Question 1

The expenditure multiplier occurs because
A) a change in autonomous expenditure causes real GDP to change in the opposite direction.
B) government expenditure on goods and services change by a proportional amount to government taxes.
C) a change in autonomous expenditures changes households' incomes.
D) any change in real GDP must also change the price level.
E) a change in households' incomes changes autonomous expenditure.

Accepted Answer

The expenditure multiplier occurs because a change in autonomous expenditures (government or consumer spending) changes households' incomes. This change in income leads to a change in consumer spending, creating a chain reaction that amplifies the initial change in autonomous expenditure, resulting in a greater change in real GDP overall.

Question 2

If aggregate planned expenditure is greater than real GDP,
A) an unplanned decrease in inventories leads to an increase in production.
B) an unplanned increase in inventories leads to a decrease in production.
C) a planned decrease in inventories leads to an decrease in production.
D) a planned increase in inventories leads to an increase in production.
E) an unplanned decrease in inventories leads to an increase in the price level.

Accepted Answer

When aggregate planned expenditure exceeds real GDP, it results in an unplanned decrease in inventories, prompting firms to increase production to meet the higher demand.

Question 3

If investment increases by $100, then the aggregate expenditure model concludes that equilibrium expenditure
A) increases by $100.
B) increases by less than $100.
C) increases by more than $100.
D) remains unchanged.
E) decreases by $100.

Accepted Answer

In the aggregate expenditure model, an increase in investment leads to a multiplied increase in equilibrium expenditure due to the multiplier effect, resulting in an increase greater than the initial investment.

Question 4

If investment increases ,which of the following happens?
i. aggregate expenditure increases
ii. real GDP increases
iii. consumption expenditure decreases
A) i and ii
B) i only
C) ii only
D) ii and iii
E) i, ii, and iii

Accepted Answer

When investment increases, it directly increases the aggregate expenditure due to the expenditure approach of GDP. Moreover, investment also contributes to the increase in real GDP as it is one of the components of GDP. However, there is no direct relationship between investment and consumption expenditure. Therefore, the correct options are i and ii only.

Question 5

In an economy with no income taxes or imports, the expenditure multiplier is
A) less than 1 only if the MPC is less than 1.
B) greater than 1 only if the MPC is greater than 1.
C) equal to 1 if the MPC is greater than 1.
D) greater than 1 if the MPC is less than 1.
E) always less than 1 no matter what the size of the MPC.

Accepted Answer

The expenditure multiplier is greater than 1 if the MPC (marginal propensity to consume) is less than 1 but greater than 0, as it is calculated as 1/(1-MPC).

Question 6

The multiplier means that an increase in investment results in ________ aggregate expenditure that is ________ the increase in investment.
A) increase; larger than
B) increase; the same size as
C) increase; smaller than
D) decrease; larger than
E) decrease; smaller than

Accepted Answer

The multiplier effect implies that an initial increase in investment leads to a larger increase in aggregate expenditure due to the subsequent rounds of spending it generates in the economy.

Question 7

In an economy in with no income taxes or imports, the expenditure multiplier equals
A) 
B)  
C)  
D)  
E)

Accepted Answer

The answer of In an economy in with no income...

Question 8

When aggregate planned expenditure exceeds real GDP, there is
A) a planned decrease in inventories.
B) a planned increase in inventories.
C) an unplanned decrease in inventories.
D) an unplanned increase in inventories.
E) an unplanned decrease in the price level.

Accepted Answer

When aggregate planned expenditure exceeds real GDP, firms sell more than they expected, leading to an unplanned decrease in inventories as they dip into their stock to meet the higher demand.

Question 9

When investment increases, the expenditure multiplier points out that
A) consumption decreases by a greater amount.
B) real GDP increases by a greater amount.
C) consumption increases by the same amount.
D) real GDP decreases by a greater amount.
E) ultimately investment increases by more than the initial increase.

Accepted Answer

The expenditure multiplier shows the overall effect of an initial increase in investment on real GDP. When investment increases, it will lead to an increase in overall spending (including investment, consumption, and government spending) in the economy. This increase in spending will in turn lead to an increase in overall output (i.e. real GDP) by a greater amount than the initial increase in investment. Therefore, the correct answer is that real GDP increases by a greater amount.

