross domestic product (GDP).
142. The difference between Gross National Product and Net National Product is the
a. rate of inflation.
b. statistical discrepancy encountered in calculating GDP.
c. difference between real versus nominal GDP.
d. depreciation of the economy's capital stock.
344
143. The sum of all factor payments in the economy yields
a. gross domestic product.
b. national income.
c. disposable income.
d. net domestic product.
144. The term "depreciation" in the national income accounts refers to

a. the adjustment of GDP for inflation.
b. plant and equipment "used up" in producing current output.
c. citizenship differences among income recipients.
d. government transfer payments minus tax revenues.
145. The national income accounts include a value for the amount of capital stock "used up" during the
production of current output. This dollar amount is called
a. appreciation.
b. dollarization.
c. amortization.
d. depreciation.
146. The largest income component in the national income accounts is

a. wages.
b. rents.
c. corporate profits.
d. interest.
147. Employee compensation accounts for about what percentage of national income?
a. 30 percent
b. 40 percent
c. 70 percent
d. 90 percent
345
148. Based on the relative size of factor payments, the most important resource in the U.S. economy is
a. capital.
b. land.
c. labor.
d. natural resources.
149. The value of intermediate goods is not included in the calculation of GDP to avoid the problem of
a. depreciation.
b. inflation.
c. double counting.
d. transfer payments.
150. GDP can be calculated by the value-added approach, which

a. is useful in avoiding double counting.
b. includes only the value-added portion from the sale of goods and services.
c. includes the revenue a firm receives from selling a product minus the amount paid for goods
purchased from other firms.
d. All of the above correct.
151. National income can be calculated by subtracting

a. depreciation from GDP.
b. indirect business taxes from GDP.
c. depreciation and indirect business taxes from GDP.
d. transfer payments and taxes from GDP.
152. Disposable income is obtained by

a. subtracting personal income taxes from personal income.
b. subtracting personal income taxes from national income.
c. adding transfer payments to national income.
d. adding transfer payments to personal income.
346
153. Which of the following methods could be used to calculate GDP?
a. the sum of all spending on final goods and services
b. the sum of all factor payments plus depreciation and indirect business taxes
c. the sum of all values added at each stage of production
d. All of the above could be used.
154. Which of the following is the best example of an intermediate good?

a. a tire purchased by an auto company
b. a new house purchased by a newly married couple
c. grain sold to foreign farmers
d. All of the above are intermediate goods.
155. Whirlpool Corporation buys steel in sheets to manufacture refrigerators. Whirlpool also buys a new
factory and a metal press to mold the steel. Which purchases are included in GDP?
a. the steel
b. the steel, the factory, and the metal press
c. the factory and the metal press
d. the steel and the metal press
Table 8-1
Item Amount (billions)

Personal Consumption Expenditures 600
Depreciation 50
Wages 800
Indirect Business Taxes 10
Rental Income 25
Gross Private Domestic Investment 150
Corporate Profits 75
Net Exports 5
Government Purchases of Goods and Services 200
Government Transfer Payments 50
156. According to the data in Table 8-1, the value of GDP is

a. 800.
b. 805.
c. 955.
d. 1055.
347
157. According to the data in Table 8-1, the value of NNP is

a. 900.
b. 805.
c. 750.
d. 705.
158. According to the data in Table 8-1, the value of GNP is

a. 900.
b. 950.
c. 955.
d. 960.
ANS: B PTS: 1 DIF: Difficult NAT: Reflective
159. Government-produced goods are added to GDP at

a. their market value.
b. the value they have to their users.
c. the value of the inputs used to produce them.
d. the value Congress places on them.
160. Which of the following transactions is included in GDP?

a. You buy a used car for $10,000.
b. An unemployed worker receives a check for $450 as unemployment benefits.
c. You buy a one-acre lot in Florida where you plan to build a beach house.
d. Toyota builds 1,000 Accords in Kentucky at a cost of $25,000 each but is unable to sell them
and, therefore, they are added to inventory.
161. National income is the sum of

