Question 1

Consider a simple macro model with demand-determined output.In such a model,the larger the marginal propensity to spend,the

Accepted Answer

In a demand-determined output model, the larger the marginal propensity to spend (MPS), the larger the simple multiplier. This is because a larger MPS means that a given change in autonomous spending (such as investment or government spending) will result in a larger change in total output. Therefore, the correct answer is (D) larger the simple multiplier.

Question 2

Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $3.5 billion.The marginal propensity to spend in this economy is 0.6.What is the eventual total new expenditure in this economy due to the increase in investment?

Accepted Answer

The eventual total new expenditure in the economy due to the increase in investment can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - marginal propensity to spend). In this case, the multiplier is 1 / (1 - 0.6) = 2.5. Therefore, the total new expenditure is the initial investment increase ($3.5 billion) multiplied by the multiplier (2.5), which equals $8.75 billion.

Question 3

Consider a simple macro model with a constant price level and demand-determined output.In the extreme situation where the marginal propensity to spend is zero,the simple multiplier is

Accepted Answer

The simple multiplier is 1 when the marginal propensity to spend is zero, because any change in autonomous spending leads to an equal change in output, making the multiplier 1.

Question 4

Consider a simple macro model with demand-determined output.Using such a 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 reciprocal of one minus

Accepted Answer

The multiplier effect in a demand-determined output model is calculated using the marginal propensity to consume (MPC), which is the reciprocal of one minus the marginal propensity to spend (MPS).

Question 5

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 0.4,the simple multiplier is

Accepted Answer

The simple multiplier is calculated as 1/(1 - marginal propensity to spend), which in this case is 1/(1 - 0.4) = 1/0.6 = 1.67.

Question 6

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

The simple multiplier in a demand-determined output model is calculated as 1/(1 - marginal propensity to spend). With a marginal propensity to spend of 0.8, the multiplier is 1/(1 - 0.8) = 1/0.2 = 5.0.

Question 7

Consider a simple macro model with a constant price level.If the AE function is horizontal,then we know the simple multiplier is

Accepted Answer

If the AE function is horizontal, it means that a change in autonomous spending will have a one-to-one effect on real GDP. This means that the simple multiplier will be exactly one.

Question 8

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the marginal propensity to spend is 0.7,the simple multiplier is

Accepted Answer

The simple multiplier is calculated as 1/(1 - marginal propensity to spend), which in this case is 1/(1 - 0.7) = 1/0.3 = 3.33.

Question 9

Consider a simple macro model with demand-determined output.In such a model,the smaller the marginal propensity to spend,the

Accepted Answer

In a demand-determined output model, the simple multiplier is given by 1/(1-MPC). So, the smaller the MPC (marginal propensity to consume), the larger the simple multiplier. Therefore, the correct option is (B) which states that the smaller the marginal propensity to spend, the smaller the simple multiplier.

Question 10

Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million.The marginal propensity to spend in this economy is 0.75.What is the eventual total new expenditure in this economy due to the increase in investment?

Accepted Answer

The total new expenditure is calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. Thus, the total increase in expenditure is 4 times the initial investment of $100 million, resulting in $400 million.

Question 11

Consider the simplest macro model with demand-determined output.Suppose an increase in business confidence leads firms to increase investment in new equipment by $30 million.The marginal propensity to spend in this economy is 0.9.What is the eventual total new expenditure in this economy due to the increase in investment?

Accepted Answer

The total new expenditure is calculated using the spending multiplier, which is 1/(1-MPC). Here, MPC is 0.9, so the multiplier is 10. The initial increase in investment is $30 million, so the total new expenditure is 10 * $30 million = $300 million.

Question 12

Consider a simple macro model with demand-determined output.If z is the marginal propensity to spend out of national income,Y is national income and A is autonomous expenditure,then the simple multiplier is equal to

Accepted Answer

The simple multiplier in a demand-determined output model is defined as the ratio of the change in national income (ΔY) to the initial change in autonomous expenditure (ΔA). This can be expressed as:
Multiplier = ΔY/ΔA
Using the equation for equilibrium output in a demand-determined model, we can derive that:
Y = A/(1-z)
Taking the derivative of this equation with respect to autonomous expenditure (A), we get:
dY/dA = 1/(1-z)
So, the simple multiplier is equal to 1/(1-z). Therefore, the correct answer is option D.

