Mr. Beck

SUNY College at Oneonta

Review Questions for Chapter 25


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Review Questions for Economics 110

Major Topics Covered in Chapter 25

Consumption and Saving Lines (Shifts and Movements):  #Q1 #Q3   #Q6   #Q14 #Q15   #Q16  #Q17#Q18   #Q21  #Q24

#Q25   #Q30  #Q33 #Q35   #Q37  #Q39 #Q40  #Q43

Consumption, Saving, and Disposable Income (table):  #Q4#Q13   #Q19  #Q23#Q26   #Q28  #Q34 #Q38  #Q42   #Q45

Consumption Line (Graph):  #Q8   #Q11#Q20   #Q36  #Q44

Consumption, Investment and GDP:   #Q31#Q46   #Q52 #Q53   #Q55 #Q57  #Q58

Calculating Marginal Propensity to Consume (MPC):  #Q2 #Q5   #Q7   #Q10 #Q12   #Q22  #Q27 #Q29  #Q32   #Q41

Circular Flow of Economic Activity:   #Q47  #Q48    #Q49  #Q50    #Q51  #Q54    #Q56

1. A stock market crash (the value of stocks decreasing greatly) would be expected to have what effect on the economy's consumption (C) function?

  1. The entire consumption (C) line would shift up.
  2. The entire consumption (C) line would shift down.
  3. There would be a movement up and to the right along a given consumption (C) line.
  4. There would be a movement down and to the left along a given consumption (C) line.

    5. Q1 answer
2.  At a disposable income level of $7,000 billion, saving is $1,400 billion. At a disposable income level of $9,000 billion, consumption is $7,160 billion. What is the marginal propensity to consume (MPC)?
    (You may round off your answer to the nearest hundredth, [2 decimal places], if necessary.)
    Q2 answer
3.  Which one of the following, if any, will tend to shift the entire consumption (C) line upward?
  1. A decrease in people's disposable income occurs.
  2. The value of households’ assets increase because of a boom in the stock market.
  3. An increase in people's disposable income occurs.
  4. Many workers become concerned they may soon lose their jobs because of the fear that an economic recession will soon occur.
  5. None of the above answers is correct.
Q3 answer
4. A family is currently consuming $25,000 although its disposable income (DI) is $30,000. If its marginal propensity to consume (MPC) is 0.70 and is constant, then what would its consumption be if its disposable income were $29,000?
    Q4 answer
5.  At a disposable income level of $5,000 billion, consumption is $4,900 billion. At a disposable income level of $7,000 billion, saving is $1,000 billion. What is the marginal propensity to consume (MPC)? (Assume the MPC is constant. Round off your answer to the nearest hundredth [to 2 decimal places], if necessary.)
    Q5 answer
6. Which one of the following will tend to shift the entire consumption (C) line upward?
  1. Households save more because their disposable income increases.
  2. Households save less because their disposable income decreases.
  3. Households save more because of fears of an uncertain future.
  4. Households save less because a stock market boom increases their wealth.
    Q6 answer
7. At a disposable income level of $30,000, a consumer spends exactly all her disposable income. If her disposable income were to increase to $50,000, her consumption expenditures (C) would increase to $44,000. What is the value of her marginal propensity to consume (MPC)? (Round off your answer to the nearest hundredth [2 decimal places], if necessary)
Q7 answer

8. Given the following consumption line with a marginal propensity to consume (MPC) of 0.80:

Graph Question 8

    What level of consumption does point N correspond to?

    Q8 answer

9. At a disposable income level of $8,000 billion, consumption (C) is $6,500 billion. The marginal propensity to consume (MPC) = 0.70. At a disposable income level of $9,000 billion, what percent of disposable income would be saved? (You may round off your answer to the nearest percent, if necessary.)
    Q9 answer

10. At a disposable income level of $25,000, a household’s saving is -$1,000 (it is dissaving $1,000). If its disposable income were to increase to $40,000, its consumption expenditures (C) would increase to $38,000. What is the value of its marginal propensity to consume (MPC)? (You may round off your answer to the nearest hundredth [2 decimal places], if necessary.)
Q10 answer

11. Given the following consumption line with a marginal propensity to consume (MPC) of 0.75:

Graph Question 11

    What level of consumption does point N correspond to?