a. wages and profits.
b. wages, interest, profits, and rent.
c. interest and rent.
d. wages, transfer payments, and tax revenues.
348
162. In the national income accounts, new investment goods are considered
a. intermediate goods, and therefore, not counted.
b. final goods.
c. subtractions from final output.
d. depreciated goods
ESSAY
1. Define the following terms and explain their importance in the study of macroeconomics:
a. consumer expenditures
b. investment spending
c. national income
d. transfer payments
ANS:
a. Consumer expenditures are the total amount spent by consumers of newly produced final
goods and services (excluding purchases of new houses, which are included in the
investment component of GDP). Consumer expenditures are the largest component of total
spending and account for about two-thirds of GDP.
b. Investment spending is the sum of purchases by businesses on new plant, equipment, and
software plus the purchase of new housing by individuals. Investment also includes
inventories, newly produced goods that are not sold but are considered "purchased" by the
firms that produce them.
c. National income is the total of incomes earned in the production of all final goods and
services. Incomes earned include wages, rents, interest, and profits. National income does
not include transfer payments because they do not come from the production of goods and
services.
d. Transfer payments are payments that individuals receive as grants from the government in
the form of unemployment benefits, income support for families, etc. The largest type of
transfer payments in the United States are Social Security payments.
PTS: 1 DIF: Easy NAT: Analytic

2. What is aggregate demand? What are its major components?
ANS:
Aggregate demand is the total amount that all consumers, business firms, and government agencies
spend on final goods and services. The major components are:
1. Consumer expenditure is the total value of all consumer goods and services demanded.
349
2. Investment spending is the amount that firms spend on factories, machinery, software, and
the like, plus the amount that families spend on new houses.
3. Government purchases of goods and services, includes items such as paper, computers,
airplanes, ships, and labor bought by all levels of government.
4. Net exports is defined as U.S. exports minus U.S. imports.

3. What is disposable income? How is it calculated?
ANS:
Disposable income (DI) is the sum of the incomes of all individuals in the economy after all taxes have
been deducted and all transfer payments have been added.
DI = GDP − Taxes + Transfer payments

= GDP − (Taxes − Transfers)
=Y−T
where Y represents GDP and T represents taxes net of transfers or simply net taxes.

4. Define investment?
The meaning of investment is different for economists. Explain.
ANS:
Investment is an asset or item that is purchased with the hope that it would generate income or appreciate
in the future.
For an economist, investments are the sum of the expenditures of business enterprises on new factories,
machines and individuals on new homes. Financial investments and the resale of existing physical assets
are not included in the economist's definition. In finance, an investment is a monetary asset purchased
with the idea that the asset will provide a flow of income in the future in the form of profit or interest or
gain on capital.

5. What is the marginal propensity to consume (MPC) and why is it important in predicting consumer
behavior?
ANS:
350
The marginal propensity to consume is the ratio of the change in consumption spending to the change in
disposable income. The value of the MPC typically is less than one because when consumers receive an
increase in income, their spending does not increase as much as income. For the United States, statistical
estimates yield an MPC of approximately 0.95. If one knows the MPC, then predictions can be made of
how much consumer spending will increase when disposable income increases by a certain amount. This
is especially useful with regard to tax changes. If the federal government intends to increase aggregate
demand through decreasing taxes, then knowing the MPC is necessary. For example, if the desired
increase in consumer spending is $475 million and the MPC is .95, then taxes must be reduced by $500
million.
PTS: 1 DIF: Moderate NAT: Analytic

6. Explain why national income and domestic product must be equal.
ANS:
When a firm produces goods and sells them, it uses the sales revenue to pay all the factors of production,
such as labor, persons who loaned funds, rent on leased property, and profits to owners of the firm. The
total value of production, or total sales revenues, becomes income for someone. This basic identity
provides the basis for the circular flow of income and spending between the major sectors of the
economy.

7. Which factors will cause the consumption function to shift? Which factors do not cause the function to
shift?
ANS:
The principal factors that will cause the consumption function to shift are: changes in wealth; changes in
the price level; and changes in consumer expectations. If wealth increases, then more consumption is
possible at the same level of income. If the price level changes, fixed money assets change in value.
When prices rise, fixed money assets decrease in value and consumption will decrease. As consumers
become more optimistic, they will tend to spend more even if their current income is not changing. The
only factor that will not shift the consumption function is disposable income. When disposable income
changes, you move up or down a consumption function depending on the direction of change. If
disposable income increases, then one moves up along the consumption function.

8. For each of the following, how would they be included in the national income accounts?
a. The University of California buys a new computer.
b. Charles buys a new MP3 player.
c. Marian buys a new mountain cabin.
d. Vikki buys an old mansion with hopes of restoring it.
e. Farmer Brown buys a used combine harvester.
ANS:
351
a. Government purchases. Purchased by a state university.
b. Consumption. Purchased by an individual.
c. Investment. New house purchased by an individual.
d. Not included. Built in a previous year.
e. Not included. Only newly produced goods are included.

