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

$$400\text{ billion} = 0.8 \times 500\text{ billion}$$

Q: Suppose the government increases its purchases by $$100$$ billion, and the marginal propensity to consume is $$0.6. $$What is the total change in equilibrium real GDP?

$$250\text{ billion} = \frac{1}{1-0.6} \times 100\text{ billion}$$

Question 1

Which of the following best describes the aggregate expenditure model in macroeconomics?

Accepted Answer

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

Question 2

Which of the following is NOT a component of aggregate expenditure?

Accepted Answer

Transfer Payments (T)

Question 3

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

Accepted Answer

$$400	ext{ billion} = 0.8 	imes 500	ext{ billion}$$

Question 4

If the marginal propensity to consume (MPC) is 0.75, what is the marginal propensity to save (MPS)?

Accepted Answer

$$0.25$$

Question 5

Which of the following scenarios would most likely cause a decrease in planned investment?

Accepted Answer

An increase in corporate income taxes

Question 6

If planned aggregate expenditure is less than real GDP, what will happen to inventories and production?

Accepted Answer

Inventories will rise, and firms will decrease production.

Question 7

Which of the following best explains why spending on durable goods like cars and RVs is more volatile than spending on nondurable goods?

Accepted Answer

Households can postpone purchases of durable goods during economic downturns.

Question 8

Given the consumption function $$C = 2{,}000 + 0.8Y$$, where $$Y is $$national income, what is the value of autonomous consumption?

Accepted Answer

$$2{,}000$$

Question 9

If the multiplier is 5, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.8$$

Question 10

Suppose the government increases its purchases by $$100$$ billion, and the marginal propensity to consume is $$0.6. $$What is the total change in equilibrium real GDP?

Accepted Answer

$$250	ext{ billion} = \frac{1}{1-0.6} 	imes 100	ext{ billion}$$

Question 11

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

Accepted Answer

Planned investment that does not depend on the level of GDP

Question 12

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

Accepted Answer

An increase in government purchases

Question 13

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

Accepted Answer

Net exports will decrease because U.S. exports fall and imports rise.

Question 14

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

Accepted Answer

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

Question 15

If the marginal propensity to consume is $$0.9$$, what is the value of the multiplier?

Accepted Answer

$$10$$

Question 16

Which of the following best describes the paradox of thrift?

Accepted Answer

Increased saving in the short run can reduce incomes and push the economy into recession.

Question 17

Which of the following is a likely effect of an increase in the price level on aggregate expenditure?

Accepted Answer

Aggregate expenditure decreases due to a fall in real wealth, higher interest rates, and lower net exports.

Question 18

Given the following aggregate expenditure equations: $$C = 1{,}000 + 0.7Y$$, $$I = 500$$, $$G = 800$$, $$NX = -100$$, what is the equilibrium level of GDP ($$Y$$)?

Accepted Answer

$$Y = 4{,}000$$

Question 19

Which of the following best explains why U.S. net exports tend to become less negative during a recession?

Accepted Answer

U.S. imports fall as domestic spending decreases.

Question 20

If the marginal propensity to consume is $$0.6$$ and autonomous expenditure increases by $$50$$ billion, what is the total change in equilibrium GDP?

Accepted Answer

$$125	ext{ billion}$$

Aggregate Expenditure and Output in the Short Run: Study Notes

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