Archive for July 2018

The investment function intersects the saving schedule at an interest rate of 8 percent and a level of investment of $1.2 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then

Naim 05:30

The investment function intersects the saving schedule at an interest rate of 8 percent and a level of investment of $1.2 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then




A) the C + I curve will intersect the 45-degree reference line at $1.2 trillion.
B) the C + I curve will intersect the 45-degree line at $1.8 trillion.
C) the equilibrium level of real GDP is $1.8 trillion.
D) the equilibrium level of real GDP is $4.2 trillion.


Answer: D

Investment is

Naim 05:30

Investment is




A) a positive function of real GDP.
C) autonomous with respect to real GDP.
B) a negative function of real GDP.
D) a positive function of interest rates.


Answer: C

The 45-degree reference line indicates all points at which

Naim 05:30

The 45-degree reference line indicates all points at which




A) planned real consumption expenditures and planned real saving are equal.
B) planned real saving and planned real investment are equal.
C) planned real consumption expenditures and real GDP are equal.
D) planned real saving and planned real saving are equal.


Answer: C

Using real GDP on the horizontal axis instead of real disposable income implies that a marginal propensity to consume 0.75 generates for every additional $100 of real GDP

Naim 05:29

Using real GDP on the horizontal axis instead of real disposable income implies that a marginal propensity to consume 0.75 generates for every additional $100 of real GDP




A) $75 of additional real disposable income.
B) $25 of additional saving.
C) $56.25 of additional consumption spending.
D) $25 of additional saving and taxes.



Answer: D

A permanent increase in autonomous investment causes

Naim 05:29

A permanent increase in autonomous investment causes




A) a more than proportional increase in real Gross Domestic Product (GDP).
B) a proportional increase in real Gross Domestic Product (GDP).
C) a less than proportional increase in real Gross Domestic Product (GDP).
D) an offsetting change in saving that leaves real Gross Domestic Product (GDP) at the same level.


Answer: A

Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that

Naim 05:29

Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that




A) saving equals $200 billion.
B) consumption expenditures equal $12 trillion less saving less $200 billion.
C) planned investment is $200 billion more than planned saving.
D) planned investment is $200 billion less than planned saving.


Answer: C

Ignoring the government and foreign sectors, if planned investment spending is $500 billion, planned saving is $800 billion, and real Gross Domestic Product (GDP) is $13 trillion, then unplanned inventories will

Naim 05:29

Ignoring the government and foreign sectors, if planned investment spending is $500 billion, planned saving is $800 billion, and real Gross Domestic Product (GDP) is $13 trillion, then unplanned inventories will




A) decrease $300 billion.
B) increase $300 billion.
C) increase $800 billion.
D) not change.


Answer: B

Ignoring the government and foreign sectors, equilibrium real Gross Domestic Product (GDP) is determined by

Naim 05:28

Ignoring the government and foreign sectors, equilibrium real Gross Domestic Product (GDP) is determined by




A) the intersection of the planned saving and planned investment schedules.
B) the intersection of the planned saving and planned consumption schedules.
C) the intersection of the consumption function with the 45-degree line.
D) finding the real Gross Domestic Product (GDP) for which real savings are zero.


Answer: A

If firms' unplanned inventories are increasing, then in a closed, private economy,

Naim 05:28

If firms' unplanned inventories are increasing, then in a closed, private economy, 




A) the level of real national income will rise.
B) the level of real national income will not change in the foreseeable future.
C) actual consumption is greater than planned consumption.
D) consumers are saving more than businesses anticipated.


Answer: D

A decrease in interest rates will

Naim 05:28

A decrease in interest rates will




A) shift the investment function relating planned investment to the interest rate to the right.
B) shift the investment function relating planned investment to the interest rate to the left.
C) be a movement along the investment function relating planned investment to the interest rate.
D) have no impact on the investment function relating planned investment to the interest rate.


Answer: C

The investment function tells us, at any given interest rate,

Naim 05:27

The investment function tells us, at any given interest rate, 




A) how many funds people will invest in the stock market.
B) how many funds people will earn on their stock market investments.
C) how profitable it will be for firms to expand.
D) how much businesses will spend on adding to the capital stock.