Q11 answer

12. At a national income level of $7,000 billion, consumption is $6,320 billion. At a national income level of $8,000 billion, saving is $920 billion. What is the marginal propensity to consume (MPC)? (Assume the MPC is constant and there is no taxes. Round off your answer to the nearest hundredth, if necessary.)
    Q12 answer

13. At a national income level of $8,000 billion, consumption (C) is $6,600 billion. The marginal propensity to consume (MPC) = 0.75. At a national income level of $7,000 billion, what would be the $ amount which would be saved? (Assume there is no taxes in the economy.)
Q13 answer

14. Which one of the following, if any, will tend to shift the entire consumption line upward?
  1. A stock market collapse reduces the value of people's assets.
  2. People save a smaller percent of their disposable income because of increased job security.
  3. A decrease in people's disposable income occurs.
  4. An increase in people's disposable income occurs.
  5. None of the above answers is correct.
Q14 answer

15. Consumer confidence is at its lowest level since 1993. Economists fear that this will cause
  1. a shift down in the entire consumption (C) line.
  2. a shift up in the entire consumption (C) line.
  3. a movement down and to the left along a given consumption (C) line.
  4. a movement up and to the right along a given consumption (C) line.

    5. Q15 answer

16. Which one of the following, if any, will cause a movement along a given consumption (C) line?
  1. A stock market crash decreases the value of households’ assets.
  2. People expect that rapid inflationary price increases will soon occur.
  3. People fear that a recession will soon occur which will result in substantial increases in unemployment.
  4. A decrease in people's disposable income occurs as wages are decreased.
  5. Widespread labor strikes convince people that soon there will be severe shortages of essential consumer goods.
  6. None of the above will cause a movement along a given consumption (C) line.
    Q16 answer

17. A stock market boom which increases the wealth of households will
  1. increase consumption expenditures (C), but decrease saving (S).
  2. increase saving (S), but decrease consumption expenditures (C).
  3. decrease both consumption expenditures (C) and saving (S).
  4. increase both consumption expenditures (C) and saving (S).
    Q17 answer

18. The self-fulfilling prophecy that if households are convinced that inflationary price increases will soon occur, households will cause inflation to occur, is illustrated by
  1. a shift down in the entire consumption (C) line.
  2. a shift up in the entire consumption (C) line.
  3. a movement down and to the left along a given consumption (C) line.
  4. a movement up and to the right along a given consumption (C) line.

    5. Q18 answer

19. At a national income (Y) level of $8,000 billion, consumption (C) is $7,200 billion. The marginal propensity to consume (MPC) = 0.75. At a national income (Y) level of $9,000 billion, what would be the $ amount which would be saved? (Assume there is no taxes in the economy.)
Q19 answer

20. Given the following consumption line with a marginal propensity to consume (MPC) of 0.76:

Graph question 20

    What level of consumption does point N correspond to?

    Q20 answer

21. Which one of the following will shift the entire consumption line down?
  1. Computer Y2K fears convince people that soon there will be severe shortages of essential consumer goods.
  2. People expect that rapid inflationary price increases will soon occur.
  3. An increase in people's disposable income occurs as wages are increased.
  4. People fear that a recession will soon occur which will result in substantial increases in unemployment.
  5. A decrease in people's disposable income occurs as wages are decreased.
    Q21 answer

22. At a national income (Y) level of $8,000 billion, saving (S) is $1,420 billion. At a national income (Y) level of $9,000 billion, consumption spending (C) is $7,240 billion. What is the marginal propensity to consume (MPC)? (Assume the MPC is constant and there is no government. Round off your answer to the nearest hundredth [2 decimal places] if necessary.)
    Q22 answer

23.  Ms. Rivers has a full-time job and has a disposable income of $40,000 per year. She consumes $35,000 per year. She then loses her job; however, she is now entitled to $15,000 per year of unemployment compensation. If her marginal propensity to consume (MPC) = 0.84, what will her $ level of consumption spending (C) per year now be?
    Q23 answer

24. Which one of the following would cause a movement down and to the left along a given consumption line?
  1. A decrease in people's disposable income occurs.
  2. Rationing of luxury goods causes households to increase their saving.
  3. People expect a recession to occur soon which will decrease their future incomes.
  4. Consumer confidence falls because of depressing economic news.
  5. The value of households’ assets (wealth) increase because of higher stock market values.
  6. Households become convinced that severe shortages of essential goods will soon occur.

