Q: Which formula correctly expresses the multiplier in terms of the marginal propensity to consume (MPC)?

$$\text{Multiplier} = \frac{1}{1 - MPC}$$

Q: Which equation correctly calculates the change in equilibrium real GDP resulting from a change in autonomous expenditure?

$$\Delta \text{Real GDP} = \Delta \text{Autonomous Expenditure} \times \frac{1}{1 - MPC}$$

Question 1

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

Accepted Answer

It occurs where the planned aggregate expenditure (AE) line intersects the Y = AE 45-degree line.

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8. If U.S. net exports increase by $100 billion, what is the resulting change in equilibrium real GDP?

Accepted Answer

$500 billion

Question 3

Which formula correctly expresses the multiplier in terms of the marginal propensity to consume (MPC)?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{1 - MPC}$$

Question 4

If the MPC is 0.5, what is the value of the multiplier?

Accepted Answer

2

Question 5

A decrease in interest rates by the Federal Reserve is most likely to cause which of the following in the AE model?

Accepted Answer

An upward shift of the AE line and an increase in equilibrium real GDP.

Question 6

Which of the following would cause the AE line to shift upward?

Accepted Answer

An increase in expected future income.

Question 7

What is the effect of a decrease in autonomous expenditure on equilibrium real GDP, according to the multiplier effect?

Accepted Answer

It causes a larger decrease in equilibrium real GDP.

Question 8

Which of the following best explains why the multiplier is typically overestimated in simple models?

Accepted Answer

Because the models ignore changes in imports, inflation, interest rates, and income taxes as real GDP changes.

Question 9

If the planned aggregate expenditure is greater than real GDP, what will happen to inventories and production?

Accepted Answer

Inventories will fall and firms will increase production.

Question 10

Which of the following is NOT a component of autonomous expenditure in the AE model?

Accepted Answer

Consumption that depends on current income.

Question 11

Suppose the government increases income taxes. What is the likely effect on the AE line and equilibrium real GDP?

Accepted Answer

The AE line shifts downward and equilibrium real GDP decreases.

Question 12

Which equation correctly calculates the change in equilibrium real GDP resulting from a change in autonomous expenditure?

Accepted Answer

$$\Delta 	ext{Real GDP} = \Delta 	ext{Autonomous Expenditure} 	imes \frac{1}{1 - MPC}$$

Question 13

A recession in the U.S. causes a decrease in spending on residential construction. According to the multiplier effect, what is the likely impact on the broader economy?

Accepted Answer

Many sectors experience falling sales due to the multiplier effect.

Question 14

If the MPC increases, what happens to the value of the multiplier?

Accepted Answer

The multiplier increases.

Question 15

Which of the following best describes the process of the multiplier effect?

Accepted Answer

A change in autonomous expenditure leads to a series of induced increases in consumption spending, resulting in a larger change in real GDP.

Question 16

If the AE line is below the 45-degree line, what does this indicate about the economy?

Accepted Answer

Planned aggregate expenditure is less than real GDP.

Question 17

Which of the following would be considered an example of an autonomous expenditure?

Accepted Answer

A government infrastructure project unrelated to current income levels.

Question 18

If the MPC is 0.75 and autonomous expenditure increases by $200 billion, what is the change in equilibrium real GDP?

Accepted Answer

$800 billion

Question 19

Which of the following statements about the multiplier effect is TRUE?

Accepted Answer

The multiplier effect occurs for both increases and decreases in planned aggregate expenditure.

Question 20

What does an 'inventory drawdown' typically indicate about current production and sales?

Accepted Answer

Current production is less than sales, leading to falling inventories.

Chapter 12 Study Guide- Part B

Study Guide - Practice Questions

Study Guide - Flashcards