Question 10

The idea of the multiplier is that a change in ________ expenditure changes real GDP, which then changes ________ expenditure. The change in total expenditure will be larger than the initial change in ________ expenditure.
A) induced; autonomous; induced
B) autonomous; induced; induced
C) induced; autonomous; autonomous
D) induced; induced; autonomous
E) autonomous; induced; autonomous

Accepted Answer

The multiplier effect describes how an initial change in autonomous expenditure (such as investment or government spending) leads to a larger change in real GDP, which then induces further changes in consumption expenditure.

Question 11

Increases in autonomous expenditure induce ________ in aggregate expenditure thereby making the multiplier ________.
A) further increases; greater than one
B) further increases; less than one
C) a decrease; greater than one
D) a decrease; less than one
E) further increases; unnecessary

Accepted Answer

Autonomous expenditure refers to spending that is not influenced by changes in income. When autonomous expenditure increases, it directly increases aggregate expenditure. This, in turn, triggers a chain reaction of further increases in expenditure through the multiplier effect. Therefore, with an increase in autonomous expenditure, aggregate expenditure and the multiplier will both increase.

Question 12

Equilibrium expenditure is the level of expenditure at which
A) firms' inventories are zero.
B) firms' inventories are at the desired level.
C) firms' produce more output than they sell.
D) aggregate planned expenditure minus planned changes in inventories equals real GDP.
E) aggregate planned expenditure plus planned changes in inventories equals real GDP.

Accepted Answer

Equilibrium expenditure occurs when firms' inventories are at the desired level, meaning that the amount produced matches the amount sold, and there is no unplanned change in inventories.

Question 13

The expenditure multiplier is typically
A) less than 1 but greater than 0.
B) greater than 1.
C) equal to 1.
D) greater than 10.
E) negative.

Accepted Answer

The expenditure multiplier is the ratio of a change in national income to the change in autonomous expenditures that caused it. Since autonomous expenditures (such as government spending or investment) have a greater impact on the economy than changes in consumer spending, the expenditure multiplier is typically greater than 1.

Question 14

The expenditure multiplier measures the change in
A) equilibrium expenditure that results from a change in autonomous expenditure.
B) autonomous spending that results from a change in equilibrium expenditure.
C) equilibrium expenditure from a change in induced consumption.
D) consumption expenditure for a given change in disposable income.
E) the price level that results from a change in real GDP.

Accepted Answer

The expenditure multiplier measures the change in equilibrium expenditure that results from a change in autonomous expenditure. Autonomous expenditure refers to any spending that is not influenced by changes in income, such as government spending, investment, or exports. The expenditure multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume, which measures the change in consumption expenditure for a given change in disposable income.

Question 15

If an increase of $10 billion of investment results in an increase in equilibrium expenditure of $40 billion, the expenditure multiplier equals
A) $10 billion × $40 billion = $400 billion.
B) $40 billion - $10 billion = $30 billion.
C) $40 billion ÷ $10 billion = 4.
D) $10 billion ÷ $40 billion = 0.25.
E) $10 billion - $40 billion = -$30 billion.

Accepted Answer

The expenditure multiplier is calculated as the change in equilibrium expenditure divided by the change in investment. In this case, the change in equilibrium expenditure is $40 billion and the change in investment is $10 billion. Therefore, the expenditure multiplier is $40 billion ÷ $10 billion = 4.

Question 16

If real GDP equals aggregate planned expenditure, then inventories
A) rise above their target levels.
B) fall below their target levels.
C) equal their target levels.
D) are either above or below their target levels depending on whether planned inventories are above or below their target levels.
E) None of the above answers is necessarily correct because there is no relationship between inventories and aggregate planned expenditure.

Accepted Answer

When real GDP equals aggregate planned expenditure, it means that all the goods and services produced are being purchased without any excess demand or supply in the market. This also implies that firms are producing goods exactly equal to what they planned to sell, which means that their inventories are at their target levels. Therefore, the correct answer is C - inventories equal their target levels.

