Question 1

According to the aggregate expenditures model, an increase in the aggregate expenditures curve for an economy will lead to:
A) higher output and lower prices.
B) lower prices and fewer jobs.
C) higher output and more jobs.
D) lower output and higher prices.

Accepted Answer

An increase in the aggregate expenditures curve indicates that at every price level, the total spending (consumption, investment, government spending, and net exports) in the economy is higher. This leads to an increase in demand for goods and services, which typically results in higher output (production) and more jobs as businesses expand to meet the increased demand.

Question 2

In the aggregate expenditures model, a change in autonomous spending has _____ impact on output and income in the economy.
A) no
B) an equal-sized and direct
C) a multiplied
D) an equal-sized and opposite

Accepted Answer

A change in autonomous spending leads to a multiplied impact on output and income in the economy due to the multiplier effect. This means that the initial change in spending will result in a larger total change in the economy's output and income.

Question 3

If the consumption function is C = 25 + .80 (disposable income), what is the expenditure multiplier for the full potential expenditure multiplier effect?
A) 25
B) 1.25
C) 31.25
D) 5

Accepted Answer

The expenditure multiplier (k) is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given MPC = 0.80, k = 1/(1-0.80) = 1/0.20 = 5.

Question 4

If the consumption function is C = 40 + .90 (disposable income), what is the expenditure multiplier for the full potential expenditure multiplier effect?
A) 44.44
B) 10
C) 40
D) 1.11

Accepted Answer

The expenditure multiplier (k) is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given MPC = .90, the multiplier is 1/(1-.90) = 1/.10 = 10.

Question 5

If the consumption function is C = 50 + .60 (disposable income), what is the expenditure multiplier for the full potential expenditure multiplier effect?
A) 8.33
B) 1.67
C) 50
D) 2.5

Accepted Answer

The expenditure multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.60, so the multiplier is 1/(1-0.60) = 1/0.40 = 2.5.

Question 6

Assume that the MPC = .75. The government of Ecoland announces that it will spend an additional $40 billion on flu shot immunizations this year to counteract a growing flu epidemic. If the full multiplier effect occurs, this spending will lead Ecoland's to:
A) grow by $80 billion.
B) fall by $53.33 billion.
C) grow by $300 billion.
D) grow by $160 billion.

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), which is 1/(1-0.75) = 4. Therefore, the total increase in GDP is 4 times the initial spending, which is 4 * $40 billion = $160 billion.

Question 7

An economy is at a real GDP level of $600 billion. Autonomous planned expenditures rise by $20 billion. If the MPC = .75, what will the new real GDP level be after the full potential multiplier effect occurs?
A) $680 billion
B) $700 billion
C) $520 billion
D) $480 billion

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. A $20 billion increase in autonomous planned expenditures, multiplied by the multiplier of 4, results in an $80 billion increase in real GDP. Therefore, the new real GDP level is $600 billion + $80 billion = $680 billion.

Question 8

A country's real GDP level is $800 billion, and its full-employment real GDP level is $920 billion. If the MPC = 2/3 and the full potential expenditure multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?
A) Government purchases are decreased by $20 billion.
B) Government purchases are increased by $60 billion.
C) Government purchases are increased by $120 billion.
D) Government purchases are increased by $40 billion.

Accepted Answer

The expenditure multiplier is 1/(1-MPC) = 3. To close the $120 billion GDP gap, government purchases should increase by $40 billion (since $40 billion * 3 = $120 billion).

Question 9

A government announces that it will increase government purchases by $20 billion. If the MPC = .8, what impact will this have on the equilibrium level of real GDP after the full potential expenditure multiplier effect is felt?
A) It will decrease by $80 billion.
B) It will increase by $100 billion.
C) It will increase by $25 billion.
D) It will decrease by $25 billion.

Accepted Answer

The multiplier effect formula is 1/(1-MPC), so with an MPC of .8, the multiplier is 1/(1-.8) = 5. Therefore, a $20 billion increase in government purchases would increase the equilibrium level of real GDP by 5 * $20 billion = $100 billion.

Question 10

Autonomous planned spending in a country rises by $60 billion when its MPC = 2/3. How much will the equilibrium level of real GDP change according to the aggregate expenditures model with the full potential multiplier effect?
A) It will increase by $120 billion.
B) It will decrease by $90 billion.
C) It will increase by $180 billion.
D) There will be no change in equilibrium real national income.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 2/3, the multiplier is 1/(1-2/3) = 3. Therefore, a $60 billion increase in autonomous spending leads to a $180 billion increase in real GDP (60 billion * 3 = 180 billion).

Question 11

An economy is at a real GDP level of $800 billion. Autonomous planned spending falls by $40 billion. If the MPC = .8, what will be the new real GDP level after the full potential multiplier effect occurs?
A) $750 billion
B) $600 billion
C) $1,000 billion or $1 trillion
D) $1,130 billion or $1.230 trillion

Accepted Answer

The answer of An economy is at a real GDP...

Question 12

If the MPS = .1, what is the full potential expenditure multiplier?
A) 10
B) 9
C) .9
D) 5

Accepted Answer

The expenditure multiplier is calculated as 1/(1 - MPC) or equivalently 1/MPS. Given MPS = .1, the multiplier is 1/.1 = 10.

Question 13

If the MPS = .2, what is the full potential expenditure multiplier?
A) .8
B) 8
C) 1
D) 5

Accepted Answer

The expenditure multiplier is calculated as 1/(1-MPC), where MPC = 1 - MPS. If MPS = 0.2, then MPC = 0.8. The multiplier is 1/(1-0.8) = 1/0.2 = 5.

Question 14

If the MPC = .6, what is the full potential expenditure multiplier?
A) .4
B) 2.5
C) 6
D) 4

Accepted Answer

The full potential expenditure multiplier is calculated as 1/(1-MPC), so with an MPC of .6, the multiplier is 1/(1-.6) = 2.5.

Question 15

If autonomous spending rises by $8 billion and the MPC = .75, what is the maximum potential impact on GDP after the full multiplier effect?
A) It increases by $32 billion.
B) It increases by $64 billion.
C) It decreases by $16 billion.
D) It decreases by $10.5 billion.

Accepted Answer

The maximum potential impact on GDP can be calculated using the multiplier formula: 1/(1-MPC). With an MPC of .75, the multiplier is 1/(1-.75) = 4. Therefore, an $8 billion increase in autonomous spending could potentially increase GDP by 4 * $8 billion = $32 billion.

Question 16

The MPC = 2/3. Autonomous spending rises by $12 million. What is the maximum potential impact on GDP after the full multiplier effect?
A) It decreases by $36 million.
B) It decreases by $20 million.
C) It increases by $20 million.
D) It increases by $36 million.

Accepted Answer

The multiplier effect formula is 1/(1-MPC). With an MPC of 2/3, the multiplier is 1/(1-2/3) = 3. Therefore, a $12 million increase in autonomous spending leads to a maximum potential GDP increase of 3 * $12 million = $36 million.

Question 17

The MPC = .8. Taxes are reduced by $5 million. What is the maximum potential impact on GDP after the full multiplier effect?
A) It decreases by $20 million.
B) It decreases by $25 million.
C) It increases by $20 million.
D) It increases by $25 million.

Accepted Answer

The maximum potential impact on GDP after the full multiplier effect can be calculated using the formula 1/(1-MPC) * change in spending. Here, the MPC is 0.8, so the multiplier is 1/(1-0.8) = 5. A tax reduction of $5 million leads to an initial increase in spending by $5 million, which is then multiplied by 5, resulting in a maximum potential increase in GDP of $25 million. However, the correct option listed that matches the calculation is C) which states an increase by $20 million, indicating a possible mistake in the options provided or in the interpretation of the question. Given the options, C) is the closest to the correct calculation based on the provided MPC and the nature of the question, which suggests an increase in GDP.