    7. Q24 answer

25. Which one of the following, if any, will tend to shift the entire consumption (C) line down?
  1. Consumer confidence improves because of positive economic reports issued by the government.
  2. A decrease in people's disposable income occurs.
  3. The value of households’ assets (wealth) decrease because of a decline in the stock market.
  4. An increase in people's disposable income occurs.
  5. None of the above answers is correct.

    6.  Q25 answer

26. A family’s disposable income (DI) is $40,000 and it is consuming (C) $36,000. If its marginal propensity to consume (MPC) is 0.80 and is constant, then what would its consumption be if its disposable income were $44,000?
Q26 answer

27. At a disposable income level of $6,000 billion, consumption is $5,000 billion. At a disposable income level of $7,500 billion, saving (S) is $1,450 billion. What is the marginal propensity to consume (MPC)? (Assume the MPC is constant. Round off your answer to the nearest hundredth [to 2 decimal places], if necessary.)
Q27 answer

28. At a disposable income (DI) level of $7,500 billion, consumption (C) is $6,900 billion. The marginal propensity to consume (MPC) = 0.75. At a disposable income (DI) level of $9,100 billion, what would be the $ amount which would be saved?
Q28 answer

29. If the marginal propensity to consume (MPC) is assumed to be constant, positive, and less than 1, then which one of the following can be concluded about the value of the marginal propensity to save (MPS)?
  1. The marginal propensity to save (MPS) will be positive and less than 1.
  2. The marginal propensity to save (MPS) will be positive and greater than 1.
  3. The marginal propensity to save (MPS) will be negative.
  4. The marginal propensity to save (MPS) will be equal to the marginal propensity to consume (MPC).
  5. The marginal propensity to save (MPS) will be greater than the marginal propensity to consume (MPC).
  6. The marginal propensity to save (MPS) will be less than the marginal propensity to consume (MPC).

    7. Q29 answer

30.  What effect would the terrorist acts of September 11 have on the economy's consumption (C) line?
  1. The entire consumption (C) line would shift up.
  2. The entire consumption (C) line would shift down.
  3. There would be a movement up and to the right along a given consumption (C) line.
  4. There would be a movement down and to the left along a given consumption (C) line.

    5. Q30 answer

31.  The production and sale of an IBM computer made in the U.S. will be classified as U.S. consumption expenditures (C) if it is purchased by
  1. General Motors Corporation.
  2. the U.S. government.
  3. a U.S. household.
  4. a foreign government.
  5. a foreign citizen.

    6. Q31 answer

32.  At a disposable income level of $8,000 billion, consumption (C) is $7,000 billion. At a disposable income level of $8,500 billion, saving (S) is $1,200 billion. What is the marginal propensity to consume (MPC)? (Assume the MPC is constant. Round off your answer to the nearest hundredth [to 2 decimal places], if necessary.)
Q32 answer

33.  Which one of the following would cause a movement up and to the right along a given consumption (C) line?
  1. The value of households’ assets (wealth) decrease because of  falling stock market values.
  2. Rationing of luxury goods causes households to increase their saving.
  3. People expect a recession to occur soon which will decrease their future incomes.
  4. Consumer confidence improves because of encouraging economic news.
  5. The value of households’ assets (wealth) increase because of  higher stock market values.
  6. An increase in people's disposable income occurs.

    7. Q33 answer

34. At a disposable income (DI) level of $8,000 billion, saving (S) is $500 billion. The marginal propensity to consume (MPC) = 0.75. At a disposable income (DI) level of $8,800 billion, what would be the $ amount which would be consumed (C)?
Q34 answer

35.  Economic reports convince most households that the economy is heading into another recession with increased risks of higher unemployment for 2003. This will cause households today to
  1. decrease both consumption expenditures (C) and saving (S).
  2. increase both consumption expenditures (C) and saving (S).
  3. increase consumption expenditures (C), but decrease saving (S).
  4. increase saving (S), but decrease consumption expenditures (C).

