Question 1

According to the Aggregate Expenditure (AE) model, what is the key determinant of the level of real GDP in any particular year?

Accepted Answer

The level of aggregate expenditure (total spending)

Question 2

If total spending (aggregate expenditure) is less than total production (real GDP), what is the most likely short-run outcome for inventories and employment?

Accepted Answer

Inventories increase, leading to a decrease in production and employment

Question 3

Which of the following is NOT assumed by the Aggregate Expenditure model?

Accepted Answer

Prices are flexible in the short run

Question 4

Which type of unemployment does the AE model primarily help to explain?

Accepted Answer

Cyclical unemployment

Question 5

Suppose the marginal propensity to consume (MPC) is 0.8. If disposable income increases by $500, by how much will consumption increase?

Accepted Answer

$$400 = 0.8 	imes 500$$

Question 6

Which of the following would most likely increase investment spending, holding all else constant?

Accepted Answer

A decrease in the interest rate

Question 7

If the exchange rate value of the dollar appreciates, what is the likely effect on U.S. net exports?

Accepted Answer

Net exports decrease

Question 8

Which of the following best describes the relationship between the interest rate and consumption spending?

Accepted Answer

Higher interest rates decrease consumption spending

Question 9

A country experiences a rapid increase in foreign real GDP. What is the most likely effect on its net exports?

Accepted Answer

Net exports increase due to higher foreign demand for exports

Question 10

Which of the following equations correctly represents the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{\Delta C}{\Delta Y}$$

Question 11

If planned aggregate expenditure (AE) equals real GDP, what is true about inventories and macroeconomic equilibrium?

Accepted Answer

Inventories are unchanged, and the economy is in equilibrium

Question 12

Which of the following would most likely decrease U.S. net exports?

Accepted Answer

An appreciation of the U.S. dollar

Question 13

A government reduces the corporate income tax rate. According to the AE model, what is the likely effect on investment spending?

Accepted Answer

Investment spending increases

Question 14

Which of the following is NOT a factor that directly determines consumption spending in the AE model?

Accepted Answer

Business taxes

Question 15

Suppose the U.S. economy is experiencing an increase in inventories. What does this indicate about the relationship between aggregate expenditure and real GDP?

Accepted Answer

Aggregate expenditure is less than real GDP

Question 16

If the interest rate falls, which of the following is most likely to occur in the market for consumer durables, such as cars and appliances?

Accepted Answer

Consumption of durables increases

Question 17

Which of the following best explains why higher interest rates tend to decrease investment spending?

Accepted Answer

Higher interest rates increase the cost of borrowing for firms and households

Question 18

If the growth rate of GDP in the U.S. is higher than in other countries, what is the likely effect on U.S. net exports?

Accepted Answer

Net exports decrease

Question 19

Which of the following is a direct component of aggregate expenditure in the AE model?

Accepted Answer

Government purchases

Question 20

A country’s currency depreciates relative to other currencies. What is the most likely effect on its exports and imports?

Accepted Answer

Exports increase and imports decrease

Aggregate Expenditure and Output in the Short Run: Study Notes

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