Question 1

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 one, the simple multiplier is

Accepted Answer

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

Question 2

Consider the aggregate consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation's households are

Accepted Answer

When APC (average propensity to consume) is 1, it means that the households are consuming all of their disposable income and not saving any of it. Therefore, the answer is C - consuming all of their disposable income.

Question 3

Undesired or unplanned inventory accumulation is likely to occur when

Accepted Answer

Undesired inventory accumulation occurs when businesses produce more than consumers are willing and able to buy. This can happen when actual aggregate expenditure (the sum of consumer spending, investment, government spending, and net exports) exceeds desired aggregate expenditure (the total level of spending that businesses planned for).

Question 4

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 model, the simple multiplier represents the effect of a change in autonomous spending on equilibrium output. The simple multiplier is derived as 1/(1-MPC). Therefore, the larger the MPC (marginal propensity to spend), the larger the simple multiplier, and the larger the effect of a change in autonomous spending on equilibrium output.

Question 5

Suppose the price level is constant, output is demand- determined, and the economy is closed with no government. If the saving function is S = - 100 + (0.2)Y, the simple multiplier is

Accepted Answer

The simple multiplier is calculated as 1/(1-MPC), where MPC (marginal propensity to consume) is 1 minus the marginal propensity to save (MPS). Given the saving function S = -100 + 0.2Y, MPS is 0.2, so MPC is 0.8. Therefore, the multiplier is 1/(1-0.8) = 5.

Question 6

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 is equal to 1/(1- z) in a demand-determined output model. This is because a change in autonomous expenditure, A, will lead to a change in output, Y, by a multiple of the initial change, which is equal to the multiplier. The multiplier is derived from the marginal propensity to spend out of national income, z, which represents the fraction of additional income that is spent rather than saved. The formula for the multiplier is derived from the equation Y = A + zY, which can be solved for Y to find the multiplier as Y/A = 1/(1- z).

Question 7

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

Accepted Answer

National income is demand-determined in the short run according to Keynesian economics. Therefore, in order for national income to be in equilibrium, the level of desired aggregate expenditure must equal the actual level of national income. This can be represented by the equation Y = AE.

Question 8

In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in . In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is the marginal propensity to consume.

Accepted Answer

In the simplest macro model with no government and no international trade, there is only one source of income - national income, and the only use for that income is either consumption or saving. Therefore, the marginal propensity to spend is the same as the marginal propensity to consume, as any change in national income will result in a corresponding change in disposable income, leaving consumption as the only possible outlet for that change in income. Therefore, the correct answer is A, where the marginal propensity to spend and the marginal propensity to consume are both defined in terms of national income and disposable income is not relevant in this context.

Question 9

On a graph of a consumption function, what is the significance of the 45- degree line?

Accepted Answer

The 45-degree line on a consumption function graph represents points where desired consumption equals actual disposable income, indicating that all income is spent.

Question 10

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 any change in autonomous spending (such as government spending or consumption) will have a proportional change in output. This means that the simple multiplier will be exactly one, as a change in spending will result in an equivalent change in output.

Question 11

With respect to consumption, investment, government purchases and net exports, the national- income and product accounts measure

Accepted Answer

The national-income and product accounts measure actual expenditures in each of the categories of consumption, investment, government purchases and net exports.

Question 12

Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y. Assuming that we have no government, no international trade and desired investment is autonomous and is equal to $56 billion, then which of the following is the correct statement of the consumption function?

Accepted Answer

The aggregate expenditure function is given by AE = $300 billion + (0.87)Y, where Y is the income. Desired investment is given as autonomous and is equal to $56 billion. Therefore, the total expenditure in the economy is given by AE = C + I, where I is the autonomous investment which is $56 billion.

Substituting the value of AE, we get:

AE = C + I 
$300 billion + (0.87)Y = C + $56 billion 
C = $244 billion + (0.87)Y

Therefore, the correct statement of the consumption function is C = $244 billion + (0.87)Y.

Question 13

Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that

Accepted Answer

When desired consumption plus desired investment exceeds actual national income, firms will see a decrease in inventories and respond by increasing output, leading to an increase in actual national income.

Question 14

The aggregate consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption

Accepted Answer

The aggregate consumption function assumes that as real disposable income rises, both aggregate desired consumption and desired saving will increase, as people tend to consume more and save more when they have higher disposable income.

Question 15

The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their

Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption expenditure divided by the change in disposable income. In this case, the change in disposable income is $2,000 ($42,000 - $40,000) and the change in consumption expenditure is $1,600 ($39,600 - $38,000).

MPC = $1,600 / $2,000 = 0.8

Therefore, the correct answer is D) MPC is 0.8.

Question 16

The aggregate consumption function is based on a number of assumptions. Given these assumptions, which of the following statements is true?

Accepted Answer

The marginal propensity to consume (MPC) is typically between 0 and 1, meaning that consumers spend a portion of additional income. The average propensity to consume (APC) tends to decrease as income increases because consumption grows at a slower rate than income.

Question 17

When desired consumption exceeds disposable income, desired saving is ; when desired consumption is less than the disposable income, desired saving is _ .

Accepted Answer

When desired consumption exceeds disposable income, individuals are spending more than they earn, leading to negative saving. Conversely, when desired consumption is less than disposable income, individuals are saving the excess, resulting in positive saving.

Question 18

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 in this case is given by 1/(1-MPC) = 1/(1-0.4) = 1/0.6 = 1.67.

Question 19

Which of the following statements must be true in the simple macro model ?

Accepted Answer

In the simple macro model, the sum of MPC (marginal propensity to consume) and MPS (marginal propensity to save) is always equal to one. This is because all income is either consumed or saved, and there are no other leakages or injections in the model. Therefore, option D is the only statement that must be true.

Question 20

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

Accepted Answer

An upward shift of the saving function implies that households are saving more at each level of income, which reduces consumption. This decrease in consumption leads to a downward shift in the aggregate expenditure (AE) function, causing equilibrium national income to fall.

Quiz 21: The Simplest Short-Run Macro Model