Question 17

The expenditure multiplier explains how a change in
A) real GDP leads to a change in autonomous expenditure.
B) induced expenditure leads to a change in real GDP.
C) autonomous expenditure leads to a change in real GDP.
D) real GDP leads to a change in induced expenditure.
E) induced expenditure leads to a change in autonomous expenditure.

Accepted Answer

The expenditure multiplier measures the change in real GDP that results from a change in autonomous expenditure, such as government spending or investment. Induced expenditure, which is driven by changes in income and consumption, can amplify the initial impact on real GDP through the expenditure multiplier effect. However, the multiplier is ultimately based on changes in autonomous expenditure.

Question 18

The expenditure multiplier is 5 and, as a result of a change in expenditure, equilibrium expenditure and real GDP change by $200 billion.What was the initial change in autonomous expenditure?
A) $50 billion
B) $40 billion
C) $20 billion
D) $200 billion
E) $1,000 billion

Accepted Answer

The expenditure multiplier formula is:
Expenditure Multiplier = 1 / (1 - MPC)
where MPC is the marginal propensity to consume.

If the expenditure multiplier is 5, then we can say that:
Expenditure Multiplier = ΔY / ΔE
where ΔY is the change in equilibrium expenditure and ΔE is the initial change in autonomous expenditure.

We are told that equilibrium expenditure and real GDP change by $200 billion. Therefore, ΔY = $200 billion.

Using the formula for the expenditure multiplier, we can solve for ΔE:
5 = $200 billion / ΔE
ΔE = $40 billion

Therefore, the initial change in autonomous expenditure was $40 billion. The correct answer is B.

Question 19

If autonomous spending decreases, then
A) equilibrium expenditure decreases by the same amount.
B) the expenditure multiplier means that equilibrium expenditure decreases by a larger amount.
C) equilibrium expenditure does not change.
D) the expenditure multiplier means that equilibrium expenditure increases by a larger amount.
E) the expenditure multiplier means that equilibrium expenditure increases by a smaller amount.

Accepted Answer

The expenditure multiplier amplifies the effect of a change in autonomous spending, leading to a larger change in equilibrium expenditure.

Question 20

According to the aggregate expenditure model, when autonomous expenditure increases, equilibrium expenditure
A) increases by a larger amount.
B) increases by an equal amount.
C) does not change because only induced expenditures increase equilibrium expenditure.
D) does not change because autonomous expenditures has no effect on equilibrium expenditure.
E) increases by a smaller amount.

Accepted Answer

In the aggregate expenditure model, autonomous expenditure refers to spending that is not influenced by changes in income or prices, such as government spending or investment by firms. When autonomous expenditure increases, it directly increases the aggregate expenditure at every level of income. This leads to a larger increase in equilibrium expenditure, as reflected by the multiplier effect. Therefore, choice A is correct.

Quiz 14: Aggregate Expenditure Multiplier

The expenditure multiplier occurs because

If aggregate planned expenditure is greater than real GDP,

If investment increases by $100, then the aggregate expenditure model concludes that equilibrium expenditure

If investment increases ,which of the following happens? i. aggregate expenditure increases ii. real GDP increases iii. consumption expenditure decreases

In an economy with no income taxes or imports, the expenditure multiplier is

The multiplier means that an increase in investment results in aggregate expenditure that is the increase in investment.

In an economy in with no income taxes or imports, the expenditure multiplier equals

When aggregate planned expenditure exceeds real GDP, there is

When investment increases, the expenditure multiplier points out that

The idea of the multiplier is that a change in expenditure changes real GDP, which then changes expenditure. The change in total expenditure will be larger than the initial change in expenditure.

Increases in autonomous expenditure induce in aggregate expenditure thereby making the multiplier .

Equilibrium expenditure is the level of expenditure at which

The expenditure multiplier is typically

The expenditure multiplier measures the change in

If an increase of $10 billion of investment results in an increase in equilibrium expenditure of $40 billion, the expenditure multiplier equals

If real GDP equals aggregate planned expenditure, then inventories

The expenditure multiplier explains how a change in

The expenditure multiplier is 5 and, as a result of a change in expenditure, equilibrium expenditure and real GDP change by $200 billion.What was the initial change in autonomous expenditure?

If autonomous spending decreases, then

According to the aggregate expenditure model, when autonomous expenditure increases, equilibrium expenditure