Question 1

How accurately does the multiplier model incorporate small shocks to the economy? What about large shocks?

Accepted Answer

The multiplier model tends to overestimate the effects of small shocks to the economy and underestimate the effects of large shocks to the economy.

Question 2

Suppose consumers decide to spend less of every dollar of income earned than previously spent.What would happen to the AE curve? Explain.

Accepted Answer

The AE curve would get flatter.The amount of every dollar of income spent is the mpe,which is the slope of the AE curve.If the slope goes down,the curve gets flatter.

Question 3

What is meant by the term induced expenditures? Provide an example.

Accepted Answer

Induced expenditures refer to expenditures that are a function of income.For example,a person may spend,say,$4,000 per year on basic necessities of life,regardless of their income.But people who have higher incomes will eat better (and more expensive)food,live in nicer (and more expensive)homes,and spend more money on entertainment,luxury items,etc.than those who are just struggling to get by.As people's incomes rise,they tend to spend some portion of the additional income (the mpc),and in that sense,these expenditures are induced by rises in income.

Question 4

How does the multiplier-accelerator model work?

Accepted Answer

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Question 5

How is the level of income determined graphically in the multiplier model?

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Question 6

List four reasons why analyzing the economy is not as precise as the multiplier model makes it appear.

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Question 7

Assume that the marginal propensity to expend is 0.75 and therefore the multiplier is 4.According to the multiplier model,an increase in autonomous exports of 100 would raise the equilibrium level of income by 400.Explain how the multiplier process amplifies the initial shift in autonomous expenditures.

Accepted Answer

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Question 8

In the multiplier model all expenditures are classified as one of two types.Explain and give an example of each type of expenditure.

Accepted Answer

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Question 9

What is the difference between viewing the multiplier model as a mechanistic model versus viewing it as an interpretive model?

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Question 10

Explain how you can use planned aggregate expenditures and aggregate production to determine the level of income at which the economy will be in equilibrium.

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Question 11

Write the formula for the multiplier.What happens to the multiplier when the mpe gets larger?

Accepted Answer

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Question 12

Describe the basic difference between the AS/AD model and the multiplier model.

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Question 13

Suppose the government increases autonomous taxes (taxes that do not depend on income).What would happen to the AE curve? Explain.

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Question 14

Assume that the economy is initially at an income level of $1,000 and the potential income level is $1,200.How can government fiscal policy be used to get the economy out of this recession? Why might this policy not work in real life?

Accepted Answer

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Question 15

Analyzing the economy is not as precise as the multiplier model makes it appear,for the following reasons: 1)Fluctuations can sometimes be greater than the model suggests,2)The multiplier model is not a complete model of the economy,3)Shifts are not as great as intuition suggests.4)The price level will often change in response to shifts in demand.5)People's forward-looking expectations make the adjustment process much more complicated.6)Shifts in expenditures might reflect desired shifts in supply and demand,and,7)Expenditures depend on much more than current income.Discuss three of these reasons.

Accepted Answer

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Question 16

What shifts the aggregate expenditures function? What changes its slope?

Accepted Answer

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Question 17

Demonstrate graphically and explain the AP curve in the multiplier model.

Accepted Answer

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Question 18

Use the multiplier equation to determine equilibrium income.Give a numeric example.

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Question 19

What is the real business cycle theory of the economy?

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Question 20

What is the marginal propensity to expend? How does it relate to the AE curve?

Accepted Answer

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Quiz 11: The Multiplier Model