Q: If autonomous investment increases by $100 million and the marginal propensity to spend (z) is 0.8, by how much will equilibrium output increase?

$$\Delta Y = \frac{1}{1-0.8} \times 100 = 5 \times 100 = 500$$ million

Question 1

In the simple short-run macroeconomic model for a closed economy with no government sector, which equation correctly represents Aggregate Expenditures (AE)?

Accepted Answer

$$AE = C + I$$

Question 2

If the consumption function is $$C = 540 + 0.74YD$$, what is the corresponding saving function?

Accepted Answer

$$S = -540 + 0.26YD$$

Question 3

Suppose disposable income increases from $$154,897 to 161$$,580 and consumption increases from $$128,600 to 132$$,745. What is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{4,145}{6,683} = 0.6202$$

Question 4

Which of the following would cause an upward shift in the consumption function?

Accepted Answer

An increase in household wealth

Question 5

Given the consumption function $$C = 668 + 0.62YD$$, what is the break-even level of disposable income ($$Y_{DBE}$$)?

Accepted Answer

$$Y_{DBE} = \frac{668}{1 - 0.62} = 1,758$$

Question 6

If the marginal propensity to consume (MPC) is 0.64, what is the marginal propensity to save (MPS)?

Accepted Answer

$$MPS = 1 - 0.64 = 0.36$$

Question 7

Which of the following best describes the 45-degree line in the Keynesian cross diagram?

Accepted Answer

It shows all points where consumption equals disposable income ($$C = YD)$$

Question 8

If the aggregate expenditures equation is $$AE = 1,146 + 0.62Y$$, what is the value of the expenditures multiplier?

Accepted Answer

$$\frac{1}{1 - 0.62} = 2.63$$

Question 9

Which of the following is NOT a determinant of gross business investment expenditures?

Accepted Answer

Household disposable income

Question 10

If autonomous investment increases by $100 million and the marginal propensity to spend (z) is 0.8, by how much will equilibrium output increase?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.8} 	imes 100 = 5 	imes 100 = 500$$ million

Question 11

In the Keynesian model, what happens if actual output ($$Y) $$exceeds aggregate expenditures ($$AE$$)?

Accepted Answer

Unplanned inventory increases, leading firms to reduce output

Question 12

Which of the following statements about equilibrium in the simple macroeconomic model is TRUE?

Accepted Answer

Equilibrium occurs when $$Y = AE$$

Question 13

If the consumption function is $$C = 962 + 0.65YD$$, what is the value of autonomous consumption ($$C_0$$)?

Accepted Answer

$$962$$

Question 14

Which of the following would rotate the aggregate expenditures (AE) curve upward (increase its slope)?

Accepted Answer

An increase in the marginal propensity to consume (mpc)

Question 15

If the marginal propensity to spend (z) is 0.62 and autonomous expenditures ($$A_0) $$are $$1,146$$, what is the equilibrium output ($$Y_e$$)?

Accepted Answer

$$Y_e = \frac{1,146}{1 - 0.62} = 3,015.79$$

Question 16

Which of the following best explains the multiplier effect in the Keynesian model?

Accepted Answer

An initial increase in autonomous spending leads to a larger total increase in output due to repeated rounds of spending

Question 17

If the consumption function is $$C = 668 + 0.62YD$$ and disposable income is $$2,000$$, what is the level of consumption?

Accepted Answer

$$C = 668 + 0.62 	imes 2,000 = 668 + 1,240 = 1,908$$

Question 18

Which of the following is a correct interpretation of the average propensity to consume (APC)?

Accepted Answer

The fraction of disposable income spent on consumption

Question 19

If the economy is in equilibrium and investment increases by $200 million, with a marginal propensity to spend of 0.5, what is the new increase in equilibrium output?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.5} 	imes 200 = 2 	imes 200 = 400$$ million

The Simple Short-Run Macroeconomic Model with Demand-Determined Output

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