Question 1

Consider the simplest macro model with a constant price level and demand- determined output. If national income is less than its equilibrium level, it is likely that firms' inventories are _ , and so national income tends to .

Accepted Answer

If national income is less than its equilibrium level, firms' inventories are being depleted because demand exceeds supply, leading to an increase in production and thus a rise in national income.

Question 2

Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause _ in desired consumption and in desired investment.

Accepted Answer

An exogenous increase in the real interest rate reduces the level of consumption and investment in the economy due to the higher cost of borrowing. As a result, both desired consumption and desired investment decline, causing a decrease in overall aggregate demand. Therefore, Choice D, which predicts a decrease in both desired consumption and investment, is the correct answer.

Question 3

Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the consumption function is C = (2/3)Y, then the simple multiplier is

Accepted Answer

The simple multiplier in a closed economy with no government and a constant price level is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given C = (2/3)Y, the MPC is 2/3. Therefore, the multiplier is 1/(1-2/3) = 3.

Question 4

The marginal propensity to save refers to the

Accepted Answer

The marginal propensity to save (MPS) refers to the additional saving that occurs out of an additional dollar of income, therefore, option B is the correct answer. Option A refers to the average propensity to save, option C is not related to the concept of marginal propensity to save, option D refers to the marginal propensity to invest, and option E is the change in saving divided by total income, which is not the same as the MPS.

Question 5

Consider a simple macro model with a constant price level and demand- determined output. Using this 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

Accepted Answer

The simple multiplier is used in macroeconomic models to estimate the total effect of a given change in autonomous expenditure (such as investment) on equilibrium national income. It is calculated as 1/(1-MPC) or 1/MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. Therefore, the change in desired investment should be multiplied by the simple multiplier to estimate the total effect on equilibrium national income.

Question 6

For firms or individual households, desired expenditure is

Accepted Answer

Desired expenditure refers to what individuals or firms plan on spending, given the resources at their command. It is not always greater than planned expenditure or actual expenditure and is a relevant concept, despite human wants being unlimited.

Question 7

If the consumption function coincides with the 45- degree line, then we know that

Accepted Answer

When the consumption function coincides with the 45-degree line, it means that all disposable income is consumed, leaving no room for saving, hence desired saving is zero at all levels of disposable income.

Question 8

Suppose there is an increase in the marginal propensity to spend out of national income. The result will be

Accepted Answer

The answer of Suppose there is an increase in the...

Question 9

If the marginal propensity to consume (MPC)is equal to 0.9, an increase in household income causes desired consumption expenditure to

Accepted Answer

The marginal propensity to consume (MPC) of 0.9 means that for every additional dollar of income, consumption increases by 90 cents. Therefore, consumption rises by less than the full increase in income.

Question 10

A decrease in the marginal propensity to spend out of national income will cause

Accepted Answer

A decrease in the marginal propensity to spend means that for each additional dollar of income, people are saving more and spending less. This will cause the slope of the AE curve to decrease, as the increase in income leads to a smaller increase in consumption. This rotation of the AE curve downward reflects the decreased spending and increased saving.

Question 11

The aggregate consumption function

Accepted Answer

The aggregate consumption function describes the relationship between desired consumption expenditure and the factors that determine it, like national income. It is a key component in macroeconomics, as consumption is a significant part of aggregate expenditure. Options A, C, D, and E are incorrect because they do not accurately describe the aggregate consumption function.

Question 12

An increase in the marginal propensity to spend out of national income will cause

Accepted Answer

An increase in the marginal propensity to spend out of national income increases the slope of the Aggregate Expenditure (AE) curve, as it indicates a higher change in spending for each additional unit of income.

Question 13

Suppose aggregate output is demand- determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to

Accepted Answer

The marginal propensity to spend (MPS) can be calculated using the multiplier effect formula: Multiplier = 1/(1-MPS). Given that a $20 million decrease in investment leads to a $50 million decrease in income, the multiplier is 50/20 = 2.5. Solving 2.5 = 1/(1-MPS) gives MPS = 0.6.

Question 14

In Canada, as in many other countries, the largest component of domestic investment expenditure is

Accepted Answer

Plant and equipment represent the largest component of domestic investment expenditure in Canada, as they are crucial for business operations and economic growth.

Question 15

Consider a simple macro model with a constant price level and demand- determined output. In such a model, a downward shift of the saving function causes equilibrium national income to

Accepted Answer

The answer of Consider a simple macro model with a...

Question 16

In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes shift of the saving function.

Accepted Answer

According to the simple Keynesian model, an upward shift of the aggregate consumption function would lead to a decrease in savings because households are consuming more of their income and saving less. Therefore, the saving function shifts downward, and the best choice is D) an equal downward shift.

Question 17

Consider a simple macro model with a constant price level and demand- determined output. If the marginal propensity to spend in such a model is 0.8, the simple multiplier is

Accepted Answer