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

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

Q: Suppose U.S. net exports increase by $$100$$ billion and the MPC is $$0.8. $$What is the change in equilibrium real GDP?

$$\Delta Y = 100 \times \frac{1}{1-0.8} = 500$$ billion

Q: Which equation correctly represents the relationship between the change in equilibrium real GDP and the change in autonomous expenditure?

$$\Delta Y = \Delta \text{Autonomous Expenditure} \times \frac{1}{1-MPC}$$

Q: If the MPC is 0.5, what is the value of the multiplier?

$$\text{Multiplier} = \frac{1}{1-0.5} = 2$$

Question 1

In the Aggregate Expenditure (AE) model, macroeconomic equilibrium occurs at the point where:

Accepted Answer

The planned aggregate expenditure (AE) line intersects the 45° line ($$Y = AE).$$

Question 2

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

Accepted Answer

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

Question 3

Suppose U.S. net exports increase by $$100$$ billion and the MPC is $$0.8. $$What is the change in equilibrium real GDP?

Accepted Answer

$$\Delta Y = 100 	imes \frac{1}{1-0.8} = 500$$ billion

Question 4

Which of the following would shift the AE line upward in the short run?

Accepted Answer

An increase in autonomous expenditure

Question 5

If the MPC increases, what happens to the value of the multiplier?

Accepted Answer

The multiplier increases.

Question 6

Which equation correctly represents the relationship between the change in equilibrium real GDP and the change in autonomous expenditure?

Accepted Answer

$$\Delta Y = \Delta 	ext{Autonomous Expenditure} 	imes \frac{1}{1-MPC}$$

Question 7

A decrease in interest rates (expansionary monetary policy) will most likely cause:

Accepted Answer

An upward shift of the AE line and an increase in equilibrium real GDP.

Question 8

If planned aggregate expenditure is greater than real GDP, what will happen to inventories and production?

Accepted Answer

Inventories will fall and firms will increase production.

Question 9

Which of the following best describes the multiplier effect?

Accepted Answer

A change in autonomous expenditure leads to a larger change in real GDP due to induced increases in consumption.

Question 10

If the MPC is 0.5, what is the value of the multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{1-0.5} = 2$$

Question 11

Which of the following is NOT a component of planned aggregate expenditure (AE)?

Accepted Answer

Imports (M) alone

Question 12

A contractionary fiscal policy, such as an increase in income taxes, will:

Accepted Answer

Shift the AE line downward and decrease equilibrium real GDP.

Question 13

Which of the following statements about the 45° line in the AE model is correct?

Accepted Answer

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

Question 14

If the economy is experiencing an unplanned increase in inventories, what does this indicate?

Accepted Answer

Planned aggregate expenditure is less than real GDP.

Question 15

Which of the following best explains why the multiplier calculated from the MPC may be too high in the real world?

Accepted Answer

The model ignores changes in imports, inflation, interest rates, and income taxes as real GDP changes.

Question 16

Which of the following scenarios would most likely cause a downward shift in the AE line?

Accepted Answer

A decrease in government purchases

Question 17

If the multiplier is 4 and autonomous expenditure increases by $$50$$ billion, what is the change in equilibrium real GDP?

Accepted Answer

$$\Delta Y = 50 	imes 4 = 200$$ billion

Question 18

Which of the following is a correct interpretation of the multiplier effect?

Accepted Answer

A change in autonomous expenditure leads to a change in real GDP that is larger than the initial change.

Question 19

Which of the following would NOT be considered an autonomous expenditure?

Accepted Answer

A change in consumption due to a change in current income

Question 20

If the MPC is 0.6 and autonomous expenditure decreases by $$20$$ billion, what is the change in equilibrium real GDP?

Accepted Answer

$$\Delta Y = -20 	imes \frac{1}{1-0.6} = -50$$ billion

Aggregate Expenditure and Output in the Short Run: Macroeconomic Equilibrium and the Multiplier

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