Q: If the consumption function is $$C = 30 + 0.8Y_D$$ and disposable income is $$150$$, what is the level of desired savings ($$S$$)?

$$S = Y_D - C = 150 - (30 + 0.8 \times 150) = 150 - 150 = 0$$

Question 1

Which of the following best describes autonomous expenditure?

Accepted Answer

Expenditure that does not depend on the level of national income.

Question 2

Given the consumption function $$C = 30 + 0.8Y_D$$, what is the marginal propensity to consume (MPC)?

Accepted Answer

$$0.8$$

Question 3

If disposable income ($$Y_D) $$increases from $$150 to$$ $$250$$, and the consumption function is $$C = 30 + 0.8Y_D$$, what is the change in desired consumption ($$\Delta C$$)?

Accepted Answer

$$\Delta C = 80$$

Question 4

Which of the following will cause a parallel shift in the consumption function?

Accepted Answer

A change in wealth.

Question 5

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

Accepted Answer

$$0.25$$

Question 6

Which of the following best explains why desired investment is considered autonomous in the short run?

Accepted Answer

Because investment decisions are based on long-term planning and are not immediately affected by current income.

Question 7

What is the equation for equilibrium national income in the simple aggregate expenditure model?

Accepted Answer

$$AE = Y$$

Question 8

Suppose the aggregate expenditure function is $$AE = 105 + 0.8Y. $$What is the equilibrium level of national income ($$Y_0$$)?

Accepted Answer

$$Y_0 = 525$

Question 9

If actual national income is greater than equilibrium national income, what will happen to inventories and output?

Accepted Answer

Inventories will accumulate and firms will reduce output.

Question 10

If the marginal propensity to spend ($$z) is$$ $$0.8$$, what is the value of the simple multiplier ($$SM$$)?

Accepted Answer

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

Question 11

If autonomous investment increases by $$10$$ and the marginal propensity to spend is $$0.75$$, what is the resulting change in equilibrium national income ($$\Delta Y$$)?

Accepted Answer

$$\Delta Y = \frac{10}{1-0.75} = 40$$

Question 12

Which of the following is NOT a factor that shifts the investment function?

Accepted Answer

Changes in disposable income.

Question 13

In the context of the aggregate expenditure model, what does the 45-degree line represent in the AE diagram?

Accepted Answer

Points where desired aggregate expenditure equals actual national income.

Question 14

If the consumption function is $$C = 30 + 0.8Y_D$$ and disposable income is $$150$$, what is the level of desired savings ($$S$$)?

Accepted Answer

$$S = Y_D - C = 150 - (30 + 0.8 	imes 150) = 150 - 150 = 0$$

Question 15

Which of the following best explains the volatility of private-sector investment as shown in the historical data?

Accepted Answer

Investment is highly sensitive to changes in business confidence, interest rates, and sales expectations.

Question 16

If the marginal propensity to consume increases, what happens to the slope of the aggregate expenditure function and the simple multiplier?

Accepted Answer

Both the slope and the simple multiplier increase.

Question 17

Suppose the consumption function shifts upward due to increased consumer confidence. What is the immediate effect on equilibrium national income?

Accepted Answer

Equilibrium national income increases.

Question 18

If desired aggregate expenditure is less than actual national income, what will firms do?

Accepted Answer

Firms will reduce output to prevent inventory accumulation.

Question 19

Which of the following equations correctly represents the savings function if the consumption function is $$C = 30 + 0.8Y_D$$?

Accepted Answer

$$S = Y_D - (30 + 0.8Y_D)$$

The Simplest Short-Run Macro Model: Consumption, Investment, and Aggregate Expenditure

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