Question 1

Which of the following is true of macroeconomic equilibrium in the simple Keynesian model?

Accepted Answer

In the simple Keynesian model, macroeconomic equilibrium occurs when aggregate expenditure (AE) equals output (Y), meaning AE = Y.

Question 2

Income rises when desired investment is:

Accepted Answer

Desired investment refers to the amount of money individuals, businesses, and governments want to invest in capital goods such as factories, machines, and infrastructure. Desired savings, on the other hand, refers to the amount of money individuals, businesses, and governments want to save. If desired investment is greater than desired savings, it means that there is excess demand for funds in the economy, which pushes up interest rates. Higher interest rates encourage people to save more and borrow less, which leads to an increase in income. Therefore, option A is correct.

Question 3

In the simple Keynesian model with no government and foreign sectors, suppose that initially the economy is in equilibrium at an output level of $10 trillion with a marginal propensity to consume of 0.8. If investment spending increases by $0.5 trillion, what is the new equilibrium output level?

Accepted Answer

The answer of In the simple Keynesian model with no...

Question 4

Activities that remove spending from the economy are called:

Accepted Answer

Activities that remove spending from the economy are called withdrawals. This includes things like saving money, paying off debt, or buying imports, all of which decrease the amount of money circulating within the domestic economy.

Question 5

During the millennium scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?

Accepted Answer

The marginal propensity to consume (MPC) is 0.75, meaning that for every dollar not spent, $0.75 of spending is lost in the economy. The spending multiplier is 1/(1-MPC) = 1/0.25 = 4. Therefore, a $1,000 reduction in spending leads to a $4,000 decrease in national income.

Question 6

The formula for the simple spending multiplier is:

Accepted Answer

The simple spending multiplier is calculated as 1/(1 - MPC), where MPC stands for the marginal propensity to consume. This formula is used to estimate the total impact on the economy of a change in spending.

Question 7

In the simple Keynesian model with no government and foreign sectors, assume that the economy is in equilibrium at an output level of $2 billion with a marginal propensity to consume of 0.9. If investment spending decreases by $0.05 billion, what is the new equilibrium output level?

Accepted Answer

The answer of In the simple Keynesian model with no...

Question 8

(Table) The following table shows data on consumption at various levels of income. Investment spending is $500 for all levels of income. $$\begin{array} { r r } 
\text { Income } & \text { Consumption } \
\$ 0 & \$ 500 \
\$ 1,000 & \$ 1,250 \
\$ 2,000 & \$ 2,000 \
\$ 3,000 & \$ 2,750 \
\$ 4,000 & \$ 3,500
\end{array}$$ If there is no government spending or net exports, the equilibrium income level is:

Accepted Answer

The answer of (Table) The following table shows data on...

Question 9

(Table) The following table shows data on consumption at various levels of income. $$\begin{array} { r c } 
\text { Income } & \text { Consumption } \
\$ 0 & \$ 250 \
\$ 500 & \$ 700 \
\$ 1,000 & \$ 1,150 \
\$ 1,500 & \$ 1,600 \
\$ 2,000 & \$ 2,050 \
\$ 2,500 & \$ 2,500
\end{array}$$ The value of the MPC is:

Accepted Answer

The answer of (Table) The following table shows data on...

Question 10

If aggregate expenditures are less than current output:

Accepted Answer

When aggregate expenditures are less than current output, it indicates that there is less demand for goods and services than what is being produced, leading businesses to cut back on output to avoid excess inventory.

Question 11

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which of the following statements is correct?

Accepted Answer

A higher marginal propensity to consume (MPC) means that any increase in spending will have a larger multiplier effect. Therefore, with an MPC of 0.9, the U.S. will experience a more powerful effect from a small increase in spending compared to Japan's MPC of 0.6.

Question 12

The multiplier effect shows that a change in aggregate spending:

Accepted Answer

The multiplier effect indicates that an initial change in aggregate spending leads to a larger change in overall output, as the initial spending circulates through the economy, creating additional income and further spending.

