$$\text{MPC} = \frac{\Delta C}{\Delta Y}$$

Question 1

According to the Aggregate Expenditure (AE) model, what determines the level of real GDP in any particular year?

Accepted Answer

The level of aggregate expenditure (total spending)

Question 2

If total spending (aggregate expenditure) is less than total production (real GDP), what is the likely outcome for inventories and future production?

Accepted Answer

Inventories increase, leading to a decrease in production and employment

Question 3

Which type of unemployment does the Aggregate Expenditure model primarily seek to explain?

Accepted Answer

Cyclical unemployment

Question 4

Which of the following is NOT an assumption of the Aggregate Expenditure model?

Accepted Answer

Prices are flexible

Question 5

Which equation correctly defines the marginal propensity to consume (MPC)?

Accepted Answer

$$	ext{MPC} = \frac{\Delta C}{\Delta Y}$$

Question 6

Which of the following factors would most likely increase consumption spending?

Accepted Answer

An increase in household wealth

Question 7

If the interest rate rises, what is the expected effect on investment spending?

Accepted Answer

Investment spending decreases because borrowing becomes more expensive

Question 8

Which of the following would cause U.S. net exports to increase?

Accepted Answer

An increase in foreign real GDP

Question 9

Suppose the U.S. dollar appreciates relative to other currencies. What is the likely effect on U.S. net exports?

Accepted Answer

Net exports decrease because U.S. exports become more expensive and imports become cheaper

Question 10

Which of the following best describes the macroeconomic equilibrium in the Aggregate Expenditure model?

Accepted Answer

Planned aggregate expenditure equals total production (real GDP)

Question 11

A decrease in the corporate income tax would most likely have which effect on investment spending?

Accepted Answer

Increase investment spending by raising after-tax profitability

Question 12

Which of the following is a direct component of aggregate expenditure?

Accepted Answer

Government purchases

Question 13

If inventories are falling unexpectedly, what does this indicate about aggregate expenditure and production?

Accepted Answer

Aggregate expenditure exceeds production, signaling firms to increase production

Question 14

Which of the following scenarios would most likely lead to an increase in consumption spending?

Accepted Answer

A bull market in stocks increases household wealth

Question 15

Which formula represents the relationship between unintended inventories, real GDP, and aggregate expenditure?

Accepted Answer

$$	ext{Unintended Inventories} = 	ext{Real GDP} - 	ext{Aggregate Expenditure}$$

Question 16

Which of the following would decrease U.S. net exports, holding all else constant?

Accepted Answer

An appreciation of the U.S. dollar

Question 17

If the marginal propensity to consume (MPC) is 0.8, how much will consumption increase if disposable income rises by $500?

Accepted Answer

$400

Question 18

Which of the following is most likely to increase investment spending?

Accepted Answer

A decrease in the interest rate

Question 19

Which of the following best describes the effect of higher interest rates on consumption and investment?

Accepted Answer

Higher interest rates decrease both consumption and investment

Question 20

If the growth rate of GDP in the U.S. is higher than in other countries, what is the likely effect on U.S. net exports?

Accepted Answer

U.S. net exports decrease because imports rise faster than exports

Chapter 12 Study Guide- Part A

Study Guide - Practice Questions