$\Delta Y = Multiplier \times \Delta G = 2 \times 100 = 200$ billion

Question 1

Which of the following best describes the 'Paradox of Thrift' as proposed by John Maynard Keynes?

Accepted Answer

An increase in individual savings can reduce aggregate demand, potentially leading to lower overall income and output.

Question 2

Given the GDP identity $GDP = C + I + G + (X - M)$, what would GDP be in a closed economy?

Accepted Answer

$GDP = C + I + G$

Question 3

Which of the following is NOT an autonomous determinant of consumption?

Accepted Answer

Marginal propensity to save (MPS)

Question 4

In the Keynesian Cross Model, what does the 45° line represent?

Accepted Answer

Points where aggregate expenditures equal real GDP

Question 5

If the marginal propensity to consume (MPC) is 0.8, what is the value of the simple expenditure multiplier?

Accepted Answer

$Multiplier = \frac{1}{1 - 0.8} = 5$

Question 6

Which of the following scenarios would most likely create an inflationary gap in the economy?

Accepted Answer

Aggregate expenditures exceed real GDP at full employment

Question 7

Suppose the government increases its spending by $100 billion and the expenditure multiplier is 2. What is the expected change in real GDP?

Accepted Answer

$\Delta Y = Multiplier 	imes \Delta G = 2 	imes 100 = 200$ billion

Question 8

Which of the following best explains why higher interest rates tend to reduce consumption spending?

Accepted Answer

Higher interest rates increase the cost of borrowing, making consumers less likely to finance purchases.

Question 9

If the marginal propensity to save (MPS) is 0.25, what is the marginal propensity to consume (MPC)?

Accepted Answer

$MPC = 1 - MPS = 0.75$

Question 10

Which of the following is a likely effect of increased household debt on aggregate consumption?

Accepted Answer

Aggregate consumption decreases because households have less available funds.

Question 11

In the short-run policy tradeoff, what is the relationship between unemployment and inflation?

Accepted Answer

There is a temporary tradeoff: reducing unemployment may increase inflation and vice versa.

Question 12

Which of the following would most likely increase net exports (NX) in the GDP equation?

Accepted Answer

A depreciation of the domestic currency, making exports cheaper and imports more expensive.

Question 13

If planned aggregate expenditures are less than real GDP, what is likely to happen to output in the next period?

Accepted Answer

Output will decrease as inventories build up.

Question 14

Which of the following is true about the equilibrium in the Keynesian Cross Model?

Accepted Answer

Equilibrium occurs where planned aggregate expenditures equal real GDP.

Question 15

If the government wants to close a recessionary gap, which fiscal policy action is most appropriate?

Accepted Answer

Increase government spending or decrease taxes.

Question 16

Which of the following best describes the effect of expectations on consumption spending?

Accepted Answer

Higher expectations about future income or economic conditions increase current consumption.

Question 17

Suppose the marginal propensity to consume (MPC) is 0.6 and the government increases spending by $50 billion. What is the total change in GDP?

Accepted Answer

$Multiplier = \frac{1}{1 - 0.6} = 2.5$, so $\Delta Y = 2.5 	imes 50 = 125$ billion

Question 18

Which of the following is a direct result of increased productivity in the Keynesian Cross Model?

Accepted Answer

Greater economic growth due to higher output and income.

Question 19

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

Accepted Answer

$MPS = 1 - MPC = 0.25$

Aggregate Spending, Keynesian Theory, and the Aggregate Expenditure Multiplier

Study Guide - Practice Questions