Question 1

If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by
A)$1 billion.
B)$0.9 billion.
C)$10 billion.
D)$9 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.9, the multiplier is 10. Therefore, a $1 billion increase in government spending will increase consumption by $9 billion (0.9 * $10 billion).

Question 2

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion.If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment?
A)a decrease of $12 billion
B)an increase of $25 billion
C)an increase of $10 billion
D)an increase of $15 billion

Accepted Answer

To find the change in aggregate expenditures needed, use the formula: Change in Income = Multiplier x Change in Expenditures. The multiplier is 1/(1-MPC) = 1/(1-0.625) = 2.67. The change in income needed is $240 billion - $200 billion = $40 billion. Therefore, $40 billion = 2.67 x Change in Expenditures, so Change in Expenditures = $40 billion / 2.67 ≈ $15 billion.

Question 3

The multiplier effect demonstrates that
A)equal increases in government spending and taxes do not change the equilibrium GDP.
B)equal increases in government spending and taxes reduce the equilibrium GDP.
C)equal increases in government spending and taxes increase the equilibrium GDP.
D)taxes have a stronger effect upon equilibrium GDP than do government purchases.

Accepted Answer

The multiplier effect suggests that an increase in government spending has a more significant impact on equilibrium GDP than an equivalent increase in taxes, due to the initial spending leading to further rounds of spending.

Question 4

If the MPC is 0.50 and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap is
A)$40 billion.
B)$20 billion.
C)$60 billion.
D)$80 billion.

Accepted Answer

The recessionary expenditure gap is calculated by multiplying the GDP gap by the marginal propensity to consume (MPC) multiplier. The multiplier is 1/(1-MPC), which in this case is 2. Therefore, the expenditure gap is $40 billion / 2 = $20 billion.

Question 5

If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will
A)decrease GDP by $20.
B)decrease GDP by $40.
C)increase GDP by $20.
D)increase GDP by $40.

Accepted Answer

When both taxes and government spending increase by the same amount, the net effect on GDP is determined by the multiplier effect. With an MPC of 0.5, the spending multiplier is 2. The balanced budget multiplier, which is always 1, means that GDP will increase by the amount of the increase in government spending, which is $20.

Question 6

Assume in a closed economy that the equilibrium level of income is $380 and the MPS is 0.25.Now suppose government collects taxes of $50 and spends the entire amount.As a result,
A)the equilibrium level of real income and the price level will both remain unchanged.
B)the equilibrium level of income will remain unchanged.
C)the equilibrium level of income will rise to $420.
D)the equilibrium level of income will rise to $430.

Accepted Answer

The answer of Assume in a closed economy that the...

Question 7

Graphically, the height of the investment schedule depends on the real interest rate, together with the location of the investment demand curve.

Accepted Answer

The investment schedule is derived from the investment demand curve, which shows the relationship between the real interest rate and the level of investment. Changes in the real interest rate shift the investment demand curve, affecting the height of the investment schedule.

Question 8

In an aggregate expenditures diagram, equal increases in government spending and in lump-sum taxes will
A)shift the aggregate expenditures line downward.
B)shift the aggregate expenditures line upward.
C)leave the aggregate expenditures line unchanged.
D)reduce the equilibrium GDP.

Accepted Answer

The answer of In an aggregate expenditures diagram, equal increases...

Question 9

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to
A)increase by $30 billion.
B)increase by $45 billion.
C)decrease by $35 billion.
D)increase by $50 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 2/3, the multiplier is 3. Therefore, an increase in government purchases by $15 billion will increase the equilibrium GDP by 15 billion * 3 = $45 billion.

Question 10

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by
A)$1 billion.
B)$0.75 billion.
C)$3 billion.
D)$4 billion.

Accepted Answer

The marginal propensity to consume (MPC) is 0.75, meaning that for every dollar of income, consumption increases by 75 cents. A $1 billion increase in taxes reduces disposable income by $1 billion, leading to an initial decrease in consumption of $0.75 billion. The multiplier effect further reduces consumption by $0.75 billion / (1 - 0.75) = $3 billion.

Question 11

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion,
A)real and nominal GDP will both increase.
B)GDP will remain at $400 billion unless aggregate expenditures change.
C)real GDP will increase, but nominal GDP will decrease.
D)the price level will increase.

Accepted Answer

In equilibrium, GDP will remain at $400 billion unless there is a change in aggregate expenditures to shift the economy towards the full-employment GDP of $500 billion.

Question 12

The U.S.recession of 2007-2009 provides a good example of
A)demand-pull inflation.
B)cost-push inflation.
C)a recessionary expenditure gap.
D)the repercussions of hyperinflation.

