Q: Given the consumption function $C = a + bYD$, if $a = 600$ and $b = 0.5$, what is the level of consumption when disposable income ($YD$) is $2000$?

$C = 600 + 0.5 \times 2000 = 600 + 1000 = 1600$

Q: If the marginal propensity to consume (MPC) is $0.8$, and autonomous consumption is $200$, what is the change in consumption when disposable income increases from $1000$ to $1500$?

$\Delta C = 0.8 \times (1500 - 1000) = 0.8 \times 500 = 400$

Q: If autonomous consumption increases by $100$ and the marginal propensity to consume (MPC) is $0.75$, by how much does equilibrium income ($Y$) increase?

$\Delta Y = \frac{1}{1-0.75} \times 100 = 4 \times 100 = 400$

Question 1

Given the consumption function $C = 600 + 0.5YD$, what is the value of autonomous consumption, and what does it represent in macroeconomic terms?

Accepted Answer

Autonomous consumption is $600; it represents the amount households would consume even if disposable income were zero.

Question 2

Suppose the consumption function is $C = 200 + 0.8Y$ and investment $I = 300$. What is the equation for aggregate expenditure ($AE$)?

Accepted Answer

$AE = 200 + 0.8Y + 300$

Question 3

If the marginal propensity to consume (MPC) is $0.7$, what is the marginal propensity to save (MPS)?

Accepted Answer

$MPS = 0.3$

Question 4

Given the following data from a consumption table: when disposable income increases from $0$ to $30$, consumption increases from $15$ to $36$. What is the marginal propensity to consume (MPC)?

Accepted Answer

$MPC = \frac{36-15}{30-0} = \frac{21}{30} = 0.70$

Question 5

In the aggregate expenditure (AE) model, what happens when $AE > Y$ at a given level of income?

Accepted Answer

Inventories fall, and firms increase output.

Question 6

If the consumption function is $C = 200 + 0.8Y$ and investment is $I = 300$, what is the equilibrium level of income ($Y$) where $AE = Y$?

Accepted Answer

$Y = 2500$

Question 7

Why are income ($Y$) and disposable income ($Y_d$) considered equal in a simple macroeconomic model with no government or taxes?

Accepted Answer

Because there is no government or taxation, so all income is disposable.

Question 8

If the marginal propensity to consume (MPC) is $0.5$, what is the value of the multiplier ($k$) in the simple Keynesian model?

Accepted Answer

$k = \frac{1}{1-0.5} = 2$

Question 9

Suppose the AE curve is below the 45° line at a certain income level. What does this indicate about inventories and future output?

Accepted Answer

Inventories are accumulating, so firms will decrease output.

Question 10

Given the consumption function $C = a + bYD$, if $a = 600$ and $b = 0.5$, what is the level of consumption when disposable income ($YD$) is $2000$?

Accepted Answer

$C = 600 + 0.5 	imes 2000 = 600 + 1000 = 1600$

Question 11

If the marginal propensity to consume (MPC) is $0.8$, and autonomous consumption is $200$, what is the change in consumption when disposable income increases from $1000$ to $1500$?

Accepted Answer

$\Delta C = 0.8 	imes (1500 - 1000) = 0.8 	imes 500 = 400$

Question 12

A country has the following consumption function: $C = 100 + 0.75Y$. If investment is $200$, what is the equilibrium level of income ($Y$)?

Accepted Answer

$Y = \frac{100 + 200}{1 - 0.75} = \frac{300}{0.25} = 1200$

Question 13

If the marginal propensity to save (MPS) is $0.2$, what is the value of the multiplier ($k$)?

Accepted Answer

$k = \frac{1}{0.2} = 5$

Question 14

Which of the following best describes the relationship between the 45° line and the AE curve in the Keynesian cross diagram?

Accepted Answer

The 45° line shows all points where $AE = Y$, and equilibrium occurs where the AE curve intersects the 45° line.

Question 15

If autonomous consumption increases by $100$ and the marginal propensity to consume (MPC) is $0.75$, by how much does equilibrium income ($Y$) increase?

Accepted Answer

$\Delta Y = \frac{1}{1-0.75} 	imes 100 = 4 	imes 100 = 400$

Question 16

In a simple economy with no government or foreign sector, if planned aggregate expenditure ($AE$) is less than output ($Y$), what is the likely short-run effect?

Accepted Answer

Firms will cut production due to rising inventories.

Question 17

If the consumption function is $C = 150 + 0.6Y$ and income is $1000$, what is the level of saving ($S$)?

Accepted Answer

$S = Y - C = 1000 - (150 + 0.6 	imes 1000) = 1000 - 750 = 250$

Question 18

A government introduces a lump-sum tax of $T$ in an economy with the consumption function $C = 200 + 0.8(Y - T)$. If $T$ increases by $50$, what is the immediate effect on consumption?

Accepted Answer

$\Delta C = 0.8 	imes (-50) = -40$

Question 19

If the marginal propensity to consume (MPC) is $0.6$ and investment increases by $200$, what is the total change in equilibrium income ($Y$)?

Accepted Answer

$\Delta Y = \frac{1}{1-0.6} 	imes 200 = 2.5 	imes 200 = 500$

Chapter 6: The Simplest Short-Run Macro Model – Consumption, Aggregate Expenditure, and Equilibrium

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