# Macro Practice Questions, Chapter-End Questions CHAPTER 28

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The most important determinant of consumption and saving is the:
level of income
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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:
consume is two-fifths
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The consumption schedule shows
the amounts households intend to consume at various possible levels of aggregate income
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The relationship between consumption and disposable income is such that:
a direct and relatively stable relationship exists between consumption and income.
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The MPC for an economy is:
the slope of the consumption schedule or line.
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The consumption schedule: C = 20 + .9Y, where C is consumption and Y is disposable income. At an \$800 level of disposable income, the level of saving is:
\$60.
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The equation C = 35 + .75Y, where C is consumption and Y is disposable income, shows that:
households will consume \$35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive.
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In the late 1990s, the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
wealth effect.
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When consumption and saving are graphed relative to real GDP, an increase in personal taxes will shift:
both the consumption and saving schedules downward.
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The investment demand slopes downward and to the right because lower real interest rates:
enable more investment projects to be undertaken profitably.
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Assume a machine that has a useful life of only one year costs \$2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be \$2,300. If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should:
purchase the machine because the expected rate of return exceeds the interest rate.
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The investment demand curve will shift to the right as the result of:
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The investment demand curve will shift to the left as a result of:
an increase in the excess production capacity available in industry.
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. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
22 percent.
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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.
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The multiplier is defined as:
change in GDP/initial change in spending.
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If the MPC is .70 and investment increases by \$3 billion, the equilibrium GDP will:
increase by \$10 billion.
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The multiplier applies to:
investment, net exports, and government spending.
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The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because:
in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.
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During the Great Recession of 2007-2009, both real interest rates and investment spending declined. This suggests that:
the investment demand curve shifted inward.
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(Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how:
a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.
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2. Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship? LO2
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4. In what direction will each of the following occurrences shift the investment demand curve, other things equal? LO4 a. An increase in unused production capacity occurs. b. Business taxes decline. c. The costs of acquiring equipment fall. d. Widespread pessimism arises about future business conditions and sales revenues. e. A major new technological breakthrough creates prospects for a wide range of profitable new products.
Answer: a. This will decrease investment demand causing the investment curve to shift to the left. The increase in unused capacity reduces the need (expected return) for capital. b. This will increase investment demand causing the investment curve to shift to the right. The decrease in business taxes increase after-tax expected returns (which determines investment decisions). c. This will increase investment demand causing the investment curve to shift to the right. The expected return increases due to the declining cost. d. This will decrease investment demand causing the investment curve to shift to the left. Widespread pessimism about future business conditions and sales revenues reduces expected returns. e. This will increase investment demand causing the investment curve to shift to the right. The major new technological breakthrough increases expected returns.
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Why is the actual multiplier in the U.S. economy less than the multiplier in this chapter's example? LO5