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Principles of Microeconomics 7Th Edition Gottheil Test Bank Full Chapter PDF
Principles of Microeconomics 7Th Edition Gottheil Test Bank Full Chapter PDF
https://testbankpack.com/p/test-bank-for-principles-of-microeconomics-7th-
edition-gottheil-1285064445-9781285064444/
Chapter 6
Consumption, Investment, and National Income
TRUE/FALSE
Answer: T 1. Keynes suggested that poor people consume a higher percentage of their income than do
Diff: 1 the rich.
Answer: F 2. The marginal propensity to consume rises as the absolute level of income increases.
Diff: 3
Answer: T 4. If the MPC is 0.6, then the MPS must be 0.4 for Macroland.
Diff: 2
Answer: F 5. If Macroland’s MPC is 0.8, then we know that the MPS = 1.8 from the relation
Diff: 2 MPS = 1 + MPC.
Answer: T 7. According to Milton Friedman, how much we spend on consumption depends strictly on
Diff: 3 our permanent income.
Answer: F 9. The marginal propensity to save is always larger than the marginal propensity to
Diff: 2 consume.
Answer: F 10. National income plays a more decisive role in determining investment than it plays in
Diff: 5 determining consumption spending.
Answer: T 11. The rate of capacity utilization is a principal determinant of autonomous investment.
Diff: 4
Answer: T 12. For producers, there is a cost to having flexibility. Carrying excess productive capacity
Diff: 4 can be an expensive way of overcoming short-run production bottlenecks.
Answer: T 13. Unlike consumption, which is fairly stable over time, investment is subject to erratic
Diff: 3 fluctuations even through very short periods of time.
Answer: F 14. The consumption function shows the relationship between consumption and saving.
Diff: 3
Answer: T 15. The marginal propensity to consume is the ratio of a change in consumption to a change
Diff: 3 in income.
Answer: F 16. According to Keynes, the marginal propensity to consume is constant when income
Diff: 2 increases.
Answer: F 17. Autonomous consumption refers to the level of consumption associated with a given
Diff: 2 level of income.
Answer: T 18. If people expect prices to rise in the future, the consumption curve will shift upward.
Diff: 1
Answer: T 19. The marginal propensity to consume is equal to the slope of the consumption function.
Diff: 4
Answer: F 20. When saving is negative, the value of the marginal propensity to save is negative.
Diff: 3
Answer: T 21. When investment is autonomous, it is independent of the level of national income.
Diff: 1
Answer: T 22. The relationship between changes in interest rates and changes in the level of investment
Diff: 3 is depicted by the downward-sloping investment curve.
Answer: T 23. According to Milton Friedman, regular income can be divided into permanent income
Diff: 2 and transitory income.
Answer: F 24. Production and consumption decisions are dependent on each other.
Diff: 1
Answer: F 25. The consumption function is the relation between consumption and production.
Diff: 2
Answer: T 26. Kuznets’s research showed that the marginal propensity to consume remains constant as
Diff: 2 national income rises.
Answer: F 27. Historical data shows that if consumption increases by $80 billion when national income
Diff: 4 rises from $100 billion to $200 billion, then consumption will increase by less than $80
billion when national income rises from $200 billion to $300 billion.
Answer: F 28. Milton Friedman believes that consumption spending depends on both permanent and
Diff: 1 transitory income.
Answer: F 29. According to Milton Friedman, a person’s MPC will change as their actual income
Diff: 2 changes.
Answer: F 30. If national income is equal to zero, then consumption must also be equal to zero.
Diff: 2
Answer: T 31. If people expect inflation to occur, they will make more consumption purchases today.
Diff: 2
Answer: T 32. Unlike consumption, which is fairly stable over time, investment is subject to erratic
Diff: 2 fluctuations.
Answer: T 33. The 45-degree line equates the level of income measured on the horizontal axis to the
Diff: 3 level of consumption plus saving measured on the vertical axis.
