Q: If the government increases its purchases by $50 billion and the MPC is 0.8, what is the total change in equilibrium real GDP?

$\frac{1}{1-0.8} \times 50 = 5 \times 50 = 250$ billion

Q: If the MPC is 0.6 and autonomous expenditure increases by $100 billion, what is the total change in equilibrium GDP?

$\frac{1}{1-0.6} \times 100 = 2.5 \times 100 = 250$ billion

Question 1

Which of the following best describes the aggregate expenditure (AE) model in macroeconomics?

Accepted Answer

A model that focuses on the short-run relationship between total spending and real GDP, assuming the price level is constant.

Question 2

Which equation correctly represents aggregate expenditure in the AE model?

Accepted Answer

$AE = C + I + G + NX$

Question 3

Suppose planned aggregate expenditure is less than GDP. What is the most likely short-run consequence for firms?

Accepted Answer

Firms will experience unplanned increases in inventories and reduce production.

Question 4

If the marginal propensity to consume (MPC) is 0.75, what is the value of the multiplier?

Accepted Answer

$\frac{1}{1-0.75} = 4$

Question 5

Which of the following is NOT a determinant of consumption in the aggregate expenditure model?

Accepted Answer

Corporate income tax rate

Question 6

A decrease in the price level in Canada, holding all else constant, will most likely:

Accepted Answer

Increase aggregate expenditure due to higher real wealth and net exports.

Question 7

If the government increases its purchases by $50 billion and the MPC is 0.8, what is the total change in equilibrium real GDP?

Accepted Answer

$\frac{1}{1-0.8} 	imes 50 = 5 	imes 50 = 250$ billion

Question 8

Which of the following best explains the paradox of thrift?

Accepted Answer

In the short run, increased saving can reduce consumption and aggregate expenditure, potentially causing a recession.

Question 9

Given the consumption function $C = 100 + 0.8Y$, planned investment $I = 125$, government spending $G = 125$, and net exports $NX = -30$, what is the equilibrium level of GDP ($Y$)?

Accepted Answer

$Y = 1600$

Question 10

Which of the following would cause the aggregate expenditure line to shift upward in the 45°-line diagram?

Accepted Answer

An increase in autonomous investment

Question 11

If the MPC is 0.6 and autonomous expenditure increases by $100 billion, what is the total change in equilibrium GDP?

Accepted Answer

$\frac{1}{1-0.6} 	imes 100 = 2.5 	imes 100 = 250$ billion

Question 12

Which of the following statements about the aggregate demand (AD) curve is correct?

Accepted Answer

It shows the inverse relationship between the price level and the level of planned aggregate expenditure, holding other factors constant.

Question 13

Which of the following is a plausible real-world scenario illustrating the multiplier effect?

Accepted Answer

A government stimulus package increases spending, leading to a larger increase in GDP than the initial amount spent.

Question 14

If the marginal propensity to save (MPS) is 0.3, what is the marginal propensity to consume (MPC)?

Accepted Answer

$MPC = 0.7$

Question 15

Which of the following would most likely decrease planned investment in the aggregate expenditure model?

Accepted Answer

An increase in real interest rates

Question 16

In the 45°-line diagram, what does a point above the AE line but below the 45° line represent?

Accepted Answer

Planned aggregate expenditure is less than GDP, leading to inventory accumulation.

Question 17

Which of the following is true regarding autonomous expenditures?

Accepted Answer

They do not depend on the level of GDP.

Question 18

If net exports are negative, what does this imply about a country's trade?

Accepted Answer

The value of imports exceeds the value of exports.

Question 19

Which of the following would most likely cause the aggregate demand curve to shift to the right?

Accepted Answer

An increase in consumer confidence leading to higher consumption spending.

Chapter 8

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