Answer: D

Aging baby-boomers, predisposed to hearing loss because of years of listening to loud music, are now approaching the age range in which hearing loss starts to become apparent. What effect does this have on investment spending within the hearing aid industry?

Naim 05:27

Aging baby-boomers, predisposed to hearing loss because of years of listening to loud music, are now approaching the age range in which hearing loss starts to become apparent. What effect does this have on investment spending within the hearing aid industry?




A) There will no longer be an opportunity cost associated with investment spending.
B) There will be no change in real investment spending, because hearing aid manufacturers will look only at the interest rate in determining whether to expand production.
C) The investment function relating planned real investment spending to the interest rate can be expected to shift rightward.
D) The investment function relating planned real investment spending to the interest rate can be expected to shift leftward.


Answer: C

When the investment is graphed as a function of real GDP,

Naim 05:27

When the investment is graphed as a function of real GDP,




A) it graphs as a vertical straight line.
B) it graphs as a 45-degree line starting at the indicated level of investment.
C) it graphs as a negatively sloped line indicating the inverse relationship between interest rates and investment.
D) it graphs as a horizontal straight line at the level of investment.


Answer: D

Which one of the following statements is true?

Naim 05:27

Which one of the following statements is true?




A) Over the years, real consumption spending has been more volatile than real investment spending.
B) Over the years, real investment spending has been more volatile than real consumption spending.
C) Domestic real investment in the United States was highest during the Great Depression.
D) In the Keynesian model, changes in the volume of real investment spending are fully explained by changes in the real interest rate.


Answer: B

Which of the following will NOT lead to a shift in the investment function?

Naim 05:26

Which of the following will NOT lead to a shift in the investment function? 



A) A firm downgrades its future profitability.
B) A new discovery leads to a technological advancement.
C) The government just lowered business taxes.
D) The cost of borrowing has just decreased.


Answer: D

Which of the following is a true statement relative to retained earnings and investment?

Naim 05:26

Which of the following is a true statement relative to retained earnings and investment?




A) Lower interest rates stimulate borrowing for investment, but have no effect on the use of retained earnings for investment spending.
B) Lower interest rates stimulate borrowing for investment, but discourage the use of retained earnings for investment.
C) Lower interest rates reduce the opportunity cost of retained earnings, stimulating the use of these funds in investment.
D) Lower interest rates have no effect on investment spending at all because investment spending is autonomous.


Answer: C

Investment spending is

Naim 05:26

Investment spending is




A) directly related to the interest rate.
B) inversely related to the interest rate.
C) directly related to real disposable income.
D) inversely related to real disposable income.


Answer: B

A firm will invest in a project if

Naim 05:25

A firm will invest in a project if




A) the interest rate exceeds the opportunity cost of the project.
B) the firm's level of capital is at the desired level.
C) the firm's level of capital is higher than the desired level.
D) the rate of return of the project is greater than the opportunity cost of the investment.


Answer: D

For an investment to be considered autonomous, it must

Naim 05:25

For an investment to be considered autonomous, it must 




A) be negatively related to the interest rate.
B) increase as the level of income increases.
C) include fixed components.
D) be independent of the level of real disposable income.


Answer: D

Technological progress should lead to

Naim 05:25

Technological progress should lead to




A) an outward (rightward) shift in the investment function.
B) a downward movement of the investment function.
C) an unchanged investment function.
D) less saving.


Answer: A

The planned investment function will shift downward if

Naim 05:24

The planned investment function will shift downward if 




A) real disposable income increases.
B) the interest rate falls.
C) business expectations become more pessimistic.
D) the existing stock of capital decreases.


Answer: C

The investment function would shift inward to the left if

Naim 05:24

The investment function would shift inward to the left if 




A) real disposable income decreased.
B) interest rates increased.
C) there was an increase in business taxes.
D) there was a positive change in productive technology.


Answer: C

What happens as interest rates fall?

Naim 05:24

What happens as interest rates fall?