MULTIPLE CHOICE
Answer: C 1. The relative income hypothesis, stating that MPC remains constant as national income
Diff: 3 increases, was proposed by
a. Keynes
b. Friedman
c. Duesenberry
d. Marshall
e. Modigliani
Answer: B 2. The “life cycle” hypothesis sates that
Diff: 3 a. MPC remains constant as national income rises
b. MPC varies with age
c. transitory income determines consumption
d. MPC varies with permanent income
e. consumption spending is independent of income
Answer: E 3. Which of the following does not affect the level of autonomous investment?
Diff: 3 a. level of technology
b. expectations of future growth
c. rate of capacity utilization
d. rate of interest
e. level of income
Year Y C
Answer: E 4. Given the data in Exhibit U-1 on Macroland’s economy, what is the level of saving in
Diff: 3 2001?
a. $600
b. $800
c. $1,000
d. $1,200
e. $2,000
Answer: B 5. Given the data in Exhibit U-1 on Macroland’s economy, what is the MPS in 2002?
Diff: 4 a. 4,600
b. 0.4
c. 3,200
d. 0.6
e. 0.7
Answer: A 6. Given the data in Exhibit U-1 on Macroland’s economy, what is the MPC in 2001?
Diff: 4 a. 0.5
b. 600
c. 1,400
d. 0.54
e. 5,400
Year Y S
2000 $8,000 $2,000
2001 $12,000 $4,000
2002 $16,000 $6,400
2003 $20,000 $9,200
Answer: B 7. Given the data in Exhibit U-2 on Macroland’s economy, what is the level of consumption in
Diff: 4 2002?
a. $1,600
b. $9,600
c. $10,800
d. $2,400
e. $6,400
Answer: A 8. Given the data in Exhibit U-2 on Macroland’s economy, what is the MPC in 2002?
Diff: 5 a. 0.4
b. 0.6
c. 9,600
d. 10,800
e. 0.3
Answer: A 9. Given the data in Exhibit U-2 on Macroland’s economy, what is the MPS in 2003?
Diff: 4 a. 0.7
b. 0.3
c. 9,200
d. 2,800
e. 0.46
Answer: B 10. Suppose Beth Dollins, Nike’s CEO, decides to produce 1 million pairs of cross-training
Diff: 2 shoes, but when the shoes reach the market, consumers decide to buy only 600,000 pairs.
Assuming Nike’s situation is similar to other producers, the most likely resulting scenario
would be
a. an increase in overall production and an increase in the economy’s unemployment
b. a cutback in overall production and an increase in the economy’s unemployment
c. a decrease in real GDP and a decrease in the economy’s unemployment
d. a decrease in real GDP and no effect on the economy’s unemployment
e. no change, because Nike will not alter its production plans due to short-run market
changes
Answer: C 11. Suppose that Paola Flygare, producer of the Flygare fiberglass bass boat, produces 8,000
Diff: 2 bass boats, but consumers want 13,000 bass boats. Assuming other producers have also
underproduced for the market, the most plausible consequence is
a. an increase in overall production and an increase in the economy’s is unemployment
b. a cutback in overall production and an increase in the economy’s unemployment
c. an increase in real GDP and a decrease in the economy’s unemployment
d. an increase in real GDP and an increase in the economy’s unemployment
e. no change, because Flygare will not alter its production plans due to short-run
market changes
Answer: E 12. Economists refer to the simple relationship between consumption and income as
Diff: 1 a. autonomous consumption
b. the marginal propensity to consume
c. the absolute income hypothesis
d. disposable income
e. the consumption function
Answer: D 13. Keynes’s absolute income hypothesis asserts that consumption
Diff: 3 a. increases as income increases, but at a constant rate
b. decreases as income increases, but at a constant rate
c. increases as income decreases, but at a constant rate
d. increases as income increases, but at a decreasing rate
e. decreases as income increases, but at an increasing rate
Answer: A 14. According to Keynes’s absolute income hypothesis, if Record Swap store manager
Diff: 2 Brenda Nielsen and pop singer Madonna were each given $1,000,
