The Level of Household Debt Answer Key 1

1. The most important determinant of consumer spending is: A) the level of household debt. C) the stock of wealth. B) consumer expectations. D) the level of income. Answer: D 2. The most important determinant of consumption and saving is the: A) level of bank credit. B) level of income. C) interest rate. D) price level. Answer: B 3. If Smith'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: A) save is three-fifths. C) consume is three-fifths. B) consume is one-half. D) consume is one-sixth. Answer: C 4. With an MPS of .4, the MPC will be: A) 1.0 minus .4. B) .4 minus 1.0. C) the reciprocal of the MPS. D) .4. Answer: A 5. The MPC can be defined as that fraction of a: A) change in income that is not spent. C) given total income that is not consumed. B) change in income that is spent. D) given total income that is consumed. Answer: B 6. The 45-degree line on a graph relating consumption and income shows: A) all points where the MPC is constant. B) all points at which saving and income are equal. C) all the points at which consumption and income are equal. D) the amounts households will plan to save at each possible level of income. Answer: C 7. As disposable income goes up the: A) APC falls. C) volume of consumption declines absolutely. B) APS falls. D) volume of investment diminishes. Answer: A 8. The consumption schedule shows: A) that the MPC increases in proportion to GDP. B) that households consume more when interest rates are low. C) that consumption depends primarily on the level of business investment. D) the amounts households plan or intend to consume at various possible levels of aggregate income. Answer: D 9. The consumption schedule relates: A) consumption to the level of disposable income. C) disposable income to domestic income. B) saving to the level of disposable income. D) consumption to saving. Answer: A 10. A decline in disposable income: A) increases consumption by moving upward along a specific consumption schedule. B) decreases consumption because it shifts the consumption schedule downward. C) decreases consumption by moving downward along a specific consumption schedule. D) increases consumption because it shifts the consumption schedule upward. Answer: C 11. The APC is calculated as: A) change in consumption / change in income C) change in income / change in consumption B) consumption / income D) income / consumption Answer: B 12. The consumption schedule shows: A) a direct relationship between aggregate consumption and accumulated wealth. B) a direct relationship between aggregate consumption and aggregate income. C) an inverse relationship between aggregate consumption and accumulated financial wealth. D) an inverse relationship between aggregate consumption and aggregate income. Answer: B 13. The APC can be defined as the fraction of a: A) change in income that is not spent. B) change in income that is spent. C) specific level of total income that is not consumed. D) specific level of total income that is consumed. Answer: D 14. The consumption schedule in the above diagram indicates that: A) consumers will maximize their satisfaction where the consumption schedule and 45° line intersect. B) up to a point consumption exceeds income, but then falls below income. C) the MPC falls as income increases. D) households consume as much as they earn. Answer: B 15. The consumption schedule is drawn on the assumption that as income increases consumption will: A) be unaffected. B) increase absolutely, but remain constant as a percentage of income. C) increase absolutely, but decline as a percentage of income. D) increase both absolutely and as a percentage of income. Answer: C 16. Which of the following is correct? A) APC + APS = 1. B) APC + MPS = 1. C) APS + MPC = 1. D) APS + MPS = 1. Answer: A 17. For all levels of income to the left of the intersection of the 45-degree line and the consumption schedule, the APC is: A) greater than 100 percent. C) equal to the MPC. Answer: A B) less than the APS. D) equal to 100 percent. 18. The consumption and saving schedules reveal that the: A) MPC is greater than zero, but less than one. B) MPC and APC are equal at the point where the consumption schedule intersects the 45degree line. C) APS is positive at all income levels. D) MPC is equal to or greater than one at all income levels. Answer: A 19. The size of the MPC is assumed to be: A) less than zero. B) greater than one. C) greater than zero, but less than one. D) two or more. Answer: C 20. As disposable income increases, consumption: A) and saving both increase. C) decreases and saving increases. B) and saving both decrease. D) increases and saving decreases. Answer: A 21. The average propensity to consume indicates the: A) amount by which income exceeds consumption. B) relationship between a change in saving and the consequent change in consumption. C) percentage of total income that will be consumed. D) percentage of a change in income that will be consumed. 