Question 1

If autonomous consumption rises by $0.8 trillion and the marginal propensity to consume (MPC) equals 3/4, the equilibrium level of output demanded will rise by
A)$0.2 trillion
B)$0.6 trillion
C)$1.07 trillion
D)$2.4 trillion
E)$3.2 trillion

Accepted Answer

The answer of If autonomous consumption rises by $0.8 trillion...

Question 2

If the marginal propensity to consume is 4/5, the simple multiplier is
A)1/6
B)6
C)5/6
D)6/5
E)5

Accepted Answer

The answer of If the marginal propensity to consume is...

Question 3

If autonomous investment increases by $100 billion, equilibrium real GDP demanded will
A)increase by $100 billion
B)not change
C)increase by ($100 billion)/MPC
D)increase by $100 billion * MPC
E)increase by $100 billion/MPS

Accepted Answer

The answer of If autonomous investment increases by $100 billion,...

Question 4

What does the marginal propensity to consume tell us?
A)how much of our total income we spend on current consumption
B)how much additional income is spent on consumption
C)how much of aggregate expenditures will be allocated to consumption spending
D)how much induced consumption there is in the economy
E)the relationship between autonomous and induced consumption

Accepted Answer

The marginal propensity to consume (MPC) tells us how much additional income is spent on consumption. It is the ratio of the change in consumption to the change in income. For example, if the MPC is 0.8, it means that for every additional dollar of income, 80 cents will be spent on consumption.

Question 5

Which is true regarding the marginal propensity to consume and the multiplier?
A)The lower the MPC, the higher the multiplier.
B)The higher the MPC, the lower the multiplier.
C)The MPC equals the multiplier.
D)The sum of the MPC and the multiplier equals 1.
E)The lower the MPC, the lower the multiplier.

Accepted Answer

The answer of Which is true regarding the marginal propensity...

Question 6

Suppose that planned investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The aggregate expenditure line will shift upward by __________ at every level of real GDP.
A)$40 billion
B)$160 billion
C)$200 billion
D)$250 billion
E)$1,000 billion

Accepted Answer

The formula for calculating the change in aggregate expenditure is: 
Change in AE = Change in Investment × Multiplier
The multiplier = 1 / (1 - Marginal Propensity to Consume) = 1 / (1 - 0.80) = 5

Therefore, Change in AE = $200 billion × 5 = $1000 billion 
However, the question is asking for the shift at every level of real GDP, so we need to divide the change in AE by the change in real GDP to find the slope of the new aggregate expenditure line:

Slope of new AE line = Change in AE / Change in Real GDP = $1000 billion / $200 billion = 5

This means that the new aggregate expenditure line will be upward sloping with a slope of 5, which represents an increase of $200 billion in planned investment. Therefore, at any given level of real GDP, the aggregate expenditure will increase by $200 billion (the amount of the increase in planned investment) multiplied by the slope of the new AE line, which is 5.

So the answer is C) $200 billion.

Question 7

If autonomous investment decreases by $60 billion, equilibrium real GDP demanded will
A)increase by $60 billion
B)decrease by $60 billion
C)decrease by ($60 billion) *MPC
D)decrease by $60 billion * (1 - MPC)
E)decrease by $60 billion/MPS

Accepted Answer

The answer of If autonomous investment decreases by $60 billion,...

Question 8

If an increase in planned investment of $70 billion causes equilibrium output demanded to rise by $280 billion, the value of the marginal propensity to consume is
A)4
B)4/3
C)1/3
D)1/4
E)3/4

Accepted Answer

The answer of If an increase in planned investment of...

Question 9

Which of the following would result from a decrease in autonomous saving?
A)an upward shift of the aggregate expenditure line
B)an upward shift of the 45-degree line
C)a decrease in the equilibrium level of real GDP demanded
D)an increase in the level of autonomous consumption
E)an increase in the level of autonomous investment

Accepted Answer

Autonomous saving is a component of aggregate expenditure, so a decrease in autonomous saving would result in a decrease in aggregate expenditure. This would shift the aggregate expenditure line downward, resulting in a decrease in the equilibrium level of real GDP demanded. However, since the 45-degree line represents the identity between real GDP demanded and real GDP produced, it would not be affected by a change in autonomous saving.

Question 10

If the multiplier is 4, a $10 billion increase in autonomous investment will cause a
A)$10 billion increase in equilibrium investment
B)$40 billion increase in equilibrium investment
C)$40 billion increase in equilibrium real GDP demanded
D)$400 billion increase in equilibrium real GDP demanded
E)$40 billion increase in consumption spending

Accepted Answer

The answer of If the multiplier is 4, a $10...

Question 11

If the simple multiplier is 10, the marginal propensity to save is
A)1/10
B)9/10
C)1/9
D)10/9
E)9

Accepted Answer

The simple multiplier formula is 1/(1-MPS), where MPS is the marginal propensity to save. If the simple multiplier is 10, then 1/(1-MPS) = 10. Solving for MPS, we get MPS = 1/10.

Question 12

In the simple aggregate expenditure model, the slope of the aggregate expenditure line depends on
A)interest rates
B)government budget policy
C)the price level
D)the marginal propensity to consume
E)all of the above

Accepted Answer

The slope of the aggregate expenditure line is determined by the marginal propensity to consume. This is because the marginal propensity to consume measures the change in consumer spending that occurs with a change in income. As income changes, spending will change by a multiple of the change in income based on the marginal propensity to consume. Therefore, the slope of the aggregate expenditure line will depend on the marginal propensity to consume. The other options (A, B, and C) may affect aggregate expenditure, but they do not determine the slope of the aggregate expenditure line.