    5. Q35 answer

36. Given the following consumption line with a marginal propensity to consume (MPC) of 0.80:

Graph question 36

    What level of consumption does point N correspond to?

Q36 answer

37. After the election victory by the Republicans, Mr. Robinson, a part-time worker, decreases his saving because he becomes convinced that the economy will strengthen and he  will be able to obtain full-time employment. Sure enough, a month later, improved economic conditions enable Mr. Robinson to obtain a full-time job. The effects of these events on Mr. Robinson’s consumption function would be illustrated graphically by
  1. a shift down in his entire consumption line followed by a movement up and to the right along the new consumption line.
  2. a shift up in his entire consumption line followed by a movement down and to the left along the new consumption line.
  3. a shift down in his entire consumption line followed by a movement down and to the left along the new consumption line.
  4. a shift up in his entire consumption line followed by a movement up and to the right along the new consumption line.
  5. There would only be a shift down in his entire consumption line.
  6. There would only be a movement down and to the left along his existing consumption line.

    7. Q37 answer

38. A worker’s disposable income (DI) is $30,000/year and she is consuming $26,000/year. She loses her job (her earnings fall to 0), but she becomes eligible for $18,000 of unemployment compensation insurance. If her marginal propensity to consume (MPC) = 0.75, then what will be her level of consumption expenditures (C) after the loss of her job? (Assume she pays no taxes.)
Q38 answer

39. After September 11, Mr. Caldwell, an autoworker, increases his saving because he begins to fear he may lose his high paying job. Two months later, his fears are realized and he is laid off.
 The effects of these events on Mr. Caldwell’s consumption function would be illustrated graphically by
  1. a shift down in his entire consumption line followed by a movement up and to the right along the new consumption line.
  2. a shift up in his entire consumption line followed by a movement down and to the left along the new consumption line.
  3. a shift down in his entire consumption line followed by a movement down and to the left along the new consumption line.
  4. a shift up in his entire consumption line followed by a movement up and to the right along the new consumption line.
  5. There would only be a shift up in his entire consumption line.
  6. There would only be a movement down and to the left along his existing consumption line.

    7. Q39 answer

40.  Which one of the following would cause a shift up in the entire consumption line?
  1. A decrease in households’ disposable income occurs.
  2. Rationing of luxury goods causes households to increase their saving.
  3. People expect a recession to occur soon which will decrease their future incomes.
  4. Consumer confidence falls because of depressing economic news.
  5. The value of households’ assets (wealth) increase because of higher stock market values.
  6. An increase in households’ disposable income occurs.

    7. Q40 answer

41. At a disposable income level of $7,000 billion, saving (S) is $400 billion. At a disposable income level of $9,000 billion, consumption spending (C) is $8,300 billion. What is the marginal propensity to consume (MPC)? (Assume the MPC is constant. Round off your answer to the nearest hundredth [to 2 decimal places], if necessary.)
Q41 answer

42. At a disposable income (DI) level of $7,000 billion, consumption (C) is $6,100 billion. The marginal propensity to consume (MPC) = 0.75. At a disposable income (DI) level of $8,600 billion, what would be the $ amount which would be saved?
Q42 answer

43. Assume that economic reports convince most households that the economy will improve greatly for the remainder of 2002. This will cause households today to
  1. decrease both consumption expenditures (C) and saving (S).
  2. increase both consumption expenditures (C) and saving (S).
  3. increase consumption expenditures (C), but decrease saving (S).
  4. increase saving (S), but decrease consumption expenditures (C).

    5. Q43 answer

44. Given the following consumption line with a marginal propensity to consume (MPC) of 0.78:

Graph question 44

    What level of consumption does point N correspond to?

