Q: Suppose the government increases its expenditure by $50 billion, the MPC is 0.8, and there are no taxes or imports. What is the total change in equilibrium expenditure?

$$\Delta Y = Multiplier \times \Delta G = \frac{1}{1 - 0.8} \times 50 = 5 \times 50 = 250$$

Question 1

In the Keynesian model, which of the following best describes the behavior of the price level and real GDP in the short run?

Accepted Answer

The price level is fixed, and real GDP is determined by aggregate expenditure.

Question 2

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

Accepted Answer

Disposable income

Question 3

Suppose disposable income increases by $$100 and consumption increases by 80. $$What is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{80}{100} = 0.8$$

Question 4

Which of the following best describes autonomous consumption?

Accepted Answer

Consumption that occurs even when disposable income is zero.

Question 5

The 45° line on the graph of the consumption function represents:

Accepted Answer

All points where consumption equals disposable income.

Question 6

If the marginal propensity to consume (MPC) is 0.75, what is the marginal propensity to save (MPS)?

Accepted Answer

$$MPS = 1 - MPC = 1 - 0.75 = 0.25$$

Question 7

Which of the following would cause a movement along the consumption function, rather than a shift of the function?

Accepted Answer

A change in disposable income

Question 8

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

Accepted Answer

Inventories will rise, and firms will reduce production.

Question 9

Which equation correctly represents the multiplier in terms of the marginal propensity to consume (MPC), marginal propensity to save (MPS), marginal tax rate (t), and marginal propensity to import (MPM)?

Accepted Answer

$$Multiplier = \frac{1}{1 - MPC(1 - t) - MPM}$$

Question 10

Suppose the government increases its expenditure by $50 billion, the MPC is 0.8, and there are no taxes or imports. What is the total change in equilibrium expenditure?

Accepted Answer

$$\Delta Y = Multiplier 	imes \Delta G = \frac{1}{1 - 0.8} 	imes 50 = 5 	imes 50 = 250$$

Question 11

Which of the following best explains why the multiplier is smaller in an open economy with taxes than in a closed economy with no taxes?

Accepted Answer

Because part of any increase in income is spent on imports and taxes, reducing the impact on domestic output.

Question 12

If the aggregate expenditure curve is steeper, what does this imply about the size of the multiplier?

Accepted Answer

The multiplier is larger.

Question 13

Which of the following is an example of induced expenditure?

Accepted Answer

A household increases its spending on groceries as its income rises.

Question 14

How does the aggregate expenditure model explain the occurrence of business cycles?

Accepted Answer

Fluctuations in autonomous expenditure lead to changes in equilibrium GDP through the multiplier effect.

Question 15

If the marginal propensity to import (MPM) increases, what happens to the multiplier?

Accepted Answer

The multiplier decreases.

Question 16

Which of the following statements about equilibrium expenditure is correct?

Accepted Answer

It occurs where planned aggregate expenditure equals real GDP.

Question 17

Suppose the MPC is 0.6, the marginal tax rate is 0.2, and the marginal propensity to import is 0.1. What is the value of the multiplier?

Accepted Answer

$$Multiplier = \frac{1}{1 - 0.6(1 - 0.2) - 0.1} = \frac{1}{1 - 0.6 	imes 0.8 - 0.1} = \frac{1}{1 - 0.48 - 0.1} = \frac{1}{0.42} \approx 2.38$$

Question 18

Which of the following best describes the relationship between aggregate expenditure and aggregate demand?

Accepted Answer

A change in aggregate expenditure shifts the aggregate demand curve.

Question 19

In the short run, an increase in autonomous investment will:

Accepted Answer

Increase equilibrium real GDP by more than the initial increase in investment due to the multiplier effect.

Question 20

Which of the following is an example of dissaving?

Accepted Answer

A household spends more than its disposable income, using credit or savings.

Ch. 11: Expenditure Multipliers and Keynesian Model

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