Question 1

In a simple economy in which prices are constant and with no income taxes or imports, the slope of the AE curve is 0.8. In order to increase real GDP by $500 billion, then

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. With a slope of 0.8, the MPC is 0.8, so the multiplier is 1/(1-0.8) = 5. Therefore, an increase in autonomous expenditure of $100 billion will lead to an increase in GDP of $100 billion * 5 = $500 billion.

Question 2

Equilibrium real GDP is $400 billion, the MPC = 0.9, and there are no income taxes or imports. Investment increases $40 billion. If the price level is constant, after the increase in investment, equilibrium real GDP will be

Accepted Answer

The answer of Equilibrium real GDP is $400 billion, the...

Question 3

The slope of the aggregate expenditure curve increases when the marginal propensity to consume
Or the marginal propensity to import _.

Accepted Answer

The slope of the aggregate expenditure curve is determined by the marginal propensity to consume (MPC) and the marginal propensity to import (MPM). An increase in MPC increases the slope, while an increase in MPM decreases it.

Question 4

Suppose that the slope of the AE curve is 0.80. Then an increase of investment of $10 billion leads to an increase in equilibrium real GDP equal to

Accepted Answer

The expenditure multiplier can be calculated as 1/(1-slope of AE curve). In this case, the expenditure multiplier would be 1/(1-0.80) = 5. An increase in investment of $10 billion would therefore lead to an increase in equilibrium real GDP of 5*$10 billion = $50 billion.

Question 5

In general, the flatter the aggregate expenditure curve, the

Accepted Answer

A flatter aggregate expenditure curve indicates a smaller marginal propensity to consume, which results in a smaller multiplier effect.

Question 6

A change in which of the following changes the slope of the aggregate expenditure curve?

Accepted Answer

The slope of the aggregate expenditure curve is determined by the marginal propensity to consume (MPC). An increase in the MPC increases the slope, while a decrease in the MPC decreases the slope. Changes in autonomous consumption or government expenditures shift the curve but do not affect its slope.

Question 7

An economy has no imports and no taxes. The marginal propensity to save is 0.1. A increase in autonomous expenditure increases equilibrium expenditure by $60 billion and the multiplier is _ .

Accepted Answer

The answer of An economy has no imports and no...

Question 8

The smaller the slope of the AE curve, _ .

Accepted Answer

The answer of The smaller the slope of the AE...

Question 9

Given an MPC of 0.80, if there are no income taxes or imports and prices are constant, then when investment increases by $50 million, when prices are fixed equilibrium GDP would

Accepted Answer

The formula for the multiplier is 1/MPC. Therefore, with an MPC of 0.80, the multiplier is 1/0.80 = 1.25. This means that for every $1 increase in investment, there will be a $1.25 increase in equilibrium GDP. Thus, an increase in investment of $50 million would result in a total increase in equilibrium GDP of $50 million x 1.25 = $62.5 million. However, since prices are fixed, the full amount of the increase in GDP would be absorbed by the increase in investment, resulting in a net increase in equilibrium GDP of $50 million.

Question 10

Suppose that the slope of the AE curve is 0.75. Then a $100 decrease in autonomous spending causes equilibrium expenditure to

Accepted Answer

The multiplier is calculated as 1/(1-slope of AE curve) = 1/(1-0.75) = 4. Therefore, a $100 decrease in autonomous spending results in a $400 decrease in equilibrium expenditure (100 * 4 = 400).

Question 11

If the slope of the AE curve is 0.60, the value of the multiplier is

Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. If the slope of the AE curve is 0.60, this is the MPC. Therefore, the multiplier is 1/(1-0.60) = 2.5.

Question 12

The slope of the AE curve is 0.9. Investment decreases by $100 million and the price level is constant. Real GDP

Accepted Answer

The slope of the AE curve (marginal propensity to consume) is 0.9, meaning that for every dollar decrease in investment, GDP decreases by $10 due to the multiplier effect. A $100 million decrease in investment leads to a $1 billion decrease in GDP (100 million x 10).

