Q: If the multiplier is 5 and there is a $100 billion increase in autonomous expenditure, what is the total change in equilibrium real GDP?

$$\Delta Y = 5 \times 100 = 500$$ billion

Q: What is the formula for the multiplier in the aggregate expenditure model?

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

Question 1

Which of the following best describes the aggregate expenditure model in macroeconomics?

Accepted Answer

A model that focuses on the short-run relationship between total spending and real GDP, assuming the price level is constant.

Question 2

Which of the following is NOT a component of aggregate expenditure?

Accepted Answer

Transfer payments (T)

Question 3

Suppose a household receives an extra $$1,000 in disposable income and spends 750 of it. $$What is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{750}{1000} = 0.75$$

Question 4

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

Accepted Answer

$$MPS = 1 - MPC = 1 - 0.8 = 0.2$$

Question 5

Which of the following factors would most likely cause a decrease in planned investment spending?

Accepted Answer

An increase in corporate income taxes

Question 6

During a recession, which component of aggregate expenditure is most likely to decrease sharply, based on historical data?

Accepted Answer

Planned investment

Question 7

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

Accepted Answer

Inventories will increase and production will decrease.

Question 8

Which equation represents macroeconomic equilibrium in the aggregate expenditure model?

Accepted Answer

$$Y = AE$$

Question 9

If the multiplier is 5 and there is a $100 billion increase in autonomous expenditure, what is the total change in equilibrium real GDP?

Accepted Answer

$$\Delta Y = 5 	imes 100 = 500$$ billion

Question 10

Which of the following best explains the volatility of consumer spending on durable goods like cars and RVs?

Accepted Answer

Households can postpone buying durable goods when incomes are down, and interest rates fluctuate.

Question 11

Which of the following would cause the aggregate expenditure line to shift upward in the 45-degree line diagram?

Accepted Answer

An increase in autonomous expenditure

Question 12

If the price level rises in the United States faster than in other countries, what is the likely effect on net exports?

Accepted Answer

Net exports will decrease because U.S. exports fall and imports rise.

Question 13

What is the formula for the multiplier in the aggregate expenditure model?

Accepted Answer

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

Question 14

Which scenario illustrates the paradox of thrift?

Accepted Answer

Households increase savings, causing consumption and incomes to decrease, potentially pushing the economy into recession.

Question 15

Which of the following is an induced expenditure in the aggregate expenditure model?

Accepted Answer

Consumption that depends on income

Question 16

If the marginal propensity to consume (MPC) is 0.75 and autonomous investment increases by $200 billion, what is the total change in equilibrium real GDP?

Accepted Answer

$$\Delta Y = \frac{1}{1 - 0.75} 	imes 200 = 4 	imes 200 = 800$$ billion

Question 17

Which of the following best describes the aggregate demand (AD) curve?

Accepted Answer

A curve showing the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.

Question 18

Which of the following would most likely cause the aggregate expenditure function to shift downward?

Accepted Answer

A decrease in planned investment

Question 19

In the algebraic model of macroeconomic equilibrium, which equation represents the equilibrium condition?

Accepted Answer

$$Y = C + I + G + NX$$

Question 20

If the U.S. dollar exchange rate rises, what is the likely effect on U.S. net exports?

Accepted Answer

Net exports will decrease because U.S. goods become more expensive for foreign buyers.

Aggregate Expenditure and Output in the Short Run: Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards