AP Macroeconomics
MODULE 16 REVIEW
Check Your Understanding
1. Explain why a decline in investment spending caused by a change in business expectations leads to a fall in
consumer spending.
2. What is the multiplier if the marginal propensity to consume is 0.5? What is it if MPC is 0.8?
3. Suppose a crisis in the capital markets makes consumers unable to borrow and unable to save money. What
implication does this have for the effects of expected future disposable income on consumer spending?
4. For each event, explain whether the initial effect is a change in planned investment spending or a change in
unplanned inventory investment, and indicate the direction of the change.
a. an unexpected increase in consumer spending
b. a sharp rise in the cost of business borrowing
c. a sharp increase in the economy’s growth rate of real GDP
d. an unanticipated fall in sales
Tackle the Test: Multiple-Choice Questions
1. Changes in which of the following leads to a shift of the aggregate consumption function?
I. expected future disposable income
II. aggregate wealth
III. current disposable income
a. I only
b. II only
c. III only
d. I and II only
e. I, II and III
2. The slope of a family’s consumption function is equal to
a. the real interest rate
b. the inflation rate
c. the marginal propensity to consume
d. the rate of increase in household current disposable income
e. the tax rate
3. Given the consumption function c = $16,000 + 0.5 yd, if individual household current disposable income is $20,000,
individual household consumer spending will equal
a. $36,000
b. $26,000
c. $20,000
d. $16,000
e. $6,000
4. The level of planned investment spending is negatively related to the
a. rate of return on investment
b. level of consumer spending
c. level of actual investment spending
d. interest rate
e. all of the above
5. Actual investment spending in any period is equal to
a. planned investment spending + unplanned inventory investment
b. planned investment spending − unplanned inventory investment
c. planned investment spending + inventory decreases
d. unplanned inventory investment + inventory increases
e. unplanned inventory investment − inventory increases
Tackle the Test: Free-Response Questions (answer on loose leaf)
1. Use the consumption function provided to answer the following questions.
c = $15,000 + 0.8 × yd
a. What is the value of the marginal propensity to consume?
b. If individual household current disposable income is $40,000, individual household consumer spending
will equal how much?
c. Draw a correctly labeled graph showing this consumption function.
d. What is the slope of this consumption function?
e. On your graph from part c, show what would happen if expected future income decreased.
2. List the three most important factors affecting planned investment spending. Explain how each is related to actual
investment spending.