a. Madonna would likely spend less of the $1,000 on consumption than Brenda
b. Madonna would likely spend more of the $1,000 on consumption than Brenda
c. Madonna and Brenda would spend equal amounts of the $1,000 on consumption
d. Madonna and Brenda would save equal amounts over their lifetimes
e. Neither Madonna nor Brenda would save any of the $1,000
Answer: D 15. If a millionaire receives a $500 gift, the stronger motive guiding his behavior, according
Diff: 2 to Keynes’s absolute income hypothesis, is
a. shelter
b. food
c. clothing
d. accumulation
e. benevolence
Answer: A 16. The change in consumption divided by a change in income is defined as
Diff: 1 a. the marginal propensity to consume
b. autonomous consumption
c. the consumption function
d. Keynes’s absolute income hypothesis
e. transitory consumption
Answer: D 17. According to the absolute income hypothesis, the marginal propensity to consume
Diff: 4 a. is always increasing
b. increases as the absolute level of income increases
c. decreases as the absolute level of income falls
d. decreases as the absolute level of income increases
e. always stays the same
Exhibit U-3
Total Change
Income (Y) in Income Consumption (C)
0 500
1,000 1,000 1,400
2,000 1,000 2,200
3,000 1,000 2,900
4,000 1,000 3,500
5,000 1,000 4,000
Answer: C 18. In Exhibit U-3 (on the previous page), when total income (Y) increases from $1,000 to
Diff: 3 $2,000, the marginal propensity to consume is
a. 0.2
b. 0.6
c. 0.8
d. 1.0
e. 1.25
Answer: E 19. In Exhibit U-3, when total income increases from $2,000 to $3,000 to $4,000,
Diff: 4 a. total consumption increases by $1,000
b. the marginal propensity to consume remains constant
c. the marginal propensity to consume increases from 0.6 to 0.7
d. the marginal propensity to consume decreases from 0.8 to 0.7
e. the marginal propensity to consume decreases from 0.7 to 0.6
Answer: B 20. In Exhibit U-3, when total income (Y) increases from $0 to $1,000 to $2,000, the
Diff: 4 marginal propensity to consume
a. is 1
b. decreases from 0.9 to 0.8
c. decreases from 0.8 to 0.7
d. increases from 0.8 to 0.9
e. is negative
Answer: C 21. When national income increases from $300 billion to $400 billion, national consumption
Diff: 3 increases from $300 billion to $360 billion. At Y = $400 billion, the MPC is
a. 0.2
b. 0.5
c. 0.6
d. 0.67
e. 1.33
Answer: C 22. Keynes once remarked that, in the long run, we’re all dead. He was responding to the
Diff: 4 conventional wisdom of classical economics, which argued that
a. the aggregate supply curve is vertical in the long run
b. the aggregate supply curve is horizontal in the long run
c. an economy out of equilibrium was only a short-run, temporary departure from full-
employment equilibrium
d. we must save for the future
e. consumption will run out in the long run
Answer: C 23. Simon Kuznets’s research in his National Income and Its Composition showed that
Diff: 2 a. Keynes’s absolute income hypothesis is empirically correct
b. budget deficits crowd out consumption spending
c. a nation’s MPC tends to remain fairly constant regardless of the absolute level of
national income
d. as national income increases, consumption spending increases, but by diminishing
amounts
e. consumption and income cannot be linked in any meaningful fashion
Answer: E 24. According to James Duesenberry
Diff: 4 a. relative income is unimportant
b. the MPC decreases as national income increases
c. Keynes’s absolute income hypothesis is correct but his investment hypothesis is not
confirmed by the data
d. the consumption function slopes downward
e. consumption spending is rooted in status
Answer: D 25. If Brenda’s MPC is 0.8 at an income of $20,000 and her income increases to $40,000
Diff: 3 at the same time everyone else’s income doubled, according to Duesenberry’s relative