Question 13

Suppose that the slope of the AE curve is 0.75. Then a $100 increase in autonomous spending causes equilibrium expenditure to

Accepted Answer

The slope of the AE curve is the multiplier. So, a $100 increase in autonomous spending will cause equilibrium expenditure to increase by $100 * 0.75 = $750.

Question 14

In a simple economy in which prices are constant and with no income taxes or imports, the marginal propensity to save is 0.2. If exports increase $50, what impact will that have on aggregate expenditure?

Accepted Answer

An increase in exports would lead to an increase in aggregate expenditure. The size of the increase in aggregate expenditure would be determined by the marginal propensity to spend, which is equal to 1 minus the marginal propensity to save. In this case, the marginal propensity to save is 0.2, so the marginal propensity to spend is 1 - 0.2 = 0.8. This means that for every increase in exports of $50, there would be an increase in aggregate expenditure of $50 x 0.8 = $40. Therefore, an increase in exports of $50 would lead to an increase in aggregate expenditure of $40, or a total increase of $50 + $40 = $90.

Question 15

Suppose that the slope of the AE curve is 0.67. Then a $100 decrease in autonomous spending causes equilibrium expenditure to

Accepted Answer

The slope of the AE curve is the marginal propensity to consume (MPC) plus the marginal propensity to save (MPS). Since the slope is 0.67, the MPC is 0.67 and the MPS is 0.33. A $100 decrease in autonomous spending causes a decrease in equilibrium expenditure equal to the initial decrease times the multiplier. The multiplier is equal to 1/(1-MPC) = 1/(1-0.67) = 3. Therefore, the equilibrium expenditure decreases by 100*3 = $300.

Question 16

Suppose that the slope of the AE curve is 0.80. If prices remain constant and government expenditures increase by $10 billion, what will be the change in real GDP?

Accepted Answer

The change in real GDP is calculated using the spending multiplier, which is 1/(1-MPC). With a slope of the AE curve (MPC) of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an increase in government expenditures by $10 billion will increase real GDP by 5 * $10 billion = $50 billion.

Question 17

In general, the steeper the aggregate expenditure curve, the

Accepted Answer

The steeper the aggregate expenditure curve, the larger the multiplier. This is because a small change in autonomous expenditure causes a large change in equilibrium output.

Question 18

Suppose that the slope of the AE curve is 0.67. Then a $100 increase in autonomous spending causes equilibrium expenditure to

Accepted Answer

The multiplier effect is calculated as 1/(1-slope of AE curve). With a slope of 0.67, the multiplier is 1/(1-0.67) = 3. Therefore, a $100 increase in autonomous spending results in a $300 increase in equilibrium expenditure.

Question 19

An economy saves 20 percent of any increase in income and there are no income taxes or imports. Then, an increase in investment of $2 billion can produce a short run increase in real GDP of as much as

Accepted Answer

According to the marginal propensity to save, the percentage of an increase in income that is saved is 20 percent. Therefore, if there is an increase in investment of $2 billion, only 80 percent of it ($1.6 billion) will actually be spent on goods and services. This increase in spending will lead to an increase in production, and since there are no other limitations in the scenario, the increase in real GDP can be as much as ten times the increase in spending, or $16 billion.

Question 20

If the value of the multiplier is 3.33 and there are no imports or income taxes, then the value of the

Accepted Answer

The multiplier formula is: 
Multiplier = 1 / (1 - MPC)
3.33 = 1 / (1 - MPC)
1 - MPC = 1 / 3.33
MPC = 1 - (1 / 3.33)
MPC = 0.7
Therefore, the MPC is 0.7 and we can conclude that the MPS is 0.3 (since MPS + MPC = 1). So, both answer choices A and B are correct.

Quiz 11: Expenditure Multipliers: They Keynesian Model