Question 1

Which of the following best describes the equation for GDP using the expenditure approach?

Accepted Answer

$$Y = C + I + G + NX$$

Question 2

Suppose the marginal propensity to consume (MPC) is 0.75. If the government increases spending by $100 billion, by how much will total output (GDP) eventually increase, according to the Keynesian multiplier?

Accepted Answer

$$400$$ billion

Question 3

Which of the following is NOT included in government spending (G) in the aggregate expenditure model?

Accepted Answer

Transfer payments such as Social Security

Question 4

If planned aggregate expenditure (PAE) is less than actual output (Y), what will likely happen in the economy?

Accepted Answer

Firms will experience unplanned inventory accumulation and reduce production.

Question 5

Given the consumption function $$C = a + bY_D$$, what does the parameter $$a$$ represent?

Accepted Answer

Autonomous consumption

Question 6

If a household’s disposable income increases by $$500 and its consumption increases by 400$$, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.8$$

Question 7

Which of the following would most likely increase investment (I) in the aggregate expenditure model?

Accepted Answer

A decrease in interest rates

Question 8

Suppose planned consumption is $$C = 50 + 0.8Y$$, planned investment is $$100$$, planned government spending is $$200$$, and planned net exports is $$50. $$What is the planned aggregate expenditure (PAE) function?

Accepted Answer

$$PAE = 400 + 0.8Y$$

Question 9

If the planned aggregate expenditure (PAE) is $$PAE = 250 + 0.75Y$$ and the full employment output is $$Y_{FE} = 1,500$$, what type of output gap does the economy face if equilibrium output is less than $$Y_{FE}$$?

Accepted Answer

A recessionary output gap

Question 10

Which of the following factors would most likely cause net exports (NX) to decrease?

Accepted Answer

An increase in domestic income

Question 11

If the marginal propensity to consume (MPC) is 0.6, what is the value of the expenditure multiplier?

Accepted Answer

$$2.5$$

Question 12

Which of the following best explains why the economy can get stuck below its potential GDP according to Keynes?

Accepted Answer

Insufficient aggregate spending in one or more components of aggregate expenditure

Question 13

If the economy is at equilibrium where $$PAE = Y$$, and the government increases spending by $$50$$ with an MPC of $$0.8$$, by how much will equilibrium output increase?

Accepted Answer

$$250$$

Question 14

Which of the following is a non-income determinant of consumption?

Accepted Answer

Wealth effect

Question 15

If actual output (Y) is greater than planned aggregate expenditure (PAE), what is the likely result?

Accepted Answer

Firms will experience unplanned inventory accumulation

Question 16

Suppose the planned aggregate expenditure function is $$PAE = 300 + 0.7Y. If $$the current output is $$Y = 2,000$$, what is the value of PAE?

Accepted Answer

$$1,700$$

Question 17

Which of the following scenarios would most likely lead to an inflationary output gap?

Accepted Answer

Equilibrium output exceeds full employment output

Question 18

If the MPC is 0.9, what is the expenditure multiplier, and how much will GDP increase if investment rises by $$100$$?

Accepted Answer

Multiplier is $$10$$, GDP increases by $$1,000$$

Question 19

Which of the following best describes the Keynesian equilibrium condition?

Accepted Answer

$$PAE = Y$$

Question 20

A stock market crash reduces household wealth significantly. According to the aggregate expenditure model, what is the most likely immediate effect on the economy?

Accepted Answer

Consumption (C) decreases, leading to lower aggregate expenditure and output

Aggregate Expenditure and Keynesian Equilibrium: A Study Guide

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