income hypothesis, her MPC will
a. fall to 0.4
b. rise to 0.9
c. rise to 1.0
d. remain at 0.8
e. double
Answer: A 26. As national income increases, consumption spending increases as well, always by the
Diff: 3 same amount. That is, as national income increases, MPC remains constant, according to
a. Duesenberry’s relative income hypothesis
b. Keynes’s absolute income hypothesis
c. Friedman’s permanent income hypothesis
d. Modigliani’s life-cycle hypothesis
e. real asset theory
Answer: B 27. The regular income a person expects to earn annually, which may differ by some
Diff: 3 unexpected gain or loss from the actual income earned, is known as
a. disposable income
b. permanent income
c. transitory income
d. relative income
e. intended income
Answer: E 28. The unexpected gain or loss of income that a person experiences that is the difference
Diff: 2 between a person’s regular and actual income in any year is known as
a. life-cycle income
b. relative income
c. investment income
d. permanent income
e. transitory income
Exhibit U-4
Answer: D 29. In the scenario in Exhibit U-4, the permanent income hypothesis suggests that, assuming
Diff: 4 MPC = 0.8, Natasha’s consumption would be
a. $15,000
b. $40,000
c. $50,000
d. $52,000
e. $65,000
Answer: E 30. In the scenario in Exhibit U-4, the effect of her negative $15,000 transitory income shows
Diff: 4 up as
a. increased investment
b. autonomous consumption
c. permanent income
d. increased saving
e. reduced saving
Answer: B 31. In the scenario in Exhibit U-4, Natasha’s saving in 1998 becomes
Diff: 5 a. –$15,000
b. –$2,000
c. $0
d. $2,000
e. $15,000
Exhibit U-5
Answer: B 32. In the scenario in Exhibit U-5, assuming Peter’s MPC = 0.80, his 1998 consumption,
Diff: 3 fixed by his permanent income, is
a. $15,000
b. $28,000
c. $35,000
d. $40,000
e. $50,000
Answer: A 33. In the scenario in Exhibit U-5, the effect of the $15,000 positive transitory income shows
Diff: 4 up as
a. saving
b. dissaving
c. permanent income
d. relative income
e. reduced investment
Answer: E 34. In the scenario in Exhibit U-5, Peter’s saving in 1998 becomes
Diff: 5 a. –$28,000
b. –$22,000
c. $0
d. $15,000
e. $22,000
Answer: A 35. The three phases of consumption behavior—each identified by a different MPC—of
Diff: 3 Modigliani’s life-cycle hypothesis are
a. young adults, middle age, and near or in retirement
b. apprentice, skilled, professional
c. staff, manager, senior manager
d. agricultural, industrial, services
e. urban, rural, international
Answer: C 42. The average propensity to consume (C/Y) for the period 1970 to 1991 ranged between
Diff: 4 a. 0 and - 0.80
b. 0 and 0.01
c. 0.65 and 0.80
d. 0.95 and 1.00
e. 1.20 and 1.50
Answer: A 43. The short-run consumption curve may shift upward over the long run largely because
Diff: 4 a. people become wealthier
b. the marginal propensity to save increases
c. the 45-degree line becomes a 90-degree line
d. the demand curve for investment is upward sloping
e. economic growth, although still positive, slows down
Answer: E 44. That part of national income not spent on consumption is defined as
Diff: 1 a. transitory income
b. permanent income
c. disposable income
d. autonomous consumption
e. saving
Answer: E 45. The marginal propensity to save is
Diff: 2 a. the change in saving induced by a change in consumption
b. (change in S) × (change in Y)
c. 1 – MPC/MPC
d. (change in Y – bY)/(change in Y) where b is the MPC
e. 1 – MPC
Answer: A 46. If national income is $400 billion, consumption spending is $380 billion, and MPC is 0.5,
Diff: 3 what is the level of saving?
a. $20 billion
b. $210 billion
c. $380 billion
d. $590 billion
e. $780 billion
Answer: A 47. If national income is $400 billion, autonomous consumption is $60 billion, and MPC is
Diff: 5 0.8, what is the level of saving?
