Question 1

Suppose the full employment level of income is $1,200 billion, and the present level of income is $1,000 billion.Which of the following describes autonomous expenditure under these circumstances?

Accepted Answer

Autonomous expenditure refers to the sum of all consumption, investment, and government purchases that are not influenced by changes in income levels. In this scenario, the full employment level of income is higher than the present level of income, which means that there is a recessionary gap. Therefore, an increase in autonomous expenditure is needed to reach a full employment equilibrium. Since choice B states that autonomous expenditure is too low for a full employment equilibrium, it is the correct answer.

Question 2

Other things constant, how would a smaller marginal propensity to save affect the marginal propensity to consume?

Accepted Answer

A smaller marginal propensity to save means that individuals are less likely to save and more likely to spend, which would increase the marginal propensity to consume. Therefore, choice B is the correct answer.

Question 3

What is the term for that fraction of a change in disposable income that is consumed?

Accepted Answer

The term for that fraction of a change in disposable income that is consumed is the marginal propensity to consume (MPC). MPC indicates the proportion of additional income that a consumer spends rather than saves. It is important in determining the impact of fiscal policy on the economy.

Question 4

The many job losses that occurred soon after the September 11, 2001 attacks in the United States could be viewed as just part of the first round of reduced aggregate expenditure.When did the second round occur?

Accepted Answer

The second round of reduced aggregate expenditure occurred when people who lost jobs or feared they would lose their jobs started spending less, leading to further job losses and economic downturn.

Question 5

Suppose households save $30 billion more at each level of income, and the MPC = 0.9.How will the aggregate expenditure line be affected?

Accepted Answer

The answer of Suppose households save $30 billion more at...

Question 6

Which of the following best describes the simple spending multiplier?

Accepted Answer

The simple spending multiplier refers to the idea that an initial increase in spending will lead to a larger overall increase in economic activity, much like the ripples that spread out from a stone thrown in a pond. Option A is a common phrase meaning it is better to have something for certain now than to wait for something else that may not be guaranteed. Option B refers to the fallacy that two wrong actions can somehow cancel each other out and produce a right result. Option D refers to the idea that too much of a good thing can have negative consequences.

Question 7

Other things constant, how would a smaller marginal propensity to save affect the multiplier?

Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. A smaller marginal propensity to save means a larger marginal propensity to consume, which would result in a larger value for the multiplier. Therefore, option A is correct.

Question 8

What is the definition of the simple multiplier?

Accepted Answer

The simple multiplier is defined as 1.0 divided by the marginal propensity to save (MPS), reflecting the relationship between an initial change in spending and the total change in economic output that it generates.

Question 9

If the MPS is 0.25, what is the simple multiplier?

Accepted Answer

The simple multiplier can be calculated using the formula 1/(1 - MPS), where MPS is the marginal propensity to save. Given MPS = 0.25, the multiplier = 1/(1 - 0.25) = 1/0.75 = 4.

Question 10

-Refer to the graph in the exhibit.Assume the economy is in equilibrium with real GDP of $5 trillion.Suppose aggregate expenditure increases by $1 trillion.How would the economy's equilibrium real GDP most likely be affected?

Accepted Answer

When aggregate expenditure increases, it leads to a multiplier effect in the economy, causing the equilibrium real GDP to increase by more than the initial increase in spending. This is because one person's spending becomes another person's income, which, when spent, becomes income for others, and so on, amplifying the initial increase in expenditure.

Question 11

Suppose the economy is currently at equilibrium at $1 trillion, and the MPC is 0.6.And suppose there is a $100 billion decrease in government purchases of goods and services.Which of the following is the new equilibrium?

Accepted Answer

The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.6) = 2.5. A $100 billion decrease in government purchases would decrease the equilibrium by 2.5 times that amount, which is $250 billion. Therefore, the new equilibrium would be $1 trillion - $250 billion = $750 billion.

Question 12

Other things constant, how would a smaller marginal propensity to save affect the consumption function?

Accepted Answer

The marginal propensity to save (MPS) is inversely related to the marginal propensity to consume (MPC). A smaller MPS means a larger MPC, which implies that consumers are likely to spend a larger portion of any additional income, making the consumption function steeper.

Question 13

Suppose the marginal propensity to consume equals 0.9.What is the multiplier?

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 0.9, the multiplier is 1/(1-0.9) = 10.

Question 14

Suppose autonomous investment expenditures decline because of higher interest rates.How will this affect aggregate demand?

Accepted Answer

The answer of Suppose autonomous investment expenditures decline because of...

Question 15

Suppose the spending multiplier is greater than 1.0.Which of the following will be the result of a $200 billion increase in autonomous investment?

Accepted Answer

If the spending multiplier is greater than 1.0, then an increase in autonomous investment will lead to a larger increase in equilibrium real GDP demanded. Therefore, the $200 billion increase in autonomous investment will lead to an increase in equilibrium real GDP demanded by more than $200 billion. Option A is incorrect because the spending multiplier being greater than 1.0 implies that a change in autonomous investment will be multiplied more than proportionally by the resulting changes in consumption, investment, and aggreate demand. Option B is also incorrect because an increase in autonomous investment will increase equilibrium investment, not decrease it. Option D is incorrect because the spending multiplier being greater than 1.0 implies that the increase in equilibrium real GDP demanded will be greater than the increase in autonomous investment.

Question 16

Suppose Herbert spends two-thirds of any extra income he receives.And suppose that Herbert engages in new autonomous spending of $10, which causes equilibrium to increase.What is the amount of the equilibrium increase?

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 2/3, so the multiplier is 1/(1-2/3) = 3. The increase in equilibrium is the multiplier times the autonomous spending: 3 * $10 = $30.

Question 17

On the aggregate expenditure graph, if autonomous saving decreases by $15 billion.What will be the effect on the aggregate expenditure line?

Accepted Answer

A decrease in autonomous saving implies an increase in autonomous consumption. This increase in consumption shifts the aggregate expenditure line upward by the amount of the decrease in saving, assuming the marginal propensity to consume is less than 1.

Question 18

Suppose households save $40 billion less at each level of income, and the MPC = 0.8.How will the aggregate expenditure line will be affected?

Accepted Answer

The aggregate expenditure line will shift downward by $40 billion because households are saving $40 billion less at each level of income. This means that there will be more money available for spending, which will increase aggregate expenditure.

Question 19

Suppose investment increases by $100 and, as a result, GDP ultimately increases by $200.What does the multiplier equal?

Accepted Answer

The multiplier represents the change in GDP that results from a change in investment. In this case, the multiplier is equal to the total change in GDP divided by the initial change in investment:

Multiplier = $200/$100 = 2

Therefore, the correct answer is B.

Question 20

Which of the following best describes the multiplier?

Accepted Answer

The multiplier concept in economics refers to the idea that an initial change in spending (planned aggregate spending) will lead to a larger change in the overall equilibrium output demanded. This is because the initial spending creates income for others, who then spend a portion of that income, creating further income for others, and so on.

Quiz 10: Aggregate Expenditure and Aggregate Demand