A) The number of profitable investment opportunities declines.
B) The opportunity cost of using retained earnings to finance investment spending declines.
C) Planned investment spending also falls.
D) Planned investment spending remains constant since it depends on profit projections not interest rates.


Answer: B

An increase in the interest rate will cause

Naim 05:23

An increase in the interest rate will cause




A) planned investment spending to increase.
B) planned investment spending to decrease.
C) the investment function to shift out.
D) the investment function to shift in.


Answer: B

The planned investment function shows that

Naim 05:23

The planned investment function shows that




A) real gross investment falls as real NNP increases.
B) a negative relationship exists between the level of planned investment and the interest rate.
C) a positive relationship exists between planned consumption and planned investment.
D) at higher levels of planned saving, planned investment increases.


Answer: B

The average propensity to consume is the

Naim 05:22

The average propensity to consume is the




A) percentage of total disposable income consumed.
B) rate at which real disposable income changes as planned consumption changes.
C) ratio of changes in planned consumption to changes in real disposable income.
D) slope of the consumption function.


Answer: A

When a household's disposable income falls to zero, what do we expect will happen?

Naim 05:21

When a household's disposable income falls to zero, what do we expect will happen? 




A) The household's consumption spending also falls to zero.
B) The household will maintain a positive level of saving.
C) The household will maintain its previous level of consumption.
D) Consumption will fall to the level of autonomous consumption.



Answer: D

In economics, the term "autonomous" means

Naim 05:21

In economics, the term "autonomous" means 




A) existing independently.
C) disposable income.
B) non-economic related.
D) cash payments.


Answer: A

Autonomous consumption is

Naim 05:21

Autonomous consumption is




A) consumption spending that is earned rather than transferred from the government.
B) consumption spending that does not depend on the level of income.
C) the amount spent on consumption when saving equals zero.
D) consumption spending when the marginal propensity to consume is 1.


Answer: B

When a family's income is low and it is spending more on consumption than it is receiving in income,

Naim 05:20

When a family's income is low and it is spending more on consumption than it is receiving in income,




A) the APC must be increasing.
B) the APC must be equal to the ratio of planned consumption expenditure to total saving.
C) the MPC must be zero.
D) some segment of the consumption function curve lies above the 45-degree line, indicating dissaving.


Answer: D

In the graph for the consumption function, the 45-degree line

Naim 05:20

In the graph for the consumption function, the 45-degree line 




A) contains only a consumption component.
B) represents both planned consumption and planned investment.
C) shows various combinations where planned consumption equals real disposable income.
D) reflects a decreasing APC as real disposable income rises.


Answer: C

According to Keynes,

Naim 05:20

According to Keynes,




A) consumption is positively related to the interest rate.
B) consumption is directly related to income but saving is inversely related to income.
C) both consumption and saving are positively related to real disposable income.
D) consumption is directly related to income but saving has no relationship with income.


Answer: C

Along a linear consumption function,

Naim 05:19

Along a linear consumption function,




A) the average propensity to consume falls with an increase in income.
B) the marginal propensity to consume rises with an increase in income.
C) the average propensity to consume rises with income, but the marginal propensity to consume falls with an increase in income.
D) both the average propensity to consume and the marginal propensity to consume rise with an increase in income.


Answer: A

The consumption function shows

Naim 05:19

The consumption function shows





A) a positive relationship between an individual's stock of wealth and his level of planned consumption.
B) a positive relationship between disposable income and planned consumption.
C) a negative relationship between planned consumption and aggregate saving.
D) a negative relationship between disposable income and planned consumption.


Answer: B

Fixed investment is

Naim 05:17

Fixed investment is




A) when a firm adds to its inventories of goods.
B) when a firm accumulates profits.
C) dissavings.
D) an expenditure by firms on new machines that are expected to produce income in the future.


Answer: D

Thinking as an economist would, which is true of investment?

Naim 05:17

Thinking as an economist would, which is true of investment?




A) It is the portion of disposable income that is not used for consumption or saving.
B) Investment represents spending on capital goods.
C) Investment is putting money into stocks and bonds.
D) Investment is a stock concept.


Answer: B
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