Q: If the marginal propensity to consume (MPC) is $$0.6$$ and disposable income increases by $$500$$, what is the change in consumption?

$$\Delta C = 0.6 \times 500 = 300$$

Question 1

Suppose a government increases taxes on households. According to the determinants of consumption, which of the following is the most likely immediate effect on aggregate demand?

Accepted Answer

Aggregate demand will decrease because current disposable income falls.

Question 2

If the marginal propensity to consume (MPC) is $$0.8$$, what is the marginal propensity to save (MPS)?

Accepted Answer

$$MPS = 0.2$$

Question 3

A household receives a temporary increase in income. According to the concept of consumption smoothing, what is the most likely response?

Accepted Answer

The household will save most of the extra income and increase consumption gradually.

Question 4

Which of the following best describes the effect of a rise in real interest rates on investment spending?

Accepted Answer

Investment spending will decrease because the cost of borrowing rises.

Question 5

Given the aggregate demand curve equation $$AD = C + I + G + NX$$, which component would be most directly affected by a change in government spending?

Accepted Answer

Government spending ($$G)$$

Question 6

If the economy is experiencing a recession, which of the following policies would most likely shift the aggregate demand curve to the right?

Accepted Answer

Decreasing taxes.

Question 7

Suppose the marginal propensity to consume (MPC) is $$0.75. If $$the government increases spending by $$100$$ million, what is the total change in real GDP according to the simple multiplier formula $$\Delta Y = \frac{1}{1-MPC} 	imes \Delta G$$?

Accepted Answer

$$\Delta Y = 400$$ million

Question 8

Which of the following is NOT a determinant of investment spending?

Accepted Answer

Current disposable income

Question 9

A firm is deciding whether to invest in new machinery. Which factor is most likely to increase the firm's investment?

Accepted Answer

An increase in cash flow from current operations.

Question 10

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

Accepted Answer

As the price level rises, real wealth falls, leading to lower consumption and demand.

Question 11

If the marginal propensity to consume (MPC) is $$0.6$$ and disposable income increases by $$500$$, what is the change in consumption?

Accepted Answer

$$\Delta C = 0.6 	imes 500 = 300$$

Question 12

Which of the following would most likely cause a leftward shift in the aggregate demand curve?

Accepted Answer

A decrease in net exports due to a global recession.

Question 13

Which statement best describes the concept of 'autonomous consumption'?

Accepted Answer

Consumption that occurs even when disposable income is zero.

Question 14

If the government implements a policy that increases business expectations about future sales, what is the most likely effect on investment and aggregate demand?

Accepted Answer

Investment will increase and aggregate demand will shift right.

Question 15

Which of the following is an example of a non-durable good?

Accepted Answer

A loaf of bread

Question 16

If the marginal propensity to consume (MPC) is $$0.7$$, what is the value of the simple multiplier?

Accepted Answer

$$\frac{1}{1-0.7} = 3.33$$

Question 17

Which of the following would most likely increase aggregate supply in the long run?

Accepted Answer

An increase in technology and capital stock.

Question 18

If a country experiences a fall in exports due to a global downturn, which component of aggregate demand is directly affected?

Accepted Answer

Net exports ($$NX)$$

Question 19

Which of the following is most likely to cause a movement along the aggregate demand curve rather than a shift?

Accepted Answer

A change in the price level.

Question 20

Suppose the government increases subsidies for business investment. What is the most likely effect on the aggregate demand curve?

Accepted Answer

Aggregate demand will shift to the right.

Determinants of Consumption, Aggregate Demand, and Macroeconomic Equilibrium

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