Question 1

Which of the following best describes the relationship between aggregate output and aggregate income in the macroeconomy?

Accepted Answer

Aggregate output and aggregate income are always exactly equal by definition.

Question 2

According to the Keynesian theory of consumption, which equation represents a straight-line consumption function?

Accepted Answer

$$C = a + bY$$

Question 3

If the marginal propensity to consume (MPC) is 0.8, what is the marginal propensity to save (MPS)?

Accepted Answer

$$0.2$$

Question 4

Suppose the consumption function is $$C = 100 + 0.75Y. If $$income increases from $$Y = 400 to$$ $$Y = 600$$, by how much does consumption increase?

Accepted Answer

$$150$$

Question 5

Which of the following is an example of an exogenous variable in the context of the multiplier model?

Accepted Answer

Planned investment ($$I)$$

Question 6

If the interest rate increases, what is the likely effect on planned investment, ceteris paribus?

Accepted Answer

Planned investment decreases.

Question 7

Which of the following best explains the concept of equilibrium in the goods market?

Accepted Answer

Equilibrium occurs when planned aggregate expenditure equals aggregate output.

Question 8

Given the multiplier formula $$k = \frac{1}{1 - MPC}$$, what is the value of the multiplier if $$MPC = 0.6$$?

Accepted Answer

$$2.5$$

Question 9

A firm expects higher future sales and decides to increase its planned investment. According to the multiplier effect, what will happen to equilibrium output?

Accepted Answer

Equilibrium output will increase by more than the initial increase in investment.

Question 10

If planned aggregate expenditure is less than aggregate output, what will happen in the economy?

Accepted Answer

Firms will reduce output, moving the economy toward equilibrium.

Question 11

Which of the following is NOT a determinant of household consumption according to the Keynesian model?

Accepted Answer

The current level of government spending

Question 12

Suppose the MPC is 0.75 and planned investment increases by $$40. By $$how much will equilibrium output increase, according to the simple multiplier model?

Accepted Answer

$$160$$

Question 13

Which of the following best describes the 'paradox of thrift'?

Accepted Answer

An increase in planned saving can lead to a decrease in equilibrium output and no change in overall saving.

Question 14

If the consumption function is $$C = 100 + 0.8Y$$ and planned investment is $$I = 50$$, what is the equilibrium level of output ($$Y$$)?

Accepted Answer

$$750$$

Question 15

Which of the following scenarios would most likely cause the planned aggregate expenditure line to become steeper?

Accepted Answer

An increase in the marginal propensity to consume (MPC)

Question 16

In the saving/investment approach to equilibrium, which condition must be satisfied?

Accepted Answer

$$S = I$$

Question 17

Which of the following would reduce the size of the multiplier in the real world?

Accepted Answer

Tax payments that depend on income

Question 18

A behavioral economist suggests that automatic enrollment in retirement plans increases saving rates. This is an example of:

Accepted Answer

A commitment device influencing saving behavior

Question 19

If a firm overestimates sales and ends up with more inventory than planned, what does this imply about actual and planned investment?

Accepted Answer

Actual investment is greater than planned investment.

Question 20

Which of the following best describes the effect of 'animal spirits' on planned investment?

Accepted Answer

Entrepreneurs' optimism or pessimism about the future can significantly affect current planned investment.

Aggregate Expenditure and Equilibrium Output: Core Concepts in Macroeconomic Theory

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