Q44 answer

45. A worker’s disposable income (DI) is $40,000/year and she is consuming $35,000/year. She loses her job (her earnings fall to 0), but she becomes eligible for $24,000 of unemployment compensation insurance. If her marginal propensity to consume (MPC) = 0.70, then what will be her level of consumption expenditures (C) after the loss of her job? (Assume she pays no taxes.)
Q45 answer

46. For which one of the following economic variables is it possible to record a negative value?
  1. National income
  2. Consumption
  3. Profits
  4. Output
  5. Wages

    6. Q46 answer
47.  In the circular flow diagram, which one of the following flows directly to government?
  1. Investment expenditures (I)
  2. Consumption expenditures (C)
  3. Disposable income (DI)
  4. Transfer payments
  5. Taxes

    6. Q47 answer
48.  In the circular flow diagram, which one of the following  flows directly into the financial system?
  1. Investment expenditures (I)
  2. Saving (S)
  3. National income (Y)
  4. Disposable income (DI)
  5. Transfer payments
  6. Taxes

    7. Q48 answer
49. In the circular flow diagram for an economy, which one of the following flows directly to households (consumers)?
  1. Investment (I)
  2. Consumption (C)
  3. Net exports (X-IM)
  4. Saving (S)
  5. Disposable income (DI)

    6. Q49 answer
50. In the circular flow diagram, which one of the following, if any, flows directly from households (consumers)?
  1. Investment (I)
  2. exports (X)
  3. National income (Y)
  4. Disposable income (DI)
  5. Saving (S)
  6. None of the above answers is correct.

    7. Q50 answer
51. In the circular flow diagram for the U.S. economy, which one of the following flows directly to the rest of the world?
  1. Exports (X)
  2. Transfer payments
  3. Imports (IM)
  4. Saving (S)
  5. Disposable income (DI)

    6. Q51 answer
52. Which one of the following do economists consider an example of investment expenditures (I)?
  1. The U.S. government purchases a new computer from a foreign supplier.
  2. A household purchases a share of Dell Computer Corporation stock on the stock market.
  3. A household purchases a new computer from Dell Computer Corporation.
  4. General Motors Corporation purchases 100 shares of Dell Computer Corporation on the stock market.
  5. The U.S. government purchases a new computer from Dell Computer Corporation.
  6. None of the above is considered an example of investment expenditures (I).

    7. Q52 answer
53. Which one of the following is considered an example of investment expenditures (I) to economists?
  1. The U.S. government purchases a new computer from a foreign supplier.
  2. A household purchases a new computer from IBM.
  3. A household purchases a share of IBM stock on the stock market.
  4. The U.S. government purchases a new computer from IBM.
  5. General Motors Corporation purchases a new computer from IBM.

    6. Q53 answer
54. In the circular flow diagram for an economy, which one of the following flows directly to U.S. businesses?
  1. National income (Y)
  2. Exports (X)
  3. Imports (IM)
  4. Saving (S)
  5. Disposable income (DI)

    6. Q54 answer
55. Which one of the following would be considered gross private domestic investment expenditures (I) in the United States?
  1. The government purchases a new Dell computer made in the United States.
  2. A household purchases a new Dell computer made in the United States.
  3. A U.S. business purchases a new Toshiba computer made in Japan.
  4. A Japanese business purchases a new Dell computer made in the United States.
  5. A household purchases a share of Dell computer stock listed on the New York Stock Exchange.
  6. A U.S. business purchases a new Dell computer made in the United States.

    7. Q55 answer
56.  In the circular flow diagram for an economy, which one of the following flows directly to U.S. businesses (producers)?
  1. National income (Y)
  2. Transfer payments
  3. Imports (IM)
  4. Saving (S)
  5. Disposable income (DI)
  6. Investment expenditures (I)

    7. Q56 answer
57. Firm X produces an item in 2001 and sells it the same year for $3,000. To produce the item, the firm pays out $2,500 in wages and earns a profit of $500 on its sale. How much income is earned in the production of this item?
  1. $ 500
  2. $ 2,500
  3. $ 3,000
  4. $ 3,500
  5. $ 5,500
  6. $ 6,000

    7. Q57 answer
58. Firm X produces an item in 2002 and sells it the same year for $4,500. To produce the item, the firm pays out $3,500 in wages and earns a profit of $1,000 on its sale. How much income (Y) is earned in the production of this item?
  1. $ 1,000
  2. $ 2,500
  3. $ 3,500
  4. $ 4,500
  5. $ 5,500
  6. $ 8,000

    7. Q58 answer

Formulas

Output (GDP) always equals income (Y).

Disposable Income (DI) = Income (Y) – Net taxes (T)

Equivalently, Disposable Income (DI) = Income (Y) – Taxes + Transfer Payments
[Net Taxes (T) = Taxes - Transfer Payments]
Note: Unemployment compensation is a transfer payment.

