Question 1

In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which

Accepted Answer

In a simple macro model with no government and no foreign trade, there are only two components of aggregate desired expenditure: consumption and investment. Since there is no government or foreign trade, there is no government spending or net exports to consider. Therefore, the equilibrium level of national income is the level at which aggregate desired expenditure equals actual national income. This is because if aggregate desired expenditure is less than actual national income, there will be a surplus of goods and services and producers will cut back on production, leading to a decrease in national income. Conversely, if aggregate desired expenditure is greater than actual national income, there will be a shortage of goods and services and producers will increase production, leading to an increase in national income. Only when aggregate desired expenditure equals actual national income is there no pressure for national income to change, and the economy is in equilibrium.

Question 2

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be

Accepted Answer

The marginal propensity to spend (MPS) can be calculated using the multiplier effect formula: Multiplier = 1/(1-MPS). Given that a $4 billion decrease in investment leads to a $20 billion decrease in national income, the multiplier is 20/4 = 5. Solving 1/(1-MPS) = 5 gives MPS = 4/5.

Question 3

Investment expenditure is the volatile component of GDP, and changes in investment are associated with business- cycle fluctuations.

Accepted Answer

Investment expenditure is the component of GDP that tends to fluctuate the most, and these fluctuations are strongly associated with business-cycle fluctuations.

Question 4

A rise in the real rate of interest the opportunity cost of holding an inventory of a given size, and therefore desired investment expenditure.

Accepted Answer

According to the given statement, when the real rate of interest increases, it increases the opportunity cost of holding an inventory of a given size. As a result, the desired investment expenditure decreases. Therefore, the answer is (D) that is, an increase in the real interest rate leads to a decrease in desired investment expenditure.

Question 5

In each of the four expenditure categories, national income accounts measure expenditures, while national income theory deals with expenditures.

Accepted Answer

National income accounts measure actual expenditures, while national income theory deals with desired expenditures, which are the expenditures that economic agents plan or wish to make.

Question 6

In the simple macroeconomic model, "autonomous expenditures" are

Accepted Answer

Autonomous expenditures are not dependent on national income and remain constant regardless of changes in income levels.

Question 7

Consider the simplest macro model with a constant price level and demand- determined output. If desired aggregate expenditure is less than actual national income, then

Accepted Answer

When desired aggregate expenditure is less than actual national income, it indicates that not all output is being purchased, leading to an accumulation of inventories. This suggests that actual national income is above the equilibrium level, as equilibrium is where desired expenditure equals actual income.

Question 8

Consider a consumption function that is upward sloping but flatter than the 45- degree line. When real disposable income rises

Accepted Answer

When real disposable income rises, desired consumption increases, but since the consumption function is flatter than the 45-degree line, not all additional income is consumed, leading to an increase in saving as well.

Question 9

In a simple macro model with demand- determined output, the equilibrium level of national income is at an income

Accepted Answer

In a demand-determined macro model, the equilibrium level of national income is where the aggregate expenditure (AE) curve intersects the 45-degree line, which represents the situation where output (income) equals desired expenditure. At this point, there is no unplanned inventory accumulation or depletion, and the economy is in equilibrium. Therefore, the correct answer is (C) where the AE curve intersects the 45-degree line.

Question 10

Consider a simple macro model with demand- determined output. Using such a model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the reciprocal of one minus

Accepted Answer

The correct formula for calculating the effect of a change in desired investment on equilibrium national income (Y) is ΔY = ΔI/(1 - MPC), where MPC is the marginal propensity to consume. This formula assumes that output is demand-determined, meaning that changes in autonomous spending (such as investment) directly affect equilibrium output. The reciprocal of one minus the MPC is therefore the multiplier, which indicates the amount by which equilibrium output will change in response to a change in autonomous spending. Choice B is the option that includes the correct variable (the marginal propensity to spend) in the formula.

Question 11

In Canada, consumption expenditure in the national accounts is typically of GDP.

Accepted Answer

Consumption expenditure in Canada typically accounts for about 55-60 percent of GDP, reflecting the significant role of consumer spending in the economy.

Question 12

Suppose aggregate output is demand- determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be

Accepted Answer

If a decrease in investment of $4 billion causes a decrease in national income of $12 billion, the marginal propensity to spend must be 2/3. This is because the multiplier effect in this scenario is 3 (change in national income divided by the initial change in investment), so we can set up the equation: 
$12 billion = 3 x $4 billion x MPC 
Solving for MPC, we get MPC = 2/3.

Question 13

The marginal propensity to consume is defined to be

Accepted Answer

The marginal propensity to consume (MPC) measures the change in desired consumption (due to a change in income) relative to the change in disposable income. This is expressed as a ratio, where the change in desired consumption is the numerator and the change in disposable income is the denominator. Therefore, the correct choice is E, which is "the change in desired consumption divided by the change in disposable income."

Question 14

Consider the simplest macro model with demand- determined output. If desired aggregate expenditure is greater than actual national income, then

Accepted Answer

When desired aggregate expenditure exceeds actual national income, inventories fall, prompting firms to increase production, indicating that actual national income is below equilibrium.

Question 15

The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the

Accepted Answer

The definition provided in the question refers to the marginal propensity to spend, which is the change in spending for a given change in income. Therefore, the correct choice is (E) marginal propensity to spend. The other answer choices do not match the definition provided.

Question 16

"The marginal propensity to consume" refers to the additional

Accepted Answer

The marginal propensity to consume is the fraction of additional disposable income that a household spends on consumption. It measures the increase in consumption as disposable income goes up by one unit. Therefore, it refers to the desired consumption that occurs out of an additional dollar of disposable income.

Question 17

Suppose aggregate output is demand- determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will and the marginal propensity to spend must equal .

Accepted Answer

Since the simple multiplier is 4, an increase in planned investment spending of $10 billion will cause aggregate output to increase by 4 times that amount, or $40 billion. The marginal propensity to spend is the fraction of any additional income that is spent, so it must equal 0.75 (which is the difference between 1 and the marginal propensity to save, assumed to be 0.25 in this question).

Question 18

Consider a simple macro model with demand- determined output. In such a model, the smaller the marginal propensity to spend, the

Accepted Answer

In a demand-determined output model, the simple multiplier formula is 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, the smaller the MPC, the larger the denominator of the formula, resulting in a smaller value for the overall multiplier.

Question 19

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that

Accepted Answer

When actual national income ($900 billion) is greater than desired consumption plus investment ($890 billion), firms will experience an unplanned increase in inventories, leading them to reduce output, which will decrease actual national income.

Question 20

If a family's annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000, it can be concluded that the family's

Accepted Answer

The marginal propensity to consume is the amount by which consumption expenditure changes when disposable income changes by $1. In this case, the change in income is $5,000 and the change in consumption is $4,000. Therefore, the marginal propensity to consume is $4,000/$5,000 = 0.8.

Quiz 21: The Simplest Short-Run Macro Model