a. $20 billion
b. $210 billion
c. $380 billion
d. $590 billion
e. $780 billion
Answer: C 48. The 45-degree line, measuring Y = C + S, is also called the
Diff: 2 a. saving line
b. consumption curve
c. income line
d. investment curve
e. GDP curve
Answer: B 49. If consumption spending is greater than national income,
Diff: 2 a. saving is positive
b. dissaving occurs
c. saving is exactly zero
d. a depression results
e. investment is greater than saving
Answer: B 50. Caterpillar, Inc. deciding to expand its forklift production line and Sears deciding to open
Diff: 1 an outlet in Raleigh, North Carolina, are examples of
a. transitory decisions
b. investment decisions
c. saving decisions
d. autonomous consumption
e. permanent income
Answer: D 51. When the Artistic Headwear Company in Bangor, Maine, protecting itself from
Diff: 3 inadequate supplies, decides to increase its raw material inventories, this decision is
included in
a. saving
b. dissaving
c. transitory investment
d. inventory investment
e. autonomous investment
Answer: D 52. Intended investment is
Diff: 4 a. always greater at a national income of $800 billion than at a national income of $500
billion
b. always smaller at a national income of $500 billion than at a national income of $800
billion
c. directly proportional to consumption spending
d. independent of the level of national income
e. always equal to intended saving
Answer: B 53. The level of technology, the rate of interest, expectations of future economic growth, and
Diff: 4 the rate of capacity utilization all determine
a. life cycle wealth
b. investment
c. permanent income
d. transitory income
e. dissaving
Answer: A 54. When sketched as a function of national income, the investment curve is
Diff: 3 a. horizontal
b. vertical
c. upward sloping
d. downward sloping
e. parabolic
Answer: B 55. If Y = $100 billion, then C = $50 billion, and I = $60 billion. What will autonomous
Diff: 4 investment be when Y = $200 billion and C = $100 billion?
a. $50 billion
b. $60 billion
c. $100 billion
d. $120 billion
e. $200 billion
Answer: E 56. Historical note: When the railroad displaced water transport as the principal means of
Diff: 5 long-distance transportation, it sparked massive investment spending not only in the
railroad industry, but in secondary industries such as
a. mining, automobiles, and genetic engineering
b. steel, computers, and videocassette recorders
c. lumber, construction, and aviation
d. construction, steel, housing, and semiconductors
e. mining, steel, lumber, and construction
Answer: D 57. For some investment projects, typically large-scale and long-term, such as housing
Diff: 2 construction or expansion of automobile assembly lines,
a. the interest rate has no influence on the investment decisions
b. investment decisions depend directly on saving by firms in those industries
c. slight changes in the interest rate rarely affect decisions
d. interest charges are an important cost factor
e. autonomous investment varies according to production quotas
Answer: C 58. Michelle Vlasminski, CEO of Michelle Enterprises, has five projects in hand and is
Diff: 3 considering which, if any, to undertake. Their expected returns are: project A = 12
percent, project B = 7 percent, project C = 10 percent, project D = 9 percent, and project
E = 8 percent. If the interest rate is 8.5 percent, which, if any, investment projects will
she accept?
a. only project A
b. projects A and C
c. projects A, C and D
d. projects A, C, D and E
e. projects A, B, C, D and E
Answer: B 59. A lower interest rate makes more investment projects feasible, meaning that
Diff: 4 a. there is a direct relationship between the rate of interest and the quantity of
investment spending
b. there is an inverse relationship between the rate of interest and the quantity of
investment spending
c. there is no relationship between the rate of interest and the quantity of investment
spending
d. the demand curve for investment spending is horizontal
e. the demand curve for investment spending is vertical
Answer: D 60. The demand curve for investment as a function of the interest rate is
Diff: 2 a. vertical
b. horizontal
c. upward sloping
d. downward sloping
e. the same as the demand curve for saving
Answer: C 61. The investment curve is ________ of (on) the level of national income and ___________
Diff: 4 as the interest rate falls.
a. independent; quantity demanded of investment decreases
b. dependent; quantity demanded of investment increases
c. independent; quantity demanded of investment increases
d. dependent; quantity demanded of investment remains unchanged
e. dependent; investment curve shifts from horizontal to upward sloping
Answer: A 62. Producers base their decisions concerning future investment spending not on the absolute
Diff: 4 level of national income, but on
a. past changes in the national income and the projections of those changes into the
future
b. expectations of future rates of saving
c. autonomous investment and saving
d. capacity utilization
e. absolute level of nominal GDP
Exhibit U-6
Change in Change
National National Consumption in
Income (Y) Income (C) Consumption MPC
$ 0 $ 50
100 125 75 .75
200 100 .75
300 275 75
100 350 .75
500 100 75
Fig. 203.—Streptaxis
Perroteti Pfr., Nilghiri
Hills: A, adult; A´,
young form.