Question 1

When aggregate planned expenditure is greater than real GDP, inventories decrease.

Accepted Answer

When aggregate planned expenditure exceeds real GDP, it indicates that the demand for goods and services is higher than what the economy is currently producing. As a result, businesses will draw down their inventories to meet the excess demand, leading to a decrease in inventories.

Question 2

Actual aggregate expenditure does not always equal real GDP.

Accepted Answer

The answer of Actual aggregate expenditure does not always equal...

Question 3

The positive relationship between consumption expenditure and disposable income is shown by a movement along the consumption function.

Accepted Answer

A movement along the consumption function indicates changes in consumption expenditure due to changes in disposable income, reflecting their positive relationship.

Question 4

As disposable income increases, saving increases.

Accepted Answer

As disposable income increases, individuals typically have more money available after covering their basic needs, which allows them to save more.

Question 5

A change in the real interest rate creates a movement along the consumption function.

Accepted Answer

A change in the real interest rate affects the level of consumption but does not cause a movement along the consumption function; instead, it shifts the consumption function. This is because the consumption function is based on the relationship between consumption and disposable income, not interest rates.

Question 6

The slope of the AE curve is .80. What is the multiplier? Everything else the same, by how much does equilibrium aggregate expenditure increase if
a) exports increase from $1.75 trillion to $2.25 trillion.
b) government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion.
c) investment increases from $1.2 trillion to $2.3 trillion.

Accepted Answer

The answer of The slope of the AE curve is...

Question 7

Suppose the economy has no income taxes or imports. The MPC equals 0.8. What does the expenditure model predict will be the change in real GDP if investment increases by $200 billion?

Accepted Answer

The answer of Suppose the economy has no income taxes...

Question 8

Suppose a country has no income taxes or imports. If the MPC is 0.75, what does the multiplier equal?

Accepted Answer

The answer of Suppose a country has no income taxes...

Question 9

The autonomous components of aggregate expenditures are consumption, savings, and investment.

Accepted Answer

The autonomous components of aggregate expenditures are typically considered to be consumption, investment, government spending, and net exports, not savings. Savings are not directly a part of aggregate expenditures but rather influence the economy through their impact on investment.

Question 10

The marginal propensity to consume must increase as disposable income increases.

Accepted Answer

The marginal propensity to consume (MPC) refers to the proportion of additional income that a consumer spends on goods and services, rather than saving. It does not necessarily increase as disposable income increases; it can vary depending on factors such as consumer confidence, interest rates, and economic conditions.

Question 11

Suppose the economy has no income taxes or imports. How is the size of the expenditure multiplier related to the marginal propensity to consume? What is the multiplier if the MPC equals 0.25? If the MPC equals 0.50? If the MPC equals 0.90?

Accepted Answer

The answer of Suppose the economy has no income taxes...

Question 12

A movement along the consumption function is the result of changes in disposable income.

Accepted Answer

A movement along the consumption function occurs when there is a change in disposable income, affecting the amount of goods and services consumers are willing and able to purchase at each price level.

Question 13

If wealth increases, the consumption function shifts upward.

Accepted Answer

When wealth increases, individuals have more resources at their disposal, leading to an increase in their consumption levels at each income level, which is represented by an upward shift in the consumption function.

Question 14

Components of induced aggregate expenditure include government expenditure, investment and consumption expenditure.

Accepted Answer

The answer of Components of induced aggregate expenditure include government...

Question 15

If the change in autonomous investment equals $1 trillion and the change in real GDP equals $4 trillion, the multiplier equals 1/4.

Accepted Answer

The multiplier is calculated as the change in real GDP divided by the change in autonomous investment, which in this case is $4 trillion / $1 trillion = 4.

Question 16

If the price level is constant, a change in investment has a multiplied impact on real GDP.

Accepted Answer

This is because of the multiplier effect, where an initial increase in spending (such as an increase in investment) leads to a series of spending by others, thus having a multiplied impact on the overall economy and increasing real GDP more than the initial amount of spending.

Question 17

In the very short term, planned investment, planned government expenditure, planned exports, planned consumption, and planned imports are all fixed and do not change when GDP changes.

Accepted Answer

In the very short term, planned investment, government expenditure, exports, consumption, and imports can change with GDP due to factors like economic policies, consumer confidence, and global market conditions.

Question 18

In the short run, the multiplier typically is less than 1.

Accepted Answer

In the short run, the multiplier is typically greater than 1 because an initial increase in spending will lead to a larger total increase in income and output due to the chain reaction of spending.

Question 19

If the multiplier is 3, a $750,000 increase in autonomous expenditure increases equilibrium expenditure by $2.25 million.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC) or simply the multiplier itself if given. With a multiplier of 3, a $750,000 increase in autonomous expenditure would indeed increase the equilibrium expenditure by 3 times $750,000, which equals $2.25 million.

Question 20

Components of aggregate expenditure include saving, consumption expenditure, investment and government expenditure.

Accepted Answer

Components of aggregate expenditure include consumption expenditure, investment, government expenditure, and net exports, but not saving, as saving is not a component of expenditure but rather a part of income that is not spent.

Quiz 11: Expenditure Multipliers