Question 1

Consider the simplest macro model with a constant price level and demand -determined output. In such a model, an upward shift of the saving function causes equilibrium national income to
A) fall because the AE function shifts downward simultaneously.
B) rise because the AE function shifts upward simultaneously.
C) remain constant but consist of more consumption and less investment.
D) remain constant but consist of less consumption and more investment.
E) remain constant because it does not affect desired aggregate expenditure.

Accepted Answer

In a demand-determined output model, the level of desired aggregate expenditure (AE) determines the level of equilibrium national income. Saving is a leakage from the circular flow of income and decreases the level of AE at any given level of income. An upward shift of the saving function implies an increase in saving at each level of income, which leads to a downward shift of the AE function. As a result, the equilibrium level of national income falls. Therefore, the correct answer is A.

Question 2

FIGURE 21-3
-Refer to Figure 21-3. A shift in the aggregate expenditure function downward from AE1 to AE0 could be caused by
A) a rise in the multiplier.
B) a fall in the marginal propensity to consume.
C) a rise in the marginal propensity to consume.
D) an increase in autonomous desired saving.
E) a decrease in autonomous desired saving.

Accepted Answer

The answer of  FIGURE 21-3
-Refer to Figure 21-3. A...

Question 3

Consider a simple macro model with a constant price level and demand-determined output. If the simple multiplier is 3 and there is a $2 million increase in autonomous investment spending, then the equilibrium level of income will increase by
A) $1.2 million.
B) $2 million
C) $3 million.
D) $4.5 million.
E) $6 million.

Accepted Answer

The answer of Consider a simple macro model with a...

Question 4

FIGURE 21-3
-Consider a simple macro model with a constant price level and demand-determined output. Using this 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
A) average propensity to save.
B) marginal propensity to save.
C) equilibrium level of national income.
D) simple multiplier.
E) reciprocal of the marginal propensity to spend.

Accepted Answer

The concept being described is the simple multiplier, which is the amount by which national income increases due to an increase in autonomous expenditures, such as desired investment. The formula for the simple multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, since the model assumes constant prices and demand-determined output, we can assume that the MPC is equal to one, and thus the simple multiplier is equal to 1/(1-1) = 1. Therefore, any change in desired investment would be multiplied by a factor of one, resulting in an equal change in equilibrium national income.

Question 5

If national income is demand-determined, the condition for national income to be in equilibrium can be stated as
A) unemployment must equal the natural unemployment rate.
B) AE must be greater than Y.
C) desired saving equals actual investment.
D) actual saving equals actual investment.
E) desired aggregate expenditure equals the actual level of national income.

Accepted Answer

If national income is demand-determined, it means that the level of national income is determined by the level of aggregate demand. In equilibrium, the level of national income will be such that desired aggregate expenditure (which includes consumption, investment, government spending, and net exports) equals the actual level of national income. This is because in the short run, firms will produce and sell output up to the point where aggregate demand equals aggregate supply, which is also the point where desired aggregate expenditure equals actual national income. Therefore, E is the correct condition for national income to be in equilibrium.

Question 6

Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to
A) fall because the AE function shifts downward simultaneously.
B) rise because the AE function shifts upward simultaneously.
C) remain constant but consist of more consumption and less investment.
D) remain constant but consist of less consumption and more investment.
E) remain constant because it does not affect desired aggregate expenditure.

Accepted Answer

In this model, a downward shift in the saving function implies that at any given level of income, households are saving less and therefore consuming more. This increase in consumption shifts the aggregate expenditure (AE) function upward, leading to a higher equilibrium national income.

Question 7

FIGURE 21-3
-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 increase in expenditure in this economy during the second round of spending?
A) $25 million
B) $100 million
C) $400 million
D) $75 million
E) $500 million

Accepted Answer

The initial increase in investment spending of $100 million will lead to an increase in aggregate demand of $100 million * (1/0.25) = $400 million. During the second round of spending, households and firms will spend 0.75 of this increase, which is $300 million. Therefore, the increase in expenditure during the second round will be $300 million - $225 million (which leaked out as savings or imports) = $75 million.

