Ch 27-29 Practice Test
1. The most important determinant of consumption and saving is the:
A. level of bank credit.
B. level of income.
C. interest rate.
D. price level.
2. If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus
$100 to a plus $100, her marginal propensity to:
A. save is 3/5
B. consume is ½.
C. consume is 3/5.
D. consume is 1/6.
3. As disposable income goes up the:
A. APC falls.
B. APS falls.
C. volume of consumption declines absolutely.
D. volume of investment diminishes.
4. If the MPC is .8 and disposable income is $200, then:
A. consumption and saving cannot be determined from the information given.
B. saving will be $20.
C. personal consumption expenditures will be $80.
D. saving will be $40.
5. Tessa's break-even income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000, her
level of:
A. consumption spending will be $14,500.
B. consumption spending will be $15,500.
C. consumption spending will be $13,000.
D. saving will be $2,500.
6. At the point where the consumption schedule intersects the 45-degree line:
A. the MPC equals 1.
B. the APC is zero. C. saving equals income.
D. saving is zero.
7. Which one of the following will cause a movement up along an economy's saving schedule?
A. an increase in household borrowing
B. an increase in disposable income
C. an increase in stock prices
D. an increase in interest rates
8. Refer to the above data. The marginal propensity to consume is:
A. .25.
B .75.
C. .20.
D. .80.
9. Refer to the above data. If disposable income was $325, we would expect consumption to be:
A. $315.
B. $305.
C. $20.
D. $290.
10. The investment demand slopes downward and to the right because lower real interest rates:
A. expand consumer borrowing, making investments more profitable.
B. boost expected rates of returns on investment.
C. enable more investment projects to be undertaken profitably.
D. create tax incentives to invest.
11. Investment spending in the United States tends to be unstable because:
A. expected profits are highly variable.
B. capital goods are durable.
C. innovation occurs at an irregular pace.
D. all of these contribute to the instability.
12. Refer to the above diagram. The average propensity to consume is 1 at point:
A. F.
B. A.
C. D.
13. Refer to the above diagram. At income level F the volume of saving is:
A. BD.
B. AB.
C. CF-BF.
D. B.
D. CD.
Answer the next question(s) on the basis of the following consumption schedules. DI signifies disposable
income and C represents consumption expenditures. All figures are in billions of dollars.
14. Refer to the above data. The marginal propensity to consume in economy (1) is:
A. .5.
B. .3.
C. .8.
D. .7.
15. Refer to the above data. The marginal propensity to consume:
A. is highest in economy (1).
B. is highest in economy (2).
C. is highest in economy (3).
D. cannot be calculated from the data given.
16. Refer to the above data. At an income level of $40 billion, the average propensity to consume:
A. is highest in economy (1).
B. is highest in economy (2).
C. is highest in economy (3).
D. cannot be determined from the data given.
17. The multiplier can be calculated as:
A. 1/(MPS + MPC).
B. MPC/MPS.
C. 1/(1 - MPC).
D. 1 - MPC = MPS.
18. If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:
A. increase by $10 billion.
B. increase by $2.10 billion.
C. decrease by $4.29 billion.
D. increase by $4.29 billion.
19. If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will
increase:
A. GDP by $120 billion.
B. GDP by $20 billion.
C. saving by $25 billion.
D. consumption by $80 billion.
20. In a mixed open economy the equilibrium GDP exists where:
A. Ca + Ig + Xn intersects the 45-degree line.
B. Ca + Ig = Sa + T + X.
C. Ca + Ig + Xn + G = GDP.
D. Ca + Ig + Xn = Sa + T.
21. Refer to the above diagrams. Curve A:
A. is an investment schedule and curve B is a consumption of fixed capital schedule.
B. is an investment demand curve and curve B is an investment schedule.
C. and B are totally unrelated.
D. shifts to the left when curve B shifts upward.
22. Refer to the above diagrams. Other things equal, curve B will shift upward when:
A. the level of GDP increases.
B. the interest rate increases.
C. curve A shifts to the left.
D. curve A shifts to the right.
23. Refer to the above diagrams. Other things equal, an interest rate decrease will:
A. shift curve A to the right and shift curve B upward.
B. shift curve A to the left and shift curve B downward.
C. leave curve A in place but shift curve B downward.
D. leave curve A in place but shift curve B upward.
24. Refer to the above diagram for a private closed economy. The equilibrium level of GDP is:
A. $400.
B. $300.
C. $200.
D. $100.
25. Refer to the above diagram for a private closed economy. At the equilibrium level of GDP, investment and
saving are both:
A. $50.
B. $100.
C. $20.
D. $40.
26. Refer to the above diagram for a private closed economy. The $400 level of GDP is:
A. that output at which saving is zero.
B. too high because consumption exceeds investment.
C. unstable because aggregate expenditures exceed GDP.
D. unstable because aggregate expenditures are less than GDP.
27. The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase
at each price level are the:
