Question 1

Which of the following best describes the aggregate expenditure model in the short run?

Accepted Answer

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

Question 2

Which equation correctly represents the aggregate expenditure (AE) in an economy?

Accepted Answer

$$AE = C + I + G + NX$$

Question 3

Suppose the marginal propensity to consume (MPC) is 0.8. If disposable income increases by $100 billion, by how much will consumption increase?

Accepted Answer

$$80$$ billion

Question 4

If the marginal propensity to consume (MPC) is 0.75, what is the value of the multiplier?

Accepted Answer

$$4$$

Question 5

Which of the following will cause the aggregate expenditure line to shift upward in the 45°-line diagram?

Accepted Answer

An increase in government purchases

Question 6

If planned aggregate expenditure is less than real GDP, what will happen to inventories and GDP in the next period?

Accepted Answer

Inventories will increase, and GDP will decrease.

Question 7

Which of the following is NOT a determinant of consumption in the aggregate expenditure model?

Accepted Answer

Corporate tax rate

Question 8

If the price level in the United States rises relative to other countries, what is the likely effect on U.S. net exports?

Accepted Answer

Net exports will decrease because U.S. goods become more expensive for foreigners.

Question 9

Given the consumption function $$C = 1,000 + 0.65Y$$, planned investment $$I = 1,500$$, government purchases $$G = 1,500$$, and net exports $$NX = -500$$, what is the equilibrium level of GDP ($$Y$$)?

Accepted Answer

Question 10

If the marginal propensity to save (MPS) is 0.3, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.7$$

Question 11

Which of the following scenarios best illustrates the paradox of thrift?

Accepted Answer

Households increase their saving, causing aggregate expenditure and GDP to fall, possibly leaving total saving unchanged.

Question 12

If the U.S. dollar appreciates relative to other currencies, what is the likely effect on U.S. net exports?

Accepted Answer

Net exports will decrease because U.S. goods become more expensive for foreigners.

Question 13

Suppose autonomous investment increases by $200 billion and the MPC is 0.8. By how much will equilibrium GDP increase?

Accepted Answer

$$1,000$$ billion

Question 14

Which of the following is an example of an autonomous expenditure?

Accepted Answer

A government increases spending on infrastructure regardless of the current GDP.

Question 15

Which of the following best explains why the aggregate demand curve is downward sloping?

Accepted Answer

A higher price level reduces the real value of household wealth, increases interest rates, and makes exports less competitive, all reducing aggregate expenditure.

Question 16

If the interest rate rises, which component of aggregate expenditure is most likely to decrease significantly?

Accepted Answer

Planned investment

Question 17

Which of the following is the correct formula for the multiplier in the simple aggregate expenditure model?

Accepted Answer

$$\frac{1}{1 - MPC}$$

Question 18

If the U.S. economy is in recession and the government increases its purchases, what is the likely short-run effect according to the aggregate expenditure model?

Accepted Answer

Aggregate expenditure will increase, leading to a multiplied increase in GDP.

Question 19

Which of the following best describes the relationship between the marginal propensity to consume (MPC) and the size of the multiplier?

Accepted Answer

The larger the MPC, the larger the multiplier.

Question 20

If the price level falls, what is the likely effect on the aggregate expenditure line and equilibrium real GDP?

Accepted Answer

The AE line shifts upward and equilibrium GDP rises.

Aggregate Expenditure and Output in the Short Run: Study Notes

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