Question 1

Income taxes reduce the size of the multiplier.

Accepted Answer

Income taxes reduce the amount of disposable income that households have to spend, which reduces consumption and ultimately leads to a smaller multiplier effect.

Question 2

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

Accepted Answer

This is because the formula for calculating the change in equilibrium expenditure due to a change in autonomous expenditure is: change in equilibrium expenditure = multiplier x change in autonomous expenditure. Given that the multiplier is 3 and the increase in autonomous expenditure is $750,000, we can calculate the change in equilibrium expenditure as follows:

change in equilibrium expenditure = 3 x 750,000 = $2.25 million.

Question 3

The short-run impact changes in autonomous spending have on real GDP and the price level depends on aggregate supply.

Accepted Answer

Changes in autonomous spending can shift the aggregate demand curve, which can then intersect with the aggregate supply curve at different points. Depending on the position of the aggregate supply curve, the short-run impact on real GDP and the price level will vary. For example, if the aggregate supply curve is horizontal (i.e. there is excess capacity in the economy), an increase in autonomous spending will primarily lead to an increase in real GDP, with little impact on prices. However, if the aggregate supply curve is upward sloping (i.e. the economy is nearing full capacity), an increase in autonomous spending may lead to both higher prices and higher GDP.

Question 4

In the economy of St.Maynard Island,autonomous consumption expenditure is $185 million,and the marginal propensity to consume is 0.75.Investment is $150 million,government expenditure is $100 million,and net taxes are $80 million.Investment,government expenditure,and taxes are constant-they do not vary with income.The island does not trade with the rest of the world.
a) Draw the aggregate expenditure curve.
b) What is the island's autonomous aggregate expenditure?
c) What is the size of the multiplier in St.Maynard Island's economy?
d) What is the island's aggregate planned expenditure and what is happening to inventories when real GDP is $1,100 million?
e) What is the economy's equilibrium aggregate expenditure?

Accepted Answer

The answer of In the economy of St.Maynard Island,autonomous consumption...

Question 5

Actual aggregate expenditure does not always equal real GDP.

Accepted Answer

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

Question 6

If there are no income taxes or imports,the multiplier equals 1/(1 - marginal propensity to consume).

Accepted Answer

This is the formula for the simple spending multiplier in an economy with no income taxes or imports.

Question 7

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

Accepted Answer

In the short run, the multiplier is typically greater than 1. This is because when there is an initial increase in spending or investment, it leads to an increase in income and consumption, which in turn leads to more spending and investment, creating a multiplier effect. However, in the long run, the multiplier may decrease due to factors such as inflation and interest rates.

Question 8

A fall in the price level shifts the aggregate expenditure curve upward and increases the quantity of real GDP demanded.

Accepted Answer

A fall in the price level leads to a decrease in the cost of production, which increases the level of consumption, investment, and net exports. This causes an upward shift in the aggregate expenditure curve and an increase in the quantity of real GDP demanded.

Question 9

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 10

Imports and income taxes make the multiplier larger than it would otherwise be.

Accepted Answer

Imports and income taxes actually reduce the size of the multiplier because they cause leakages from the circular flow of income, meaning that not all income will be spent on domestically produced goods and services.

Question 11

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

Accepted Answer

According to the investment multiplier effect, a change in investment leads to a multiplied impact on real GDP. This is because investment creates a chain reaction throughout the economy, as increased investment leads to increased income, which in turn leads to increased consumption and further economic activity. If the price level is constant, this multiplier effect is even stronger as it means that there is no inflationary pressure on prices, so the impact on real GDP is even greater.

Question 12

In the economy of Keynesian Island,autonomous consumption expenditure is $50 million,and the marginal propensity to consume is 0.8.Investment is $160 million,government expenditure is $190 million,and net taxes are $250 million.Investment,government purchases,and taxes are constant-they do not vary with income.The island does not trade with the rest of the world.
a) Draw the aggregate expenditure curve.
b) What is equilibrium real GDP for Keynesian Island?
c) What is the size of the multiplier in Keynesian Island's economy?
d) If the government increases its purchases by $200 million,what will be the change in the economy's equilibrium real GDP?

Accepted Answer

The answer of In the economy of Keynesian Island,autonomous consumption...

Question 13

In the country of Midland,autonomous consumption expenditure is $60 million,and the marginal propensity to consume is 0.6.Investment is $110 million,government expenditure is $70 million,and there are no income taxes.Investment and government expenditure are constant-they do not vary with income.The nation does not trade with the rest of the world.
a) Draw the aggregate expenditure curve.
b) What is the autonomous aggregate expenditure?
c) What is the size of the multiplier in Midland's economy?
d) What is aggregate planned expenditure and what is happening to inventories when real GDP is $800 million?
e) What is the economy's equilibrium aggregate expenditure?

Accepted Answer

The answer of In the country of Midland,autonomous consumption expenditure...

Question 14

In the short run,an upward shift in the aggregate expenditure curve leads to a leftward shift in the short-run aggregate supply curve.

Accepted Answer

An upward shift in the aggregate expenditure curve leads to an increase in demand, which typically results in a rightward shift in the aggregate demand curve, not a shift in the short-run aggregate supply curve.

Quiz 11: Expenditure Multipliers