22. The relationship between consumption and disposable income is such that: A) an inverse and stable relationship exists between consumption and income. B) a direct, but very volatile, relationship exists between consumption and income. C) a direct and relatively stable relationship exists between consumption and income. D) the two are always equal. Answer: C 23. If the MPC is .8 and disposable income is $200, then A) consumption and saving cannot be determined from the information given. B) saving will be $20. C) personal consumption expenditures will be $80. D) saving will be $40. Answer: A 24. The MPC for an economy is: A) the slope of the consumption schedule or line. B) the slope of the savings schedule or line. C) 1 divided by the slope of the consumption schedule or line. D) 1 divided by the slope of the savings schedule or line. Answer: A 25. In contrast to investment, consumption is: A) relatively stable. B) relatively unstable. C) measurable. D) immeasurable. Answer: A Use the following to answer questions 26-27: Answer the next question(s) on the basis of the following consumption schedule: C = 20 + .9Y , where C is consumption and Y is disposable income. 26. Refer to the above data. The MPC is: A) .45. B) .20. C) .50. D) .90. Answer: D 27. Refer to the above data. At an $800 level of disposable income, the level of saving is: A) $180. B) $740. Answer: C C) $60. D) $18. 28. Which one of the following will cause a movement down along an economy's consumption schedule? A) an increase in stock prices B) a decrease in stock prices Answer: D C) an increase in consumer indebtedness D) a decrease in disposable income 29. The above diagram shows consumption schedules for economies A and B. We can say that the: A) MPC is greater in B than in A. B) APC at any given income level is greater in B than in A. C) MPS is smaller in B than in A. D) MPC is greater in A than in B. Answer: D 30. At the point where the consumption schedule intersects the 45-degree line: A) the MPC is 1.00. B) the APC is 1.00. Answer: B C) saving is equal to consumption. D) the economy is in equilibrium. 31. Holly's break-even level of income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000, her level of: A) consumption spending will be $14,500. C) consumption spending will be $13,000. B) consumption spending will be $15,500. D) saving will be $2,500. Answer: A 32. If Ben's MPC is .80, this means that he will: A) spend eight-tenths of any increase in his disposable income. B) spend eight-tenths of any level of disposable income. C) break even when his disposable income is $8,000. D) save two-tenths of any level of disposable income. Answer: A 33. Suppose a family's consumption exceeds its disposable income. This means that its: A) MPC is greater than 1. C) APC is greater than 1. Answer: C B) MPS is negative. D) APS is positive. 34. If the equation for the consumption schedule is C = 20 + 0.8Y , where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is: A) $80. B) $100. Answer: B C) $120. D) $160. 35. The equation C = 35 + .75Y , where C is consumption and Y is disposable income, shows that: A) households will consume three-fourths of whatever level of disposable income they receive. B) households will consume $35 if their disposable income is zero and will consume threefourths of any increase in disposable income they receive. C) there is an inverse relationship between disposable income and consumption. D) households will save $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive. Answer: B 36. If the equation C = 20 + .6Y , where C is consumption and Y is disposable income, were graphed: A) the vertical intercept would be +.6 and the slope would be +20. B) it would reveal an inverse relationship between consumption and disposable income. C) the vertical intercept would be negative, but consumption would increase as disposable income rises. D) the vertical intercept would be +20 and the slope would be +.6. Answer: D 37. One can determine the amount of any level of total income that is consumed by: A) multiplying total income by the slope of the consumption schedule. B) multiplying total income by the APC. C) subtracting the MPS from total income. D) multiplying total income by the MPC. Answer: B 38. Which of the following is correct? A) MPC + MPS = APC + APS B) APC + MPS = APS + MPC Answer: A C) APC + MPC = APS + MPS D) APC - APS = MPC - MPS 39. The consumption and saving schedules reveal that: A) consumption rises, but saving declines, as disposable income rises. B) saving varies inversely with the profitability of investment. C) saving varies directly with the level of disposable income. D) saving is inversely related to the rate of interest. Answer: C 40. Dissaving means: A) the same thing as disinvesting. B) that households are spending more than their current incomes. C) that saving and investment are equal. D) that disposable income is less than zero. Answer: B 41. Dissaving occurs where: A) income exceeds consumption. B) saving exceeds consumption. Answer: C C) consumption exceeds income. D) saving exceeds income. 