Question 8

Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are , and so national income tends to
)
A) accumulating; rise
B) accumulating; fall
C) being depleted; rise
D) being depleted; fall
E) constant; fall

Accepted Answer

If national income is above its equilibrium level, it means that the level of output being produced is higher than the level of output being demanded. This implies that firms are producing more than what is being consumed, leading to an accumulation of inventories. To adjust to this situation, firms will reduce production, which will decrease national income until it reaches its equilibrium level where output equals demand. Therefore, national income tends to fall in order to correct for the accumulation of inventories.

Question 9

Consider the following information describing an economy with demand -determined output. There is no government or foreign trade. All dollar figures are in billions.
1. equilibrium condition is Y = C + I
2. marginal propensity to save = 0.20
3. the autonomous part of C is $50
4. investment is autonomous and equals $25
TABLE 21-5
-Consider a simple macro model with a constant price level and demand-determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,
A) inventories will build up, causing national income to rise.
B) national income will fall, because desired expenditures are less than actual expenditures.
C) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.
D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save.
E) there will be no change in national income because only actual expenditure is relevant.

Accepted Answer

If the level of actual national income is less than desired aggregate expenditure, then there will be shortages of goods and reductions in inventories, which will cause producers to increase output and national income to rise. This is because producers want to meet the demand for goods and will increase output to reduce inventories and meet the desired level of expenditure. Therefore, the best choice is C.

Question 10

Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause
In desired consumption and in desired investment.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; a decrease
D) a decrease; no change
E) a decrease; an increase

Accepted Answer

An exogenous increase in the real interest rate typically leads to a decrease in desired consumption and investment because borrowing costs are higher, making saving more attractive and borrowing less attractive.

Question 11

Consider the following information describing an economy with demand -determined output. There is no government or foreign trade. All dollar figures are in billions.
1. equilibrium condition is Y = C + I
2. marginal propensity to save = 0.20
3. the autonomous part of C is $50
4. investment is autonomous and equals $25
TABLE 21-5
-Consider a simple macro model with a constant price level and demand-determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45-degree line represents
A) desired accumulation of inventories.
B) desired decumulation of inventories.
C) the amount by which output exceeds desired expenditures.
D) the output gap.
E) the amount by which desired expenditures exceeds output.

Accepted Answer

The vertical distance between the AE (Aggregate Expenditure) curve and the 45-degree line at any level of income represents the amount by which output (or actual national income) exceeds desired expenditures. When desired aggregate expenditures are less than the current level of national income, firms experience unintended inventory accumulation because they produce more than what is being demanded.

Question 12

Consider the following information describing an economy with demand -determined output. There is no government or foreign trade. All dollar figures are in billions.
1. equilibrium condition is Y = C + I
2. marginal propensity to save = 0.20
3. the autonomous part of C is $50
4. investment is autonomous and equals $25
TABLE 21-5
-Refer to Table 21-5. The equilibrium level of national income is
A) $375.
B) $249.
C) $155.
D) $75.
E) $93.75.

Accepted Answer

The answer of Consider the following information describing an economy...

Question 13

FIGURE 21-3
-The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in
A) investment induced by changes in equilibrium income.
B) saving caused by changes in investment.
C) the equilibrium level of national income caused by changes in autonomous expenditure.
D) the rate of interest caused by increased demand for credit.
E) employment induced by changes in equilibrium income.

Accepted Answer

The answer of  FIGURE 21-3
-The simple multiplier, which applies...

Question 14

Consider the following information describing an economy with demand -determined output. There is no government or foreign trade. All dollar figures are in billions.
1. equilibrium condition is Y = C + I
2. marginal propensity to save = 0.20
3. the autonomous part of C is $50
4. investment is autonomous and equals $25
TABLE 21-5
-Refer to Table 21-5. At the equilibrium level of national income, the level of desired saving will be
A) equal to consumption expenditures.
B) $375.
C) $50.
D) $25.
E) $0

Accepted Answer

The answer of Consider the following information describing an economy...