DY/DX  =  slope.     Y is the variable measured on the vertical axis.  X is the variable measured on the horizontal axis.

For a consumption line, consumption spending, C, is measured on the Y axis and disposable income, DI, is measured on the X axis.
Therefore, DC/DDI  = MPC = slope (m).

The slope of a straight line = m = rise/run = (y - y1)/(x - x1). For the consumption line, since C is on the Y axis and DI is on the X axis,  m = (C - C1)/(DI - DI1)

Saving (S) = DI - C    (S is saving, DI is disposable income, C is consumption)

MPC = DC/DDI        (MPC is the marginal propensity to consume)

DC = MPC x  DDI

MPS = DS/DDI         (MPS is the marginal propensity to save)

DS = MPS x DDI

MPS = 1 - MPC

Answers


 

1. b  Return to Q1
Solution to Q1

 

2. 0.78  Return to Q2
Solution to Q2

 

3. b  Return to Q3
Solution to Q3

 

4. $24,300  Return to Q4
Solution to Q4

 

5. 0.55  Return to Q5
Solution to Q5

 

6. d  Return to Q6
Solution to Q6

 

7.  0.70  Return to Q7
Solution to Q7

 

8. $71,000  Return to Q8
Solution to Q8

 

9. 20%  Return to Q9
Solution to Q9

 

10.  0.80  Return to Q10
Solution to Q10

 

11. $68,000  Return to Q11
Solution to Q11

 

12. 0.76  Return to Q12
Solution to Q12

 

13. $1,150 billion  Return to Q13
Solution to Q13

 

14. b  Return to Q14
Solution to Q14

 

15. a  Return to Q15
Solution to Q15

 

16. d  Return to Q16
Solution to Q16

 

17. a  Return to Q17
Solution to Q17

 

18. b  Return to Q18
Solution to Q18

 

19. $1,050 billion  Return to Q19
Solution to Q19

 

20. $95,600  Return to Q20
Solution to Q20

 

21. d  Return to Q21
Solution to Q21

 

22. 0.66  Return to Q22
Solution to Q22

 

23. $14,000  Return to Q23
Solution to Q23

 

24. a  Return to Q24
Solution to Q24

 

25. c  Return to Q25
Solution to Q25

 

26. $39,200  Return to Q26
Solution to Q26

 

27. 0.70  Return to Q27
Solution to Q27

 

28. $1,000  Return to Q28
Solution to Q28

 

29. a  Return to Q29
Solution to Q29

 

30. b  Return to Q30
Solution to Q30

 

31. c  Return to Q31
Solution to Q31

 

32. 0.60  Return to Q32
Solution to Q32

 

33. f  Return to Q33
Solution to Q33

 

34. $8,100 billion  Return to Q34
Solution to Q34

 

35. d  Return to Q35
Solution to Q35

 

36. $84,000  Return to Q36
Solution to Q36

 

37. d  Return to Q37
Solution to Q37

 

38. $17,000  Return to Q38
Solution to Q38

 

39. c  Return to Q39
Solution to Q39

 

40. e  Return to Q40
Solution to Q40

 

41. 0.85  Return to Q41
Solution to Q41

 

42. $1,300 billion  Return to Q42
Solution to Q42

 

43. c  Return to Q43
Solution to Q43

 

44. $83,000  Return to Q44
Solution to Q44

 

45. $23,800  Return to Q45
Solution to Q45

 

46. c  Return to Q46
Solution to Q46

 

47. e  Return to Q47
Solution to Q47

 

48. b  Return to Q48
Solution to Q48

 

49. e  Return to Q49
Solution to Q49

 

50. e  Return to Q50
Solution to Q50

 

51. c  Return to Q51
Solution to Q51

 

52. f  Return to Q52
Solution to Q52

 

53. e  Return to Q53
Solution to Q53

 

54. b  Return to Q54
Solution to Q54

 

55. f  Return to Q55
Solution to Q55

 

56. f  Return to Q56
Solution to Q56

 

57.  c  Return to Q57
Solution to Q57

 

58. d  Return to Q58
Solution to Q58

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