Q: Suppose the government increases taxes by $100 billion, and the MPC is 0.75. What is the expected change in equilibrium GDP?

$$\Delta Y = -100 \times \frac{0.75}{1-0.75} = -300$$

Question 1

Suppose the aggregate expenditure (AE) curve shifts upward due to an increase in government spending. According to the Keynesian cross diagram, what is the immediate effect on equilibrium real GDP?

Accepted Answer

Equilibrium real GDP increases as the new AE curve intersects the 45-degree line at a higher level.

Question 2

If the marginal propensity to consume (MPC) is 0.8, what is the value of the simple spending multiplier?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 3

In the Keynesian cross model, what does the 45-degree line represent?

Accepted Answer

All points where real GDP equals aggregate expenditure ($$Y = AE).$$

Question 4

If planned aggregate expenditure is less than real GDP, what will happen to inventories and output in the next period?

Accepted Answer

Inventories will rise, and firms will reduce output.

Question 5

Suppose the government increases taxes by $100 billion, and the MPC is 0.75. What is the expected change in equilibrium GDP?

Accepted Answer

$$\Delta Y = -100 	imes \frac{0.75}{1-0.75} = -300$$

Question 6

Which of the following best describes the effect of an increase in autonomous consumption on the aggregate expenditure curve?

Accepted Answer

The AE curve shifts upward by the amount of the increase in autonomous consumption.

Question 7

If the economy is currently at point J on the Keynesian cross diagram, where planned aggregate expenditure is less than real GDP, what adjustment will occur?

Accepted Answer

Firms will cut production, moving the economy toward equilibrium.

Question 8

Given the following: $$C = 200 + 0.7Y$$, $$I = 150$$, $$G = 100$$, and $$NX = 50$$, what is the equilibrium level of real GDP ($$Y$$)?

Accepted Answer

$$Y = \frac{200 + 150 + 100 + 50}{1 - 0.7} = 1667$$

Question 9

Which of the following would cause the aggregate expenditure curve to shift downward?

Accepted Answer

A decrease in investment spending.

Question 10

If the marginal propensity to save (MPS) is 0.2, what is the value of the spending multiplier?

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 11

Suppose the government wants to increase equilibrium GDP by $400 billion. If the MPC is 0.8, by how much should government spending increase?

Accepted Answer

$$\Delta G = \frac{400}{5} = 80$$

Question 12

Which of the following statements about the 45-degree line in the Keynesian cross diagram is correct?

Accepted Answer

It shows all points where planned aggregate expenditure equals real GDP.

Question 13

If the marginal propensity to consume (MPC) increases, what happens to the slope of the aggregate expenditure curve?

Accepted Answer

The slope increases, making the AE curve steeper.

Question 14

A country experiences a decrease in net exports due to a global recession. What is the likely effect on the aggregate expenditure curve and equilibrium GDP?

Accepted Answer

The AE curve shifts downward, and equilibrium GDP decreases.

Question 15

If actual real GDP is greater than planned aggregate expenditure, what will happen in the economy?

Accepted Answer

Firms will experience unplanned inventory accumulation and reduce output.

Question 16

Suppose the consumption function is $$C = 100 + 0.6Y. If $$income increases by $200, what is the change in consumption?

Accepted Answer

$$\Delta C = 0.6 	imes 200 = 120$$

Question 17

Which of the following would increase the equilibrium level of real GDP in the Keynesian cross model?

Accepted Answer

An increase in autonomous investment.

Question 18

If the marginal propensity to consume (MPC) is 0.6 and the government increases spending by $50 billion, what is the total change in equilibrium GDP?

Accepted Answer

$$\Delta Y = 50 	imes \frac{1}{1-0.6} = 125$$

Question 19

Which of the following best explains why the aggregate expenditure curve is upward sloping?

Accepted Answer

As real GDP increases, consumption increases, leading to higher aggregate expenditure.

Question 20

If the marginal propensity to save (MPS) is 0.3, what is the marginal propensity to consume (MPC)?

Accepted Answer

0.7

Aggregate Expenditure and Equilibrium GDP: Macroeconomics Study Notes

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