Deck 36: Appendix: Aggregate Expenditure and the Multiplier

Question 1

The Great Depression changed economic thought by:

A)regulating the foreign exchange market, the bond market, and the government.
B)eliminating the stock market, the labor market, and the bond market.
C)creating banks, the goods market, and the labor market.
D)challenging the notion of a self-correcting economy.

Answer 1

challenging the notion of a self-correcting economy.

Question 2

Aggregate expenditure is the sum of:

A)consumption, planned investment, imports, and taxes.
B)consumption, exports, and planned investment.
C)planned Investment, government expenditure, exports, and imports.
D)consumption, planned investment, government expenditure, and net exports.

Answer 2

consumption, planned investment, government expenditure, and net exports.

Question 3

Consumption refers to the:

A)purchases of goods and services by households.
B)taxes collected by the government.
C)sum of all purchases of goods and services in the economy.
D)total purchases of goods and services by consumers and the government.

Answer 3

purchases of goods and services by households.

Question 4

Planned investment refers to the:

A)total investment.
B)intentional expenditures by companies on capital goods such as factories, machinery, and software.
C)total purchases of inputs by companies.
D)spending on capital imports by an economy.

Question 5

The difference between total investment and planned investment is that:

A)planned investment is total investment minus taxes.
B)planned investment is always larger than total investment.
C)total investment includes changes in inventories.
D)planned investment includes changes in inventories.

Question 6

The relationship between consumption and income is:

A)sometimes positive and sometimes negative.
B)positive.
C)negative.
D)zero.

Question 7

The slope of the consumption function is:

A)always 1.
B)positive.
C)negative.
D)zero.

Question 8

Which of the following figures shows the correct typical shape of the consumption function?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 9

The consumption function is:

A)the relationship between aggregate expenditure and real GDP.
B)a plot of consumption relative to income taxes in the economy.
C)always negative in slope.
D)a plot of consumption at each level of real GDP.

Question 10

A movement along the same aggregate expenditure line is caused by a change in:

A)prices.
B)income.
C)price expectations.
D)interest rates.

Question 11

Consumption is $3,500 when income is $4,000, and consumption rises to $5,000 when income is $6,000. What is the marginal propensity to consume?

A)0.75
B)0.5
C)1.33
D)0.25

Question 12

Consumption is $3,600 when income is $4,000, and consumption rises to $4,400 when income is $5,000. What is the marginal propensity to consume?

A)0.9
B)0.2
C)0.8
D)0.5

Question 13

Consumption is $5,900 when income is $6,000, and consumption rises to $6,800 when income is $7,000. What is the marginal propensity to consume?

A)0.9
B)0.1
C)1.11
D)0.2

Question 14

The marginal propensity to consume (MPC) is the:

A)tendency that consumers have to spend more than they save.
B)total consumption as a percentage of real GDP in a country.
C)fraction of each dollar of extra income that households save.
D)fraction of each dollar of extra income that households spend on consumption.

Question 15

The slope of the aggregate expenditure line is the:

A)marginal propensity to consume (MPC).
B)fraction of each dollar of extra income that households save.
C)change in income divided by the change in consumption.
D)total consumption in the country as a percentage of real GDP.

Question 16

Consider the following data. What is the equilibrium GDP in this economy (in billions of dollars)? $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Aggregate } \\\text { Expenditure } \\\text { (billions of \$) }\end{array} & \begin{array} { c } \text { Real GDP } \\\text { (billions of \$) }\end{array} \\\hline 35 & 20 \\\hline 50 & 40 \\\hline 65 & 60 \\\hline 80 & 80 \\\hline 95 & 100 \\\hline\end{array}$$

A)95
B)90
C)80
D)40

Question 17

Consider the following data. What is the equilibrium GDP (in trillions of dollars)? $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Aggregate } \\\text { Expenditure } \\\text { (trillions of \$) }\end{array} & \begin{array} { c } \text { Real GDP } \\\text { (trillions of \$) }\end{array} \\\hline 5.9 & 5 \\\hline 6.6 & 6 \\\hline 7.3 & 7 \\\hline 8.0 & 8 \\\hline 8.7 & 9 \\\hline\end{array}$$

A)7.3
B)8
C)8.7
D)7

Question 18

Consider the following data. What is the marginal propensity to consume? $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Aggregate } \\\text { Expenditure } \\\text { (trillions of \$) }\end{array} & \begin{array} { c } \text { Real GDP } \\\text { (trillions of \$) }\end{array} \\\hline 5.9 & 5 \\\hline 6.6 & 6 \\\hline 7.3 & 7 \\\hline 8.0 & 8 \\\hline 8.7 & 9 \\\hline\end{array}$$

A)0.8
B)0.7
C)0.9
D)0.3

Question 19

Consider the following data. What is the equilibrium GDP in this economy (in millions of $)? $$\begin{array} { | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Consumption } \\\text { (millions of } \\\text { S) }\end{array} & \begin{array} { c } \text { Investment } \\\text { (millions of } \\\text { \$) }\end{array} & \begin{array} { c } \text { Government } \\\text { Expenditure } \\\text { (millions of }\\\text { \$) }\end{array} & \begin{array} { c } \text { Exports } \\\text { (millions of }\\\text { \$) }\end{array} & \begin{array} { c } \text { Imports } \\\text { (millions of } \\\text { \$) }\end{array} & \begin{array} { c } \text { Real } \\\text { GDP } \\\text { (millions of } \\\text { \$) }\end{array} \\\hline 1,000 & 525 & 575 & 300 & 300 & 1,300 \\\hline 1,400 & 525 & 575 & 300 & 300 & 1,900 \\\hline 1,800 & 525 & 575 & 300 & 300 & 2,500 \\\hline 2,200 & 525 & 575 & 300 & 300 & 3,100 \\\hline 2,600 & 525 & 575 & 300 & 300 & 3,700 \\\hline 3,000 & 525 & 575 & 300 & 300 & 4,300 \\\hline\end{array}$$

A)3,700
B)3,100
C)2,500
D)4,300

Question 20

Consider the following data. What is the marginal propensity to consume in this economy? $$\begin{array} { | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Consumption } \\\text { (millions of } \\\text { S) }\end{array} & \begin{array} { c } \text { Investment } \\\text { (millions of } \\\text { \$) }\end{array} & \begin{array} { c } \text { Government } \\\text { Expenditure } \\\text { (millions of }\\\text { \$) }\end{array} & \begin{array} { c } \text { Exports } \\\text { (millions of }\\\text { \$) }\end{array} & \begin{array} { c } \text { Imports } \\\text { (millions of } \\\text { \$) }\end{array} & \begin{array} { c } \text { Real } \\\text { GDP } \\\text { (millions of } \\\text { \$) }\end{array} \\\hline 1,000 & 525 & 575 & 300 & 300 & 1,300 \\\hline 1,400 & 525 & 575 & 300 & 300 & 1,900 \\\hline 1,800 & 525 & 575 & 300 & 300 & 2,500 \\\hline 2,200 & 525 & 575 & 300 & 300 & 3,100 \\\hline 2,600 & 525 & 575 & 300 & 300 & 3,700 \\\hline 3,000 & 525 & 575 & 300 & 300 & 4,300 \\\hline\end{array}$$

A)0.87
B)1.5
C)0.5
D)0.67

Question 21

Consider the following data. What is the equilibrium GDP in this economy (in millions of dollars)? $$\begin{array} { | c | c | c | c | c | } \hline \begin{array} { c } \text { Real GDP } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Consumptio } \\\mathbf { n } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Investment } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Government } \\\text { Expenditure } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Net Exports } \\\text { (millions of } \\\text { dollars) }\end{array} \\\hline 0 & 400 & 525 & 550 & - 75 \\\hline 600 & 800 & 525 & 550 & - 75 \\\hline 1,200 & 1,200 & 525 & 550 & - 75 \\\hline 1,800 & 1,600 & 525 & 550 & - 75 \\\hline 2,400 & 2,000 & 525 & 550 & - 75 \\\hline 3,000 & 2,400 & 525 & 550 & - 75 \\\hline 3,600 & 2,800 & 525 & 550 & - 75 \\\hline 4,200 & 3,200 & 525 & 550 & - 75 \\\hline 4,800 & 3,600 & 525 & 550 & - 75 \\\hline\end{array}$$

A)2,400
B)3,600
C)4,200
D)4,600

Question 22

Consider the following data. Based on this data, over what range of real GDP (in millions of dollars) will businesses need to sell inventory in order to meet current demand? $$\begin{array} { | c | c | c | c | c | } \hline \begin{array} { c } \text { Real GDP } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Consumptio } \\\mathbf { n } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Investment } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Government } \\\text { Expenditure } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Net Exports } \\\text { (millions of } \\\text { dollars) }\end{array} \\\hline 0 & 400 & 525 & 550 & - 75 \\\hline 600 & 800 & 525 & 550 & - 75 \\\hline 1,200 & 1,200 & 525 & 550 & - 75 \\\hline 1,800 & 1,600 & 525 & 550 & - 75 \\\hline 2,400 & 2,000 & 525 & 550 & - 75 \\\hline 3,000 & 2,400 & 525 & 550 & - 75 \\\hline 3,600 & 2,800 & 525 & 550 & - 75 \\\hline 4,200 & 3,200 & 525 & 550 & - 75 \\\hline 4,800 & 3,600 & 525 & 550 & - 75 \\\hline\end{array}$$

A)when real GDP is less than 3,600
B)when real GDP is less than 4,200
C)when real GDP is greater than 4,800
D)when real GDP is greater than 4,200

Question 23

Consider the following data. Based on this data, over what range of real GDP (in millions of dollars) will businesses build up inventory? $$\begin{array} { | c | c | c | c | c | } \hline \begin{array} { c } \text { Real GDP } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Consumptio } \\\mathbf { n } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Investment } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Government } \\\text { Expenditure } \\\text { (millions of } \\\text { dollars) }\end{array} & \begin{array} { c } \text { Net Exports } \\\text { (millions of } \\\text { dollars) }\end{array} \\\hline 0 & 400 & 525 & 550 & - 75 \\\hline 600 & 800 & 525 & 550 & - 75 \\\hline 1,200 & 1,200 & 525 & 550 & - 75 \\\hline 1,800 & 1,600 & 525 & 550 & - 75 \\\hline 2,400 & 2,000 & 525 & 550 & - 75 \\\hline 3,000 & 2,400 & 525 & 550 & - 75 \\\hline 3,600 & 2,800 & 525 & 550 & - 75 \\\hline 4,200 & 3,200 & 525 & 550 & - 75 \\\hline 4,800 & 3,600 & 525 & 550 & - 75 \\\hline\end{array}$$

A)when real GDP is less than 3,600
B)when real GDP is less than 4,200
C)when real GDP is greater than 4,800
D)when real GDP is greater than 4,200

Question 24

Consider the following data. Based on this data, over what range of real GDP will businesses need to sell inventory in order to meet current demand? $$\begin{array} { | c | c | c | c | c | } \hline \text { Real GDP } & \text { Consumption } & \text { Investment } & \begin{array} { c } \text { Government } \\\text { Expenditure }\end{array} & \text { Net Exports } \\\hline 0 & 800 & 1,050 & 1,100 & - 150 \\\hline 1,200 & 1,600 & 1,050 & 1,100 & - 150 \\\hline 2,400 & 2,400 & 1,050 & 1,100 & - 150 \\\hline 3,600 & 3,200 & 1,050 & 1,100 & - 150 \\\hline 4,800 & 4,000 & 1,050 & 1,100 & - 150 \\\hline 6,000 & 4,800 & 1,050 & 1,100 & - 150 \\\hline 7,200 & 5,600 & 1,050 & 1,100 & - 150 \\\hline 8,400 & 6,400 & 1,050 & 1,100 & - 150 \\\hline 9,600 & 7,200 & 1,050 & 1,100 & - 150 \\\hline\end{array}$$

A)when real GDP is equal to potential GDP
B)when real GDP is equal to 9,600
C)when real GDP is greater than 8,400
D)when real GDP is less than 8,400

Question 25

Consider the following data. Based on this data, businesses will build up inventory when real GDP is: $$\begin{array} { | c | c | c | c | c | } \hline \text { Real GDP } & \text { Consumption } & \text { Investment } & \begin{array} { c } \text { Government } \\\text { Expenditure }\end{array} & \text { Net Exports } \\\hline 0 & 800 & 1,050 & 1,100 & - 150 \\\hline 1,200 & 1,600 & 1,050 & 1,100 & - 150 \\\hline 2,400 & 2,400 & 1,050 & 1,100 & - 150 \\\hline 3,600 & 3,200 & 1,050 & 1,100 & - 150 \\\hline 4,800 & 4,000 & 1,050 & 1,100 & - 150 \\\hline 6,000 & 4,800 & 1,050 & 1,100 & - 150 \\\hline 7,200 & 5,600 & 1,050 & 1,100 & - 150 \\\hline 8,400 & 6,400 & 1,050 & 1,100 & - 150 \\\hline 9,600 & 7,200 & 1,050 & 1,100 & - 150 \\\hline\end{array}$$

A)less than 8,400
B)equal to 9,600
C)greater than 8,400
D)greater than 7,200

Question 26

In the Keynesian cross, the 45-degree line:

A)is always lower than the aggregate expenditure function.
B)has the same slope as the aggregate expenditure function.
C)is a plot of all equilibrium GDP levels.
D)is always higher than the aggregate expenditure function.

Question 27

In the Keynesian cross, macroeconomic equilibrium occurs where:

A)real GDP is below the aggregate expenditure line.
B)potential GDP meets the 45-degree line.
C)aggregate expenditure line meets the 45-degree line.
D)aggregate expenditure line is below the 45-degree line.

Question 28

Consider the Keynesian cross shown here. At the real GDP level of $31 billion, aggregate expenditures are:

A)$37 billion.
B)$33 billion.
C)$41 billion.
D)$43 billion.

Question 29

Consider the Keynesian cross shown here. At the real GDP level of $43 billion, aggregate expenditures are:

A)$41 billion.
B)$33 billion.
C)$37 billion.
D)$43 billion.

Question 30

Consider the Keynesian cross shown here. What is the slope of the aggregate expenditure function?

A)0.9
B)0.76
C)0.75
D)0.67

Question 31

Consider the Keynesian cross shown here. The level of equilibrium GDP is:

A)$41 billion.
B)$33 billion.
C)$37 billion.
D)$43 billion.

Question 32

Consumption is $53 billion, investment is $47.8 billion, government expenditure is $35.5 billion, and the economy has a trade deficit of $19.2 billion. What is aggregate expenditure?

A)$155.5 billion
B)$120 billion
C)$117.1 billion
D)$136.3 billion

Question 33

Consumption is $60 billion, investment is $54 billion, government expenditure is $47 billion, exports are $34 billion, and imports are $41 billion. What is aggregate expenditure?

A)$195 billion
B)$154 billion
C)$161 billion
D)$168 billion

Question 34

Consumption is $60 billion, investment is $54 billion, government expenditure is $47 billion, exports are $34 billion, and imports are $41 billion. What is real GDP if the economy is at macroeconomic equilibrium?

A)$161 billion
B)$195 billion
C)$168 billion
D)$154 billion

Question 35

Consumption is $51 billion, investment is $54 billion, government expenditure is $46 billion, and the economy has a trade surplus of $8 billion. What is aggregate expenditure?

A)$159 billion
B)$151 billion
C)$143 billion
D)$150 billion

Question 36

If consumption decreases:

A)a depression occurs in the economy.
B)real GDP rises.
C)the aggregate expenditure line shifts down.
D)the aggregate expenditure line shifts up.

Question 37

If investment increases:

A)consumption also increases.
B)real GDP falls.
C)the aggregate expenditure line shifts up.
D)the aggregate expenditure line shifts down.

Question 38

If investment decreases:

A)the aggregate expenditure line shifts down.
B)real GDP is not affected.
C)government expenditure also decreases.
D)the aggregate expenditure line shifts up.

Question 39

If exports rise and imports fall:

A)equilibrium GDP falls.
B)aggregate expenditure rises.
C)aggregate expenditure falls.
D)net exports are not affected.

Question 40

Aggregate expenditure will shift upward if:

A)consumption or investment or government expenditure or net exports rise.
B)consumption or investment or government expenditure or net exports fall.
C)the government reduces its expenditure and increases its tax collection.
D)the marginal propensity to consume falls.

Question 41

A rise in the marginal propensity to consume will:
(i) lower the slope of the consumption function.
(ii) increase the slope of the consumption function.
(iii) increase the level of equilibrium GDP.
(iv) shift the aggregate expenditure function upward.

A)(i) and (ii)
B)(ii) and (iii)
C)(i) and (iv)
D)(ii) and (iv)

Question 42

A rise in the marginal propensity to consume:
(i) shifts the aggregate expenditure function downward.
(ii) implies a fall in the proportion of income people save when their incomes change.
(iii) will decrease the level of equilibrium GDP.
(iv) will increase the slope of the aggregate expenditure function.

A)(i) and (ii)
B)(ii) and (iii)
C)(i) and (iv)
D)(ii) and (iv)

Question 43

Which of the following figures shows the impact of increased consumer pessimism on the aggregate expenditure function?

A)

B)

C)

D)

Question 44

Which of the following figures shows the impact of increased tariffs on automobile imports on the aggregate expenditure function?

A)

B)

C)

D)

Question 45

Which of the following figure shows the impact of lower interest rates on investment, on the aggregate expenditure function?

A)

B)

C)

D)

Question 46

The U.S. dollar appreciates, leading to a decrease in the competitiveness of U.S. exports. Which figure shows what happens to the aggregate expenditure function?

A)

B)

C)

D)

Question 47

Which figure shows the impact of a rise in the marginal propensity to consume (MPC) on the aggregate expenditure function?

A)

B)

C)

D)

Question 48

Which figure shows the impact of a fall in the marginal propensity to consume (MPC) on the aggregate expenditure function?

A)

B)

C)

D)

Question 49

If the Federal Reserve raises interest rates:

A)consumption will not be affected, but investment will rise, and this will increase aggregate expenditure.
B)consumption and investment will increase, leading a rise in aggregate expenditure and an increase in equilibrium GDP.
C)consumption and investment will decrease, leading to a fall in aggregate expenditure and a decrease in equilibrium GDP.
D)the dollar will depreciate, and this will lead to lower imports and higher exports, and a rise in aggregate expenditure.

Question 50

If the federal government lowers government expenditure:

A)aggregate expenditure will fall, leading to a decrease in equilibrium GDP.
B)aggregate expenditure will rise, leading to a rise in equilibrium GDP.
C)consumption and investment will decrease, leading to a fall in aggregate expenditure and a decrease in equilibrium GDP.
D)the government will experience a budget surplus, which will raise aggregate expenditure.

Question 51

If the Federal Reserve lowers interest rates:

A)the dollar will appreciate, and this will lead to higher imports and lower exports and a fall in aggregate expenditure.
B)consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP.
C)consumption and investment will decrease, leading to a fall in aggregate expenditure and a decrease in equilibrium GDP.
D)banks will lower loan amounts, and this will lead to a fall in investment, and a fall in aggregate expenditure.

Question 52

If the federal government raises government expenditure:

A)aggregate expenditure will fall, leading to a decrease in equilibrium GDP.
B)consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP.
C)aggregate expenditure will rise, leading to an increase in equilibrium GDP.
D)the government will experience a budget deficit, which will lower aggregate expenditure.

Question 53

If the federal government raises taxes:

A)aggregate expenditure will fall, leading to a decrease in equilibrium GDP.
B)consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP.
C)aggregate expenditure will rise, leading to an increase in equilibrium GDP.
D)the government will experience a budget surplus, which will raise aggregate expenditure.

Question 54

If the federal government lowers taxes:

A)aggregate expenditure will fall, leading to a decrease in equilibrium GDP.
B)consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP.
C)the government will experience a budget deficit, which will lower aggregate expenditures.
D)aggregate expenditure will rise, leading to an increase in equilibrium GDP.

Question 55

If a country imports more than it exports:

A)net exports will increase, causing aggregate expenditure to rise and leading to an increase in equilibrium GDP.
B)net exports will decrease, causing aggregate expenditure to fall and leading to a decrease in equilibrium GDP.
C)the currency will appreciate, leading to a rise in aggregate expenditures.
D)aggregate expenditure will rise, leading to an increase in equilibrium GDP.

Question 56

If the federal government lowers taxes on investment by businesses:

A)aggregate expenditure will fall, leading to a decrease in equilibrium GDP.
B)consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP.
C)imports by consumers will rise and this will cause net exports to fall.
D)aggregate expenditure will rise, leading to an increase in equilibrium GDP.

Question 57

If a country exports more than it imports:

A)net exports will increase, causing aggregate expenditure to rise and leading to an increase in equilibrium GDP.
B)net exports will decrease, causing aggregate expenditure to fall and leading to a decrease in equilibrium GDP.
C)aggregate expenditure is not affected in the long run.
D)aggregate expenditure will rise, leading to an increase in equilibrium GDP.

Question 58

Which of the following scenarios shows the multiplier at work?

A)The government estimates that GDP is expected to fall in the near future, so the government decides to increase expenditure now to boost GDP.
B)You decide to save money and begin shopping around for lower priced items. You then proceed to buy only those items that are on sale.
C)The government builds a new highway, which costs $35 billion. The construction company and the workers are paid and spend some of the money on buying goods and services from grocery stores and department stores. The grocery store employees and the department store employees then are paid and purchase more goods and services.
D)You decide to work fewer hours per week, so your income falls.

Question 59

The multiplier:

A)increases unplanned inventory stocks in the economy.
B)creates additional government expenditure expenses.
C)minimizes the impact of a change in spending on GDP.
D)causes a ripple effect of an increase in spending on GDP.

Question 60

If the marginal propensity to consume is 0.5, the multiplier is:

A)1.
B)5.
C)2.
D)0.2.

Question 61

If the marginal propensity to consume is 0.75, the multiplier is:

A)0.25.
B)4.
C)3.
D)1.33.

Question 62

If the marginal propensity to consume is 0.75, how much will GDP change when the government increases spending by $25 billion?

A)$125 billion
B)$25 billion
C)$100 billion
D)$75 billion

Question 63

If the marginal propensity to consume is 0.60, how much will GDP change when the government increases spending by $45 billion?

A)$75 billion
B)$60 billion
C)$45 billion
D)$112.5 billion

Question 64

If the marginal propensity to consume is 0.8, how much will GDP change when consumption increases by $7.5 billion?

A)$37.5 billion
B)$7.5 billion
C)$15 billion
D)$6 billion

Question 65

If the marginal propensity to consume is 0.9, how much will GDP change when consumption increases by $5 billion?

A)$4.5 billion
B)$5 billion
C)$6.5 billion
D)$50 billion

Question 66

Which of the following is the fiscal policy reaction when a weaker GDP is expected?

A)If government policymakers expect weaker GDP, they proactively increase government expenditure to boost GDP.
B)If the Federal Reserve expects weaker GDP, it will proactively decrease interest rates to boost GDP.
C)If the Federal Reserve expects weaker GDP, it will proactively increase interest rates to boost GDP.
D)If government expenditure rises, then GDP will also rise.

Question 67

Which of the following is the monetary policy reaction when a weaker GDP is expected?

A)When government policymakers expect a weaker GDP, they proactively increase government expenditure to boost GDP.
B)When the Federal Reserve expects a weaker GDP, it will proactively decrease interest rates to boost GDP.
C)When the Federal Reserve expects a weaker GDP, it will proactively increase interest rates to boost GDP.
D)When government expenditure rises, then GDP will also rise.

Question 68

The difference between the multiplier effect and the fiscal policy reaction is that the multiplier effect:

A)measures the effect of a change in taxes on aggregate expenditure, whereas the fiscal policy reaction measures the change in interest rates in the economy.
B)is seen only with changes in interest rates, whereas the fiscal policy reaction is seen only with changes in government expenditure.
C)links increases in government expenditure to higher future output, whereas the fiscal policy reaction links lower future output to higher government expenditure.
D)links increases in government expenditure to higher future output, whereas the fiscal policy reaction links lower future output to lower interest rates.

Question 69

The difference between the multiplier effect and the monetary policy reaction is that the multiplier effect:

A)measures the effect of a change in taxes on aggregate expenditure, whereas the monetary policy reaction measures the change in interest rates in the economy.
B)measures the effect of a change in government expenditure on aggregate expenditure, whereas the monetary policy reaction measures the change in interest rates in the economy.
C)links increases in government expenditure to higher future output, whereas the fiscal policy reaction links lower future output to higher government expenditure.
D)links increases in government expenditure to higher future output, whereas the monetary policy reaction links lower future output to lower interest rates.

Question 70

If total demand in the economy increases while there are supply-side constraints, the economy will experience:

A)an increase in potential GDP.
B)deflation.
C)increases in government expenditure.
D)inflation.

Question 71

An increase in spending in the economy will lead to an increase in production if:

A)government expenditure also increases.
B)the economy is above potential GDP.
C)there are no supply side constraints.
D)the economy has large stocks of inventory.

Question 72

Aggregate expenditure is made up of the following four components:

A)healthcare, infrastructure spending, defense spending, and social security spending.
B)consumption, investment, government expenditure, and net exports.
C)stocks, bonds, mutual funds, and certificates of deposit.
D)consumption, investment, government expenditure, and taxation.

Question 73

Consumption is $45 billion, investment is $40 billion, government expenditure is $38 billion, exports are $20 billion, and imports are $25 billion. Aggregate expenditure is:

A)$118 billion.
B)$123 billion.
C)$128 billion.
D)$143 billion.

Question 74

This question has three parts.
(a) Consumption is $4.5 billion, investment is $3.9 billion, government expenditure is $4.2 billion, and net exports are $3 billion. What is aggregate expenditure?
(b) Consumption is $30 billion, investment is $27.9 billion, government expenditure is $23 billion, exports are $17 billion, and imports are $23.5 billion. What is aggregate expenditure?
(c) Consumption is $42 billion, investment is $39 billion, government expenditure is $36 billion, and the economy has a trade deficit of 25 billion. If the economy is experiencing macroeconomic equilibrium, what is the level of real GDP?

Question 75

Define the following concepts:
(a) marginal propensity to consume (MPC)
(b) macroeconomic equilibrium
(c) multiplier effect

Question 76

In each of the following cases, identify the impact on aggregate expenditure.
(a) The government raises taxes.
(b) A major trading partner country institutes tariffs on U.S. exports to that country.
(c) The government increases defense spending.

Question 77

Consider the following data. What is the equilibrium GDP?

Question 78

In each of the cases, use graphs of the Keynesian cross to show the impact of the change on aggregate expenditure and equilibrium GDP.
(a) The marginal propensity to consume rises.
(b) The government lowers spending.
(c) There is a fiscal policy reaction to an expectation of lower output in the future.
(d) There is a monetary policy reaction to an expectation of lower output in the future.