Q: Which equation correctly represents the accounting identity for disposable income?

$$\text{Disposable Income} = \text{Consumption} + \text{Saving}$$

Q: Which formula correctly expresses the multiplier in terms of the marginal propensity to save (MPS)?

$$\text{Multiplier} = \dfrac{1}{\text{MPS}}$$

Question 1

According to the Keynesian model, which of the following is the primary determinant of household consumption and saving decisions?

Accepted Answer

Real disposable income

Question 2

Which equation correctly represents the accounting identity for disposable income?

Accepted Answer

$$	ext{Disposable Income} = 	ext{Consumption} + 	ext{Saving}$$

Question 3

If the marginal propensity to consume (MPC) is 0.75, what is the marginal propensity to save (MPS)?

Accepted Answer

$$0.25$$

Question 4

Which of the following would cause the consumption function to shift upward?

Accepted Answer

An increase in job security

Question 5

In the Keynesian model with government and the foreign sector, equilibrium real GDP is established when:

Accepted Answer

$$C + I + G + X = Y$$

Question 6

Suppose the marginal propensity to consume (MPC) is $$0.8. If $$autonomous investment increases by $$\50$ billion, what is the total change in equilibrium real GDP, assuming the price level is constant?

Accepted Answer

$$\250$ billion

Question 7

Which of the following best describes the life-cycle theory of consumption?

Accepted Answer

People base their consumption on both current and anticipated future income.

Question 8

If the planned investment function shifts upward due to improved profit expectations, what is the likely effect on equilibrium real GDP?

Accepted Answer

Equilibrium real GDP will increase.

Question 9

Which formula correctly expresses the multiplier in terms of the marginal propensity to save (MPS)?

Accepted Answer

$$	ext{Multiplier} = \dfrac{1}{	ext{MPS}}$$

Question 10

If $$C + I + G + X \u003c Y in $$the Keynesian model, what will happen in the economy?

Accepted Answer

There will be an unplanned increase in inventories, and businesses will reduce output.

Question 11

Which of the following is NOT a non-income determinant of consumption?

Accepted Answer

Marginal propensity to save

Question 12

A household spends more than its disposable income by borrowing or using up assets. This situation is best described as:

Accepted Answer

Dissaving

Question 13

Which of the following best explains why changes in planned investment spending receive so much attention from economists?

Accepted Answer

Variations in investment cause large multiplier effects on equilibrium real GDP.

Question 14

If the marginal propensity to consume (MPC) increases, what happens to the size of the multiplier?

Accepted Answer

The multiplier increases.

Question 15

Which of the following is a direct effect of an increase in the price level on aggregate demand?

Accepted Answer

Real-balance effect

Question 16

Suppose the government increases its autonomous spending by $$\20$ billion and the marginal propensity to save (MPS) is 0.2$. What is the total change in equilibrium real GDP?

Accepted Answer

$$\100$ billion

Question 17

Which of the following best describes the relationship between the aggregate demand (AD) curve and the $$C + I + G + X$$ curve?

Accepted Answer

The AD curve is derived from the $$C + I + G + X$$ curve by allowing the price level to change.

Question 18

If the marginal propensity to consume (MPC) is $$0.6$$, what is the value of the multiplier?

Accepted Answer

$$2.5$$

Question 19

Which of the following scenarios would most likely cause a downward shift in the planned investment function?

Accepted Answer

A decline in profit expectations

Question 20

If autonomous consumption increases while all other factors remain constant, what happens to the consumption function?

Accepted Answer

It shifts upward.

Consumption, Real GDP, and the Multiplier – Keynesian Macroeconomic Analysis

Study Guide - Practice Questions

Study Guide - Flashcards