Question

[5] Aggregate, or total, spending is the combined spending for new goods and services of all:
A) households.
B) households and businesses.
C) households, businesses, and government units.
D) households, businesses, government units, and foreign buyers.

[6] The sector of the economy that purchases the most goods and services is the:
A) foreign sector.
B) business sector.
C) household sector.
D) government sector.

[7] Household spending:
A) is based primarily on unearned income.
B) tends to fluctuate widely as the economy moves through the business cycle.
C) is larger than the combined spending of all U.S. businesses, government units, and foreign buyers.
D) all of these answers are correct.

[8] The main determinant of total household spending is the:
A) size of household income.
B) stock of household wealth.
C) level of household borrowing.
D) availability of government transfer payments.

[9] If the only spending in the economy were household spending based on earned income, and if households always spent all of their incomes, from one year to the next the level of economic activity would:
A) increase.
B) decrease.
C) not change.
D) change in no predictable way.

[10] Injections into the spending stream come from:
A) household earned income.
B) profits, rents, and interest, but not wages.
C) household earned income, transfer payments, and borrowing.
D) sources other than household earned income, and include transfer payments and borrowing.

[11] Which of the following is an injection into the spending stream?
A) Taxes paid to the government.
B) Spending from transfer payments.
C) Spending from household earned income.
D) All of these answers are correct.

[12] Which of the following is a leakage from the spending stream by households?
A) Saving.
B) A decrease in earned income.
C) The receipt of transfer payments.
D) Borrowing from financial institutions.

[13] Personal consumption expenditures would likely increase if there were an increase in:
A) taxes.
B) savings.
C) transfer payments.
D) all of these answers are correct.

[14] Holding all else equal, you would expect the level of economic activity to increase if household:
A) saving were less than taxes.
B) saving plus taxes were more than earned income.
C) saving plus taxes were less than spending from borrowed funds and transfer payments.
D) all of these answers are correct.

[15] Considering only the household sector, an economy will:
A) expand as spending from transfers and borrowing, and savings and taxes increase.
B) contract as spending from transfers and borrowing, and savings and taxes increase.
C) expand as spending from transfers and borrowing increases, and contract as savings and taxes increase.
D) contract as spending from transfers and borrowing increases, and expand as savings and taxes increase.

Answer 1

Ques5: The correct answer is the option (D) i.e., households, businesses, government units, and foreign buyers. As we know that AD = C+I+G+X-M where C is spending by households, I is investment spending by the businesses, G is the government spending, X-M is the spending by foreigners.

Ques6: The sector which purchases most of the goods and services is the household sector.

Ques8: The main determinant of household income is the size of household income. There is a direct relationship between the size of household income and consumption level. If the size of the income level increases then consumption will also increase or vice versa.

Ques12: Savings is a leakage from the spending stream of the households. If there is an increase in saving then the consumption level will decrease and also the household spending. Hence saving acts as a leakage from the spending.

Ques13: Personal consumption expenditures would likely increase if there were an increase in Transfer Payments. A transfer payment is a unilateral payment made by the government to the household for ex: old age pension etc. A transfer payment by the government would result in an increase in household spending.