Question 13

If the marginal propensity to consume is 3/4, the simple multiplier is
A)3
B)7
C)4
D)25
E)3/10

Accepted Answer

The simple multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, the simple multiplier in this case would be 1/(1-3/4) = 1/(1/4) = 4.

Question 14

Suppose that the multiplier is 4, autonomous investment rises by $50 billion, and autonomous consumption falls by $50 billion at the same time. Which of the following is true?
A)Equilibrium GDP demanded will be the same, but the type of goods produced will be different.
B)Equilibrium GDP demanded will increase by $200 billion.
C)Equilibrium GDP demanded will decrease by $200 billion.
D)Equilibrium GDP demanded will increase by $400 billion.
E)Equilibrium GDP demanded will decrease by $400 billion.

Accepted Answer

The answer of Suppose that the multiplier is 4, autonomous...

Question 15

Which of the following is true concerning the relationship between the marginal propensity to consume and the consumption function?
A)the larger the MPC, the higher the level of autonomous consumption
B)the larger the MPC, the steeper the consumption function
C)the larger the MPC, the larger the MPS
D)The smaller the MPC, the steeper the consumption function
E)The larger the MPC, the larger the level of autonomous consumption

Accepted Answer

The marginal propensity to consume (MPC) measures how much of an additional dollar of income is spent on consumption. A higher MPC means that a larger proportion of additional income will be spent on consumption. As a result, the consumption function (which shows the relationship between income and consumption) will be steeper, since changes in income will lead to larger changes in consumption. However, the level of autonomous consumption (i.e. consumption that occurs even when income is zero) is not directly related to the MPC.

Question 16

If the simple multiplier is 8, the marginal propensity to consume is
A)1/8
B)1/4
C)4/5
D)7/8
E)8

Accepted Answer

The answer of If the simple multiplier is 8, the...

Question 17

Suppose that planned autonomous investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will increase by
A)$40 billion
B)$160 billion
C)$200 billion
D)$250 billion
E)$1,000 billion

Accepted Answer

The answer of Suppose that planned autonomous investment increases by...

Question 18

The aggregate expenditure model is
A)most useful in explaining situations where changes in aggregate expenditures cause the price level to change
B)not useful in situations where changes in aggregate expenditures cause the price level to change
C)helpful in explaining situations where the economy is plagued by inflationary pressures
D)the reciprocal of the aggregate demand model
E)most useful when we are dealing with an economy dominated by a foreign sector

Accepted Answer

The answer of The aggregate expenditure model is
A)most useful in...

Question 19

Other things being equal, a decrease in an economy's exports will
A)increase domestic aggregate expenditures and the equilibrium level of output
B)decrease domestic aggregate expenditures and the equilibrium level of output
C)have no impact on domestic aggregate expenditures or output
D)decrease the marginal propensity to import
E)change autonomous consumption

Accepted Answer

A decrease in exports means a decrease in foreign demand for the economy's goods, leading to a decrease in domestic aggregate expenditures and the equilibrium level of output.

Question 20

If the multiplier is 3, a $20 billion increase in autonomous consumption will cause a
A)$20 billion increase in equilibrium consumption
B)$60 billion increase in equilibrium consumption
C)$20 billion increase in equilibrium real GDP demanded
D)$60 billion increase in equilibrium real GDP demanded
E)$60 billion decrease in autonomous saving

Accepted Answer

According to the multiplier effect, a change in autonomous consumption (C) has a multiplied effect on equilibrium real GDP demanded (Y). The equation is Y = (1/1-MPC) x C, where MPC is the marginal propensity to consume. If the multiplier is 3, then 1-MPC=1/3, and MPC=2/3. Therefore, a $20 billion increase in autonomous consumption will cause a $60 billion increase in equilibrium real GDP demanded (Y)= (1/1-2/3) x $20 billion.

Quiz 10: Aggregate Expenditure and Aggregate Demand

If autonomous consumption rises by $0.8 trillion and the marginal propensity to consume (MPC) equals 3/4, the equilibrium level of output demanded will rise by

If the marginal propensity to consume is 4/5, the simple multiplier is

If autonomous investment increases by $100 billion, equilibrium real GDP demanded will

What does the marginal propensity to consume tell us?

Which is true regarding the marginal propensity to consume and the multiplier?

Suppose that planned investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The aggregate expenditure line will shift upward by __________ at every level of real GDP.

If autonomous investment decreases by $60 billion, equilibrium real GDP demanded will

If an increase in planned investment of $70 billion causes equilibrium output demanded to rise by $280 billion, the value of the marginal propensity to consume is

Which of the following would result from a decrease in autonomous saving?

If the multiplier is 4, a $10 billion increase in autonomous investment will cause a

If the simple multiplier is 10, the marginal propensity to save is

In the simple aggregate expenditure model, the slope of the aggregate expenditure line depends on

If the marginal propensity to consume is 3/4, the simple multiplier is

Suppose that the multiplier is 4, autonomous investment rises by $50 billion, and autonomous consumption falls by $50 billion at the same time. Which of the following is true?

Which of the following is true concerning the relationship between the marginal propensity to consume and the consumption function?

If the simple multiplier is 8, the marginal propensity to consume is

Suppose that planned autonomous investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will increase by

The aggregate expenditure model is

Other things being equal, a decrease in an economy's exports will

If the multiplier is 3, a $20 billion increase in autonomous consumption will cause a