Question 15

Consider the following information describing an economy with demand -determined output. There is no government or foreign trade. All dollar figures are in billions.
1. equilibrium condition is Y = C + I
2. marginal propensity to save = 0.20
3. the autonomous part of C is $50
4. investment is autonomous and equals $25
TABLE 21-5
-Refer to Table 21-5. At the equilibrium level of national income, what is the level of desired consumption expenditures?
A) $68.75
B) $125
C) $150
D) $350
E) $375

Accepted Answer

The answer of Consider the following information describing an economy...

Question 16

Consider the simplest macro model with a constant price level and demand -determined output. If national income is less than its equilibrium level, it is likely that firmsʹ inventories are , and so national income tends to .
A) accumulating; rise
B) accumulating; fall
C) being depleted; rise
D) being depleted; fall
E) constant; fall

Accepted Answer

When national income is less than its equilibrium level, it indicates that demand is higher than what firms anticipated, leading to their inventories being depleted. As firms increase production to replenish their inventories, national income tends to rise.

Question 17

FIGURE 21-3
-Refer to Figure 21-3. A shift in the aggregate expenditure function from AE0 to AE1 could be caused by
A) a rise in the multiplier.
B) a fall in the marginal propensity to consume.
C) a rise in the marginal propensity to consume.
D) an increase in desired investment expenditures.
E) a decrease in desired investment expenditures.

Accepted Answer

A rise in desired investment expenditures would shift the aggregate expenditure function to the right, from AE0 to AE1.

Question 18

The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as
A) national income divided by aggregate expenditure.
B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about.
C) the change in national income resulting from a change in expenditure, multiplied by the number of years since the initial change.
D) a change in aggregate expenditures multiplied by the equilibrium level of national income.
E) the change in national income resulting from a change in saving.

Accepted Answer

The simple multiplier formula is defined as the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about. It measures the change in national income resulting from a change in autonomous expenditure, assuming that the price level remains constant. Therefore, option B best describes the definition of the simple multiplier.

Question 19

FIGURE 21-3
-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 increase in expenditure in this economy during the initial first round of spending?
A) $75 million
B) $25 million
C) $100 million
D) $400 million
E) $500 million

Accepted Answer

The initial increase in expenditure will equal the increase in investment spending by firms, which is $100 million. Since the marginal propensity to spend is 0.75, this initial increase in expenditure will lead to a further increase in spending of 0.75 times $100 million, or $75 million. Therefore, the total increase in expenditure during the initial first round of spending will be $100 million + $75 million = $175 million. However, the question only asks for the increase in expenditure during the initial first round of spending, which is $100 million.

Question 20

FIGURE 21-3
-Refer to Figure 21-3. The simple multiplier could be measured by the ratio
A) Y1/0A.
B) Y2/0B.
C) Y1Y2/AB.
D) BA/Y1.
E) 1/Y2 - Y1).

Accepted Answer

The simple multiplier can be calculated by the output voltage divided by the input voltage, which is (Y2-Y1)/(AB). Therefore, the best choice would be C, which is (Y1Y2/AB).

Quiz 21: The Simplest Short-Run Macro Model

Consider the simplest macro model with a constant price level and demand -determined output. In such a model, an upward shift of the saving function causes equilibrium national income to

FIGURE 21-3 -Refer to Figure 21-3. A shift in the aggregate expenditure function downward from AE1 to AE0 could be caused by

Consider a simple macro model with a constant price level and demand-determined output. If the simple multiplier is 3 and there is a $2 million increase in autonomous investment spending, then the equilibrium level of income will increase by

FIGURE 21-3 -Consider a simple macro model with a constant price level and demand-determined output. Using this 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

If national income is demand-determined, the condition for national income to be in equilibrium can be stated as

Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to

Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are , and so national income tends to )

Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause In desired consumption and in desired investment.

FIGURE 21-3 -The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in

Consider the simplest macro model with a constant price level and demand -determined output. If national income is less than its equilibrium level, it is likely that firmsʹ inventories are , and so national income tends to .

FIGURE 21-3 -Refer to Figure 21-3. A shift in the aggregate expenditure function from AE0 to AE1 could be caused by

The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as

FIGURE 21-3 -Refer to Figure 21-3. The simple multiplier could be measured by the ratio