Accepted Answer

The U.S. recession of 2007-2009 was characterized by a significant decrease in aggregate demand, leading to a recessionary expenditure gap where actual GDP was below potential GDP.

Question 13

A recessionary expenditure gap exists if
A)planned investment exceeds saving at the full-employment GDP.
B)the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP.
C)the aggregate expenditures schedule intersects the 45-degree line at any level of GDP.
D)the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP.

Accepted Answer

A recessionary expenditure gap occurs when aggregate expenditures are less than the full-employment GDP, which is represented by the aggregate expenditures schedule lying below the 45-degree line at the full-employment GDP.

Question 14

If the MPS is 0.25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is
A)$5 billion below the full-employment GDP.
B)$5 billion above the full-employment GDP.
C)$20 billion below the full-employment GDP.
D)$20 billion above the full-employment GDP.

Accepted Answer

The multiplier is 1/MPS, which is 1/0.25 = 4. The recessionary gap of $5 billion, multiplied by the multiplier of 4, results in a $20 billion gap in GDP. Thus, equilibrium GDP is $20 billion below full-employment GDP.

Question 15

Which of the following statements concerning the equilibrium level of GDP is incorrect?
A)There will be no tendency for businesses to alter the aggregate rate of production.
B)Full employment will necessarily be realized.
C)No unintended changes in inventories will occur.
D)Leakages equal injections.

Accepted Answer

Full employment is not necessarily realized at the equilibrium level of GDP; the economy can be in equilibrium with unemployment present.

Question 16

If the marginal propensity to consume in an economy is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be
A)0.8.
B)0.2.
C)5.
D)0.125.

Accepted Answer

The slope of the aggregate expenditures schedule is equal to the marginal propensity to consume. In this case, the marginal propensity to consume is 0.8, so the slope of the aggregate expenditures schedule will be 0.8.

Question 17

(Last Word) Say's law and classical macroeconomics were disputed by
A)Adam Smith.
B)Jeremy Bentham.
C)John Stuart Mill.
D)John Maynard Keynes.

Accepted Answer

John Maynard Keynes disputed Say's law and classical macroeconomics by arguing that demand, not supply, drives economic activity, leading to the development of Keynesian economics.

Question 18

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from
A)the government's attempt to control hyperinflation.
B)a major increase in personal and corporate taxes.
C)a rapid decline in investment spending.
D)a rapid increase in imports resulting from large tariff reductions.

Accepted Answer

The recessionary expenditure gap during the 2007-2009 recession was primarily due to a rapid decline in investment spending, as businesses cut back on investments in response to the financial crisis and economic uncertainty.

Question 19

If an increase in aggregate expenditures results in no increase in real GDP, we can surmise that the
A)economy is in a deep recession.
B)MPC equals 1.
C)economy is already operating at full employment.
D)price level has fallen.

Accepted Answer

When the economy is operating at full employment, any increase in aggregate expenditures will not lead to an increase in real GDP because the economy is already producing at its maximum capacity.

Question 20

Equal increases in government purchases and taxes will
A)increase the equilibrium GDP, and the size of that increase varies directly with the size of the MPC.
B)increase the equilibrium GDP, and the size of that increase is independent of the size of the MPC.
C)increase the equilibrium GDP, and the size of that increase varies inversely with the size of the MPC.
D)decrease the equilibrium GDP, and the size of that decrease is independent of the size of the MPC.

Accepted Answer

The answer of Equal increases in government purchases and taxes...

Quiz 31: The Aggregate Expenditures Model

If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion.If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment?

The multiplier effect demonstrates that

If the MPC is 0.50 and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap is

If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will

Assume in a closed economy that the equilibrium level of income is $380 and the MPS is 0.25.Now suppose government collects taxes of $50 and spends the entire amount.As a result,

Graphically, the height of the investment schedule depends on the real interest rate, together with the location of the investment demand curve.

In an aggregate expenditures diagram, equal increases in government spending and in lump-sum taxes will

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by

If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion,

The U.S.recession of 2007-2009 provides a good example of

A recessionary expenditure gap exists if

If the MPS is 0.25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is

Which of the following statements concerning the equilibrium level of GDP is incorrect?

If the marginal propensity to consume in an economy is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be

(Last Word) Say's law and classical macroeconomics were disputed by

The recessionary expenditure gap associated with the recession of 2007-2009 resulted from

If an increase in aggregate expenditures results in no increase in real GDP, we can surmise that the

Equal increases in government purchases and taxes will