42. Which of the following relations is not correct? A) 1 - MPC = MPS C) MPS = MPC + 1 Answer: C B) APS + APC = 1 D) MPC + MPS = 1 43. The saving schedule is drawn on the assumption that as income increases: A) saving will decline absolutely and as a percentage of income. B) saving will increase absolutely, but remain constant as a percentage of income. C) saving will increase absolutely, but decline as a percentage of income. D) saving will increase absolutely and as a percentage of income. Answer: D 44. At the point where the consumption schedule intersects the 45-degree line: B) the APC is zero. A) the MPC equals 1. C) saving equals income. D) saving is zero. Answer: D 45. The saving schedule is such that as aggregate income increases by a certain amount saving: A) increases by the same amount as the increase in income. B) does not change. C) increases, but by a smaller amount. D) increases by an even larger amount. Answer: C 46. If the consumption schedule is linear, then the: A) saving schedule will also be linear. B) MPS will decline as income rises. Answer: A C) MPC will decline as income rises. D) APC will be constant at all levels of income. 47. Given the consumption schedule, it is possible to graph the relevant saving schedule by: A) subtracting the MPC from 1 at each level of income. B) subtracting investment from consumption at each level of GDP. C) plotting the horizontal differences between the consumption schedule and the 45-degree line. D) plotting the vertical differences between the consumption schedule and the 45-degree line. Answer: D 48. As aggregate income decreases, the APC: A) and APS will both increase. C) will increase, but the APS will decrease. B) will decrease, but the APS will increase. D) and APS will both decrease. Answer: C 49. If the marginal propensity to consume is 0.9, then the marginal propensity to save must be: A) 1. Answer: B B) 0.1. C) 1.1. D) 0.9. 50. The greater is the marginal propensity to consume, the: A) smaller is the marginal propensity to save. C) lower is the average propensity to consume. D) lower is the price level. B) higher is the interest rate. Answer: A 51. If the saving schedule is a straight line, the: A) MPS must be constant. C) APC must be constant. B) APS must be constant. D) MPC must be rising. Answer: A 52. Which one of the following will cause a movement up along an economy's saving schedule? A) an increase in household debt outstanding C) an increase in stock prices B) an increase in disposable income D) an increase in interest rates Answer: B 53. The wealth effect is shown graphically as a: A) shift of the consumption schedule. B) movement along an existing consumption schedule. C) shift of the investment schedule. D) movement along an existing investment schedule. Answer: A Use the following to answer questions 54-57: 54. Refer to the above graph. A movement from b to a along C1 might be caused by a: A) recession. B) wealth effect of an increase in stock market prices. C) decrease in income tax rates. D) increase in saving. Answer: A 55. Refer to the above graph. A shift of the consumption schedule from C1 to C2 might be caused by a: A) recession. B) wealth effect of an increase in stock market prices. C) increase in income tax rates. D) increase in saving. Answer: B 56. Refer to the above graph. A movement from a to b along C1 might be caused by a: A) recession. B) wealth effect of an increase in stock market prices. C) increase in income tax rates. D) increase in real GDP. Answer: D 57. Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be caused by a: A) increase in real GDP. B) reverse wealth effect, caused by a decrease in stock market prices. C) decrease in income tax rates. D) decrease in saving. Answer: B 58. An upward shift of the saving schedule suggests: A) nothing with respect to changes in the APC and APS. B) that the APC and APS have both decreased at each GDP level. C) that the APC and APS have both increased at each GDP level. D) that the APC has decreased and the APS has increased at each GDP level. Answer: D 59. Which of the following will not tend to shift the consumption schedule upward? A) a currently small stock of durable goods in the possession of consumers B) the expectation of a future decline in the consumer price index C) a currently low level of household debt. D) the expectation of future shortages of essential consumer goods. Answer: B 60. If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule: A) will not shift. C) will shift downward. B) may shift either upward or downward. D) will also shift upward. Answer: C