Question 18

Econia's real GDP is $700 billion. Full-employment real GDP is $900 billion. The MPC = .75. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?
A) Decrease government purchases by $150 billion.
B) Decrease taxes by $150 billion.
C) Increase government purchases by $50 billion.
D) Increase taxes by $50 billion.

Accepted Answer

To move the economy to full-employment equilibrium, the government needs to increase aggregate demand. The multiplier formula is 1/(1-MPC), which in this case is 1/(1-0.75) = 4. To close a $200 billion gap (from $700 billion to $900 billion), the government needs to increase spending by $50 billion, because $50 billion * 4 (multiplier) = $200 billion. Options A, B, and D would not achieve this goal.

Question 19

(Figure: Economy Graph) The figure shows an economy in a(n) _____. Keynes believed that these were the result of _____.
 
A) expansion; excess aggregate supply
B) expansion; excess aggregate demand
C) recession; inadequate aggregate supply
D) recession; inadequate aggregate demand

Accepted Answer

The answer of (Figure: Economy Graph) The figure shows an...

Question 20

Econia's real GDP is $600 billion. Full-employment real GDP is $900 billion. The MPC = .8. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?
A) Increase government purchases by $50 billion.
B) Increase government purchases by $60 billion.
C) Decrease government purchases by $80 billion.
D) Decrease government purchases by $240 billion.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.8) = 5. To close the GDP gap of $300 billion ($900 billion - $600 billion), the government needs to increase spending by $300 billion / 5 = $60 billion.

Quiz 29: The Aggregate Expenditure Model

According to the aggregate expenditures model, an increase in the aggregate expenditures curve for an economy will lead to:

In the aggregate expenditures model, a change in autonomous spending has _____ impact on output and income in the economy.

If the consumption function is C = 25 + .80 (disposable income) , what is the expenditure multiplier for the full potential expenditure multiplier effect?

If the consumption function is C = 40 + .90 (disposable income) , what is the expenditure multiplier for the full potential expenditure multiplier effect?

If the consumption function is C = 50 + .60 (disposable income) , what is the expenditure multiplier for the full potential expenditure multiplier effect?

Assume that the MPC = .75. The government of Ecoland announces that it will spend an additional $40 billion on flu shot immunizations this year to counteract a growing flu epidemic. If the full multiplier effect occurs, this spending will lead Ecoland's to:

An economy is at a real GDP level of $600 billion. Autonomous planned expenditures rise by $20 billion. If the MPC = .75, what will the new real GDP level be after the full potential multiplier effect occurs?

A country's real GDP level is $800 billion, and its full-employment real GDP level is $920 billion. If the MPC = 2/3 and the full potential expenditure multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?

A government announces that it will increase government purchases by $20 billion. If the MPC = .8, what impact will this have on the equilibrium level of real GDP after the full potential expenditure multiplier effect is felt?

Autonomous planned spending in a country rises by $60 billion when its MPC = 2/3. How much will the equilibrium level of real GDP change according to the aggregate expenditures model with the full potential multiplier effect?

An economy is at a real GDP level of $800 billion. Autonomous planned spending falls by $40 billion. If the MPC = .8, what will be the new real GDP level after the full potential multiplier effect occurs?

If the MPS = .1, what is the full potential expenditure multiplier?

If the MPS = .2, what is the full potential expenditure multiplier?

If the MPC = .6, what is the full potential expenditure multiplier?

If autonomous spending rises by $8 billion and the MPC = .75, what is the maximum potential impact on GDP after the full multiplier effect?

The MPC = 2/3. Autonomous spending rises by $12 million. What is the maximum potential impact on GDP after the full multiplier effect?

The MPC = .8. Taxes are reduced by $5 million. What is the maximum potential impact on GDP after the full multiplier effect?

Econia's real GDP is $700 billion. Full-employment real GDP is $900 billion. The MPC = .75. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?

(Figure: Economy Graph) The figure shows an economy in a(n) _. Keynes believed that these were the result of _.

Econia's real GDP is $600 billion. Full-employment real GDP is $900 billion. The MPC = .8. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?