Q: A government increases its spending by $800, and the marginal propensity to consume (MPC) is 0.6. What is the total change in real GDP if the aggregate supply curve is horizontal?

First, calculate the multiplier: $$\text{Multiplier} = \frac{1}{1 - 0.6} = 2.5. $$Then, $$\Delta Y = 2.5 \times 800 = 2000. So$$, the total change in real GDP is $2000.

Question 1

Suppose the domestic price level in Canada falls. According to the Aggregate Expenditure (AE) model, what is the most likely immediate effect on the AE curve?

Accepted Answer

The AE curve shifts upward, remaining parallel to its original position.

Question 2

A government increases its spending by $800, and the marginal propensity to consume (MPC) is 0.6. What is the total change in real GDP if the aggregate supply curve is horizontal?

Accepted Answer

First, calculate the multiplier: $$	ext{Multiplier} = \frac{1}{1 - 0.6} = 2.5.
$$Then, $$\Delta Y = 2.5 	imes 800 = 2000.
So$$, the total change in real GDP is $2000.

Question 3

Which of the following would cause the short-run aggregate supply (SRAS) curve to shift upward (to the left)?

Accepted Answer

A decrease in labour productivity.

Question 4

If there is an increase in demand for Canadian exports, what happens in the AD-AS model?

Accepted Answer

Aggregate demand shifts right, causing a movement upward and to the right along the AS curve.

Question 5

Suppose artificial intelligence (AI) advances reduce service-industry costs. What is the most likely effect on the aggregate supply (AS) curve?

Accepted Answer

The AS curve shifts downward and to the right.

Question 6

A decrease in business confidence leads to a fall in investment. In the AD-AS model, what is the immediate effect?

Accepted Answer

Aggregate demand shifts left, causing a movement downward and to the left along the AS curve.

Question 7

Which of the following best describes the relationship between the slope of the aggregate supply (AS) curve and the size of the multiplier?

Accepted Answer

The flatter the AS curve, the larger the multiplier; the steeper the AS curve, the smaller the multiplier.

Question 8

In an economy with a horizontal aggregate supply (AS) curve, what happens to output and prices when aggregate demand increases?

Accepted Answer

Output increases, but the price level remains constant.

Question 9

Suppose the AS curve is upward-sloping. If government spending increases and the multiplier is calculated as $$	ext{Multiplier} = 2.5$$, will the actual increase in real GDP be more, less, or equal to $$2.5 	imes \Delta G$$?

Accepted Answer

Less, because some of the increase in AD is absorbed by higher prices rather than higher output.

Question 10

Which of the following scenarios would result in a movement along the AS curve rather than a shift of the AS curve?

Accepted Answer

An increase in net exports due to higher foreign demand.

Question 11

If the marginal propensity to consume (MPC) is 0.75, and the government increases spending by $400, what is the predicted change in equilibrium output, assuming a horizontal AS curve?

Accepted Answer

First, $$	ext{Multiplier} = \frac{1}{1 - 0.75} = 4.
$$Then, $$\Delta Y = 4 	imes 400 = 1600.
So$$, the change in output is $1600.

Question 12

In the context of the AE model, which of the following best explains why a fall in the domestic price level increases aggregate expenditure?

Accepted Answer

A lower price level increases real wealth and makes domestic goods cheaper internationally, raising both consumption and net exports.

Question 13

Which of the following best describes the effect of a decrease in the wage rate on the short-run aggregate supply (SRAS) curve?

Accepted Answer

The SRAS curve shifts downward and to the right.

Question 14

If the AS curve is horizontal, which of the following statements is true?

Accepted Answer

Unit costs are constant, and output is determined entirely by aggregate demand.

Question 15

In an economy with an upward-sloping AS curve, what is the effect of an increase in aggregate demand on the price level and real wealth?

Accepted Answer

The price level rises, real wealth falls, and the increase in consumption is partially offset.

Question 16

Suppose the government increases spending by $500 in an economy where the AS curve is very steep. The MPC is 0.8. What is the expected effect on output and prices?

Accepted Answer

The increase in output will be small, and most of the effect will be seen as a higher price level.

Question 17

Which of the following best summarizes the core insight about the multiplier and the AS curve from Chapter 8?

Accepted Answer

The multiplier is largest when the AS curve is flat and smallest when the AS curve is steep.

Question 18

If the cost of capital equipment falls, what is the most likely effect on the short-run aggregate supply (SRAS) curve?

Accepted Answer

The SRAS curve shifts downward and to the right.

Question 19

Which of the following changes would NOT shift the aggregate supply (AS) curve?

Accepted Answer

A decrease in the price level.

Question 20

If the initial equilibrium output is $$5000, the government increases spending by 600$$, and the multiplier is 2, what is the new equilibrium output, assuming a horizontal AS curve?

Accepted Answer

First, $$\Delta Y = 2 	imes 600 = 1200.
So$$, new output is $$5000 + 1200 = 6200.$$

Macroeconomics Chapter 8: AE, AD, AS, and the Multiplier – Step-by-Step Study Guidance

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