A. real-balances, interest-rate, and foreign purchases effects.
B. determinants of aggregate supply.
C. determinants of aggregate demand.
D. sole determinants of the equilibrium price level and the equilibrium real output.
28. Refer to the above diagram. The level of government spending:
A. is equal to tax collections at each level of GDP.
B. is the same at all levels of GDP.
C. varies inversely with the level of GDP.
D. varies directly with the level of GDP.
29. Refer to the above diagram. The sizes of the multipliers associated with changes in investment and
government spending in this economy are:
A. 2.5 and 1.5 respectively.
B. 3 and 2 respectively.
C. both 2.5.
D. 2 and 3 respectively.
30. Refer to the above diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE3,
the:
A. inflationary expenditure gap is BC.
B. recessionary expenditure gap is BC.
C. recessionary expenditure gap is ed.
D. inflationary expenditure gap is ed.
31. Refer to the above diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE1,
the:
A. inflationary expenditure gap is BC.
B. recessionary expenditure gap is BC.
C. inflationary expenditure gap is zero.
D. inflationary expenditure gap is ei.
32. Refer to the above diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE2,
the:
A. inflationary expenditure gap is ed.
B. recessionary expenditure gap is BC.
C. inflationary expenditure gap is eg.
D. economy is in equilibrium, at full employment.
33. The real-balances effect indicates that:
A. an increase in the price level will increase the demand for money, increase interest rates, and reduce
consumption and investment spending.
B. a lower price level will decrease the real value of many financial assets and therefore reduce
spending.
C. a higher price level will increase the real value of many financial assets and therefore increase
spending.
D. a higher price level will decrease the real value of many financial assets and therefore reduce
spending.
34. Other things equal, a decrease in the real interest rate will:
A. expand investment and shift the AD curve to the left.
B. expand investment and shift the AD curve to the right.
C. reduce investment and shift the AD curve to the left.
D. reduce investment and shift the AD curve to the right.
35. In the above diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply
curves, respectively, are lines:
A. 4 and 3.
B. 4 and 1.
C. 2 and 4.
D. 2 and 3.
36. In the above diagram, the economy's immediate-short-run AS curve is line ___, its short-run AS curve is
_____, and its long-run AS curve is line ___.
A. 1; 2; 4
B. 1; 2; 3
C. 2; 3; 4
D. 3; 2; 1
37. Shifts in the aggregate supply curve are caused by changes in:
A. consumption spending.
B. the quantity of real output demanded.
C. the quantity of real output supplied.
D. one of the determinants of aggregate supply.
An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total
output of 640 units. Each unit of capital costs $10, each unit of raw materials, $4, and each unit of labor, $3.
38. Refer to the above information. The per-unit cost of production in this economy is:
A. $0.05.
B. $0.10.
C. $0.50.
D. $1.00.
39. Refer to the above information. If the per unit price of raw materials rises from $4 to $8 and all else remains
constant, the per-unit cost of production will rise by about:
A. 100 percent.
B. 50 percent.
C. 40 percent.
D. 30 percent.
40. The short-run aggregate supply curve represents circumstances where:
A. both input and output prices are fixed.
B. both input and output prices are flexible.
C. input prices are fixed, but output prices are flexible.
D. input prices are flexible, but output prices are fixed.
41. The economy's long-run aggregate supply curve:
A. slopes upward and to the right.
B. is vertical.
C. is horizontal.
D. slopes downward and to the right.
42. Refer to the above diagram. If the initial aggregate demand and supply curves are AD0 and AS0, the
equilibrium price level and level of real domestic output will be:
A. F and C, respectively.
B. G and B, respectively.
C. F and A, respectively.
D. E and B, respectively.
43. Refer to the above diagram. If the aggregate supply curve shifted from AS0 to AS1, we could say that:
A. aggregate supply has increased, equilibrium output has decreased, and the price level has increased.
B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.
C. an increase in the amount of output supplied has occurred.
D. aggregate supply has increased and the price level has risen to G.
44. Refer to the above diagram. If aggregate supply is AS1 and aggregate demand is AD0, then:
A. at any price level above G a shortage of real output would occur.
B. F represents a price level that would result in a surplus of real output of AC.
C. a surplus of real output of GH would occur.
D. F represents a price level that would result in a shortage of real output of AC.
45. Refer to the above diagram. A shift of the aggregate demand curve from AD1 to AD0 might be caused by
a(n):
A. decrease in aggregate supply.
B. decrease in the amount of output supplied.
C. increase in investment spending.
D. decrease in net export spending.
46. If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect:
A. aggregate demand to decrease and aggregate supply to increase.
B. both aggregate demand and aggregate supply to decrease.
C. both aggregate demand and aggregate supply to increase.
D. aggregate demand to increase and aggregate supply to decrease.
47. We would expect a decline in personal and corporate income taxes to:
A. shift the aggregate demand curve rightward.
B. decrease consumption and investment spending.
C. decrease real output.
D. shift the aggregate supply curve leftward.
48. If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity
supplied, we would expect:
A. inflation to occur.
B. the aggregate demand curve to shift rightward.
C. the aggregate demand curve to shift leftward.
D. the aggregate supply curve to shift leftward.
Answer the next question(s) on the basis of the following table for a particular country in which C is
consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and
M is imports. All figures are in billions of dollars. Each question is independent of the other questions.
49. Prices and wages tend to be:
A. flexible both upward and downward.
B. inflexible both upward and downward.
C. flexible downward, but inflexible upward.
D. flexible upward, but inflexible downward.
50. The fear of unwanted price wars may explain why many firms are reluctant to:
A. reduce wages when a decline in aggregate demand occurs.
B. reduce prices when a decline in aggregate demand occurs.
C. expand production capacity when an increase in aggregate demand occurs.
D. provide wage increases when labor productivity rises.