Question 1

Suppose the consumption function is given by $$C = 30 + 0.8Y_d. $$What is the level of autonomous consumption, and what does it represent?

Accepted Answer

$$30;\  it $$represents the amount of consumption when disposable income is zero.

Question 2

Given the consumption function $$C = 30 + 0.8Y_d$$, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.8$$

Question 3

If disposable income increases from $$150 to 250$$, and the consumption function is $$C = 30 + 0.8Y_d$$, by how much does desired consumption increase?

Accepted Answer

$$80$$

Question 4

Which of the following events would cause an upward shift in the consumption function?

Accepted Answer

An increase in household wealth

Question 5

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

Accepted Answer

$$0.25$$

Question 6

Which of the following best describes autonomous investment expenditure?

Accepted Answer

It does not depend on the current level of national income.

Question 7

Suppose the aggregate expenditure function is $$AE = 105 + 0.8Y. $$What is the equilibrium level of national income?

Accepted Answer

$$525$$

Question 8

If actual national income is below equilibrium, what will happen to inventories and output?

Accepted Answer

Inventories will fall and firms will increase output.

Question 9

Given $$C = 100 + 0.5Y$$ and $$I = 200$$, what is the equation for aggregate expenditure (AE)?

Accepted Answer

$$AE = 300 + 0.5Y$$

Question 10

If the marginal propensity to spend ($$z) is$$ $$0.5$$, what is the value of the simple multiplier ($$SM$$)?

Accepted Answer

$$2$$

Question 11

Suppose desired investment increases by $$75 in an $$economy where the simple multiplier is $$2. $$What is the resulting change in equilibrium national income?

Accepted Answer

$$150$$

Question 12

Which of the following would cause a parallel upward shift in the investment function?

Accepted Answer

A decrease in the real interest rate

Question 13

If the aggregate expenditure function is $$AE = 300 + 0.5Y$$, what is the equilibrium national income?

Accepted Answer

$$600$$

Question 14

If the marginal propensity to consume increases, what happens to the slope of the aggregate expenditure (AE) curve and the value of the simple multiplier?

Accepted Answer

Both the slope of the AE curve and the simple multiplier increase.

Question 15

Which of the following best explains why investment is the most volatile component of GDP?

Accepted Answer

Investment decisions are sensitive to changes in interest rates, sales, and business confidence.

Question 16

If the consumption function shifts upward, what happens to the savings function?

Accepted Answer

It shifts downward by the same amount.

Question 17

Suppose $$C = 10 + 0.4Y_d. If $$disposable income is $$150$$, what is desired savings ($$S$$)?

Accepted Answer

$$50$$

Question 18

Which of the following events would NOT shift the consumption function?

Accepted Answer

An increase in disposable income

Question 19

If actual national income is greater than equilibrium national income, what is the effect on inventories and future output?

Accepted Answer

Inventories accumulate and firms reduce output.

Question 20

If the marginal propensity to spend ($$z) is$$ $$0.6$$, what is the value of the simple multiplier ($$SM$$)?

Accepted Answer

$$2.5$$

Chapter 6: The Simplest Short-Run Macro Model – Consumption, Investment, Aggregate Expenditure, and Equilibrium

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