Question

The net export function illustrates that:

A) net exports are a positive function of domestic income.

B) net exports are independent of domestic income.

C) net exports are a negative function of domestic income.

D) imports are independent of domestic income.

E) exports are independent of foreign income.

 

Suppose the marginal propensity to import for country A is 0.4. Calculate the change in total value of imports of the country if national income increases by $100,000.

A) $16,000

B) $20,000

C) $60,000

D) $40,000

E) $25,000

 

An MPI of 0.4 indicates that for every 100 percent increase in domestic income:

A) there is a 40 percent increase in investment.

B) there is a 60 percent increase in investment.

C) there is a 40 percent decline in imports.

D) there is a 60 percent increase in imports.

E) there is a 40 percent increase in imports.

 

Which of the following would cause a change in imports?

A) A change in foreign income

B) A change in foreign consumption

C) A change in domestic tastes for foreign products

D) A change in foreign tastes for domestic products

E) A change in domestic investment spending

 

What would be the impact of an increase in foreign income on the net export function?

A) The net export function would shift upward.

B) The net export function would shift downward.

C) The slope of the net export function would increase.

D) The slope of the net export function would decrease.

E) There would be a movement up along the net export function.

 

Which of the following statements is true?

A) Real GDP is a positive function of net exports.

B) In the 1980s, the United States experienced a large trade surplus with Japan.

C) Positive net exports mean that the domestic country imports more than it exports.

D) Total U.S. net exports with Western Europe are zero.

E) U.S. net exports are negative because of large trade deficits with other industrial nations.

 

Which of the following will cause the net export function to shift?

A) A change in real GDP

B) An increase in government spending

C) An increase in investment spending

D) A change in the exchange rate

E) A change in the domestic interest rate

 

In most derivations of the aggregate expenditures model, investment is assumed to be independent of real GDP. What would be the effect on the aggregate expenditures (AE) function if investment spending were positively related to income?

A) The intercept of the AE function would rise.

B) The slope of the AE function would become flatter.

C) Both the slope and the intercept of the AE function would increase.

D) The slope of the AE function would become steeper.

E) The intercept of the AE function would increase, and its slope would become flatter.

 

The aggregate expenditures function:

A) has the same slope as the aggregate demand curve.

B) is the key determinant of equilibrium real GDP in a fixed-price model.

C) is negatively related to household consumption.

D) is negatively related to net exports.

E) is equal to C+I+G-X.

 

The slope of the aggregate expenditures function (AE) is flatter than the C+I+G function because:

A) the marginal propensity to consume is usually less than 1.

B) the marginal propensity to import is greater than 1.

C) the slope of the net exports function is negative.

D) investment(I) and government spending(G) are assumed to be autonomous.

E) there is a leakage from the aggregate expenditures function in the form of savings.

 

Consumption, saving, and wealth all represent stock concepts because they are measured over a period of time.

A) True

B) False

 

Changes in autonomous consumption will affect the slope of the consumption function.

A) True

B) False

 

An increase in disposable income will cause autonomous consumption to rise.

A) True

B) False

 

Dissaving occurs when the consumption function lies below the 45-degree line.

A) True

B) False

 

The marginal propensity to consume (MPC) is equal to the inverse of the marginal propensity to save (MPS).

A) True

B) False

 

As disposable income increases, consumption spending will rise, but it will rise by less than disposable income if the MPS is positive.

A) True

B) False

 

The consumption function has a positive slope while the savings function has a negative slope.

A) True

B) False

 

Suppose that the consumption function crosses the 45-degree line at a disposable income level of $800. Assume further that saving equals $200 when disposable income is $1,300. This implies that the MPC must equal 0.6.

A) True

B) False

 

If disposable income rises from $15,000 to $20,000 and the marginal propensity to consume equals 0.9, then saving must increase by $500.

A) True

B) False

 

An increase in the marginal propensity to consume necessarily reduces the marginal propensity to save.

A) True

B) False

 

At the point where consumption equals disposable income, the average propensity to consume equals 1.

A) True

B) False

 

Saving remaining constant, the average propensity to save declines with an increase in disposable income.

A) True

B) False

 

The average propensity to save (APS) is the proportion of disposable income that is saved.

A) True

B) False

 

Other things equal, an increase in the consumer confidence index tends to raise the average propensity to consume.

A) True

B) False

 

Economists have proved that a substantial increase in income during a month does not affect consumption much in the short run unless it is perceived as a permanent increase.

A) True

B) False

 

According to the permanent income hypothesis, when income rises above the permanent income level, the household saves at a lower rate than the long-run MPS.

A) True

B) False

 

Investment is considered to be positively correlated with current real GDP.

A) True

B) False

 

The sum of money spent by a person to purchase of a new home is considered as a part of investment spending.

A) True

B) False

 

Planned investment is inversely related to the interest rate because the higher the interest rate, the higher the rate of return on investment projects.

A) True

B) False

 

Suppose the Kwik Print Company considers an investment project that involves the purchase of a copier with an expected output of $4,000. If the firm has to borrow $3,000 and the rate of return is 11.1 percent, then the interest rate associated with the loan must be 20 percent.

A) True

B) False

 

Other things equal, a decrease in the cost of capital would be associated with an upward shift of the investment function and, hence, with a rise in aggregate expenditures.

A) True

B) False

 

The United States introduced investment tax credit in 1962 and has continued to offer it till date. This has reduced the volatility of investments in the country.