9. Why is investment spending a highly volatile component?
ANS:
Several factors influence how much businesses want to invest. These include interest rates, tax
provisions, technical change, and the strength of the economy. Sometimes these determinants change
abruptly, leading to dramatic variations in investment. But perhaps the most important factor accounting
for the volatility of investment spending is the state of business confidence, which in turn depends on
expectations about the future. Although confidence is tricky to measure, it does seem obvious that
businesses will build more factories and purchase more new machines when they are optimistic.
Correspondingly, their investment plans will be very cautious if the economic outlook appears bleak.

10. Discuss the major determinants of net exports.
ANS:
National incomes: Although both exports and imports depend on many factors, the predominant one is
income levels in different countries. When our economy grows faster than the economies of our trading
partners, our net exports tend to shrink. Conversely, when foreign economies grow faster than ours, our
net exports tend to rise.
Relative prices and exchange rates: A rise in the prices of a country's goods will lead to a reduction in
that country's net exports. Analogously, a decline in the prices of a country's goods will raise that
country's net exports. Similarly, price increases abroad raise the home country's net exports, whereas
price decreases abroad have the opposite effect.

11. Changes in the value of stocks may play a big role in the consumption decisions of individuals. How
would changes in the stock market affect the consumption function?
ANS:
352
Corporate stocks are an increasingly popular form of holding wealth in the United States. As stock prices
rise, consumers who own stock see the value of their wealth increase and may feel more comfortable
increasing their spending. Conversely, if stock prices fall, stockowners may feel poorer and decide to
decrease their consumption spending. Therefore, increases in the prices of stocks should cause the
consumption function to shift upward representing a higher level of spending even though current
disposable income has not increased. A stock market decline would cause the consumption function to
shift downward.

12. Explain why it makes a difference if consumers consider a tax cut temporary rather than permanent.
What does this explanation tell us about the importance of government credibility? Put this in the context
of the 2008 and 2009 tax cuts favored by President Bush and President Obama.
ANS:
Consumers tend to base their spending decisions on their expectations of long-run income. Short-term or
one-time-only income changes have little effect on consumer behavior. If tax cuts are perceived as only
temporary, then consumers will use less of the additional disposable income for spending on goods and
services and may use a major portion of the temporary income increase for saving. Tax cuts that are
perceived as permanent will change consumers' expectations regarding their future income more
significantly. This change in expected future income will make consumers feel more comfortable about
increasing their current spending. If government policy makers wish to increase aggregate demand by
cutting taxes and they hope the tax cut will significantly increase consumer spending, then the public
will have to believe that the government pledge to leave the tax cut in place is honest. If the public
mistrusts the government and believes a current tax cut may soon be cancelled or reversed, then
consumers may not change their spending habits in any significant way. This mistrust will render tax
policy ineffective and remove a powerful tool from those available to a government. In 2008 and 2009,
taxpayers concluded that the tax cuts were only temporary and not permanent. Because they felt the tax
cuts were only temporary, they did not have the stimulative effect on aggregate demand that the
administrations were hoping for.
PTS: 1 DIF: Difficult NAT: Reflective

353

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Macroeconomics Principles and Policy

12th Edition Baumol Test Bank

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

5. Consumer spending is an injection in the circular flow of income and spending.

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

9. Tax reductions should also reduce the amount of consumer expenditures.

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Reflective

ANS: T PTS: 1 DIF: Moderate NAT: Reflective

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

18. A decrease in disposable income causes a shift in the consumption function.

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Difficult NAT: Analytic

ANS: T PTS: 1 DIF: Difficult NAT: Analytic

21. A savings account is an example of consumer income.

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

25. Bank accounts and bonds are examples of money-fixed assets.

ANS: T PTS: 1 DIF: Easy NAT: Analytic

26. A $500 government bond is a money-fixed asset.

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

29. To economists, investment means buying stocks and bonds.

ANS: F PTS: 1 DIF: Easy NAT: Analytic

30. An example of investment is the purchase of machinery by a manufacturing company.

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

33. Government purchases are included in national product.

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Reflective

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

39. The purchase of a new house is included in government spending.

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

1. When aggregate demand decreases rapidly, the economy is likely to experience

6. Aggregate demand is the total demand for

10. Which of the following is considered to be an investment in economists' point of view?

11. The net export component of aggregate demand is defined as U.S.

13. Aggregate demand is a ____ rather than a ____.

14. Aggregate demand is the sum of

15. National income is

16. The difference between national income and disposable income is

17. Aggregate demand is defined as the total spending

19. The largest component of aggregate demand is

20. Which of the following would be added to U.S. national income?

21. The circular flow diagram is best described as a(n)

22. Saving is a leakage in the sense that

23. In economic analysis, which of the following is considered an injection?

13. Aggregate demand is a rather than a .