Question 1

The Keynesian-cross model suggests that increased saving increases the economy's output.

Accepted Answer

The Keynesian-cross model suggests that increased saving actually decreases the economy's output because it reduces overall spending in the economy.

Question 2

A change in taxes of a given amount affects an individual's consumption spending by less than that amount,because the marginal propensity to consume is less than 1.

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of a change in income that is spent on consumption. Since the MPC is less than 1 (usually between 0 and 1), a change in taxes of a given amount will only cause a smaller change in consumption spending. For example, if the MPC is 0.7, a $100 decrease in taxes would only increase consumption spending by $70 (0.7 x $100). Therefore, the statement is true.

Question 3

The expenditure multiplier only considers the impact of consumption changes on aggregate expenditures.

Accepted Answer

The expenditure multiplier is based on the idea that changes in consumption levels lead to changes in aggregate expenditures, which in turn lead to changes in national income levels. It does not take into account changes in other components of aggregate demand, such as investment, government spending, or net exports.

Question 4

When all the factors of aggregate expenditure are influenced by income,the multiplier is no longer solely a function of the marginal propensity of consumption.

Accepted Answer

When all factors of aggregate expenditure (including investment, government spending, and net exports) are influenced by income, the multiplier becomes a function of not just the marginal propensity to consume, but also the marginal propensities to invest, spend on government goods/services, and import. This means that the multiplier effect is no longer solely determined by the marginal propensity to consume.

Question 5

Keynes believed that the economy could stay in period of unemployment for a long time period without self-correcting.

Accepted Answer

Keynes believed that the economy could remain in a state of unemployment for extended periods of time without self-correcting, as he argued that markets do not always efficiently allocate resources and that government intervention was necessary to stimulate demand and boost employment.

Question 6

If consumption spending is the only variable of aggregate expenditure dependent on income,the multiplier is MPC/(1 - MPC).

Accepted Answer

The correct formula for the multiplier when only consumption spending depends on income is 1/(1 - MPC), not MPC/(1 - MPC).

Question 7

The marginal propensity to consume is a measure of the additional consumption that results from a one-dollar increase in disposable income.

Accepted Answer

This is correct. The marginal propensity to consume (MPC) is the fraction of each additional dollar of disposable income that is spent on consumption. It measures the increase in consumption resulting from a small increase in disposable income.

Question 8

Autonomous determinants of consumption expenditures are dependent on the level of current disposable income.

Accepted Answer

Autonomous determinants of consumption expenditures are independent of current disposable income. They include factors such as consumer preferences, expectations, wealth, and interest rates.

Question 9

When the Keynesian-cross model is in equilibrium,income equals output and aggregate expenditure equals output.

Accepted Answer

In the Keynesian-cross model, equilibrium occurs when aggregate expenditure (AE) equals output (Y), which in turn equals income (Y). Therefore, income equals output and aggregate expenditure equals output in equilibrium.

Question 10

A given change in either someone's income or net taxes would have a greater effect on their consumption spending the greater their MPC.

Accepted Answer

MPC (marginal propensity to consume) is the increase in consumer spending resulting from a given increase in income or reduction in taxes. The greater the MPC, the more likely individuals are to spend a larger portion of any additional income or tax savings, thus leading to a greater effect on consumption spending.

Question 11

Unplanned inventory decreases prompt firms to cut back on production until equilibrium output is restored.

Accepted Answer

Unplanned inventory decreases typically prompt firms to increase production to replenish inventory levels and meet higher-than-expected demand, aiming to restore equilibrium.

Question 12

Consumption expenditure tends to increase when consumers have higher levels of debt.

Accepted Answer

Higher levels of debt typically lead to decreased consumption expenditure as consumers allocate more of their income to debt repayment, leaving less disposable income for spending on goods and services.

Question 13

If the price level is fixed,then changes in nominal income will be equivalent to changes in real income.

Accepted Answer

If the price level is fixed, changes in nominal income (income measured in current dollars) will be the same as changes in real income (income adjusted for inflation). This is because a fixed price level means that the purchasing power of each dollar remains constant.

Question 14

The value of the expenditure multiplier depends on the marginal propensity to consume.

Accepted Answer

The expenditure multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. This means that the value of the expenditure multiplier is directly dependent on the MPC. Therefore, the statement is true.

Question 15

The expenditure multiplier applies only to changes in government spending.

Accepted Answer

The expenditure multiplier applies to changes in aggregate spending, which includes changes in government spending, investment, and consumption.

Question 16

A change in aggregate expenditures for reasons other than the price level will shift the aggregate demand curve.

Accepted Answer

A change in aggregate expenditures, such as changes in consumer spending, investment spending, government spending, or net exports, will shift the aggregate demand curve. The price level remains constant in this case.

Question 17

An increase in household debt will lead to an increase in consumption expenditures.

Accepted Answer

An increase in household debt may initially boost consumption expenditures, but over time, the need to service this debt (pay interest and principal) can lead to a decrease in disposable income, potentially reducing consumption expenditures as households prioritize debt repayment over new spending.

Question 18

The concept of cost-push inflation cannot be explained by the aggregate expenditure model.

Accepted Answer

The aggregate expenditure model focuses on the relationship between aggregate expenditure and output or GDP. It does not directly address factors that may affect the cost of production, such as changes in wages or the price of raw materials, which are the primary drivers of cost-push inflation. Therefore, the concept of cost-push inflation cannot be captured by the aggregate expenditure model.

Question 19

The Keynesian-cross model implies that changes in aggregate supply cause fluctuations in real GDP.

Accepted Answer

The Keynesian-cross model suggests that changes in aggregate demand, rather than aggregate supply, cause fluctuations in real GDP.

Question 20

The marginal propensity to consume plus the marginal propensity to save must always equal 1.

Accepted Answer

This is one of the basic principles of Keynesian economics known as the consumption function. The marginal propensity to consume (MPC) is the proportion of an additional dollar of income that is spent, while the marginal propensity to save (MPS) is the proportion of an additional dollar of income that is saved. Since all income must be either consumed or saved, the MPC + MPS must always equal 1.

Quiz 23: The Aggregate Expenditure Model