A) True

B) False

 

If capacity utilization by businesses remains constant, investment spending is likely to be the most volatile component of aggregate expenditures in the United States.

A) True

B) False

 

When government spending is added to consumption and planned investment, the slope of the aggregate expenditure function increases.

A) True

B) False

 

Other things equal, when the U.S. dollar depreciates, domestic exports rise at every level of domestic income.

A) True

B) False

 

MPI refers to the percentage of additional domestic income spent on imports.

A) True

B) False

 

The net export function is negatively sloped because exports are inversely related to domestic income.

A) True

B) False

 

Other things equal, a marginal propensity to import of 0.8 implies that a $100 million increase in domestic income will lead to an $80 million decrease in net exports.

A) True

B) False

 

Suppose that the U.S. trade balance is positive. Hence, when the net export function is added to C+I+G, the slope of the U.S. aggregate expenditures function will become steeper.

A) True

B) False

 

Once macroeconomic equilibrium has been established in an economy, there is no tendency for real GDP to change, even if there is a change in autonomous expenditure.

A) True

B) False

 

Answer 1

The net export function illustrates that:

C) net exports are a negative function of domestic income.

Suppose the marginal propensity to import for country A is 0.4. Calculate the change in total value of imports of the country if national income increases by $100,000.

D) $40,000

An MPI of 0.4 indicates that for every 100 percent increase in domestic income:

E) there is a 40 percent increase in imports.

Which of the following would cause a change in imports?

C) A change in domestic tastes for foreign products

What would be the impact of an increase in foreign income on the net export function?

B) The net export function would shift downward.

Which of the following statements is true?

A) Real GDP is a positive function of net exports.

Which of the following will cause the net export function to shift?

D) A change in the exchange rate

In most derivations of the aggregate expenditures model, investment is assumed to be independent of real GDP. What would be the effect on the aggregate expenditures (AE) function if investment spending were positively related to income?

A) The intercept of the AE function would rise.

The aggregate expenditures function:

E) is equal to C+I+G-X.

The slope of the aggregate expenditures function (AE) is flatter than the C+I+G function because:

A) the marginal propensity to consume is usually less than 1.

Consumption, saving, and wealth all represent stock concepts because they are measured over a period of time.

A) True

Changes in autonomous consumption will affect the slope of the consumption function.

A) True

An increase in disposable income will cause autonomous consumption to rise.

A) True

Dissaving occurs when the consumption function lies below the 45-degree line.

A) True

The marginal propensity to consume (MPC) is equal to the inverse of the marginal propensity to save (MPS).

B) False

As disposable income increases, consumption spending will rise, but it will rise by less than disposable income if the MPS is positive.

A) True

The consumption function has a positive slope while the savings function has a negative slope.

B) False

Suppose that the consumption function crosses the 45-degree line at a disposable income level of $800. Assume further that saving equals $200 when disposable income is $1,300. This implies that the MPC must equal 0.6.

B) False

If disposable income rises from $15,000 to $20,000 and the marginal propensity to consume equals 0.9, then saving must increase by $500.

A) True

An increase in the marginal propensity to consume necessarily reduces the marginal propensity to save.

A) True

At the point where consumption equals disposable income, the average propensity to consume equals 1.

A) True

Saving remaining constant, the average propensity to save declines with an increase in disposable income.

B) False

The average propensity to save (APS) is the proportion of disposable income that is saved.

A) True

Other things equal, an increase in the consumer confidence index tends to raise the average propensity to consume.

A) True

Economists have proved that a substantial increase in income during a month does not affect consumption much in the short run unless it is perceived as a permanent increase.

A) True

According to the permanent income hypothesis, when income rises above the permanent income level, the household saves at a lower rate than the long-run MPS.

A) True

Investment is considered to be positively correlated with current real GDP.

A) True

The sum of money spent by a person to purchase of a new home is considered as a part of investment spending.

A) True

Planned investment is inversely related to the interest rate because the higher the interest rate, the higher the rate of return on investment projects.

A) True

Suppose the Kwik Print Company considers an investment project that involves the purchase of a copier with an expected output of $4,000. If the firm has to borrow $3,000 and the rate of return is 11.1 percent, then the interest rate associated with the loan must be 20 percent.

B) False

Other things equal, a decrease in the cost of capital would be associated with an upward shift of the investment function and, hence, with a rise in aggregate expenditures.

A) True

The United States introduced investment tax credit in 1962 and has continued to offer it till date. This has reduced the volatility of investments in the country.

A) True

If capacity utilization by businesses remains constant, investment spending is likely to be the most volatile component of aggregate expenditures in the United States.

A) True

When government spending is added to consumption and planned investment, the slope of the aggregate expenditure function increases.

A) True

Other things equal, when the U.S. dollar depreciates, domestic exports rise at every level of domestic income.

A) True

MPI refers to the percentage of additional domestic income spent on imports.

A) True

The net export function is negatively sloped because exports are inversely related to domestic income.

A) True

Other things equal, a marginal propensity to import of 0.8 implies that a $100 million increase in domestic income will lead to an $80 million decrease in net exports.

B) False

Suppose that the U.S. trade balance is positive. Hence, when the net export function is added to C+I+G, the slope of the U.S. aggregate expenditures function will become steeper.

A) True

Once macroeconomic equilibrium has been established in an economy, there is no tendency for real GDP to change, even if there is a change in autonomous expenditure.

A) True