Question 1

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.
C = 60 + 0.6Y
I = I0 = 30
In equilibrium, the level of consumption spending will be
A) 170.
B) 270.
C) 160.
D) 195.

Accepted Answer

In equilibrium for a private closed economy, total spending (Y) equals consumption (C) plus investment (I). Given C = 60 + 0.6Y and I = 30, we set Y = C + I. Substituting the given values, we get Y = 60 + 0.6Y + 30. Solving for Y, we find Y = 225. Substituting Y back into the consumption function, C = 60 + 0.6(225) = 195.

Question 2

A private closed economy will expand when
A) actual GDP is less than potential GDP.
B) unplanned decreases in inventories occur.
C) aggregate expenditures are less than GDP.
D) unplanned increases in inventories occur.

Accepted Answer

Unplanned decreases in inventories indicate that demand is higher than expected, prompting businesses to increase production, leading to economic expansion.

Question 3

Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when
A) C + Ig cuts the 45-degree line.
B) GDP is $180 billion.
C) GDP is $60 billion.
D) GDP is also zero.

Accepted Answer

The answer of  Refer to the diagram for a...

Question 4

Refer to the diagram, which applies to a private closed economy. If gross investment is Ig1, the equilibrium GDP and the level of consumption will be
A) H and HB, respectively.
B) J and JI, respectively.
C) J and JK, respectively.
D) H and HF, respectively.

Accepted Answer

The answer of  Refer to the diagram, which applies...

Question 5

If an unintended increase in business inventories occurs,
A) we can expect aggregate production to be unaffected.
B) we can expect businesses to increase the level of production.
C) we can expect businesses to lower the level of production.
D) aggregate expenditures must exceed the domestic output.

Accepted Answer

If there is an unintended increase in business inventories, it means that businesses have produced more goods than consumers have purchased. In order to correct this imbalance, businesses will need to lower the level of production, otherwise they will be left with excessive inventories that they cannot sell. Therefore, we can expect businesses to lower the level of production.

Question 6

Refer to the diagram for a private closed economy. In this economy, aggregate expenditures
A) do not change as GDP increases.
B) increase by $2 for every $5 increase in GDP.
C) increase by $2 for every $4 increase in GDP.
D) increase by $2 for every $3 increase in GDP.

Accepted Answer

The diagram shows a 45-degree line, indicating that aggregate expenditures increase in proportion to GDP. The slope of the line is 1, meaning that a $1 increase in GDP is associated with a $1 increase in aggregate expenditures. The consumption function intersects the vertical axis at $2, indicating that even when there is no income, there is still $2 worth of consumption. Therefore, aggregate expenditures increase by $2 for every $3 increase in GDP.

Question 7

If aggregate expenditures exceed GDP in a private closed economy,
A) leakages will exceed injections.
B) planned investment will exceed saving.
C) unplanned investment in inventories will occur.
D) saving will exceed planned investment.

Accepted Answer

When aggregate expenditures exceed GDP, it indicates that the total spending in the economy is greater than the total output, leading to a situation where planned investment exceeds saving. This results in businesses investing more than what is being saved, reducing inventories.

Question 8

In a private closed economy, when aggregate expenditures exceed GDP,
A) GDP will decline.
B) business inventories will rise.
C) saving will decline.
D) business inventories will fall.

Accepted Answer

When aggregate expenditures exceed GDP, it means that consumers are spending more than the economy is producing, leading to a decrease in business inventories as goods are being purchased faster than they are being produced.

Question 9

For a private closed economy, an unintended decline in inventories suggests that
A) aggregate expenditures are less than the business sector expected them to be.
B) aggregate expenditures exceed production.
C) actual investment exceeds saving.
D) planned investment is greater than consumption.

Accepted Answer

An unintended decline in inventories indicates that actual sales were higher than businesses anticipated, meaning aggregate expenditures (total spending on goods and services) were greater than the amount of goods and services produced. This scenario leads to a reduction in inventories as the demand exceeds the supply.

Question 10

The equilibrium level of GDP is associated with
A) an excess of planned investment over saving.
B) no unintended changes in inventories.
C) an unintended decrease in business inventories.
D) an unintended increase in business inventories.

Accepted Answer

At the equilibrium level of GDP, there are no unintended changes in inventories. This means that businesses are producing exactly the amount of goods and services that are being demanded by consumers and other players in the economy. If businesses were experiencing unintended changes in inventories, this would suggest that they are producing more or less than what is being demanded and the economy is not in equilibrium.

Question 11

Refer to the diagram for a private closed economy. In this economy, investment
A) decreases as GDP increases.
B) increases as GDP increases.
C) is $40 billion at all levels of GDP.
D) is $60 billion at all levels of GDP.

Accepted Answer

Investment is shown as a fixed amount of $40 billion at all levels of GDP in the diagram, so the correct answer is C. Neither A nor B is correct as they suggest that investment either decreases or increases as GDP increases, which is not the case in the private closed economy shown. D is also not correct as the investment level does not change regardless of the level of GDP.

Question 12

In a private closed economy, when aggregate expenditures equal GDP,
A) consumption equals investment.
B) consumption equals aggregate expenditures.
C) planned investment equals saving.
D) disposable income equals consumption minus saving.

Accepted Answer

In a private closed economy, when aggregate expenditures equal GDP, it implies that all income not used for consumption is saved, and this saving is exactly equal to the amount businesses planned to invest. This is because, in such an economy, the only components of aggregate expenditures are consumption and investment. Therefore, when aggregate expenditures equal GDP, it means that the total amount saved by households is equal to the total amount businesses planned to invest, making choice C correct.

