Q: If disposable income increases by $500 billion and the marginal propensity to consume is 0.6, by how much will consumption increase?

$$500 \times 0.6 = 300$$ billion

Q: Suppose the government increases its purchases by $200 billion, and the marginal propensity to consume is 0.75. What is the total change in equilibrium real GDP?

$$200 \times \frac{1}{1-0.75} = 800$$ billion

Question 1

Which of the following best describes the aggregate expenditure model?

Accepted Answer

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming the price level is constant.

Question 2

Suppose a country experiences an unplanned increase in inventories. What does this indicate about aggregate expenditure and GDP?

Accepted Answer

Aggregate expenditure is less than GDP.

Question 3

Which of the following is NOT a component of aggregate expenditure in the model discussed?

Accepted Answer

Wages (W)

Question 4

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

Accepted Answer

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

Question 5

Which of the following would cause a decrease in planned investment spending?

Accepted Answer

An increase in corporate income taxes.

Question 6

If the U.S. price level rises faster than foreign price levels, what is the likely effect on U.S. net exports?

Accepted Answer

Net exports will decrease because U.S. goods become more expensive relative to foreign goods.

Question 7

Given the consumption function $$C = 1,000 + 0.75Y$$, what is the autonomous consumption?

Accepted Answer

$$1,000$$

Question 8

If disposable income increases by $500 billion and the marginal propensity to consume is 0.6, by how much will consumption increase?

Accepted Answer

$$500 	imes 0.6 = 300$$ billion

Question 9

Which of the following best explains the paradox of thrift?

Accepted Answer

In the short run, increased saving can lead to decreased aggregate expenditure and lower real GDP.

Question 10

Suppose the government increases its purchases by $200 billion, and the marginal propensity to consume is 0.75. What is the total change in equilibrium real GDP?

Accepted Answer

$$200 	imes \frac{1}{1-0.75} = 800$$ billion

Question 11

Which of the following would shift the aggregate expenditure line upward in the 45°-line diagram?

Accepted Answer

An increase in net exports.

Question 12

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

Accepted Answer

0.8

Question 13

Which of the following is a determinant of consumption according to the aggregate expenditure model?

Accepted Answer

The real interest rate.

Question 14

In the aggregate expenditure model, what happens if planned aggregate expenditure exceeds real GDP?

Accepted Answer

Inventories will fall and firms will increase production.

Question 15

Which of the following would cause a decrease in U.S. net exports?

Accepted Answer

An increase in the U.S. price level relative to foreign price levels.

Question 16

If the consumption function is $$C = 500 + 0.6Y$$, planned investment is $$200$$, government purchases are $$300$$, and net exports are $$-50$$, what is the equilibrium level of GDP ($$Y$$)?

Accepted Answer

$$Y = \frac{500 + 200 + 300 - 50}{1 - 0.6} = \frac{950}{0.4} = 2,375$$

Question 17

Which of the following best describes autonomous expenditure?

Accepted Answer

Expenditure that does not depend on the level of GDP.

Question 18

If the price level rises, which of the following is most likely to occur according to the aggregate expenditure model?

Accepted Answer

Aggregate expenditure will decrease due to a fall in the real value of household wealth.

Question 19

Which of the following equations represents the equilibrium condition in the aggregate expenditure model?

Accepted Answer

$$Y = C + I + G + NX$$

Question 20

A country’s marginal propensity to consume is 0.7. If the government wants to increase equilibrium GDP by $350 billion, by how much should it increase government purchases?

Accepted Answer

$$350 \div \frac{1}{1-0.7} = 350 \div 3.33 = 105$$ billion

Aggregate Expenditure and Output in the Short Run (Chapter 12 Study Notes)

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