Question 1

The presence of income taxes and imports make the multiplier

Accepted Answer

The presence of income taxes and imports reduces the size of the multiplier because a portion of income is either taxed away or spent on imports rather than on domestically produced goods and services. However, the multiplier remains positive, indicating that an initial change in spending still leads to a larger change in the overall level of economic activity, just not as large as it would be without taxes and imports.

Question 2

The presence of imports ________ the size of the U.S. multiplier because with an increase of U.S. real GDP, ________.

Accepted Answer

The presence of imports decreases the size of the U.S. multiplier because when U.S. real GDP increases, U.S. consumers spend more on goods from other countries, leading to a leakage from the domestic spending stream.

Question 3

A decrease in autonomous expenditure shifts the AE curve

Accepted Answer

A decrease in autonomous expenditure shifts the Aggregate Expenditure (AE) curve downward without affecting its slope, as it represents a decrease in spending at all levels of income, not a change in the rate of spending increase as income increases.

Question 4

If investment increases by $150 and, in response, equilibrium expenditure rises by $600

Accepted Answer

The multiplier is calculated as the ratio of the change in equilibrium expenditure to the change in investment, which is $600 / $150 = 4.0. This means that for every dollar increase in investment, total expenditure increases by four dollars, indicating the multiplier is 4.0.

Question 5

The intertemporal substitution effect of a change in the price level results from a

Accepted Answer

The intertemporal substitution effect refers to how consumers change their consumption of goods over time in response to changes in the relative prices of goods at different points in time. Specifically, it involves a change in the price of current goods relative to future goods, encouraging consumers to substitute between consuming now and consuming later based on which is more cost-effective.

Question 6

Intertemporal substitution means changes in purchases

Accepted Answer

Intertemporal substitution refers to the economic concept where consumers may change their spending on goods and services over different time periods, often in response to changes in prices or income over time.

Question 7

Business cycle turning points are

Accepted Answer

Business cycle turning points are influenced by changes in autonomous expenditures, such as investment, government spending, and exports. These changes can then be amplified by the multiplier effect, which describes how an initial change in spending leads to further rounds of spending, ultimately having a larger impact on the overall economy.

Question 8

You observe that unplanned inventories are increasing. You predict that there will be

Accepted Answer

When unplanned inventories increase, it typically indicates that goods are not being sold as expected, suggesting a decrease in consumer demand. This is often a precursor to a recession, as businesses may start to cut back on production and employment in response to the accumulation of unsold goods.

Question 9

Which of the following is INCORRECT?

Accepted Answer

The multiplier actually amplifies the increase in income during expansions, not dampens it. It magnifies the initial increase in autonomous spending through a chain of consumption and investment, leading to a larger increase in equilibrium GDP.

Question 10

If the price level rises, the purchasing power of wealth

Accepted Answer

When the price level rises, the purchasing power of wealth decreases because the same amount of money buys fewer goods and services.

Question 11

The larger the multiplier, the ________ the AE curve and the ________ the AD curve from an increase in investment.

Accepted Answer

A larger multiplier makes the AE (Aggregate Expenditure) curve steeper because each increase in investment results in a larger increase in aggregate expenditure. It also causes a larger shift in the AD (Aggregate Demand) curve because the total increase in demand is magnified by the multiplier effect.

Question 12

The aggregate demand curve slopes downward because of

Accepted Answer

The aggregate demand curve slopes downward primarily due to the wealth effect (where people feel wealthier when prices fall and thus spend more) and the substitution effect (where consumers and businesses substitute towards cheaper goods and services as prices fall).

Question 13

An increase in investment spending results in a ________ the aggregate expenditure curve and ________ the aggregate demand curve.

Accepted Answer

An increase in investment spending shifts the aggregate expenditure curve upward due to increased spending at all levels of income, and it also shifts the aggregate demand curve to the right, reflecting an increase in demand at all price levels.

Question 14

If investment decreases, the AE curve shifts

Accepted Answer

A decrease in investment leads to a decrease in aggregate expenditure (AE), which shifts the AE curve downward. This decrease in investment also leads to a decrease in aggregate demand (AD), shifting the AD curve leftward.

Question 15

In 2013 the government increased Social Security income taxes by 2 percentage points and increased the income tax rate on Americans making more than $400,000 by 4.6 percentage points. These tax hikes

Accepted Answer

Tax increases generally reduce disposable income, which in turn reduces consumption. Since the multiplier effect is largely driven by consumption (as one person's spending becomes another person's income), reducing consumption would decrease the size of the multiplier.

Question 16

Which of the following shifts the aggregate demand curve rightward?

Accepted Answer

An increase in government expenditure increases overall demand in the economy for goods and services, which shifts the aggregate demand curve to the right.

Question 17

Which of the following shifts the aggregate expenditure curve AND shifts the aggregate demand curve?
I. a decrease in investment
II. a change in the price level
III. an increase in exports

Accepted Answer

I (a decrease in investment) and III (an increase in exports) both shift the aggregate expenditure curve and the aggregate demand curve. A change in the price level (II) shifts the aggregate demand curve but does not shift the aggregate expenditure curve, as it is a movement along the curve rather than a shift of the curve itself.

Question 18

Because the short-run aggregate expenditure model assumes that the price level is ________, its predicted effect of changes in autonomous expenditure on equilibrium output is ________ than the prediction of the AD/SAS model.

Accepted Answer

In the short-run aggregate expenditure model, the price level is assumed to be fixed, which means that changes in autonomous expenditure have a more direct and significant impact on equilibrium output compared to the AD/SAS model, where prices can adjust.

Question 19

Which of the following does NOT occur as the economy moves from an expansion to a recession?

Accepted Answer

The change in planned spending does not necessarily exceed the change in real GDP as the economy moves from an expansion to a recession. The other options (A, C, D) describe processes or outcomes that can occur during this transition.

Question 20

Changes in which of the following will affect the size of the multiplier?
I. marginal propensity to import
II. marginal propensity to consume
III. marginal income tax rate

Accepted Answer

The size of the multiplier is affected by the marginal propensity to import, consume, and the marginal income tax rate. These factors influence how much of an additional dollar of income will be spent, saved, or taxed, thereby affecting the overall spending and the multiplier effect in the economy.

Quiz 11: Expenditure Multipliers