Question 1

Higher marginal propensities to consume and invest will make the slope of the aggregate expenditure function steeper.

Accepted Answer

When marginal propensities to consume and invest are higher, it means that for every additional unit of income earned, a larger proportion will be spent on consumption and investment. This leads to a higher slope of the aggregate expenditure function, as the increase in income will result in a greater increase in aggregate expenditure. Therefore, the statement is true.

Question 2

What are the determinants of investment spending?

Accepted Answer

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Question 3

Autonomous aggregate expenditures increases by $100 million, the marginal propensity to consume is 0.60, marginal propensity to invest is 0.20, and the marginal propensity to import is 0.10.Calculate the change in income.

Accepted Answer

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Question 4

You are given the following information on the various sectors of the economy.Derive the aggregate expenditure function.
C = 100 + 0.75Y
I = 200 + 0.20Y
G = 500
X = 250
M = 100 + 0.10Y

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Question 5

You are given the following linear consumption function: C = 200 + 0.80Yd.What is the size of the autonomous consumption expenditures and induced expenditures?

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Question 6

What factors will shift the aggregate expenditure function for a given level of real domestic income?

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Question 7

The currency exchange rate is the rate at which one nation's currency can be exchanged for another.

Accepted Answer

This statement is true. The currency exchange rate refers to the value of one nation's currency in terms of another nation's currency. For example, the exchange rate between the US dollar and the Euro is the amount of Euros that can be exchanged for one US dollar.

Question 8

In the summer of 2013, many news commentators started to raise concern over a potential tapering by the Federal Reserve.If The Federal Reserve were to cut the money supply and raise interest rates to control inflationary pressures, how would that be illustrated in the Keynesian cross diagram? Graphically illustrate and explain the impact on aggregate expenditure and income.

Accepted Answer

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Question 9

During the recession of 2007 - 2009, consumer confidence was on the decline.Using the Keynesian cross diagram, graphically illustrate and explain the impact on aggregate expenditure and income.

Accepted Answer

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Question 10

A larger marginal propensity to import will make the slope of the aggregate expenditure function flatter.

Accepted Answer

The marginal propensity to import (M) measures the fraction of each additional dollar of income that is spent on imports. The aggregate expenditure function is Y = C + I + G + NX, where NX is net exports (exports - imports). If M is larger, then the fraction of each additional dollar that is spent on imports is greater, which means that the fraction of each additional dollar that is spent on domestic goods and services (C + I + G) is smaller. This will make the slope of the aggregate expenditure function flatter because a given increase in income will lead to a smaller increase in domestic expenditure.

Question 11

Any uses of current income for purposes other than purchasing currently produced domestic goods and services are called an injection.

Accepted Answer

Injections refer to the introduction of income into the flow of an economy (e.g., investments, government spending, exports), whereas uses of current income for purposes other than purchasing currently produced domestic goods and services (e.g., saving, taxes, imports) are considered leakages or withdrawals, not injections.

Question 12

The multiple changes in income and output that results from a change in autonomous expenditure is called the multiplier.

Accepted Answer

The multiplier effect refers to the phenomenon whereby a change in autonomous expenditure (such as investment, government spending, or exports) leads to a larger change in total output or income. This is because the new injection of spending stimulates further rounds of spending, creating a chain reaction of increased demand and production in the economy. The size of the multiplier depends on the marginal propensity to consume (MPC), which is the portion of each additional dollar of income that is spent on further consumption.

Question 13

Autonomous aggregate expenditures decreases by $200 million, the marginal propensity to consume is 0.50, marginal propensity to invest is 0.25, and the marginal propensity to import is 0.10.Calculate the change in income.

Accepted Answer

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Question 14

Any supplement to consumer spending that increases domestic aggregate output and income is called a leakage.

Accepted Answer

A leakage is any diversion of income from consumer spending, such as savings or imports. Anything that increases domestic aggregate output and income would be considered an injection, not a leakage.

Question 15

Briefly explain how capacity utilization rates are used by forecasters.

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Question 16

You have the following information on personal consumption expenditures (C)and disposable income (Yd):
  
a.Compute the marginal propensity to consume.
b.Compute the amount of savings for years 1 and 2.
c.Compute the marginal propensity to save.

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Question 17

Distinguish between the short-run and long-run factors that affect residential investment.

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Question 18

In 2009, the U.S.Congress approved a fiscal stimulus measure which included additional spending by the U.S.government sector.Using the Keynesian cross diagram, graphically illustrate and explain the impact of such a policy on aggregate expenditure and income.

Accepted Answer

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Question 19

The equilibrium level of income and output is that level of income where the desired spending by all sectors of the economy equals the value of output produced and the income received from production.

Accepted Answer

The equilibrium level of income and output is determined by the point where aggregate demand and aggregate supply meet, meaning that the desired spending by all sectors of the economy equals the value of output produced and the income received from production. Therefore, the statement is true.

Question 20

U.S.import spending is not affected by U.S.real income but is influenced by the economic activity of its major trading partners and the exchange rate, hence import spending is taken as autonomous.

Accepted Answer

U.S. import spending can be influenced by various factors including domestic income, changes in consumer preferences, and changes in global economic conditions. Therefore, import spending cannot be considered fully autonomous.

Quiz 12: Spending by Individuals, Firms, and Governments on Real Goods and Services