Q: Suppose the marginal propensity to consume (MPC) is 0.8. If disposable income increases by $500 billion, by how much will consumption increase?

$$400 billion = 0.8 \times 500$$

Q: Suppose the government increases its purchases by $$100$$ billion, and the marginal propensity to consume (MPC) is $$0.6. $$What is the total change in equilibrium real GDP?

$$250$$ billion = \frac{1}{1-0.6} \times 100$

Q: If the marginal propensity to consume (MPC) is 0.6 and autonomous expenditure increases by $$50$$ billion, what is the total increase in equilibrium GDP?

$$125$$ billion = \frac{1}{1-0.6} \times 50$

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

Accepted Answer

$$400 billion = 0.8 	imes 500$$

Question 4

If the marginal propensity to consume (MPC) is 0.75, what is the marginal propensity to save (MPS)?

Accepted Answer

$$0.25$$

Question 5

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

Accepted Answer

An increase in corporate income taxes

Question 6

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

Accepted Answer

Inventories will rise, and firms will decrease production.

Question 7

Which of the following best explains why spending on durable goods like cars and RVs is more volatile than spending on nondurable goods?

Accepted Answer

Households can postpone purchases of durable goods during economic downturns.

Question 8

Given the following consumption function: $$C = 200 + 0.7Y$$, where $$C is $$consumption and $$Y is $$national income, what is the autonomous consumption?

Accepted Answer

$$200$$

Question 9

If the multiplier is 5, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.8$$

Question 10

Suppose the government increases its purchases by $$100$$ billion, and the marginal propensity to consume (MPC) is $$0.6. $$What is the total change in equilibrium real GDP?

Accepted Answer

$$250$$ billion = \frac{1}{1-0.6} 	imes 100$

Question 11

Which of the following best describes the paradox of thrift?

Accepted Answer

In the short run, increased saving can reduce income and push the economy into recession.

Question 12

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

Accepted Answer

An increase in planned investment

Question 13

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

Accepted Answer

Net exports will decrease because U.S. goods become less competitive.

Question 14

Which equation represents the equilibrium condition in the aggregate expenditure model?

Accepted Answer

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

Question 15

If the marginal propensity to consume (MPC) is 0.6 and autonomous expenditure increases by $$50$$ billion, what is the total increase in equilibrium GDP?

Accepted Answer

$$125$$ billion = \frac{1}{1-0.6} 	imes 50$

Question 16

Which of the following is a real-world example of an autonomous expenditure?

Accepted Answer

The government increases spending on infrastructure regardless of the current GDP.

Question 17

Which of the following best explains why U.S. net exports are typically negative?

Accepted Answer

The value of U.S. imports is greater than the value of U.S. exports.

Question 18

Which of the following is a likely effect of an increase in the real interest rate?

Accepted Answer

A decrease in planned investment

Question 19

If the consumption function is $$C = 300 + 0.6Y$$, planned investment is $$200$$, government purchases are $$400$$, and net exports are $$-50$$, what is the equilibrium level of GDP ($$Y$$)?

Accepted Answer

$$Y = 2000$$

Question 20

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.

Aggregate Expenditure and Output in the Short Run: Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards