Question 1

Which of the following best describes autonomous expenditure?

Accepted Answer

It is the component of aggregate expenditure that does not change when real GDP changes.

Question 2

If the marginal propensity to consume (MPC) is 0.8 and there are no taxes or imports, what is the value of the simple expenditure multiplier?

Accepted Answer

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

Question 3

Suppose the government increases its expenditure by $2 trillion. If the multiplier is 1.5, by how much will equilibrium real GDP increase?

Accepted Answer

$$3 	ext{ trillion}$$

Question 4

Which of the following will cause the consumption function to shift upward?

Accepted Answer

A fall in the real interest rate

Question 5

If the marginal propensity to import increases, what happens to the size of the multiplier?

Accepted Answer

The multiplier decreases

Question 6

Given the consumption function $$C = 2 + 0.7Y_d$$, where $$Y_d is $$disposable income, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.7$$

Question 7

If aggregate planned expenditure exceeds real GDP, what is the likely short-run effect on inventories and production?

Accepted Answer

Inventories will decrease and firms will increase production.

Question 8

Which of the following equations correctly represents aggregate expenditure?

Accepted Answer

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

Question 9

If the marginal propensity to consume is 0.75, the marginal propensity to import is 0.1, and the marginal tax rate is 0.15, what is the slope of the AE curve?

Accepted Answer

$$0.75 - 0.1 - 0.15 = 0.5$$

Question 10

Which of the following best explains why the multiplier is greater than 1?

Accepted Answer

Because an increase in autonomous expenditure induces further increases in aggregate expenditure through induced consumption.

Question 11

A decrease in autonomous expenditure will most likely trigger which of the following sequences in the business cycle?

Accepted Answer

Recession, as unplanned inventories rise and firms cut production.

Question 12

If the marginal propensity to consume is 0.6 and the marginal propensity to import is 0.2, what is the value of the multiplier (ignoring taxes)?

Accepted Answer

$$\frac{1}{1-0.6-0.2} = 1.25$$

Question 13

Which of the following is a real-world reason why the government expenditure multiplier might be less than 1, according to Robert Barro?

Accepted Answer

Because some private expenditure, mainly investment, gets 'crowded out' by government spending.

Question 14

If the price level rises, what happens to the AE curve and equilibrium expenditure?

Accepted Answer

The AE curve shifts downward and equilibrium expenditure decreases.

Question 15

Which of the following best describes the relationship between the AE curve and the AD curve?

Accepted Answer

The AE curve shows the relationship between aggregate planned expenditure and real GDP, while the AD curve shows the relationship between the quantity of real GDP demanded and the price level.

Question 16

If the marginal tax rate increases, what is the effect on the multiplier?

Accepted Answer

The multiplier decreases.

Question 17

Suppose the marginal propensity to consume is 0.8, the marginal propensity to import is 0.1, and the marginal tax rate is 0.1. What is the value of the multiplier?

Accepted Answer

$$\frac{1}{1-0.8-0.1-0.1} = 2.5$$

Question 18

Which of the following is NOT a factor that shifts the consumption function?

Accepted Answer

Changes in the marginal propensity to import

Question 19

If the economy is at equilibrium expenditure and autonomous expenditure increases, what happens next?

Accepted Answer

Aggregate planned expenditure will exceed real GDP, leading to an unplanned decrease in inventories and an increase in production.

Aggregate Expenditure Multiplier: Concepts, Mechanisms, and Applications

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