$$\Delta Y = Multiplier \times \Delta A = 4 \times 0.5 = 2$$ trillion

$$\Delta M = 0.25 \times 800 = 200$$ billion

Question 1

Which equation correctly represents the relationship between real GDP and its components in the Keynesian model with fixed prices?

Accepted Answer

$$Y = C + I + G + X - M$$

Question 2

If disposable income increases by $$2$$ trillion and consumption increases by $$1.5$$ trillion, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{1.5}{2} = 0.75$$

Question 3

Which of the following best describes the consumption function?

Accepted Answer

It shows the relationship between consumption expenditure and disposable income, all else equal.

Question 4

If the marginal propensity to save (MPS) is $$0.25$$, what is the value of the multiplier when there are no taxes or imports?

Accepted Answer

$$Multiplier = \frac{1}{MPS} = \frac{1}{0.25} = 4$$

Question 5

Suppose autonomous expenditure increases by $$0.5$$ trillion and the multiplier is $$4. By $$how much will equilibrium real GDP increase?

Accepted Answer

$$\Delta Y = Multiplier 	imes \Delta A = 4 	imes 0.5 = 2$$ trillion

Question 6

What happens to the size of the multiplier when income taxes and imports are introduced?

Accepted Answer

The multiplier decreases because both taxes and imports reduce the slope of the AE curve.

Question 7

If the marginal propensity to import is $$0.25$$ and real GDP increases by $$800$$ billion, how much do imports increase?

Accepted Answer

$$\Delta M = 0.25 	imes 800 = 200$$ billion

Question 8

Which statement best describes equilibrium expenditure in the Keynesian model?

Accepted Answer

Equilibrium expenditure occurs when aggregate planned expenditure equals real GDP.

Question 9

In the context of the AE curve, what does the slope represent when there are no taxes or imports?

Accepted Answer

The marginal propensity to consume (MPC)

Question 10

If the slope of the AE curve is $$0.5$$, what is the value of the multiplier?

Accepted Answer

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

Question 11

Which of the following is considered autonomous expenditure?

Accepted Answer

Investment, government expenditure, and exports that do not vary with real GDP

Question 12

What is the effect of an unplanned decrease in inventories on real GDP?

Accepted Answer

Firms increase production, leading to an increase in real GDP

Question 13

If the price level rises, what happens to the AE curve and equilibrium expenditure?

Accepted Answer

The AE curve shifts downward and equilibrium expenditure decreases

Question 14

In the long run, what is the value of the multiplier according to the AS-AD model?

Accepted Answer

Zero

Question 15

Which formula correctly calculates disposable income?

Accepted Answer

$$YD = Y - T$$

Question 16

If consumption exceeds disposable income, what is the value of saving?

Accepted Answer

Saving is negative (dissaving)

Question 17

Which of the following best describes induced expenditure?

Accepted Answer

Expenditure that varies with real GDP, such as consumption minus imports

Question 18

If the marginal propensity to consume is $$0.75$$, what is the marginal propensity to save?

Accepted Answer

$$MPS = 1 - MPC = 1 - 0.75 = 0.25$$

Question 19

Which of the following is true about the aggregate expenditure curve and the aggregate demand curve?

Accepted Answer

The AE curve shows planned expenditure versus real GDP at a fixed price level, while the AD curve shows real GDP demanded versus the price level.

Expenditure Multipliers and Aggregate Expenditure in the Keynesian Model

Study Guide - Practice Questions