Q: If the marginal propensity to consume (MPC) is 0.8 and autonomous expenditure increases by $\$50$, what is the total change in equilibrium national income?

$\Delta Y = \frac{1}{1-0.8} \times 50 = 250$

Question 1

Which of the following best describes 'desired aggregate expenditure' in the context of the simplest short-run macro model?

Accepted Answer

The total planned spending by consumers and firms, given real-world constraints of income and market prices.

Question 2

In the simplest short-run macro model, which of the following assumptions is made?

Accepted Answer

The economy is closed, with no government and no foreign sector.

Question 3

Given the consumption function $C = 30 + 0.8Y$ and investment $I = 75$, what is the aggregate expenditure function?

Accepted Answer

$AE = 30 + 0.8Y + 75 = 105 + 0.8Y$

Question 4

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

Accepted Answer

$MPS = 0.25$

Question 5

Which formula correctly expresses the average propensity to consume (APC)?

Accepted Answer

$APC = \frac{C}{Y_D}$

Question 6

If actual national income is less than desired aggregate expenditure, what is the likely effect on inventories and output?

Accepted Answer

Inventories will fall and output will rise.

Question 7

Which of the following is NOT a determinant of desired consumption expenditure?

Accepted Answer

Current real GDP

Question 8

Suppose the marginal propensity to spend ($z$) is 0.6. What is the value of the simple multiplier ($sm$)?

Accepted Answer

$sm = \frac{1}{1 - 0.6} = 2.5$

Question 9

Which of the following best describes autonomous expenditure?

Accepted Answer

Expenditure that does not change systematically with national income.

Question 10

If the consumption function shifts upward, which of the following could be a possible cause?

Accepted Answer

An increase in optimism about the future.

Question 11

Which equation correctly shows the relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS)?

Accepted Answer

$MPC + MPS = 1$

Question 12

Which of the following is most likely to cause a parallel upward shift in the aggregate expenditure (AE) function?

Accepted Answer

An increase in autonomous investment.

Question 13

If the AE function becomes steeper, what does this indicate about the marginal propensity to spend?

Accepted Answer

It has increased.

Question 14

Which of the following best explains why investment expenditure is considered autonomous in the simplest short-run macro model?

Accepted Answer

It is not directly affected by changes in national income.

Question 15

Suppose the economy is in equilibrium at $Y^*$. If firms become more optimistic about the future, what is the most likely short-run effect?

Accepted Answer

Desired investment will increase, shifting the AE function upward and raising equilibrium national income.

Question 16

If the marginal propensity to consume (MPC) is 0.8 and autonomous expenditure increases by $\$50$, what is the total change in equilibrium national income?

Accepted Answer

$\Delta Y = \frac{1}{1-0.8} 	imes 50 = 250$

Question 17

Which of the following is a real-world example of a self-fulfilling prophecy in macroeconomics?

Accepted Answer

Households expect a recession and reduce spending, causing national income to fall.

Question 18

Which of the following best describes the life-cycle theory of consumption?

Accepted Answer

Households try to smooth consumption over their lifetime, not responding to every change in income.

Question 19

If the average propensity to save (APS) is negative at low levels of disposable income, what does this imply?

Accepted Answer

Households are dissaving, spending more than their disposable income.

Question 20

Which of the following would cause a downward shift in the saving function?

Accepted Answer

An increase in household wealth.

Chapter 6: The Simplest Short-Run Macro Model – Study Notes

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