Question 1

Suppose the aggregate expenditure (AE) curve shifts upward due to an increase in government spending. According to the Keynesian cross diagram, what is the immediate effect on equilibrium real GDP?

Accepted Answer

Equilibrium real GDP increases as the new AE curve intersects the 45-degree line at a higher level.

Question 2

In the Keynesian cross model, what does the 45-degree line represent?

Accepted Answer

All points where aggregate expenditure equals real GDP ($$Y = AE).$$

Question 3

If planned aggregate expenditure ($$AE_p) is $$less than real GDP ($$Y$$), what will happen to firms' inventories and how will the economy adjust?

Accepted Answer

Inventories will rise, leading firms to reduce production, causing real GDP to fall toward equilibrium.

Question 4

Which of the following best describes the multiplier effect in the context of the aggregate expenditure model?

Accepted Answer

An initial increase in autonomous spending leads to a larger increase in equilibrium real GDP.

Question 5

Given the marginal propensity to consume ($$MPC) is 0.8$$, what is the value of the simple spending multiplier?

Accepted Answer

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

Question 6

If the government increases its purchases by $$100$$ billion and the $$MPC is$$ $$0.75$$, by how much will equilibrium real GDP increase, assuming no crowding out?

Accepted Answer

$$400$$ billion

Question 7

Which of the following would cause the aggregate expenditure curve to shift downward?

Accepted Answer

A decrease in consumer confidence leading to lower consumption.

Question 8

Suppose the economy is at equilibrium at point K in the Keynesian cross diagram. If planned investment falls, what happens to the equilibrium real GDP?

Accepted Answer

Equilibrium real GDP decreases as the AE curve shifts downward.

Question 9

If the marginal propensity to save ($$MPS) is$$ $$0.2$$, what is the marginal propensity to consume ($$MPC$$)?

Accepted Answer

$$0.8$$

Question 10

Which of the following statements about equilibrium in the aggregate expenditure model is correct?

Accepted Answer

Equilibrium occurs where planned aggregate expenditure equals real GDP.

Question 11

If the economy is currently producing at $$GDP_1$$ and the AE curve shifts upward to $$AE_1$$, as shown in the diagrams, what is the likely result?

Accepted Answer

The equilibrium real GDP will increase to $$GDP_2.$$

Question 12

Which of the following best explains why the aggregate expenditure curve is upward sloping?

Accepted Answer

As real GDP increases, so does consumption, leading to higher aggregate expenditure.

Question 13

If actual real GDP is greater than planned aggregate expenditure, what is the likely short-run outcome?

Accepted Answer

Firms will experience unplanned inventory accumulation and reduce output.

Question 14

Suppose the marginal propensity to consume ($$MPC) is$$ $$0.6$$ and there is an autonomous increase in investment of $$50$$ billion. What is the total change in equilibrium real GDP?

Accepted Answer

$$125$$ billion

Question 15

Which of the following would NOT shift the aggregate expenditure curve?

Accepted Answer

A change in the price level.

Question 16

If the marginal propensity to consume ($$MPC) $$increases, what happens to the value of the multiplier?

Accepted Answer

The multiplier increases.

Question 17

In the context of the aggregate expenditure model, what is meant by 'autonomous expenditure'?

Accepted Answer

Expenditure that does not depend on the level of real GDP.

Question 18

If the government wants to close a recessionary gap using fiscal policy, which of the following actions is most appropriate according to the aggregate expenditure model?

Accepted Answer

Increase government spending to shift the AE curve upward.

Question 19

Which of the following is a real-world example of an autonomous increase in aggregate expenditure?

Accepted Answer

A government stimulus package that increases infrastructure spending.

Question 20

If the marginal propensity to consume ($$MPC) is$$ $$0.9$$, and the government wants to increase equilibrium real GDP by $$900$$ billion, how much should it increase government spending?

Accepted Answer

$$100$$ billion

Aggregate Expenditure and Equilibrium GDP: Macroeconomics Study Notes

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