Question 13

If the marginal propensity to consume (MPC) rises, the multiplier:

Accepted Answer

The multiplier is the number by which an initial change in autonomous spending is multiplied to determine the total change in the equilibrium level of national income. The formula for the multiplier is 1/(1-MPC). As MPC increases, the denominator (1-MPC) decreases, making the whole fraction larger, i.e., the multiplier increases.

Question 14

At equilibrium, if spending increases by $300 and the corresponding increase in income is $1,500, what is the multiplier?

Accepted Answer

The multiplier is calculated as the change in income divided by the change in spending, which is $1,500 / $300 = 5.

Question 15

Assume that the marginal propensity to consume is 0.75. John's Clean Clones builds a factory that costs $1 billion. How much does the macroeconomic equilibrium increase by?

Accepted Answer

The macroeconomic equilibrium increases by the initial investment multiplied by the spending multiplier. The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.75, so the multiplier is 1/(1-0.75) = 4. Therefore, the increase in equilibrium is $1 billion * 4 = $4 billion.

Question 16

If the marginal propensity to consume is 0.9, what is the size of the multiplier?

Accepted Answer

The answer of If the marginal propensity to consume is...

Question 17

When the economy is in equilibrium in the simple Keynesian model:

Accepted Answer

In the simple Keynesian model, equilibrium occurs when aggregate expenditure (AE) equals output (Y). This occurs when saving (S) equals investment (I), which means that C + S = AE = Y = C + I. Therefore, in equilibrium, saving is equal to investment (C cancels out).

Question 18

Suppose the government believes consumers should spend $1 billion more to get the economy out of a recession. The government wants to provide income to households by providing them with jobs and paying them directly. If the marginal propensity to consume is 0.8, the government should increase income by:

Accepted Answer

The answer of Suppose the government believes consumers should spend...

Question 19

In the simple Keynesian model with no government and foreign sectors, assume that full employment occurs at an output level of $10,000. With a marginal propensity to consume of 0.5 and equilibrium output at $9,600, by how much will investment spending have to increase to move the economy to full employment?

Accepted Answer

The answer of In the simple Keynesian model with no...

Question 20

Equilibrium in the Keynesian model requires that withdrawals be the same as:

Accepted Answer

In the Keynesian model, equilibrium occurs when aggregate withdrawals (which include savings, taxes, and imports) are equal to aggregate injections (which include investment, government spending, and exports). Therefore, the correct answer is D - injections.

Quiz 8: Aggregate Expenditures

Which of the following is true of macroeconomic equilibrium in the simple Keynesian model?

Income rises when desired investment is:

In the simple Keynesian model with no government and foreign sectors, suppose that initially the economy is in equilibrium at an output level of $10 trillion with a marginal propensity to consume of 0.8. If investment spending increases by $0.5 trillion, what is the new equilibrium output level?

Activities that remove spending from the economy are called:

During the millennium scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the marginal propensity to consume is 0.75, by how much did national income fall?

The formula for the simple spending multiplier is:

In the simple Keynesian model with no government and foreign sectors, assume that the economy is in equilibrium at an output level of $2 billion with a marginal propensity to consume of 0.9. If investment spending decreases by $0.05 billion, what is the new equilibrium output level?

If aggregate expenditures are less than current output:

Suppose that Japan is a nation of savers with a marginal propensity to consume of 0.6 and that the United States is a nation of spenders with a marginal propensity to consume of 0.9. Which of the following statements is correct?

The multiplier effect shows that a change in aggregate spending:

If the marginal propensity to consume (MPC) rises, the multiplier:

At equilibrium, if spending increases by $300 and the corresponding increase in income is $1,500, what is the multiplier?

Assume that the marginal propensity to consume is 0.75. John's Clean Clones builds a factory that costs $1 billion. How much does the macroeconomic equilibrium increase by?

If the marginal propensity to consume is 0.9, what is the size of the multiplier?

When the economy is in equilibrium in the simple Keynesian model:

Equilibrium in the Keynesian model requires that withdrawals be the same as: