Question 1

What is the international trade effect?

Accepted Answer

The international trade effect refers to the impact of changes in relative prices on a country's exports and imports. When the domestic price level falls relative to the foreign price level, there is an increase in the demand for domestic goods and a decrease in the demand for foreign goods. As a result, there is a tendency for exports to rise and imports to fall, leading to an improvement in the country's trade balance. Therefore, the correct option is B.

Question 2

Suppose at each price level, autonomous aggregate expenditures fall by $80 billion. As a result, the aggregate expenditures curve shifts

Accepted Answer

A decrease in autonomous aggregate expenditures will lead to a decrease in overall aggregate demand, causing a leftward shift in the aggregate expenditures curve. This means that at each price level, the quantity demanded of goods and services will be lower, resulting in a downward shift in the aggregate demand curve. Therefore, the correct answer is A.

Question 3

An increase in wealth is likely to shift the consumption function curve upward.

Accepted Answer

An increase in wealth is likely to increase consumption expenditure, which means that for every level of disposable income, people will consume more. This results in a higher level of aggregate demand in the economy, leading to an upward shift in the consumption function curve.

Question 4

Suppose at each price level, autonomous aggregate expenditures increase by $50 billion. As a result, the aggregate expenditures curve shifts

Accepted Answer

Autonomous aggregate expenditures increasing by $50 billion at each price level would shift the entire aggregate expenditures curve upward, resulting in a rightward shift in aggregate demand. This means that at every price level, there would be a higher level of aggregate demand, shifting the equilibrium output and price level to a higher level.

Question 5

An increase in the slope of the aggregate expenditures curve leads to a decrease in the
Jvalue of the multiplier.

Accepted Answer

An increase in the slope of the aggregate expenditures curve indicates a higher marginal propensity to consume, which increases the value of the multiplier.

Question 6

If prices of the goods and services in the domestic market rise relative to those in foreign markets

Accepted Answer

When prices of goods and services in the domestic market rise relative to those in foreign markets, domestic products become relatively more expensive than foreign products. Therefore, households and firms will buy more foreign products and less domestic products, leading to a decrease in net exports.

Question 7

The aggregate demand traces

Accepted Answer

The answer of The aggregate demand traces
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Question 8

The current income theory assumes that current consumption is based on the average
Jincome people expect to receive for the remainder of their lives.

Accepted Answer

The current income theory suggests that consumption is based on current income, not the average expected income over a lifetime.

Question 9

Autonomous aggregate expenditures are those that automatically vary with real GDP,
Jwhereas induced expenditures only change in response to a change in an external factor.

Accepted Answer

Autonomous expenditures are independent of real GDP and do not vary with it, while induced expenditures change in response to changes in real GDP.

Question 10

Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is ⅔. Holding all else constant, if net exports increase by $50 billion, what happens to Jaggregate demand?

Accepted Answer

In this scenario, since net exports have increased by $50 billion, aggregate expenditure has increased by $50 billion. Since consumption has a marginal propensity to consume of ⅔, this increase in aggregate expenditure will lead to an increase in consumption of $33.33 billion (⅔*$50 billion). The remaining $16.67 billion will be spent on investment or government spending. Therefore, aggregate demand will shift right by $50 + $33.33 = $83.33 billion.

Question 11

The multiplier effect is triggered by a shift in the aggregate expenditures curve.

Accepted Answer

The multiplier effect is a result of changes in aggregate expenditures, specifically changes in autonomous spending (spending that is not influenced by changes in income or output). An increase in autonomous spending shifts the aggregate expenditures curve upward, leading to an increase in real GDP that is greater than the initial increase in spending, due to the multiplier effect.

Question 12

Personal saving is disposable personal income not spent on consumption.

Accepted Answer

Personal saving is the amount of disposable personal income (income after taxes) that is not spent on consumption.

Question 13

The marginal propensity to consume is the change in consumption divided by the change in
Jdisposable personal income.

Accepted Answer

The statement is true, as the marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in disposable personal income.

Question 14

Holding all else constant, a change in autonomous aggregate expenditures will shift in aggregate demand by an amount equal to

Accepted Answer

The multiplier effect tells us that a change in autonomous aggregate expenditures will have a magnified effect on the overall aggregate demand in the economy. Specifically, the multiplier effect suggests that the change in aggregate demand will be equal to the multiplier times the change in autonomous aggregate expenditures. This is because any initial increase in spending will lead to further rounds of spending as the income generated by that spending is re-spent and so on.

Question 15

Disposable personal income is the total income households spend on consumption.

Accepted Answer

Disposable personal income is the income households have available after taxes and other deductions have been taken out, and can be used for consumption, savings, or investment. It is not necessarily the total income spent on consumption.

Question 16

The interest rate effect suggests that

Accepted Answer

The interest rate effect suggests that changes in the price level affect the real quantity of money held by households and firms, which in turn affects the interest rate. As the price level increases, the real value of money held by households and firms decreases, leading to an increase in the demand for money and a decrease in the supply of money. This leads to an increase in the interest rate to restore equilibrium in the money market. Similarly, a decrease in the price level leads to a decrease in the interest rate.

Question 17

According to the interest-rate effect, higher prices

Accepted Answer

According to the interest-rate effect, higher prices lead to higher interest rates, which in turn reduces investment spending. This is because higher prices increase the demand for money, and as the demand for money increases, the supply of money decreases, causing interest rates to rise. Higher interest rates make borrowing more expensive, which reduces investment spending.

Question 18

If consumption is given by C = $10 billion + 0.5Y, and autonomous planned investment,
Jgovernment purchases, and net exports amount to $5 billion, then aggregate expenditures are
J$20 billion if Y = $10 billion.

Accepted Answer

We can use the equation for aggregate expenditures to check:
AE = C + I + G + NX 
AE = ($10 billion + 0.5($10 billion)) + $5 billion 
AE = $15 billion + $5 billion 
AE = $20 billion

This matches the given information. Therefore, the statement is true.

Question 19

The aggregate demand curve can be derived from the aggregate expenditures curves by

Accepted Answer

The aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded by households, businesses, and governments. It can be derived from the aggregate expenditures curves by changing the price level and observing the equilibrium real GDP associated with each price level. This is because as the price level rises, the real value of money decreases, which reduces the purchasing power of households, businesses, and governments. As a result, they demand less output at higher price levels, which is reflected in a downward sloping aggregate demand curve.

Question 20

The consumption function shows the negative relationship between consumption and
Jdisposable personal income.

Accepted Answer

The consumption function typically shows a positive relationship between consumption and disposable personal income, meaning as income increases, consumption also tends to increase.

Quiz 13: Consumption and the Aggregate Expenditures Model