Question 13

Consider the simplest macro model in which aggregate output is demand-determined.If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion,the marginal propensity to spend must be

Accepted Answer

The simplest macro model in which aggregate output is demand-determined is the Keynesian model. In this model, the equilibrium level of output is determined by aggregate demand, which is the sum of consumption, investment, government spending, and net exports.

The increase in autonomous consumption of $2 billion leads to an increase in equilibrium national income of $6 billion. The marginal propensity to spend (MPS) is the fraction of each additional dollar of income that is spent. In other words, MPS measures the sensitivity of consumption to changes in income.

We can use the following formula to calculate MPS:

MPS = Change in consumption / Change in income

In this case, we know that the change in consumption is $2 billion and the change in income is $6 billion. Therefore:

MPS = 2 / 6 = 0.67

So the answer is D) 0.67.

Question 14

Consider a simple macro model with a constant price level and demand-determined output.In the extreme situation where the marginal propensity to spend is one,the simple multiplier is

Accepted Answer

When the marginal propensity to spend is one, it means that all additional income is spent, leading to an infinitely large multiplier effect because each round of spending generates an equivalent amount of income in a continuous loop without any leakage into savings.

Question 15

Consider a simple macro model with demand-determined output.In such a model,the multiplier is larger,the

Accepted Answer

The answer of Consider a simple macro model with demand-determined...

Question 16

Consider the simplest macro model with a constant price level and demand-determined output.If the business community decreases its planned investment expenditures by $4 billion,causing equilibrium national income to fall by $12 billion,the marginal propensity to spend must be

Accepted Answer

The marginal propensity to spend (MPS) is the fraction of each additional dollar of national income that is spent. It can be calculated as the change in consumption (or total spending) divided by the change in national income.

In this case, since the equilibrium national income fell by $12 billion due to a decrease in investment of $4 billion, the multiplier (1/MPS) must be 3. Therefore, MPS = 1/3.

Question 17

Suppose aggregate output is demand-determined.If the business community decreases its planned investment expenditures by $4 billion,causing equilibrium national income to fall by $20 billion,the marginal propensity to spend must be

Accepted Answer

The marginal propensity to spend (MPS) is calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPS). Given that a $4 billion decrease in investment causes a $20 billion decrease in national income, the multiplier is 5 ($20 billion / $4 billion). Solving the multiplier formula for MPS gives MPS = 1 - (1/Multiplier), which is 1 - (1/5) = 4/5.

Question 18

Suppose aggregate output is demand-determined.If the business community decreases its planned investment expenditures by $4 billion,causing equilibrium national income to fall by $8 billion,the marginal propensity to spend must be

Accepted Answer

The marginal propensity to spend (MPS) is defined as the fraction of a change in income that is spent, rather than saved. In this case, we can use the formula for the simple Keynesian cross model:

Y = C + I + G

where Y is national income, C is consumption, I is investment, and G is government spending. We are given that aggregate output is demand-determined, so we can assume that government spending is fixed.

If the business community decreases planned investment expenditures by $4 billion, then I decreases by $4 billion. We are told that this causes equilibrium national income to fall by $8 billion. We can use the following formula to calculate the multiplier:

multiplier = change in Y / change in I

multiplier = -($8 billion) / (-$4 billion) = 2

The multiplier tells us how much national income changes for a given change in investment spending. It is also equal to 1 / MPS. Therefore, we can solve for MPS:

MPS = 1 / multiplier = 1 / 2 = 0.5

So the answer is B: MPS = 0.5.

Question 19

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

Accepted Answer

The simple multiplier formula in a demand-determined output model is 1/(1-MPC), where MPC is the marginal propensity to consume. Since the question states that the marginal propensity to spend (which includes consumption and other spending) is between zero and one, we can assume that the MPC is also between zero and one. Therefore, 1/(1-MPC) will be a positive number greater than one but less than infinity, resulting in choice D as the correct answer.

Question 20

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 0.6,the simple multiplier is

Accepted Answer

The simple multiplier in a demand-determined output model is calculated as 1/(1 - marginal propensity to spend). With a marginal propensity to spend of 0.6, the multiplier is 1/(1 - 0.6) = 1/0.4 = 2.5.

Quiz 21: The Simplest Short-Run Macro Model