Multiple Choice Identify the choice that best completes the statement or answers
ID: 1128815 • Letter: M
Question
Multiple Choice Identify the choice that best completes the statement or answers the question.
1. The most important determinant of a household's consumption spending is
a. its disposable income
b. its total wealth
c. the number of persons in the household
d. its net wealth e. the ratio of wage to nonwage income the household earns
2. Historically, consumption spending in the United States has
a. increased as a percentage of income
b. remained approximately constant as a percentage of income
c. decreased as a percentage of income
d. remained constant over time
e. increased more than income
3. Which is true of disposable income?
a. it excludes transfer payments
b. the portion of income is used solely for consumption
c. it is that part of aggregate income that is taken in taxes by government
d. all of disposable income contributes directly to aggregate expenditure
e. disposable income equals consumption expenditures plus saving
4. Sarah moves from Upperland, which has no taxes or transfer payments, to Lowerland, where she is hit with taxes of $2,000 and receives transfer payments of $3,000. She earns the same wage in both countries, but in Lowerland her disposable income is
a. $1,000 higher
b. $1,000 lower
c. $5,000 higher
d. $2,000 lower
e. $3,000 higher
5. At the equilibrium level of real GDP, the MPC equals 1.
a. True
b. False
6. If the MPC < 1 and a household's disposable income increases by $2,000, the household's consumption will
a. increase by less than $2,000
b. increase by $2,000
c. decrease if the family was wealthy before the income change
d. remain the same unless the change in income significantly affects the household's wealth
e. remain the same
7. If a household's income rises from $46,000 to $46,700 and its consumption spending rises from $35,800 to $36,400, then its
a. marginal propensity to consume is 0.86
b. marginal propensity to consume is 0.99
c. marginal propensity to consume is 0.98
d. marginal propensity to save is 0.01
e. marginal propensity to save is 0.86
Explanation / Answer
(1) (a)
Consumption primarily depends on disposable income.
(2) (b)
In US, ratio of Consumption to GDP (Income) is 65-68% over time.
(3) (e)
Disposable income = Consumption + Savings = Gross income - Taxes + Transfer payments
(4) (a)
Change in Disposable income = Change in Gross income - Change in Taxes + Change in Transfer payments
= 0 - $2,000 + $3,000 = $1,000 (Increase)
(5) False
MPC may range between 0 and 1.
(6) (a)
MPC = Change in consumption / Change in disposable income
If MPC < 1, (Change in consumption / Change in disposable income) < 1
Change in consumption < Change in disposable income
(7) (a)
MPC = $(36,400 - 35,800) / $(46,700 - 46,000) = $600 / $700 = 0.86
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