Question 13

$$\begin{array} { | c | c | c | } 
\hline \text { GDP } ( Y ) & \text { Consumption } ( C ) & \text { Investment (I) } \
\hline \$ 0 & \$ 60 & \$ 30 \
\hline 100 & 120 & 40 \
\hline 200 & 180 & 50 \
\hline 300 & 240 & 60 \
\hline 400 & 300 & 70 \
\hline 500 & 360 & 80 \
\hline
\end{array}$$ (Advanced analysis) The table gives data for a private closed economy. The letters Y, C, S, and I are used to represent real GDP, consumption, saving, and investment, respectively. The equation
Representing the consumption schedule for the economy is
A) C = Y ? 0.6S.
B) Y = C + S.
C) C = 60 + 0.4Y.
D) C = 60 + 0.6Y.

Accepted Answer

The consumption schedule equation represents the relationship between real GDP and consumption. The equation C = 60 + 0.6Y indicates that consumption (C) is a function of real GDP (Y), where consumption increases by 0.6 for every increase of 1 in real GDP. The constant term of 60 represents the autonomous consumption, which is the amount of consumption that does not depend on income. Therefore, D is the best choice as it represents the consumption schedule equation for the given economy.

Question 14

Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus,
A) saving is $10 billion.
B) unplanned decreases in inventories of $10 billion will occur.
C) the MPC is 0.80.
D) unplanned increases in inventories of $10 billion will occur.

Accepted Answer

The answer of Assume that in a private closed economy,...

Question 15

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.
C = 60 + 0.6Y
I = I0 = 30
In equilibrium, the level of saving will be
A) 30.
B) 26.
C) 25.
D) 60.

Accepted Answer

In equilibrium, saving (S) equals investment (I). Given I = 30, saving must also be 30.

Question 16

If an unintended increase in business inventories occurs at some level of GDP, then GDP
A) entails a rate of aggregate expenditures in excess of the rate of aggregate production.
B) may be either above or below the equilibrium output.
C) is too low for equilibrium.
D) is too high for equilibrium.

Accepted Answer

An unintended increase in business inventories indicates that production has exceeded the rate of spending in the economy. This means that GDP is too high for equilibrium, as businesses are producing more than what is being consumed or invested, leading to an increase in inventories. Therefore, the correct answer is D.

Question 17

If at some level of GDP the economy is experiencing an unintended decrease in inventories,
A) the aggregate level of saving will decline.
B) the price level will fall.
C) the business sector will lay off workers.
D) domestic output will increase.

Accepted Answer

If the economy is experiencing an unintended decrease in inventories, it means that the demand for goods and services is greater than what was expected. This would lead firms to increase production to meet the unexpected demand, resulting in an increase in domestic output.

Question 18

Which two aggregate expenditure schedules AE in the diagram for a private closed economy have the same MPC, assuming investment is the same at each level of income?
A) AE1 and AE2
B) AE2 and AE3
C) AE1 and AE4
D) AE3 and AE4

Accepted Answer

The answer of  Which two aggregate expenditure schedules AE...

Question 19

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy.
C = 60 + 0.6Y
I = I0 = 30
In this economy, the equilibrium level of income (Y) is
A) 360.
B) 225.
C) 200.
D) 135.

Accepted Answer

To find the equilibrium level of income (Y), we need to set total output (Y) equal to total expenditures (C + I). 
Substituting the given values of C and I, we have: 
Y = C + I 
Y = (60 + 0.6Y) + 30 
Y = 90 + 0.6Y 
0.4Y = 90 
Y = 225

Therefore, the equilibrium level of income in this economy is 225 billion dollars.

Question 20

Refer to the diagram for a private closed economy. The equilibrium GDP is
A) $60 billion.
B) $180 billion.
C) between $60 and $180 billion.
D) $60 billion at all levels of GDP.

Accepted Answer

At the intersection of the aggregate expenditure line (AE) and the 45-degree line (Y = E), the equilibrium GDP is $180 billion. This is because at this level of output, planned spending equals actual output, and there is no incentive for producers to increase or decrease production. Thus, B is the best choice.

Quiz 11: The Aggregate Expenditures Model

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy. C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of consumption spending will be

A private closed economy will expand when

Refer to the diagram for a private closed economy. Aggregate saving in this economy will be zero when

Refer to the diagram, which applies to a private closed economy. If gross investment is Ig1, the equilibrium GDP and the level of consumption will be

If an unintended increase in business inventories occurs,

Refer to the diagram for a private closed economy. In this economy, aggregate expenditures

If aggregate expenditures exceed GDP in a private closed economy,

In a private closed economy, when aggregate expenditures exceed GDP,

For a private closed economy, an unintended decline in inventories suggests that

The equilibrium level of GDP is associated with

Refer to the diagram for a private closed economy. In this economy, investment

In a private closed economy, when aggregate expenditures equal GDP,

Assume that in a private closed economy, consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus,

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy. C = 60 + 0.6Y I = I0 = 30 In equilibrium, the level of saving will be

If an unintended increase in business inventories occurs at some level of GDP, then GDP

If at some level of GDP the economy is experiencing an unintended decrease in inventories,

Which two aggregate expenditure schedules AE in the diagram for a private closed economy have the same MPC, assuming investment is the same at each level of income?

(Advanced analysis) The given equations describe consumption and investment (in billions of dollars) for a private closed economy. C = 60 + 0.6Y I = I0 = 30 In this economy, the equilibrium level of income (Y) is

Refer to the diagram for a private closed economy. The equilibrium GDP is